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Lost Profits: Calculating the Damage

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When a business has been damaged by another party, an expert may be needed to estimate the damages. Photo by Dovis from Pexels

Financial experts are often hired to measure economic damages in contract breach, patent infringement and other tort claims. Here’s an overview of how experts quantify damages, along with some common pitfalls to avoid.

Estimating Lost Profits

Where would the plaintiff be today “but for” the defendant’s alleged wrongdoing? There are three ways experts address that question:

1. Before-and-after method. Here, the expert assumes that, if it hadn’t been for the breach or other tortious act, the company’s operating trends would have continued in pace with past performance. In other words, damages equal the difference between expected and actual performance. A similar approach quantifies damages as the difference between the company’s value before and after the alleged tort occurred.

2. Yardstick method. Using this technique, the expert benchmarks a damaged company’s performance to external sources, such as publicly traded comparables or industry guidelines. The presumption is that the company’s performance would have mimicked that of its competitors if not for the tortious act.

3. Sales projection method. Projections or forecasts of the company’s expected cash flow serve as the basis for damages under this method. Damages involving niche players and start-ups often call for the sales projection method, because they have limited operating history and few meaningful comparables.

Experts will consider the specific circumstances of the case to determine the appropriate method (or methods) for the situation.

Discounting Damages

After experts have estimated lost profits, they discount their estimates to present value. Some jurisdictions have prescribed discount rates, but, in many instances, experts subjectively build up the discount rate based on their professional opinions about risk. Small differences in the discount rate can generate large differences in valuators’ final conclusions. As a result, the discount rate is often a contentious issue.

Mitigating Factors

Another key step is to address mitigating factors. In other words, what could the damaged party have done to minimize its loss?

For example:

• A manufacturer that suffers a business interruption should minimize the impact by resuming operations at a temporary location or outsourcing production to another company, if possible.

• A wrongfully terminated employee needs to make a reasonable effort to find another job.

• An antitrust plaintiff prevented from entering a particular market should explore opportunities to invest in alternative markets.

• A plaintiff in a breach-of-contract case should make a reasonable effort to replace the business lost as a result of the defendant’s wrongdoing.

Most jurisdictions hold plaintiffs at least partially responsible for mitigating their own damages. Similar to discount rates, this subjective adjustment often triggers widely divergent opinions among the parties involved.

Avoiding Potential Pitfalls

Some key factors need to be considered to avoid over- or underestimating a plaintiff’s loss. For example, the taxation of damages can have a significant impact on an expert’s conclusion. If the plaintiff must pay taxes, an after-tax assessment wouldn’t be equitable. Also realize that some parts of a damages award, such as return of capital, may be nontaxable and require an after-tax estimate.

Taxes also need to be handled properly when lost profits are discounted to present value. In other words, if damages need to be calculated on a pretax basis, the expert should use pretax discount rates. Mismatching after-tax discount rates to pretax cash flows would overstate damages, all else being equal.

In addition, it’s important to not assume that damages will occur into perpetuity. Economic damages generally occur over a finite period. They have a beginning and an end. Eventually most plaintiffs can overcome the effects of the defendant’s alleged wrongdoing.

For More Information

When calculating economic damages, there isn’t a one-size-fits-all approach. What’s right depends on the facts of your particular case. Contact the experts at Advent Valuation Advisors to develop an estimate that avoids potential pitfalls and can withstand scrutiny in court.

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Ex-Owner of Medical Taxi Service Jailed for Fraud

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The former operator of a medical taxi service in Orange County was sentenced Thursday to one to three years in prison for defrauding Medicaid of more than $200,000. Photo by Bill Oxford on Unsplash

The former owner of a medical cab company in the Town of Wallkill in Orange County, NY, was sentenced Thursday to one to three years in prison for defrauding Medicaid of more than $200,000 by submitting falsified claims for medical transportation services, the Times Herald-Record reported.

Quitoni was arrested in September 2018. The New York State Attorney General’s Office, which prosecuted the case, argued that from 2013 to 2017, Quitoni submitted false claims seeking inflated payments from Medicaid. He was accused of submitting individual mileage claims for each Medicaid recipient traveling together in the same vehicle, instead of submitting group claims for mileage. Medicaid reimburses group trips at a lower rate per client than individual trips because the cost to providers is lower.

Quitoni was also accused of claiming Medicaid’s maximum allowance of $50 in toll reimbursement per trip, even though his vehicles did not incur that amount of toll expense. The Attorney General’s Office noted that there are no $50 tolls in New York and no combination of tolls on trips that Quatroni’s vehicles made which, when aggregated, could have totaled $50.

Continue reading here:

https://www.recordonline.com/news/20190905/ex-owner-of-medical-taxi-service-gets-1-3-years-for-fraud

Family Dealership Charged with Fraud

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The father-and-son owners of an Orange County car dealership have been charged with tax fraud and bank fraud. Photo by Bill Oxford on Unsplash

The father-and-son operators of an Orange County used-car dealership have been charged with understating their business’s income on tax returns and overstating it on loan applications, according to the U.S. Attorney’s Office for the Southern District of New York.

Mehdi Moslem and Saaed Moslem, owners of the Exclusive Motor Sports car dealership in Central Valley, are accused of conspiring with a tax preparer and others from 2009 to 2016 to conceal millions of dollars in profits from the IRS.

Prosecutors say that in 2009, Saaed Moslem hired a tax preparer in Rockland County who agreed to lower the yearend inventory value for Exclusive, which increased Exclusive’s cost of goods sold and decreased the net income reported on Saaed Moslem’s personal tax return. From 2010 to 2013 and again in 2015, the defendants directed the tax preparer to use false information in preparing partnership tax returns for Exclusive, according to the indictment. The returns significantly understated gross receipts and underreported inventory, thereby inflating the cost of goods sold. This reduced the business income attributable to the men, resulting in the underpayment of personal income taxes.

The tax preparer is not identified in the indictment, and is referred to as CC-1, short for co-conspirator 1.

Prosecutors say Saaed Moslem used his fraudulent tax returns to conceal his assets from creditors when he filed for bankruptcy in 2015. Both men are from Central Valley.

Bank fraud

Prosecutors say that, from 2011 to 2017, the father and son also conspired to defraud several financial institutions by submitting inflated net worth statements and fabricated tax returns in support of loan applications. They inflated the market value of their real estate holdings and omitted the tax liabilities resulting from the understatement of their income on their personal tax returns, according to the indictment. The loans included a $1.2 million mortgage on the car dealership property on which the men later defaulted.

Mehdi Moslem, 70, and Saaed Moslem, 35, are each charged with one count of conspiracy to defraud the United States and one count of bank fraud conspiracy. Saaed Moslem is also charged with two counts of making false statements to a lender, and one count of concealing assets and making false declarations in a bankruptcy case.  

Read the indictment here: https://www.justice.gov/usao-sdny/press-release/file/1190301/download

Restaurateur Caught Cooking the Books

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The owner of a French restaurant in Westchester County faces multiple fraud charges. Photo by Jez Timms on Unsplash

The owner of an upscale French restaurant in Westchester County has been charged with multiple counts of fraud, accused of falsifying bank records and running up an $80,000 tab on a customer’s credit card.

Barbara “Bobbie” Meyzen, owner of La Cremaillere Restaurant in Banksville, faces a litany of fraud charges, the culmination of a five-year spree of brazen acts of theft and fraud detailed by the U.S. Attorney’s Office for the Southern District of New York.

Meyzen has owned the restaurant since 1993. From August 2015 to July 2016, Meyzen submitted applications for credit on behalf of the restaurant to at least nine lenders and factors. According to the U.S. Attorney’s Office, Meyzen provided the potential lenders with business bank statements that she had altered, changing negative balances to positive balances, removing references to bounced checks and reducing service fees. When one lender discovered that the bank statements had been altered, authorities say Meyzen created an email account in the name of a bank officer and sent an email to the lender stating that the bank statements were genuine.

Authorities say Meyzen falsely represented to the same lender that the second mortgage on the restaurant had been paid off. She is accused of forging a satisfaction of mortgage document, filing it with the Westchester County Clerk’s Office and sending a copy to the lender. Meyzen later denied filing the false document, telling FBI agents that she believed a loan broker with whom she had previously worked had done it.

Meyzen is also accused of charging more than $80,000 in food and restaurant supplies to the American Express card of one of the restaurant’s customers. When the customer discovered the charges, authorities say Meyzen claimed the charges were a mistake and promised to resolve them. She later gave the customer two checks totaling $32,000. The checks bounced.  She told the FBI that she knew nothing about the unauthorized charges and denied giving the customer any checks, according to the U.S. Attorney’s Office.

In September 2018, Meyzen Family Realty Associates, LLC, the company that owns the property where La Crémaillère operates, filed for bankruptcy in U.S. Bankruptcy Court in White Plains. In April 2019, La Crémaillère Restaurant Corp., which operates the restaurant, followed suit. Meyzen is a part owner in both businesses. Two days after the second filing, Meyzen opened a bank account in her name and diverted more than $40,000 of the restaurant’s credit card receipts to that account, authorities said. The funds were used to make payments to a food distributor and to an in-home nursing service.

That bank account was closed on May 1. Six days later, Meyzen opened an account at another bank under Honey Bee Farm, LLC, and diverted La Crémaillère’s credit card receipts, as well as $20,000 in advances on the eatery’s future credit card revenue, to that account, according to the U.S. Attorney’s Office. Authorities say Meyzen used some of that money to make a payment on Meyzen Family Realty’s mortgage and to pay food distributors, wine wholesalers, a commercial trash service, a tableware and china company, and a restaurant employee.

Meyzen, 57, of Redding, Connecticut, has been charged with aggravated identity theft, wire fraud, mail fraud, credit card fraud, two counts of making false statements and one count of concealing a debtor’s property.

Read the complaint here: https://www.justice.gov/usao-sdny/press-release/file/1186206/download