Opinion
Case Nos. 02-88564, 02-88568, 02-88570, 02-88572, 02-88573, Adv. P. No.: 04-08680 (Jointly Administered).
November 1, 2005
James M. Sullivan (JS-2189), McDERMOTT WILL EMORY LLP, New York, New York.
Howard J. Steinberg (pro hac vice), Michael H. Strub, Jr. (pro hac vice), IRELL MANELLA LLP, Los Angeles, California.
Robert A. Scher (RS-2910), FOLEY LARDNER LLP, New York, New York.
Scott E. Early (pro hac vice), Ellen Wheeler (pro hac vice), Jill L. Murch (pro hac vice), Christopher J. Werner (pro hac vice) FOLEY LARDNER LLP, Chicago, Illinois.
Issue
The plaintiffs filed a motion in limine to exclude the alleged expert testimony of Scott Peltz, a forensic accountant, on one of the main issues in this adversary proceeding; namely, whether the prepetition payment of $7,500,000 as an "option price" from Med-Diversified, Inc, to the defendants, under the terms of the disputed first amendment of the stock purchase agreement, was for reasonably equivalent value when the transferor was insolvent. The Court declined to decide the motion on an in limine basis. After reviewing the motion and memorandum in opposition to the motion, and holding some preliminary oral arguments, the Court ruled that it made more practical sense to conduct a voir dire of the proposed expert witness and then determine whether the motion should be granted at the conclusion of the voir dire. The voir dire took place for the better part of three business days, with active participation by the Court in that process. For the reasons set forth below in this Memorandum, the Court has decided to grant the plaintiff's motion, in part, as to the proposed expert's direct testimony, but to deny it, in part, so that the proposed expert may testify as a rebuttal witness to the plaintiff's proposed expert witness on business valuation, Robert Cimasi.
The voir dire took place over the better part of September 16th, 26th and 30th, 2005.
Mr. Cimasi's qualifications as an expert witness on valuation was subject to a reciprocal motion in limine filed by the defendants to disqualify him from testifying. Mr. Cimasi was also subject to an extensive voir dire conducted over three business days, with active participation by the Court. Without ruling on his qualifications, the Court permitted him to testify and be cross-examined extensively, subject to defendants' arguing their motion in limine, with the opportunity to have all or part of his testimony stricken, which will be dealt with in a later Memorandum of this Court after completion of Mr. Peltz's rebuttal testimony.
Discussion
Rule 702 of the Federal Rules of Evidence provides:
If scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education, may testify thereto in the form of an opinion or otherwise, if (1) the testimony is based upon sufficient facts or data, (2) the testimony is the product of reliable principles and methods, and (3) the witness has applied the principles and methods reliably to the facts of the case.
Fed.R.Evid. 702. In determining whether expert testimony is admissible under Rule 702, the Court is charged with the task of ensuring: (1) the evidence is relevant, (2) the expert is qualified, and (3) the expert's testimony rests on a reliable foundation. See Amorgianos v. National R.R. Passenger Corp., 303 F.3d 256, 265 (2d Cir. 2002) (relying on Daubert v. Merrill Dow Pharmaceuticals, Inc., 509 U.S. 579, 597 (1993)). Under Daubert, the Court has a duty to act as a "gatekeeper" to "ensure that the courtroom door remains closed to junk science while admitting reliable expert testimony that will assist the trier of fact." Amorgianos at 267.
In general, the first inquiry the court must make is whether the proffered testimony is relevant under Rule 401, which defines relevant evidence as "evidence having any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence." Fed.R.Evid. 401. See Amorgianos, 303 F. 3d at 265. Because there is a sufficient basis to exclude the testimony on other grounds, the Court declines to address the issue whether relevancy is a basis for exclusion as moot.
In determining whether expert testimony is reliable, the Supreme Court has identified a number of factors that may be considered, such as: (1) whether a theory or technique can be, and has been, tested; (2) whether the theory or technique has been subjected to peer review and publication; (3) a technique's known or potential rate of error and the existence and maintenance of standards controlling the techniques operation; and (4) whether a particular technique or theory has gained general acceptance in the relevant scientific community. See Daubert at 593-94; Kumho Tire Co., Ltd., 526 U.S. 137, 149 (1999). This list of factors is not exclusive. Instead, the gatekeeper inquiry the trial court must undertake is a flexible inquiry that "must focus on the principles and methodology employed by the expert, without regard to the conclusions the expert has reached or the . . . court's belief as to the correctness of those conclusions." Amorgianos at 266.
The trial court's inquiry must ensure that every step of the expert's analysis is reliable. Id. In doing so, the court is to "undertake a rigorous examination of the facts on which the expert relies, the method by which the expert draws an opinion from those facts, and how the expert applies the facts and methods to the case at hand." Id. If the court determines that either the data, methodology or studies upon which the expert's opinion is based is inadequate to support the expert's conclusions, the court must exclude the expert's testimony. Id. at 266. While minor flaws in an expert's reasoning will not require exclusion, the court must exclude the evidence "if the flaw is large enough that the expert lacks `good grounds' for his or her conclusions." Id. at 267 (quoting In re Paoli R.R. Yard PCB Litig., 35 F.3d 717, 745 (3d Cir. 1994)).
1. Peltz's Qualifications as an Expert Witness on Valuation
Rule 702 requires that an expert be qualified "by knowledge, skill, experience, training or education. . . ." Fed.R.Evid. 702. Mr. Peltz testified on voir dire that he has no peer-granted certifications as an expert on business valuations, and that his report is not to be read as a certified business valuation report, in contrast to the certified business valuation report of plaintiffs' expert witness, Mr. Cimasi. See Trial Tr. of Sept 26th at p. 79 and Sept. 30th at pp. 130-34. Moreover, Mr. Peltz's testimony and his report reveal that he has no education or training in business valuation. Id., see also Expert Report of Scott P. Peltz (Peltz Report), dated July 18, 2005, Trial Ex. 213, at Appendix A, pp 3287-91. By his own admissions, Mr. Peltz is not qualified as a business valuator.
Mr. Peltz specifically testified: "I'm not a certified valuation expert, and I don't issue valuation reports." Trial Tr. of Sept. 26th at p. 79.
Mr. Peltz also admitted repeatedly that he personally does not issue business valuation reports, although he relies upon members of his support staff who are certified business valuators for their input. See Trial Tr. of Sept. 16th at p. 175-78; Sept. 26th at p. 79, and Sept. 30th at p. 133-34. As plaintiffs' counsel properly pointed out, the plaintiffs were not given an opportunity during the trial of this adversary proceeding to cross-examine the persons who provided those inputs, and the result of these delegated duties cannot be relied upon as a basis for finding Mr. Peltz to be an expert on business valuation. Moreover, Mr. Peltz admitted that his report cannot be considered a certified business appraisal because it does not meet uniform standards for professional appraisal practices that are generally accepted by professional business appraisers. See Trial Tr. of Sept. 16th at pp. 175-78 and Sept. 30th at pp. 133-34.
In effect, Mr. Peltz relied upon a lower standard of expertise to support his expert testimony, and this Court does not accept defendants' argument that his substantive experience over the past twenty-plus years as an accountant is a satisfactory substitute for formal education or recognition as an expert witness in this sub-branch of expertise in business valuation. Mr Peltz has no experience in preparing valuation reports and very little hands-on experience in serving as a paid consultant in the health care industry, in marked contrast to Mr. Cimasi. Mr. Peltz's principal claim for expertise is a few speeches and short articles on health care insolvencies. See Peltz Report at Appendix A, pp 3287-91; see also Trial Tr. of September 30th at pp. 132-33. This Court declines to find that such a thin record is an adequate and reliable substitute for direct experience in this area.
Mr. Peltz identified three different healthcare matters he had some involvement with, Doctor's Hospital, Edgewater and Grant Hospital, and North Suburban Clinic, where he apparently played some part in the restructuring efforts of these entities. See Trial Tr. of Sept. 16th at pp. 152-55.
When asked by the Court whether he had ever authored any substantial articles published by any leading business, accounting or economic journals, Mr. Peltz replied that he had not. See Trial Tr. of Sept. 16th at pp. 166-67.
Furthermore, Mr. Peltz found himself in an impossible ethical conflict as a result of one of his prior engagements in which he served and was handsomely compensated as a fraud auditor in the National Century Financial Enterprises (NCFE) cases, which were filed as related Chapter 11 cases in 2002 with the bankruptcy court for the Southern District of Ohio, sitting in Columbus. First, in rendering his opinion, Mr. Peltz deliberately chose not to use information about the massive fraud the principals of NCFE committed in the securitized financing of the two debtors here, Tender Loving Care (TLC) and Med-Diversified, which would have been probative on the issue of whether Med-Diversified could close the transaction at issue in this adversary proceeding, given that Med-Diversified was relying upon NCFE as a source of funding for the transaction at issue. See Trial Tr. of Sept. 26th at pp. 151-55. Second, Mr. Peltz knew that at least two of the principal directors of NCFE also served on the Board of Directors of Med-Diversified, and one of the subordinate issues in this adversary proceeding was whether the Board gave corporate authorization to enter into the so-called first amendment of the stock purchase agreement, under which the $7,500,000 was released from a joint escrow account and paid to the defendants. So either Mr. Peltz's testimony is biased because he had formed a preconception of NCFE's role in the relevant Med-Diversified acquisitions of the stock of the TLC entities and the proposed acquisition of 100% of the shares of the defendant Addus that were directly controlled by Mr. Andrew Wright. Or, alternatively, Mr. Peltz deliberately chose not to apply his existing knowledge where it was directly relevant to this case. On either of these grounds alone, his direct testimony is not admissible.
Mr. Peltz testified that he did not disclose his involvement with NCFE in his resume or his report. See Trial Tr. of Sept. 26th at 153.
Putting Mr. Peltz's ethical conflicts aside for the moment, the primary case precedents relied upon by defendants in favor their argument for admission of Mr. Peltz's testimony do not dictate a contrary result. Relying on McCullock v. H.B. Fuller Co., 61 F.3d 1038 (2d Cir. 1995) and Nimely v. City of New York, 414 F.3d 381 (2d Cir. 2005), defendants argue that Mr. Peltz does not need to be certified as a business valuator in order to be qualified as an expert witness on valuation. However, in McCollock, the Court held that the expert was qualified because he had sufficient experience in the field at issue to overcome his lack of formal training and certification. As set forth above, Mr. Peltz's experience is inadequate to overcome his lack of formal training and certification. Moreover, in Nimley, the Court did not determine whether the expert was qualified, but instead held the District Court should have excluded the expert's testimony because his methods were unreliable. 414 F.3d at 396-97.
Relying on Nimely, defendants argue that Mr. Peltz's experience satisfies the "liberal" standard for admission of expert testimony under Rule 702. However, not only did the Court in Nimely decline to determine whether the expert was qualified, but the Court also stated:
The shift under the Federal Rules to a more permissive approach to expert testimony did not represent an abdication of the screening function traditionally played by trial judges. To the contrary, as Daubert explained, Rule 702 governs the district court's responsibility to ensure that `any and all scientific testimony or evidence admitted is not only relevant, but reliable.' Daubert, 509 U.S. at 589. In Kumho Tire Co. v. Carmichael, 526 U.S. 137 . . ., the Court clarified that, whether a witness's area of expertise was technical, scientific, or more generally `experience-based,' Rule 702 required the district court to fulfill the `gatekeeping' function of `mak[ing] certain that an expert, whether basing testimony upon professional studies or personal experience, employs in the courtroom the same level of intellectual rigor that characterizes the practice of an expert in the relevant field.'
Nimely, 414 F.3d at 396. As set forth below, not only does Mr. Peltz fail to qualify as a business valuation expert, but, in performing its gatekeeper role, this Court must also exclude Mr. Peltz's testimony as unreliable because he did not employ the same level of intellectual rigor that characterizes the practice of an expert in the field of business valuation.
2. Reliability of Peltz's Expert Opinion
Even if Mr. Peltz is qualified as an expert on business valuation, his testimony is still inadmissible because he showed a remarkable degree of carelessness as an alleged professional in purportedly applying the alleged professional standards and techniques found in the published practical treatises, including the standards and techniques published in the writings of Dr. Shannon Pratt and his co-authors, which were repeatedly propounded by the parties during the testimony of both Mr. Peltz and Mr. Cimasi. This was thoroughly explored in the lengthy and detailed cross-examination of Mr. Peltz by counsel for the plaintiffs. The Court cannot accept the testimony of an alleged expert in valuation where he failed to employ necessary valuation techniques, based his analysis on inadequate data, and thoroughly conflated different concepts such as gross cash flow and net cash flow from operations. His testimony did nothing to assist this Court in performing its role as the finder of fact on the material issues in this adversary proceeding; indeed, his testimony made this Court's role even harder to perform.
The methodology used by Mr. Peltz in determining the value of Addus consisted of two separate valuation techniques: (1) a Guideline Company Multiple Approach ("Company Approach") and (2) a Guideline Transaction Multiple Approach ("Transaction Approach"). See Peltz Report, Trial Exhibit 213, at pp. 3257-58. Yet the leading authorities on business valuation, including the authority most cited by the parties, Dr. Shannon Pratt, "recognize that the most reliable method for determining the value of a business is the Discounted Cash Flow ("DCF") Method." Lippe v. Bairnco Corp., 288 B.R. 678 (S.D.N.Y. 2003) (citing Shannon P. Pratt et. al., Valuing A Business: The Analysis and Appraisal of Closely Held Companies 154 (4th ed. 2000) ("Regardless of what valuation approach is used, in order for it to make rational economic sense from a financial point of view, the results should be compatible with what would result if a well-supported discounted economic income analysis were carried out.")), aff'd, 99 Fed. Appx. 274 (2d Cir. 2004). During his testimony, even Mr. Peltz recognized that the DCF method is commonly used to value 100% of the equity of a privately held company. See Trial Tr. of Sept. 30th at p. 64. Yet he did not use the DCF method in determining the value of the Addus shares. Id. at pp. 68-69.
In Lippe, the Court excluded the testimony of a business valuation expert based, in part, on the expert's failure to use the DCF method in determining the value of the business. The Court held "[b]y failing to use the DCF method and relying solely on the comparable companies method, [the expert] did not have an ability to do a `check' on his determinations." Lippe, 288 B.R. at 689. Accordingly, the expert's testimony was excluded as unreliable. Id. at 701.
Likewise, Mr. Peltz's failure to use the DCF method amounts to a flaw in his methodology large enough to find that his testimony is inadmissible because his conclusions lack `good grounds.' See Amorgianos, 303 F.3d at 266. Although Mr. Peltz used two methods in determining the value of Addus, both approaches are considered "market" approaches that apply a multiple computed from data derived from other alleged comparable companies. In contrast, the DCF method is considered an "income" approach to valuation that uses data derived from the target company itself to compute the current value of the projected future economic benefit of owning the company. Mr. Peltz never determined that the DCF method was inappropriate as a valuation method under the circumstances, and he even considered using the DCF method, stating at one point in his testimony: "[t]he methodology is appropriate. No question." Trial Tr. of Sept. 30th at p. 68. But for some unknown reason, Mr. Peltz did not use the DCF method and failed to offer an adequate explanation why he did not do so. Instead, he testified that he simply ascertained the method he used was reliable. Id. at 67. As in Lippe, this Court finds that Mr. Peltz's use of only two "comparable companies" methods simply did not provide the necessary "check" on the value he arrived at that would render that value a reliable measure of the company's worth.
Plaintiff's expert, Mr. Cimasi, used three methods in determining the value of the Addus shares: (1) the DCF method, (2) the Guideline Company Valuation Method, and (3) the Direct Market Comparable Transactions Method.
This conclusion is further supported by the fact that Mr. Peltz testified that he only performed a second analysis using the Transaction Approach as a "check" on the results from his analysis using the Company Approach. See Trial Tr. of Sept. 26th at pp. 60-61 and Sept. 30th at pp. 59-60. He stated: "if I used the transaction approach and reached a wildly variant conclusion, I'd have to go back and consider my methodology." Trial Tr. of Sept. 26th at pp. 60-61. However, Mr. Peltz also testified that while he believed he had good data for his Company Approach, he did not believe he had a very good set of transactions for use in performing an analysis under the Transaction Approach. Id. Mr. Peltz never provided any explanation why he believed the Transaction Approach could serve as a test for the reliability of the Company Approach when, by his own admission, his analysis using the Transaction Approach was itself unreliable.
Mr. Peltz provided no source of authority for using the Transaction Approach as a test of reliability for his Company Approach, stating only "the source is a professional judgment." Trial Tr. at p. 61.
Further, in computing a value under the Transaction Approach, Mr. Peltz applied a discount of 25% for the "illiquidity" of the business, even though the Transaction Approach presumably uses data from actual transactions of privately held companies that are similar to the transaction at issue. As a result, "illiquidity" is already built into the results. When asked whether he had any support for applying such a discount, Mr. Peltz replied: "I haven't researched that. It's common — I can tell you that it's been my common practice." Trial Tr. of Sept. 30th at p. 63. However, without this discount, Mr. Peltz would have reached a "wildly variant" conclusion, which, by his own testimony, would have forced him "to go back and consider [his] methodology." Trial Tr. of Sept. 26th at pp. 60-61
The results of Mr. Peltz's analyses from both methods are set forth in Exhibit C of the Peltz Report. See Trial Exhibit 213 at pp. 3276-78. The results reveal that Mr. Peltz arrived at comparable values using both methods. He arrived at a value of $77,677,000 using the Company Approach, and $73,860,000 using the Transaction Approach. However, a closer look at the numbers reveals that in applying the Company Approach, Mr. Peltz first computed two values using two separate multiples, Enterprise Value/Revenue (EV/R) and Enterprise Value/Cash Flow from Operations (EV/CFO), to arrive at two separate values for Addus, and then gave each value a weight: 33.3% for the EV/R value and 67.7% for the EV/CFO value. After adding the two weighted values and subtracting debt, Mr. Peltz arrived at a single value that was very close to the value he arrived at using the Transaction Approach. Yet Mr. Peltz failed to explain adequately why in his application of the Company Approach he gave the value he arrived at using the EV/CFO multiple a weight of 67.7%, 2/3 more than the value he arrived at using the EV/R multiple, which was significantly higher than the EV/CFO value. Absent a sufficient explanation for the weights assigned to these two values, Mr. Peltz's entire analysis is questionable because had he assigned different weights in applying the Company Approach, the value he arrived at may have been significantly divergent from the value he arrived at using the Transaction Approach.
Mr. Peltz's explanation for assigning a greater weight to EV/CFO was that he believed the EV/R value should receive less weight because prospective buyers would see adjustments to the company's financial statements and thereby place a greater significance on factors other than revenue. See Trial Tr. of Sept. 26th at p. 46. Mr. Peltz also stated that his weighting was based on the coefficient of variation he calculated for each multiple, but, as explained in more detail below, this explanation has no valid basis. See FN 14.
Moreover, in deriving a value for Addus using both the Company and Transaction approaches, Mr. Peltz depended on databases of research findings of only ten allegedly comparable privately held companies engaged in home health care and related industries. See Trial Exhibit 213 at pp. 3277 and 3279. Mr. Peltz testified that he did not do any independent analysis of these companies, and did not independently analyze the data from the databases from which he derived his figures — "Mergerstat" and "Factset." See Trial tr. of Sept. 30th at p. 55. In choosing the companies and transactions upon which his analysis is based, Mr. Peltz admittedly never considered the nature or products of the businesses, or the market in which these businesses operated. Id. Thus, the data on which Mr. Peltz's conclusions are based is simply inadequate.
Further, in applying the Company Approach, Mr. Peltz used a critical entry from the audited financial statements prepared by BDO Seidman for the calendar year ended December 31, 2001 — net cash flow from operations, but that accounting entry does not provide the empirical basis for directly drawing any valid inferences for determining the business valuation of the controlled shares of the defendant Addus. To derive the value for 100% of the shares of Addus, major adjustments would have to be made to the balance sheet in order to determine the net effect on the value of contingent liabilities and contingent assets, among other things.
Testimony revealed that in computing a multiple based on cash flow, the established method used by Mr. Peltz's only source of authority for using such a method, Dr. Pratt, is to divide the enterprise value by gross cash flow, not net cash flow from operations. See Trial Tr. of Sept. 30th at pp. 6-10. As plaintiff's counsel pointed out, there is a critical difference between the two figures unlike net cash flow from operations, gross cash flow does not include working capital, which takes into account changes in the company's assets and liabilities. Id. Mr. Peltz was not able to provide an explanation why he deviated from established valuation procedures, nor was he able to point to any authority to support the use of net cash flow from operations, as he defined it, as a valid technique to compute a Guideline Company multiple. Nor did Mr. Peltz test the validity of this method against the company's historical performance because, as he admitted during his testimony and in his deposition, he did not study the actual financial performance of the company.
Mr. Peltz stated, in effect, that he is free to develop any reliable measure for use in placing a value on a company, regardless of whether Dr. Pratt has included that same measure in his book. See Trial Tr. of Sept. 30th at p. 17. The problem is that Mr. Peltz has not shown his measure to be reliable.
Moreover, the variable Mr. Peltz chose to use, net cash flow from operations, actually had an inverse relationship with the financial well-being of the company. Testimony revealed that as the company's working capital decreased, the net cash flow from operating activities increased, which in turn increased the value of the company that Mr. Peltz derived by using the net cash flow from operating activities multiple. See Trial Tr. of Sept. 26th at p. 214. Yet, in general, a decrease in working capital typically indicates a decline in the health of a company. Indeed, testimony indicated that during the time period for which Mr. Peltz computed a value based on a net cash from operating activities multiple, 2001, Addus increased its checks against future deposits by 800%, and Mr. Peltz's analysis did nothing to compensate for this increase. Id. at 218. In addition, Mr. Peltz admitted that net cash flow from operations was substantially higher in 2001, the only year for which Mr. Peltz performed a value analysis using the net cash from operating activities multiple, than for any other year in Addus's financial history. Id. at 241-42.
Finally, Mr. Peltz testified that he believed that a multiple derived by using the net cash flow from operations figures for the guideline companies was reliable because his analysis revealed that it was closely correlated with another commonly used benchmark — earnings before interest, taxes, depreciation and amortization (EBITDA). See Trial Tr. of September 26th at p. 242. Mr. Peltz testified that he believed the two were closely correlated because their coefficient of variation was similar. Id. at 244. However, in calculating the coefficient of variation for the EBITDA figure, Mr. Peltz excluded one of the guideline companies — Gentiva, but he did not exclude Gentiva from the calculation of the coefficient of variation for the net cash flow from operations figure. Mr. Peltz testified that the exclusion was done for the EBITDA calculation because Gentiva was an "outliner" that threw the calculation off. Id. at 244-45. Mr. Peltz never adequately explained to this Court's satisfaction why Gentiva was an outliner for the EBITDA calculation but was not an outliner for the net cash flow from operations calculation, casting even more doubt on the reliability of his methods.
Mr. Cimasi used EBITDA in calculating one of the multiples used in his guideline company approach.
Mr. Peltz testified that the coefficient of variation is a measure of how tightly grouped the data is. The smaller the number, the more tightly grouped the data is, and the more tightly grouped the data is, the more reliable the data is. See Trial Tr. of Sept. 30th at p. 140.
Mr. Peltz also testified that the coefficient of variation for the cash flow multiple was much lower than for the revenue multiple, see Trial Tr. of Sept. 30th at p. 142, which is one reason he chose to give the revenue multiple a 33% weight (and the net cash flow multiple a 67% weight). See Trial Tr. of Sept. 16th at p. 26. Not only did Mr. Peltz fail to explain why he chose 33% (and not some lower or higher number), but, as set forth above, he only arrived at such a low coefficient of variation by excluding Gentiva.
The Supreme Court has clearly stated: "nothing in either Daubert or the Federal Rules of Evidence requires a . . . court to admit opinion evidence which is connected to existing data only by the ipse dixit of the expert. A court may conclude that there is simply too great an analytical gap between the data and the opinion proffered." General Electric v. Joiner, 522 U.S. 136, 146 (1997). As such, "when an expert opinion is based on data, a methodology, or studies that are simply inadequate to support the conclusions reached, Daubert and Rule 702 mandate the exclusion of that unreliable opinion testimony. Amorgianos, 303 F.3d at 266; Nimely, 414 F.3d at 396-97. Mr. Peltz's expert opinion and testimony were loaded with multiple ipse dixits. Accordingly, the Court must exclude the expert valuation opinion of Scott Peltz on this ground as well.
3. Application of Black-Scholes
As to the issue of applying the Black-Scholes Method for valuing the "option" for acquiring 100% of the privately held shares of Addus, notwithstanding the purported stipulation between the parties that this Method is appropriate, and assuming, as plaintiffs' counsel argued, that each of the variables in the Black-Scholes model could be instantiated or filled in, the parties have not cited a single case, either in a federal bankruptcy or federal district court, in which that court accepted as a recognized methodology the application of the Black-Scholes Method to valuing an option in 100% of controlled shares in a privately held company. This Court is not prepared to embark on a cruise down this jungled river to recognize the application of this Method outside the principal context in which it has been customarily applied, namely, to valuing an option for a minority of publicly traded shares. See e.g., Mathias v. Jacobs, 238 F. Supp. 2d 556 (S.D.N.Y. 2002) (Black-Scholes "is used pervasively by virtually all publicly held companies, and pervasively in option trading."); Cramer v. Comm'r Internal Revenue, 101 T.C. 225, 242 (1993) (Black-Scholes was specifically designed to place a value on publicly traded options.). The Black-Scholes Method has simply not been shown to provide a reliable measure of the value of an option to purchase 100% of controlled shares in a privately held company and the parties failed to set forth any credible evidence otherwise.
The institutional settings of cases filed in the tax courts, state matrimonial courts, or corporate litigation in the Delaware Chancery Courts are so astonishingly different in focus that this Court cannot treat those precedents as having equal dignity and compatibility to federal bankruptcy and district court adversary proceedings to determine value in fraudulent transfer litigation.
Not incidentally, Mr. Peltz admitted that if the exercise price of the option were in excess of $106,000,000, for a company he valued as of the date of the unsigned First Amendment/Option/Extension agreement, February 14, 2002, at $79,500,000, no reasonably prudent investor would have paid $7,500,000 for an option for a six and a half month period of time to purchase the company. See Trial Tr. of Sept. 30th at pp. 114-17. In this respect, his admission is directly contradictory to his report, but more importantly, refutes his own client's fundamental position in this adversary proceeding, as evidenced by the testimony of Mr. Andrew Wright, a defendant and the controlling shareholder of Addus. The Court appreciates Mr. Peltz's candor, but that hardly rises to the level of finding that his proposed direct testimony is either reliable or relevant.
Finally, although this Court is fully satisfied that the direct testimony of the proposed expert witness, Scott Peltz, has been properly excluded under the applicable standards, the Court also finds, assuming for purposes of this opinion, that even if Mr. Peltz's report and testimony could be admitted, for the same reasons of unreliability set forth above, his report and testimony do not have any probative weight.
Disposition
The plaintiff's motion to exclude the expert testimony of Scott Peltz is granted, in part, as to the proposed expert's direct testimony, but denied, in part, so that the proposed expert may testify as a rebuttal witness to the plaintiff's proposed expert witness on business valuation, Robert Cimasi. Even though Mr. Peltz has completely failed to demonstrate his expertise in reaching a valuation number for the 100% controlled shares of Addus or for the true economic value of the option price, he has sufficient expertise and familiarity with the professional literature to serve in the capacity as a rebuttal witness by raising some important issues of methodology concerning the reliability and relevance of Mr. Cimasi's expert report. In this respect, Mr. Peltz's testimony, which should only take a few hours to complete, may assist this trier of fact in determining either the admissibility or the weight of Mr. Cimasi's alleged expert report. Quite to the point, the plaintiffs' counsel has conceded that it has no objection to this Court's hearing Mr. Peltz's rebuttal testimony on the methodological issues and their application in this adversary proceeding.
Once Mr. Peltz concludes his rebuttal testimony, the Court may then be in a position to determine the admissibility or weight, in whole or in part, of Mr. Cimasi's report and testimony.