How an Expert Witness From B2B CFO Saved The Client $29 Million

It was a case involving a 21-story high rise building in a large, Northern California city in the early 1990's. One morning, the night manager was opening the building for business. He noticed that the escalator was malfunctioning, so he called an elevator service/repair company (the &ldquot;defendant&rdquot;). The repairman arrived and went into a small electrical closet on the first floor to examine and, hopefully, remedy the problem. It is unclear exactly what happened, but a catastrophic electrical malfunction of some type instantly killed the repairman, and caused a brief electrical fire. The ensuing smoke escaped into the lobby and then into the ventilation shafts, but all occupants were evacuated safely without incident. Nevertheless, a $30 million liability for clean up and restoration of the building was incurred and paid by the building insurer (the &ldquot;plaintiff&rdquot;). The plaintiff then sued the defendant for reimbursement of the claim. That's when I was brought in by the legal counsel for the defendant as a forensic accountant and potential expert witness.

My job was to determine the validity of the $30 million claim. The majority of my focus was to review the depositions and approximately 100,000 documents contained in 50 banker's boxes produced by the plaintiff including: communications, restoration/repair invoices, and other source documents relating to the claim. I would then provide a report which included a schedule of the claimed costs along with an evaluation identifying which costs were legitimate building repair and restoration charges.

I came to understand, after reviewing the documents, that mandatory code upgrades and an almost endless string of mishaps, cleanup/repair mismanagement, and outright fraud had significantly inflated the $30 million claim. The building owner had purchased a code upgrade policy from the plaintiff years prior to the fire, which he and his subordinates literally interpreted to mean that there was an open checkbook for the repair and restoration. One of the building owner's employees was so brazen as to say in his deposition, &ldquot;we had a code upgrade policy so that means we get a new building.&rdquot; The plaintiff put up little resistance to the ambitions of the building owner since the plaintiff was confident that they could simply pass the claim costs along to the defendant under subrogation.

Just one example was the claim relating to the ventilation shafts. The prevailing best practices for cleaning smoke infiltrated ventilation systems at the time was to fog a specially designed mist into the shafts which bonds and permanently adheres any smoke residue to the inner sides of the shafts, eliminating any further migration or odor from the smoke particulates. The building owner objected to this procedure and forced the cleanup crew to physically enter the shafts and clean them manually. This misplaced directive caused the ventilation shafts to bend and subsequently leak, which, in turn, caused the HVAC system to fail. The HVAC system and ventilation shafts on all 21 floors then had to be replaced, causing restoration and repair costs to soar. That was just one of the seemingly endless mishaps related to the repair and restoration of the building. Other significant claims paid by the plaintiff, but not caused by the fire, included: retrofitting the entire building with ground fault interrupters ("GFI") as required under the code upgrade portion of the policy, installing upgraded fire suppression equipment including a new standpipe and sprinklers, theft by cleanup crews, etc. Only a thorough review of each of the 100,000 documents led to these discoveries.

I preliminarily reported that, based on the my review of the documents, the smoke and fire damage allegedly caused by the defendant was not $30 million, but more like $200 thousand, after removing code upgrades, mismanagement, fraud, and other paid claims that were not the result of the fire. The legal team for the plaintiff was furious upon reviewing my preliminary report; this was evident when I was on the receiving end of the plaintiff attorney's hostility during a chance encounter at the high-rise. I considered it likely that I would receive similar treatment from them during future depositions, as well as direct and cross examination if the matter proceeded to trial.

I fully anticipated that this matter would, indeed, go the distance to trial, seeing the large dollar amount of alleged damages being contested. Then the defendant, much to my surprise, offered the plaintiff 24-hours to accept $1 million as full settlement of the alleged damages: they wanted the matter settled before having to disclose the potential liability in their 10k annual report to the SEC. The plaintiff, even more to my surprise, accepted the $1 million settlement even though it had paid out over $30 million in claims on the insured building. They did so because 1.) The defendant's fault in the accident was cloudy, at best, and would be vigorously contested in Phase One of the trial, and 2.) My report indicated that even if the plaintiff prevailed in Phase One, the liability on the part of the defendant would be argued to be a mere $200 thousand in Phase Two.

The entire forensic accounting and expert witness process in this engagement would be enhanced today through the use of high-end document management software with smart search functionality; nevertheless, the process would still require the careful examination of all 100,000 documents by an experienced and highly focused forensic accountant or other professional intent on gleaning as much useful information as possible. In this case, the process helped to save the defendant $29 million.

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