Since 2008, litigation concerning the securities industry and financial sector has been on the rise. Because of increased regulation and enforcement, in addition to record numbers of corporate bankruptcies and restructurings, this litigation is expected to continually soar. Along with such litigation comes a demand for financial services experts. The questions pertain to the types of litigation and experts that are involved in these high-dollar, high-profile cases.
Part of why financial experts are in such great demand is explained by the nature and type of litigation that has shown record highs. For example, one leading publication discusses the kinds of cases that have been seen through mid-2014 in the financial litigation sector. See Kobi Kastiel, “2014 Mid-Year Securities Litigation Update,” The Harvard Law School Forum on Corporate Governance and Financial Regulation, Aug. 4, 2014. The Harvard review noted that “filing and settlement trends continue to reflect a ‘steady state’ of several hundred cases a year.” According to NERA Economic Consulting, the rate of new class actions in the securities industry for the first four months of 2014 is about 207, which is a substantial amount. Merger and Acquisitions are on the rise, and with every merger and acquisition (M & A), litigation ensues. The Harvard author noted that a significant chunk of federal securities cases are represented by “merger objection” litigation for 2014.
Also of interest are the federal circuits that tend to hear financial litigation. One author cites the Ninth Circuit as seeing the most financial litigation, as of mid 2014. However, in an eleven-year study of financial litigation, it was found that five federal circuits hear about 58% of all cases concerning when to include or exclude the testimony of financial expert witnesses. See PriceWaterhouseCooper, “Daubert Challenges to Financial Experts: An 11-year study of trends and outcomes,” March 2011. This cumulative study correlates the rise of securities litigation with the trends pertaining to financial experts. Id. According to the analysis of PriceWaterHouseCooper (PWC), the five circuits that hear the most challenges to financial expert witnesses, from 1999-2010 are the Second, Fifth, Sixth, Seventh, and Third Circuits, with the Ninth Circuit in sixth place. This is interesting, because although most financial litigation may be centered in the Ninth Circuit this year, recently, five other circuits were more likely to hear challenges to financial expert witnesses.
The Supreme Court’s decision is discussed by PWC, as it extended Daubert challenges to not just scientific expert testimony, but to all testimony. See 526 U.S. 137 (1999). From there, PWC analyzed the trends over eleven years with respect to financial expert witnesses, since these witnesses and their economic analyses are subject to Daubert. Id. The study found many interesting trends among financial experts. One was that the majority of these experts consist of economists, appraisers, and accountants, and these three categories of experts have an additional quality about them: they are the three most likely classes of financial experts to be challenged by Daubert, according to the study, but they are also the three classes that are most likely to survive challenges, meaning their testimony tends to stay in.
Clearly, the increase in financial and securities litigation has created a need for more expert witnesses in this area. The American Institute of Certified Public Accountants recently even created a program whereby people can receive accreditation to complete forensic training and become financial experts. The rise in M & As indicates that this litigation is expected to continue, and these experts hold the key to these cases. As recently as August 6, an expert for the defense was called upon in an SEC case alleging insider trading, to explain the company’s rationale and why no collusion had occurred. Everything from investment fraud to fights over shareholder proxies is indicated as a type of litigation seen in 2014. See Kastiel, supra. The largest increase in new case filings from 2013 occurred in the consumer sector, where filings doubled. There has also been an increase in the number of shareholder proposals submitted for inclusion in public corporate proxy materials and, accordingly, an increase in lawsuits filed challenging these inclusions. The economic trends indicate that the more regulation in the financial sector, the more changes in the industry, and the more corporate restructurings, the more litigation. All of this means an increased demand for experts.
While experts in the financial sector are subject to very rigorous challenges, they seem to prevail when their qualifications and training stand them in good stead. Certain trends have emerged that are of import. For example, plaintiff financial experts face more frequent challenges than do defense experts in the field. In fact, Daubert challenges to plaintiff financial expert witnesses arose about 69% of the time. However, despite this statistic, the exclusion of plaintiff experts in financial litigation is lower than for defense experts, for the past several years through 2011. From 2000-2010, there were 6,141 Daubert challenges to expert witnesses, and slightly over 1,100 of these pertained to financial expert witnesses, a significant amount. Every year between 2000 and 2009 the number of Daubert challenges to financial experts increased, though 2010 saw an 11% decrease in these challenges, perhaps suggesting that financial experts have finally gained greater acceptance. The newly-available certification programs and increased need for experts of this type may have helped turn these numbers
The number one reason why experts may be excluded, according to a cumulative study, seems to be reliability, so this is one area in which attorneys should ensure that their experts are tops in the field. Using an expert witness service provider allows attorneys to vet their experts and find the best financial experts to meet the needs of the diverse types of cases that fall in this sector. Many factors will continue to demonstrate a demand for experts in financial cases, and the rise of these cases can only contribute to this trend.
By: Kat S. Hatziavramidis, Attorney-at-Law