Accounting Expert Not Allowed to Opine on the In-Kind Benefits of the Class 12 Accelerator Program

The underlying litigation involves claims between Plaintiffs Rev Tech Labs, LLC ("Rev Tech") and Carolinas Fintech Ventures, LP ("CFV") and Defendants Cirrus Secure, Inc. ("CSI"), Frideswide Square, Inc. ("Frideswide"), and David Brooks. To support their claims regarding the value of consideration exchanged for a SAFE investment, Plaintiffs retained forensic accountant and valuation expert, Nicholas R. Harris. Harris opined that Plaintiffs provided approximately $340,000 in total consideration, consisting of $40,000 in cash and roughly $300,000 of in-kind consideration derived from participation in Rev Tech's Accelerator Program. Harris calculated the in-kind value by utilizing a stated value from a subsequent participant agreement, applying an inflation-adjustment factor, and corroborating the figure by applying market-based revenue multiples to the expected revenue of Frideswide.

To counter Harris' conclusions, Defendants retained Ronald Seigneur, a Certified Public Accountant and business valuation expert with nearly forty years of appraisal experience, to review and critique Harris ' report. In his expert declaration, Seigneur criticized Harris' methodology, asserting that Harris relied on self-declared values, performed inadequate due diligence, and engaged in an improper comparison of revenue figures.

Defendants filed a motion in limine to strike Plaintiffs' expert, Nicholas R. Harris. Likewise, Plaintiffs filed a motion in limine to strike the testimony of Ronald Seigneur, who is offered as a rebuttal expert to Harris.

Accounting Expert Witnesses

Nicholas R. Harris, CPA/ABV, CFA, CFE has more than eighteen years of accounting and finance experience, including more than sixteen years dedicated to forensic accounting and valuation services. I have valued economic damages to companies and individuals in hundreds of disputes.

Want to know more about the challenges Nicholas Harris, has faced? Get the full details with our Challenge Study report.

Ronald L. Seigneur, MBA, CVA, ASA, CPA.ABV has been involved for 30 years in business valuation and litigation matters and has been qualified and provided testimony as an expert in several jurisdictions on a wide range of issues ranging from complex business and intellectual property valuations, financial forensic investigations, accounting malpractice claims, and various forms of economic damages.

Get the full story on challenges to Ronald Seigneur’s expert opinions and testimony with an in-depth Challenge Study.

Discussion by the Court

A. Nicholas R. Harris

1. Harris' Methodology

Plaintiffs retained Harris as their expert witness to opine on the value of consideration for the Simple Agreement for Future Equity or “SAFE” that is the security at issue in this case. The consideration for the security included $40,000 and admittance to Plaintiffs’ Accelerator Program. Plaintiffs explained that the three steps of Harris' methodology were followed: (1) start with a market indication of value; (2) adjust for inflation; and (3) test and corroborate the resulting figure. Harris testified that this is a generally accepted methodology for valuation.

First, Harris started with a baseline. To do so, Harris used a later program valuation (the "Foundation Valuation") of $350,000. This is the non-cash program value that a related entity not a party to this litigation, Rev Tech Labs Foundation, began inserting into its standard participant agreements in 2023. Harris relied on this number because "Plaintiffs' Accelerator Program participants have agreed to that value since Plaintiffs added this provision to their participation agreement in or around 2023."

Second, Harris adjusted the 2023 Foundation Valuation for inflation to discount it back to 2020, the year Defendants participated in the Accelerator Program. Harris based this adjustment on producer price inflation for management consulting services. This adjusted the baseline figure down to approximately $300,000 for 2020. Harris observed that this "suggests that the value of Plaintiffs' total consideration is approximately $340,000 including $40,000 of cash consideration."

Third, to test and corroborate the reasonableness of the $300,000 estimated value of Plaintiffs' in-kind consideration, Harris used a formula where cash consideration ($40,000) plus in-kind value equaled the value of the 6% equity interest. To do this, Harris did not calculate a value range for the stock that was given in connection with the SAFE, that is, CSI's stock. Rather, Harris calculated a value range for Frideswide's stock, reasoning that CFV thought it was receiving Frideswide stock through the SAFE. Using market-based revenue multiples based on Defendants' valuations and growth projections, Harris estimated that a 6% equity interest in Frideswide ranged from $149,502 to $678,231. Because his total consideration estimate of $340,000 fell within this equity-valuation range, Harris concluded his figure was corroborated and reasonable.

2. The Starting Figure of $350,000

At the outset, the Court found that Harris is qualified as an expert in his field of study relevant to this litigation. As to the merits of Defendants' motion, the Court first looks at Harris' reliance on the data provided to him by Plaintiffs, that is, the starting point at step one—$350,000.

Harris starts with a number provided by Plaintiffs that a different but related entity of Plaintiffs used for a different program (the "Foundation Program") in 2023, years after the 2020 Class 12 Program at issue. To give him that number, he understood Plaintiffs "looked at the items that are offered, the program itself, and determined what they believe to be the value of" the Foundation Program. Harris relied on that number based on his understanding that the Foundation Program was not materially different than the Class 12 Program and that none of the programs changed materially from the years 2020-2023. Further, his report states his understanding that "Plaintiffs' Accelerator Program participants have agreed to that value since Plaintiffs added this provision to their participation agreement in or around 2023." Harris provided no other analysis, support, or reasoning for the $350,000 figure.

As to this figure, Defendants argued that Harris took no steps to independently determine the value of attending an accelerator program, much less the Class 12 Program at issue in this case. They argued that instead, Harris accepted, without any further analysis, the Foundation Valuation based on his understanding that the Class 12 Program was not materially different from the Foundation Program and that neither program substantially changed from 2020 to 2023. They further argued that Harris did nothing to address the effect, if any, of COVID-19 on the Class 12 Program.

3. Analysis Under Rule 702(b)

The Court agreed with Defendants that Harris' reliance on the $350,000 figure, without more, "merely cloaks unexamined assumptions in the authority of expert analysis."

Harris observed that participants had agreed to that 2023 Foundation Valuation, and Plaintiffs assured him that the Foundation Program associated with that figure was substantially similar to the 2020 Program at issue. His report does not indicate how Plaintiffs arrived at the $350,000 starting point for his valuation, whether he tested that figure for reliability as a baseline value, or what calculations, if any, he made to vet that initial $350,000 figure. Plaintiffs' argument that Seigneur agreed to starting with that figure mischaracterizes his deposition testimony. Seigneur stated in his deposition that the $350,000 amount is "a reasonable place to start" and he "doesn't take issue with [ Harris] considering it." Seigneur explained, however, that "it wouldn't necessarily be the determining data point, but it would be a factor," and that it's a "self-declared value" that isn't right "just because the parties agreed on it."

Therefore, Plaintiffs have failed to meet their burden as to whether the $350,000 figure rests on a sufficient factual basis under Rule 702. As a result, the Court must exclude Harris' testimony for that reason, without consideration of his methods' reliability or whether he reliably applied them to the facts of this case.

B. Ronald Seigneur

Seigneur is a CPA and business valuation expert. Defendants retained Seigneur to rebut Harris' report. Seigneur offers several criticisms of Harris' valuation. Nevertheless, the exclusion of Harris' opinion leaves nothing for Seigneur to rebut. Seigneur was retained to review and critique Harris' report. He did not offer any independent opinions on the value of the Class 12 Program.

Held

1. The Court granted Defendants' motion in limine to exclude the testimony of Nicholas R. Harris.

2. The Court denied as moot Plaintiffs' motion in limine to exclude the rebuttal expert testimony of Ronald Seigneur.

Key Takeaway

An expert's opinion should be excluded when it is based on assumptions that are speculative and are not supported by the record.

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