Accounting Expert Witness’ Opinions on Due Diligence Procedures Admitted
Posted on April 25, 2024 by Expert Witness Profiler
A district judge in Mississippi held that the accounting expert witness was more than qualified to testify about the due diligence requirements in the stock purchase agreement in question.
Facts of the case:
Casey Morgan (“Morgan”) and Jimmy Ward (“Ward”) (collectively “Plaintiffs”) previously owned and operated Bigfoot Land Services, Inc. (“Bigfoot” or “the company”), an Oklahoma-based land services company. The Plaintiffs had a long-standing business history with the Defendants, specifically, Mr. Joseph Logan Sewell, Jr. (“Sewell”)—and in approximately 2021, the parties began discussing Sewell’s purchase of Bigfoot. The culmination of those negotiations was a Purchase and Sale Agreement dated June 3, 2022 (“Purchase and Sale Agreement” or “Contract”), where the Plaintiffs sold the entirety of their shares of stock in Bigfoot to Sewell Investments, LLC, Logan N. Sewell, and Colorado Buck Family, LP. The price tag for this stock purchase totaled Two Million Seven Hundred Seventy Thousand One Hundred Forty and 96/100 Dollars.
After the acquisition, the Defendants realized that Bigfoot was operating at a loss and subsequently mailed a letter dated October 7, 2022, alleging that the Plaintiffs fraudulently misrepresented Bigfoot’s valuation and demanding that the Plaintiffs “rescind the Purchase and Sales Agreement and return all exchanged considerations on or before October 14, 2022.”
The Plaintiffs commenced this action against the Defendants on November 4, 2022, in the United States District Court for the Southern District of Mississippi, intending to enforce the Agreement.
They asserted that the Defendants breached the Agreement by failing to pay the Plaintiffs $85,000 for work Bigfoot performed prior to the sale and making purchases on the company credit card under Morgan’s credit without authorization. The Plaintiffs further contended that the Defendants defaulted on the Promissory Note executed in Ward’s favor and repudiated the Agreement with their demand to rescind the Agreement via the Demand Letter dated October 7, 2022.
Motion to exclude
The Plaintiff’s retained expert Westley “Wes” Winborne intended to testify that the Defendants did not perform relevant tasks in order to validate that the Plaintiffs’ financial records could be relied on.
The Defendants contended that Winborne’s testimony had to be based on not only experience but also some reliable, objective methodology. The Defendants also alleged that Winborne’s testimony would have been unfairly prejudicial and would have misled the jury because the testimony improperly placed a legal duty upon the Defendants that was not recognized under Oklahoma law.
It was undisputed that Winborne’s opinions did not cite to any peer-reviewed publications, potential rates of error, or controls used. Nor did he appear to have considered alternative theories in reaching his opinion on the due diligence procedures. However, his procedures could be tested.
Winborne’s relevant field is that of providing accounting services in the sale and purchase of a company, including “litigation support, contract costing, strategic planning and related services.” Winborne submitted that he employed the same kind of data and the same methodology as he had in assisting clients in the sale and purchase of similarly situated construction businesses.
Accounting Expert Witness
Wes Winborne is the managing partner of HORNE’s construction group where he offers financial guidance and advisory services to the construction industry.
Wes joined the firm in 2000 and has more than 20 years of experience providing audit, tax and client advisory services to contractors. He has served on the boards of various local and national construction associations.
Wes received his Bachelor of Accountancy and his Master of Accountancy from Mississippi State University.
Discussion by the Court
Is Winborne qualified?
According to Winborne’s Expert Witness Report, Winborne is a CPA with “over 20 plus years of experience providing audit, accounting and tax services to numerous small and medium sized businesses and their owners.”
These services included “litigation support, contract costing, strategic planning and related services.” Winborne also testified that he has provided services in transactions concerning the purchase and sale of construction businesses on approximately 80 different occasions.
The Defendants argued that despite this experience, Winborne’s theories were based on what Winborne would have done and not based on objective and reliable methodology.
Having considered the parties’ briefs on the qualifications of Winborne, the Court concluded at this stage that pursuant to Rule 702 he appeared to be qualified to render his opinions on the relevant due diligence performed in a stock purchase based on his education as well as his experience, skill, and knowledge gained from his role as a managing partner of a construction accounting firm.
Is Winborne’s testimony relevant and reliable?
In his report, Winborne laid out the due diligence procedures, based on his 20 years of experience as a certified public accountant and his review of financial documents provided by the Plaintiffs in relation to this matter.
The Defendants’ objections to Winborne’s testimony concerned the credibility of his conclusions and the level of certitude of the procedures on which he relied. The Defendants further argued that Winborne’s testimony would impose a legal duty to perform due diligence not recognized by Oklahoma law.
Upon reviewing the Expert Report, the Court was not convinced that this was the case; instead, it appeared that Winborne was only describing the due diligence procedures he performed, including the kinds of data and methodologies he relied on, in his day-to-day business, as he did when deriving his opinions in this case.
The Court held that Winborne’s opinions were consistent with the facts of the case.
The agreement included a clause indicating that the Defendants agreed to perform due diligence prior to the purchase and that the Plaintiffs would provide full access to Bigfoot’s books and records to assist in the due diligence process. Winborne is a certified public accountant with years of experience in the purchase and sale of similarly situated construction businesses. The very nature of Winborne’s testimony involved the due diligence he would have performed in his day-to-day business as the managing partner of a construction accounting firm. Accordingly, the Court concluded that Winborne’s opinions on due diligence procedures were relevant and reliable in this matter.
Held
After reviewing the Defendants’ arguments, the applicable law, and the evidence the Defendants sought to exclude, the Court found that Winborne’s proposed testimony appeared to be sufficiently relevant and reliable pursuant to Rule 702. Thus, the Court denied the Defendants’ motion to exclude the testimony of the Plaintiff’s expert Westley “Wes” Winborne.
On January 23, 2024, both parties had filed dueling motions for partial summary judgment. The Plaintiffs’ allegations rested on the Defendants’ alleged breach and anticipatory repudiation of the Agreement. The Plaintiffs further averred that the Defendants failed to assert valid fraud claims to survive summary judgment. The Defendants’ Motion sought rescission of the Agreement, contending that the Plaintiffs had committed fraud by offering alleged materially false representations prior to the agreement. The Court denied both motions for partial summary judgment.
Key Takeaway:
An expert’s testimony “must be relevant, not simply in the sense that all testimony must be relevant, but also in the sense that the expert’s proposed opinion would assist the trier of fact to understand or determine a fact in issue.” Winborne is a certified public accountant with years of experience in the purchase and sale of similarly situated construction businesses. The very nature of Winborne’s testimony involves the due diligence he would perform in his day-to-day business as the managing partner of a construction accounting firm.
Case Details:
| Case Caption: | Morgan Et Al V. Sewell Et Al |
| Docket Number: | 5:22cv89 |
| Court Name: | United States District Court, Mississippi Southern |
| Order Date: | April 24, 2024 |
