Chapter 15 EFFECTIVE USE OF A FORENSIC ACCOUNTANT IN MEDIATING COMMERCIAL FRAUD DISPUTES

• Jurisdiction: United States

Chapter 15 EFFECTIVE USE OF A FORENSIC ACCOUNTANT IN MEDIATING COMMERCIAL FRAUD DISPUTES

Rebecca Callahan

An axiom is a self-evident truth that requires no proof — a universally accepted principle or rule. The number one axiom of dispute resolution is that all disputes come to an end at some point in time. In mediation, how that axiom plays out is a matter of choice left to the parties and their advisors. The process of mediation challenges everyone to engage at some level in the spirit of exploring a negotiated resolution before incurring the expense of litigation, trial and potential appeal.

That leads to the second axiom of dispute resolution, which is that a dispute belongs to the parties who created it; they own it and are the ones responsible for its existence. Party choice on how to resolve a dispute is a cornerstone of mediation, the idea being that the parties most directly affected by a dispute are — given the right circumstances — the ones who are best able to resolve it, and that the best resolution is likely to flow from the parties themselves. Mediation is all about creating the right circumstances for the parties to mutually agree that a negotiated resolution is in their respective strategic best interests.

Where the dispute involves significant dollars and matters of finance, such as in a commercial fraud case, it goes without saying that it would be helpful to have a skilled accountant (or two or three) at the table to facilitate the number-crunching and tax-implication aspects of any settlement discussions.

I. Mediation Overview

While mediation is routinely used to resolve commercial and other civil disputes, there are still some misconceptions or misunderstandings about the process itself. The importance of having a forensic accountant at the table will be better appreciated if the basics of the process itself are first understood.

Mediation is a dispute-resolution process that dates back to ancient times, but has only recently found its way into the vernacular of the litigated dispute. Over the past 20 years, mediation has become an accepted component of the civil litigation process. It is the rare litigation or arbitration case that does not find itself in mediation at some point during the life of the dispute. It is likewise true that the preparation and filing of most cases include, at the planning stage, strategic consideration of when might be the "right" time to explore a negotiated resolution of the dispute privately or through a facilitated mediation.

A. Voluntary Process

The first key component of mediation that needs to be understood is that it is a voluntary process. Unlike litigation, which is an involuntary process where parties are "summoned" to appear whether they want to or not (and defaulted if they do not), a mediation can be convened only if all parties agree to participate in such a process. Party volition is a key distinguishing feature of mediation. Logically, it stands to reason that for parties to agree to participate in a mediation, each must perceive the potential for some benefit or advantage flowing their way that is more valuable in some regard than the litigation alternative.

B. Autonomy

The second key component of mediation is party autonomy. In litigation, there are statutes, rules and case law that define a linear process that operates the same for all disputes and disputants and places a judge or arbitrator in control of the proceedings. Mediation is a relatively unstructured process where the parties can define when and where to meet, set the agenda, prioritize the issues, and make the ground rules. Parties also have the "power" to define and agree to a negotiated result that may not comport with the "relief" available to them in a court of law. As a process, mediation will vary from case to case as a function of the different parties at the table, the different professional advisors and the different subject matters in dispute.

C. Confidentiality

The third and final key component of mediation is confidentiality. Generally speaking, mediation is a private affair that is conducted behind closed doors. A theoretical underpinning of mediation is that the participants will treat as confidential that which is said and done during the course of the mediation so as to encourage candor and promote the exchange of settlement proposals. That being said, the confidentiality protections available under the law vary widely from jurisdiction to jurisdiction, so those "rules" need to be consulted and understood before participating in mediation.

II. The Bottom Line: Time and Cost

A. Risk vs. Reward of Litigation

Civil disputes — regardless of amount — compete with the criminal calendar for courtroom time and judge attention at the disproportionate rate of about 4 to 1. This circumstance is one of the key factors contributing to the large number of cases that are settled or abandoned before getting to trial. Among all civil matters filed, the settlement vs. trial rate is about 9 to 1. As such, when a civil action is first filed, the statistical odds are that it will be resolved by settlement and not by a trial on the merits. The questions are (a) when?, and (b) after how much time, effort and money has been invested in the litigation effort?

Early mediation provides an opportunity for parties to evaluate and gain an understanding about the nature and extent of the investment they may be required to make in order to obtain a judicial resolution. It also gives them an opportunity to critically assess the expected return on investment and to contrast that evaluation with an assessment of the risks vs. rewards associated with a litigation outcome.

B. Methods of Evaluation

Evaluating costs and risks is an area where an accountant could help his or her client at the outset assess whether it makes financial sense to explore settlement before spending significant dollars on discovery, law-and-motion and other litigation activities directed at preparing the matter for trial — which is a statistical long-shot. That analysis could include the following methodologies:

• BATNA (Best Alternative to a Negotiated Agreement)

[What is the best that I can expect from the Court/Arbitrator if we don't come to a negotiated resolution, and what is my estimated net-net return/out of pocket expenditure?]

• WATNA (Worst Alternative to a Negotiated Agreement)

[What is the worst that I can expect from the Court/Arbitrator if we don't come to a negotiated resolution, and what is my estimated net-net return/out of pocket expenditure?]

• LATNA (Likely Alternative to a Negotiated Agreement)

[What is the most likely outcome that I should expect from the Court/Arbitrator if we don't come to a negotiated resolution, and what is my estimated net-net return/out-of-pocket expenditure?]

All of the above include a financial analysis of what it will cost to prosecute and pursue the litigation alternative through trial and possibly an appeal, and what the expected return is on that investment in terms of net dollars to the client. Another component of this analysis could include opportunities lost — meaning, if "X" dollars were not spent on litigation, where might those dollars be invested or otherwise put to work, and what return might that investment return to the client?

When charting the BATNA/WATNA/LATNA analysis for a fraud claim, it is generally an either/or proposition. Fraud is either proven or it is not, so the "best" and "worst" case analyses are mirror images of each other — meaning that the plaintiff's best case (the whole enchilada) is the defendant's worst case, and the defendant's best case (zero liability) is the plaintiff's worst case. The "most likely outcome" analysis thus becomes key — for both sides — and is driven by the circumstances of the particular case, the evidence developed to date, and the credibility of the key witnesses in terms of demeanor and story. Fraud claims are frequently coupled with other types of claims (e.g., negligent misrepresentation, breach of contract, breach of fiduciary duty, etc.). Consideration of the potential outcome on the other causes of action becomes important when trying to analyze the potential value of the case for purposes of negotiating a settlement.

Chart 15-1

BATNA ANALYSIS

Claim/ Liability Exposure	Recovery/ Liability Exposure	% of "Best Days" Out of 10	Case Value
__________	__________	__________	__________
__________	__________	__________	__________
__________	__________	__________	__________

WATNA ANALYSIS

Claim/ Liability Exposure	Recovery/ Liability Exposure	% of "Best Days" Out of 10	Case Value
_____...