< PreviousBy Dorothy Haraminac, MBA, CFE, MAFF, CCI, PI Cryptocurrency in Litigation Practice: Tips and Pitfalls for the Financial Forensics Practitioner This column discusses blockchain forensics, cryptocurrency valuation, and other cryptocurrency issues in litigation. It provides financial forensics practitioners with tips and practice tools, and alerts them to the many potential pitfalls in these cases. Computer Goes Brrr: Economic Analysis for Cryptocurrency Mining 1 Wondering about the title? It is a play on the 2020 meme “money printer go brr,” https://knowyourmeme.com/memes/money-printer-go-brrr. 2 Marie Boran, “Texas Crypto Miners Must Now Register with the State,” Newsweek, November 26, 2024, https://www.newsweek.com/texas-crypto-miners-register-state-1991766. 3 For an in-depth explanation of flared gas, see Eman A. Emam, “Gas Flaring in Industry: An Overview,” Petroleum & Coal Journal 57, no. 5 (2015), available at http://large.stanford.edu/ courses/2016/ph240/miller1/docs/emam.pdf. 4 While fossil fuels tend to support electricity consumption, that support is generally produced farther downstream; whereas, cryptocurrency mining on flared gas wells may appear earlier in the production process in the upstream or midstream facilities. To address the growing need for determining the profitability of crypto mining projects, this article provides information for financial practitioners who wish to add a new offering to their practices: economic analysis for cryptocurrency mining projects. 1 The use of excess electricity has long been a consideration for grid stability in managing power supply and demand. Recently, grid management entities have included cryptocurrency mining in their electrical grid considerations. 2 In addition to excess supply, another potential source of electricity generation is the otherwise flared gas from mineral lease operators. 3 Cryptocurrency is a new tie that binds these two seemingly disparate industries together: both industries are embracing crypto mining as a solution. 4 To conduct an economic analysis, a financial practitioner must understand key components of crypto mining, flared gas wells, and electricity grids. In the electricity grid scenario, cryptocurrency mining uses electricity on an ongoing basis and when demand surges, such as during a drastic temperature change, the miners power down, releasing the electricity back to the grid to be consumed by higher priority users. In this scenario, an economic analysis should consider alternative demand response options, such as offering incentives to other users, not just cryptocurrency miners, to power down during peak usage times. In the flared gas scenario, instead of simply burning the gas away, operators capture it and use it to power cryptocurrency mining equipment. In this scenario, the economic analysis should consider alternative uses of the newly generated electricity. Many of these endeavors are already happening, and a practitioner’s introduction to this industry may be in a litigation context. For example, the practitioner may be asked to determine whether an economic analysis was appropriate or whether an entity fulfilled its obligations under a cryptocurrency mining agreement. Practitioners who understand the general principles of an economic analysis for cryptocurrency mining are well-suited to take on related litigation engagements. 30The Value Examiner Financial ForensicsCryptocurrency Mining in General Today, cryptocurrency mining looks a bit different than in days of yore, where a few graphics cards haphazardly strung together managed to accrue a handful of bitcoin mining rewards. One difference is that the hardware requirements for mining bitcoin have increased. To test this yourself, take an old laptop and run a full bitcoin mining node on it, but do it outside with all the care of deep frying a turkey (it is a fire hazard and the hardware will likely melt). 5 Another difference is that many other cryptocurrencies can be mined if we loosely interpret mining to mean earning payment for running software of some sort. The Ethereum blockchain, for instance, is a proof-of-stake (PoS) blockchain; to earn rewards, one must simply stake ether in tranches of 32 each. At recent prices, doing so locks up about $120,000 to earn about 3 percent in ether tokens while incurring costs to maintain an operable node. At current interest rates, who would engage in such an endeavor? If one purchased 32 ether along with the equipment needed to engage in home staking on the Ethereum blockchain, the cost-benefit analysis likely would not work out favorably when compared to a traditional investment, but this scenario presumes the purchase of 32 or more ether, which may not be necessary. 6 There are many other blockchains that rely on a PoS consensus algorithm to incentivize node operators. 7 Ethereum switched to PoS around the same time many ESG activists were complaining about the use of electricity for mining cryptocurrency. 5 “Node” is a non-specific computer term that means a device connected to a network; when used in reference to blockchains, it means a computer running some version of the blockchain software. 6 Even so, as an initial one-time start-up cost, this amount may be low depending on the individual or entity. 7 There are other ways to engage in staking on the Ethereum blockchain and other cryptocurrencies to mine. For more information about other ways to stake ether, see https://ethereum.org/en/staking/. 8 A list of other cryptocurrencies still using a PoW consensus algorithm can be found here: https://minerstat.com/coins. Mining, in the traditional sense, is not staking. In the traditional use of the term, mining generally refers to blockchains that rely on a proof-of-work consensus algorithm (PoW), where node operators compete to win the right to write transactions on chain. 8 With PoW, mining is effectively the conversion of electricity into a transferable asset. Since one cannot simply deposit electricity into a bank and earn interest, mining can be an attractive use of extra electricity. Who has extra electricity? Potentially mineral lease operators with otherwise flared gas, as well as the electrical grid itself, when demand falls lower than supply. Cryptocurrency mining produces cryptocurrency for the miner that guesses the right answer to an algorithm (in PoW). The goal is to maximize the number of guesses, known as the hash rate, and various pieces of equipment have marketed hash rates (the ones on the side of the box). The practitioner must determine whether the marketed hash rate is (1) accurate and (2) sustainable. For instance, a crypto mining company may include a specific hash rate and specific equipment in its contract, but the publicly available hash rate for that equipment may be lower or the environment may not be suitable for that equipment to perform at its optimal speed. In general, the following basic calculation can be used to estimate mining rewards: Expected Crypto Reward Blocks per Time Unit Crypto Network’ s Hash Rate Equipment’ s Hash Rate = Conversions for Time Period ×× Today, cryptocurrency mining looks a bit different than in days of yore, where a few graphics cards haphazardly strung together managed to accrue a handful of bitcoin mining rewards. 31March | April 2025 A Professional Development Journal for the Consulting DisciplinesA small difference in just one part of this calculation can substantially change the estimated reward. 9 This difference is compounded once the formula is projected over time. The practitioner must ensure that both the initial calculations and the projections for each component are appropriate. These calculations and projections may include costs to increase the equipment’s hash rate, costs to convert to a different cryptocurrency, and an appropriate historical basis for projecting the network’s hash rate and blocks per time unit. To determine how much cryptocurrency specific equipment can mine, the practitioner must divide the equipment’s hash rate by the selected cryptocurrency network’s hash rate and multiply that result by the average time a new block is mined (crypto miners are paid for mining blocks). This calculation has many moving parts: selecting a particular cryptocurrency, selecting a method for calculating a network hash rate (24-hour average, three-month average, specific number of blocks, etc.), determining the time to mine a new block, and ensuring that each portion is in the appropriate unit. There are a few new technical terms here, such as hash rate, but for the most part, this calculation is an application of rates over time. Many web-based calculators exist, but savvy practitioners may calculate these rates manually. Crypto mining companies may include profitability estimates in their proposals, and those estimates must be verified against actual hash rates for specific equipment and specific cryptocurrency. Detailed proposals may include verifiable sources of information and descriptions of the assumptions used to support the estimated profitability. 10 On top of these calculations, the practitioner should consider the fluctuation in price for the selected cryptocurrency. An economic analysis may consider whether or not mining rewards are held, converted into other cryptocurrency, or sold outright. The profitability calculations must match the subject company’s plan for earned cryptocurrency. The 9 “How Can I Calculate the Mining Rewards from the Hashrate?,” Ethereum Stack Exchange discussion, July 31, 2021, https://ethereum.stackexchange.com/questions/106371/how-can-i- calculate-mining-rewards-from-the-hashrate. This discussion shows the different calculations from one website along with a user’s attempts to recreate the calculation, and illustrates the importance of verifying variables. 10 It is important to note that (1) a blockchain’s hash rate is a calculation based on how many blocks were mined over a certain time period, and (2) blockchain hash rates are managed by changing difficulty. For instance, the difficulty of guessing the right answer on the Bitcoin blockchain changes every 2,016 blocks. The changing difficulty ensures that a large amount of computing power suddenly added to the network is not allowed to mine additional bitcoins very fast for an extended period of time (i.e., it controls inflation). Practitioners who do not manually calculate hash rates and do not model projected changes in difficulty based on the blockchain algorithm may compound estimation errors. This is a simplified explanation of determining a network hash rate; in practice, however, the determination can be more complex, as seen here: https://en.bitcoin.it/wiki/Difficulty. 11 MacKenzie Sigalos, “Exxon is Mining Bitcoin in North Dakota as Part of Its Plan to Slash Emissions,” CNBC, March 26, 2022, https://www.cnbc.com/2022/03/26/exxon-mining-bitcoin-with- crusoe-energy-in-north-dakota-bakken-region.html; MacKenzie Sigalos, “ConocoPhillips Is Selling Extra Gas to Bitcoin Miners in North Dakota,” CNBC, February 15, 2022, https://www.cnbc. com/2022/02/15/conocophillips-is-selling-extra-gas-to-bitcoin-miners-in-north-dakota.html. 12 Accounts is a quarterly magazine published by the Council of Petroleum Accountants Societies. 13 Anthony Cash, “How Bitcoin Is Disrupting Traditional Oil and Gas Markets,” Accounts, Spring 2022, 11, https://copas.org/wp-content/uploads/ACCOUNTS-SPRING-2022-SINGLES.pdf. Conversion in this sense is different from a chemical process. Cryptocurrency is not tangible and is not the product of a chemical process. In contrast, pentane, ethane, butane, methane, and propane are measurable results from chemical processing; whereas cryptocurrency mining is the conversion of a fuel source into electricity and the subsequent use of that electricity to participate in a blockchain network (with a proof-of-work consensus algorithm or some other incentive-producing mechanism) and receive measurable payment for that participation (mining rewards and transaction fees). value of expected mining rewards is reduced by the cost of electricity generation and the depreciation of the hardware, which also depend on the projected changes in difficulty for the selected blockchain. Cryptocurrency Mining with Gas Wells Oil companies have contracted crypto miners to recapture otherwise flared gas, generate electricity from it, and use that electricity to mine cryptocurrency. 11 This is similar to the extraction of liquids from a wet gas stream and the subsequent conversion of that stream into natural gas liquids (NGLs), which are marketable products. Likewise, the capture of flared gas, and its subsequent conversion into cryptocurrency, may also be a marketable product. As such, it may generate proceeds for interest holders. An article in the Spring 2022 issue of Accounts 12 highlighted the emerging gas-to-bitcoin opportunity: “The ability to convert low value natural gas into [b]itcoin produces profit margins that are multiples higher than the current Henry Hub market gas prices.” 13 The article focused on midstream opportunities and did not address working interest or royalty interest owners. Therein lies part of the litigation aspect of this article. 32The Value Examiner Financial ForensicsOperating companies in the oil and gas industry generally account for the production of minerals from a well to various owners (working interest, royalty interest, etc.) along with all the products into which those minerals are converted (presuming some integration across upstream, midstream, and downstream processing). These duties may be detailed in controlling agreements between owners and operators, such as a joint operating agreement (JOA). The American Association of Professional Landmen (AAPL) produces model form agreements for JOAs and other agreements, and revises them periodically to meet industry needs; for example, to account for new interests, non-consent, horizontal drilling, bankruptcy protections, and more. 14 The Council of Petroleum Accountants Societies offers interpretations of model agreements and accounting guidelines to assist petroleum accountants in their work tracking costs and revenue, from breaking ground on a new well to selling the final products, such as gas plant procedures, onshore and offshore procedures, deep water exploration projects, and others. 15 Buried in these interpretations are clauses and provisions that may apply to cryptocurrency generated from flared gas, but no provision explicitly addresses cryptocurrency mining (yet). A current television show, Landman, 16 has drawn criticism from the petroleum industry. In it, the main character engages in questionable activities, including not reporting a plane stolen by suspected drug traffickers, and an industry attorney details her tactics to reduce amounts paid to family members of employees involved in a tragic accident on the job. The petroleum industry’s response is to claim that the show is largely fiction, but the fact that members of the industry felt a need to respond to a fictional production at all indicates they may anticipate additional scrutiny because of the show. In any case, the show highlights a few areas where litigation issues arise in the oil and gas industry. A dramatic television series should not form the basis for practitioners’ industry knowledge, but it may pique their interest. Mineral extraction industry organizations work to ensure that costs and revenues are tracked, stored, and distributed through standardized mechanisms, which can reduce barriers to entry, increase competition, and keep the overall industry healthy. These organizations produce a wealth of material for new and seasoned practitioners alike. Practitioners who 14 See Dorsey Roach, “Updating the AAPL Model Form JOA: New Horizontal Drilling Provisions and More,” presentation, Natural Resources Law and Policy Conference, Oklahoma City, OK, November 8, 2013. 15 See https://copas.org/product-category/publications/model-form-interpretations/. 16 Landman is a television drama created by Taylor Sheridan and Christian Wallace, host of the Boomtown podcast produced by Texas Monthly magazine. See https://christianhwallace.com/about. 17 Presuming, of course, that the work is produced in accordance with professional standards. 18 MacKenzie Sigalos, “Bitcoin Miners Are Helping the Texas Grid Brace for Winter Storm Impact,” CNBC, February 3, 2022, https://www.cnbc.com/2022/02/03/winter-storm-descends-on- texas-bitcoin-miners-shut-off-to-protect-ercot.html. seek to add economic analysis for cryptocurrency mining to their practices should educate themselves about the oil and gas industry and electricity grid management. An economic analysis requires both industry knowledge and cryptocurrency knowledge. Aside from various disputes involving interest owners and physical injury damages, entities in the oil and gas industry may find themselves in the position of defending decisions to engage (or not engage) in cryptocurrency mining. Likewise, grid management entities may find themselves in the position of garnering public support for a mining endeavor or defending the pursuit of such an endeavor to stakeholders, such as legislators or taxpayers. Financial forensics practitioners may provide value in these cases by preparing and defending an economic analysis of a proposed cryptocurrency mining endeavor. A third-party analysis is advantageous because it is objective, unbiased, and created by a financial expert, not by an interested party. 17 Cryptocurrency Mining for Electricity Grid Stability Several electric grid management entities and municipalities have declared their intention to assess cryptocurrency mining as a measure to ensure grid stability. For instance, the Interim CEO of the Electric Reliability Council of Texas (ERCOT) stated, “A lot of these solar and wind [companies] can produce power down to a negative power range, negative $23 per megawatt hour. These [bitcoiners] see that as a great opportunity. They can get paid to use power. And that’s why they’re coming to the state.” 18 33March | April 2025 A Professional Development Journal for the Consulting DisciplinesNegative power is not healthy for the market, according to ERCOT. Bitcoin miners soak up the negative priced power and when the cost of electricity rises, they shut off, releasing that power back to the grid so it can be used by other Texans. It is a valuable potential resource, according to ERCOT, to keep up the demand so that power plants do not shut off and cause another blackout during a freeze, as they did in Texas in 2021, resulting in the deaths of about 250 people. The root cause of power plants shutting down was initially presented to the Texas public as a lack of maintenance and proper winterization, causing a delay in powering on when needed. Cryptocurrency mining would avoid the need for powering down at all, and thus, no delay in powering back up. 19 Grid stability proposals generally focus on renewable energy powering crypto mining equipment, which does not address the improper Texas maintenance issue, other than to clarify that if maintenance is needed, the crypto miners can shut down and the power they were using can be diverted to the users previously serviced by the station requiring maintenance. 20 Such a proposal presumes all electricity delivery is fluid, interconnected, and easily converted from one source to another (spoiler: it is not). Additional considerations for any municipality or grid management entity considering cryptocurrency mining as a demand booster to maintain overall grid stability include clear communication to stakeholders about how the specific grid works, how a crypto miner works, and how the entity will expect the miner to perform in periods of high demand. Clear communication with stakeholders can drive acceptance and reduce security risks. The overall scenario is known as “demand response,” and the basic offer to crypto miners is to shut off when the managing entity says so to enable higher priority users to receive electricity; but other countries are experimenting with making that offer directly to consumers. Are you willing to disconnect if the electricity company or your city pays you to do so? Consumers may be willing to do exactly that. 21 Can managing entities defend the choice of offering demand response incentives only to crypto miners? According to Forbes , “[In Texas], market signals rule, the participants innovate around them and the market is largely effective in balancing the grid.” 22 At least 250 families of those who died in the 2021 freeze may disagree, but because of its 19 Or so the argument goes, according to ERCOT and “bitcoiners.” 20 Again, as described by the proposals. 21 Jemma Green, “Why No One Saw the Success of Demand Response Coming,” Forbes, January 27, 2023, https://www.forbes.com/sites/jemmagreen/2023/01/27/why-no-one-saw-the- success-of-demand-response-coming/. 22 Ibid. unregulated electric market, Texas has become a proving ground of sorts for grid balancing innovation, including cryptocurrency mining. No word yet on whether Texas will offer “negative-priced power” directly to consumers to manage demand response. Operational Decisions for an Economic Analysis of Cryptocurrency Mining Regardless of the industry, the following operational decisions should be included in an economic analysis for cryptocurrency mining: • Crypto choice and diversification • Hardware installation • Equipment maintenance and security • Software maintenance and security • Fork anticipation policy • Consensus algorithm policy • Responsible party/division/individual • Recourse for failures to perform • Allocation of cryptocurrency earnings • Storage of cryptocurrency earnings • Conversion determination • Tabletop exercises to illustrate demand response • Public statements and communication management • Ongoing yield assessment • Ongoing operational efficacy Each of these decisions should be documented and used to drive calculations for capital expenditures, operational expenditures, and expected returns in a financial model. Expected returns from a cryptocurrency mining endeavor should include mining rewards, fee earnings, and staked interests as quantities of the cryptocurrency in which they are earned. The value in fiat currency is best presented as a separate calculation to ensure transparency of the value contribution; is it from the operation itself or from an expected increase in price and is that price expectation defensible? As with any analysis, assumptions should be presented clearly and concisely, and any impactful variations should be addressed. 34The Value Examiner Financial ForensicsEnvironmental, social, and governance (ESG) issues have been at the forefront of industry for several years. In the 1990s, the information age saw a rise in good corporate citizens, followed by a decade in which corporations earned citizen-actor status with the U.S. Supreme Court’s Citizens United decision amidst a plethora of corporate scandals. Now, we have ESG, which demands organizations prove their “goodness” and establish sustainability goals, such as those set forth by the United Nations. 23 Recently, one such measure of proof collapsed: the voluntary carbon credit market. 24 As counterintuitive as it may sound, cryptocurrency mining may offer a more transparent mechanism by which companies can achieve their ESG goals. Grid stability and the use of otherwise flared gas to reduce emissions (if the generators employed emit less than the flare) may be part of an entity’s mission or aligned with that entity’s mission. Communication is key with ESG; efforts to educate stakeholders or the public about cryptocurrency mining can be costly and should be considered in the economic analysis. In the same way an organization considers its public response and the management thereof during a cybersecurity incident, it must consider a response for ESG in cryptocurrency mining. 23 See “The 17 Goals,” United Nations, Department of Economic and Social Affairs, Sustainable Development, accessed February 21, 2025, https://sdgs.un.org/goals. 24 Susanna Twidale and Sarah Mcfarlane, “Carbon Credit Market Confidence Ebbs as Big Names Retreat,” Reuters, September 1, 2023, https://www.reuters.com/sustainability/carbon-credit- market-confidence-ebbs-big-names-retreat-2023-09-01/. Summary Financial practitioners must consider all stakeholders in their economic analyses. From a grid stability perspective, this includes a comparison to a demand response program offered directly to consumers. From a flared gas perspective, this includes consideration of various interests in the products (electricity and cryptocurrency) and a review or third-party interpretation of the clauses that may apply. Practitioners adding such an analysis to their practices must also commit to ongoing industry- specific education to stay abreast of changes in regulations and model form agreements, so that any regulatory risk can be properly addressed. The overall product is an economic analysis to determine whether a cryptocurrency mining project is feasible and when such a project becomes profitable, if at all. This ultimate deliverable is wholly contained in a traditional financial practitioner’s wheelhouse. Likewise, the assessment of such an analysis and the assessment of fulfilment obligations, such as those that arise in litigation, are also wholly contained in a traditional financial practitioner’s wheelhouse. Dorothy Haraminac, MBA, CFE, MAFF, CCI, PI, is one of the first court-qualified experts in bitcoin asset and cryptocurrency tracing. She has provided consulting, tracing, valuation, and expert witness testimony in complex commercial disputes in the oil and gas industry and in high net worth, crypto-centric matrimonial cases. She conducts traditional fraud investigations, blockchain forensic engagements, and financial forensic engagements, deploying sophisticated methods to determine whether indications of fraud exist, to prevent fraud, to assess the risk of fraud in an organization, and to monetize risk assessments in valuations. Email: dh@ybr.solutions. Practitioners adding such an analysis to their practices must also commit to ongoing industry- specific education to stay abreast of changes in regulations and model form agreements, so that any regulatory risk can be properly addressed. 35March | April 2025 A Professional Development Journal for the Consulting DisciplinesCourtside View: Valuation and Financial Forensics Perspectives from the Bench By Michael J. Molder, JD, CPA, CFE, CVA, MAFF Courtside View highlights recent decisions by federal and state courts addressing significant valuation, financial forensics, and expert witnessing issues. These cases offer valuable insights to BVFLS professionals that can help them develop sound, defensible valuation and damages analyses, and present them more effectively in court. Cases Reviewed • International Brotherhood of Electrical Workers Local 98 Pension Fund v. Deloitte & Touche LLP , 2024 U.S. Dist. LEXIS 205201 (D.S.C. November 12, 2024) • Globus Medical, Inc. v. Jamison , 2024 U.S. Dist. LEXIS 203564, 2024 WL 4711947 (E.D. Va. November 7, 2024) Former NFL quarterback Steve Young once said, “Success is really about expertise.” While this is undoubtedly true in professional football, it is also true in the world of expert witnesses. As these two cases show, damages experts are almost inevitably attacked for their analyses, but often there is a high bar for excluding those analyses. A key issue in both of these cases is the extent to which a plaintiff’s expert is responsible for allocating damages attributable to various defendants. Legal Issue Federal Rules of Evidence (FRE) Rule 702 (“FRE 702”) permits witnesses, qualified by knowledge, skill, experience, training, or education, to testify if the proponent demonstrates that it is more likely than not that: (a) The expert’s technical/scientific knowledge will be helpful to the fact finder; (b) The testimony is based on sufficient facts or data; (c) The testimony is the product of reliable principles and methods; and (d) The testimony reflects a reliable application of those principles and methods to the facts of the case. While consideration of these factors is essential to admitting expert testimony, the “Rule 702 inquiry [is] a flexible one.” 1 There is no single way to determine if the principles and methods are reliable and no objective threshold to evaluate the sufficiency of the facts and data. 1 Kumho Tire Co. v. Carmichael, 526 U.S. 137, 150, 119 S. Ct. 1167, 143 L. Ed. 2d 238 (1999), quoting Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 594, 113 S. Ct. 2786, 125 L. Ed. 2d 469 (1993). 2 This case is a putative class action brought under Section 10-b and Rule 10-b(5) of the Securities Exchange Act of 1934. It was originally filed in November 2019 by individual investor Samuel R. Floyd, III, on behalf of himself and other purchasers of SCANA stock. On a motion to intervene and for appointment as lead plaintiff, the court appointed the IBEW pension fund as the lead plaintiff in the litigation. For the sake of simplicity, “Plaintiffs” includes Mr. Floyd, the IBEW Local 98 Pension Fund, and the members of the purported class. International Brotherhood of Electrical Workers— Expert Testimony for Class Certification The Facts In 2007, SCANA Corporation obtained legislative approval to construct two nuclear reactors in Fairfield County, South Carolina (the “Project”). According to the Plaintiffs, 2 economic viability of the Project was contingent upon SCANA qualifying for $1.4 billion in federal energy production tax credits and being able to obtain rate increases to cover the construction costs. To satisfy these requirements, the Project would need to be completed and operational by January 1, 2021. Construction began in 2013 and, again according to Plaintiffs, the Project was beset with delays and cost overruns. According to internal documentation, company engineers projected that SCANA would not finish the Project until the 2030s—well after the federal tax credits had expired. The construction company’s timetables and forecasts were so 36The Value Examiner Legal Insightsunreliable, SCANA hired an independent engineering and project management company, Bechtel Corporation, to analyze the Project and its timetable. On November 9, 2015, Bechtel issued a report concluding that the likely completion date for the second reactor was in 2023, and the earliest possible completion date was in June 2022—still after the expiration date for the tax credits. Despite the voluminous internal evidence that SCANA would be unable to meet the deadlines required to qualify for the $1.4 billion in tax credits, SCANA’s reports filed with the U.S. Securities and Exchange Commission (SEC), and the financial statements accompanying those reports, continued to represent that the Project was on track and economically viable. Accordingly, the company’s financial statements were materially false and misleading. SCANA continued to maintain the economic viability of the Project, and the capitalized values of construction in progress, through July 31, 2017, when it announced in a press release that it was abandoning the Project. Defendant Deloitte & Touche LLP (“Deloitte”) had been SCANA’s auditor for more than 70 years. According to Plaintiffs, Deloitte had actual knowledge of the Bechtel report in November 2015. Deloitte nonetheless issued 3 In general, the “efficient market” theory is a prerequisite to pursuing securities claims on a class-wide basis. The efficient market theory assumes that in efficient markets, investors have reasonably relied on the market to establish a market price for the subject securities based on all the information contained in an entity’s public statements and SEC filings. Absent an efficient market for the securities, investors would need to prove individual reliance on the alleged misrepresentations, making class treatment impracticable. unqualified audit reports on SCANA’s financial statements for the years ending 2015 and 2016, and reviewed SCANAs quarterly SEC filings that also reflected the false financial information. On February 27, 2020, the SEC filed a civil action against SCANA and two of its senior executives, alleging that SCANA’s statements about the status and ultimate failure of the $9 billion Project violated securities laws and that reports and documents were available to any reasonably diligent auditor, which showed that SCANA’s financial statements were not in accordance with GAAP. On January 24, 2020, Plaintiffs filed a motion to certify a class of SCANA investors who purchased securities between February 16, 2016 (the date SCANA initially disclosed financial results for the year ended December 31, 2015), and December 20, 2017 (when SCANA’s board chair resigned, effectively acknowledging the fraud). In support of that motion, Plaintiffs proffered an expert report in which the expert opined that the market for SCANA common stock was efficient 3 and that damages “can be calculated on a class-wide basis subject to a common methodology.” Deloitte opposed the motion and moved to exclude the expert’s opinion regarding damages. 37March | April 2025 A Professional Development Journal for the Consulting DisciplinesThe Analysis Plaintiffs’ expert issued a report describing the “out-of- pocket” method of calculating damages in securities cases as a well-established and long-standing approach. The method calculates the artificial inflation of the stock on a day-by-day basis using an event study that compares the securities’ price movements when false or misleading representations are made to the price activity when curative information is revealed. The damages consist of the difference between the market price on a particular day and the price determined in the event study for that day (with mitigation deducted if the class member sells the damaged shares during the class period, realizing artificial inflation on the sale). Deloitte did not dispute the expert’s qualifications, but argued that: 1. Plaintiffs assert two theories of loss—materialization of risk and corrective disclosure—but the expert only addressed the corrective disclosure theory; and 2. The expert failed to present any methodology that distinguishes between the damages caused by SCANA and its officers, and damages allegedly attributable to Deloitte. Materialization theory of damages. As explained by the district court, in Comcast Corporation v. Behrend , 4 the Supreme Court required trial courts to determine that “a model purporting to serve as evidence of damages in a class action measures only those damages attributable to the plaintiff’s theory. If the model does not even attempt to do that, it cannot possibly establish that damages 4 569 U.S. 27 (2013). 5 Ibid. at 35 (internal punctuation omitted). 6 883 F.3d 425, 446–47 (4th Cir. 2018). 7 2024 U.S. Dist. LEXIS 205201 at *17–18 (emphasis added). 8 2024 U.S. Dist. LEXIS 205201 at *19, quoting KBC Asset Mgmt. NV v. 3D Sys. Corp., No. 0:15-2392-MGL, 2017 U.S. Dist. LEXIS 159781, 2017 WL 4297450, at *7 (D.S.C. Sept. 28, 2017). are susceptible of measurement across the entire class for purposes of Rule 23(b)(3).” 5 While any calculations or formulas need not be precise, as information obtained in discovery over the course of the litigation may affect them, the model supporting a plaintiff’s damages must be consistent with the theory of liability. According to Deloitte, Plaintiffs had set forth two separate theories of recovery. Plaintiffs alleged that (1) SCANA, its officers, and Deloitte had concealed information about the Project that, when revealed, resulted in a decline in the stock price (materialization of risk), and (2) when the company abandoned the Project and wrote off the related assets, the stock also declined (corrective disclosures). Deloitte contended that the expert’s proposed damages theory only addressed the corrective disclosures theory, not the materialization. Thus, Deloitte argued, it did not meet the Comcast requirement to be consistent with each of Plaintiffs’ theories of liability. The district court, however, looked to Singer v. Reali, 6 in which the U.S. Court of Appeals for the Fourth Circuit held that “the ultimate loss causation inquiry under either the corrective disclosure theory or the materialization of a concealed risk theory is the same; whether a misstatement or omission concealed something from the market that, when disclosed, negatively affected the value of the security.” 7 Thus, the trial court found, “the out-of-pocket method calculates the difference between the price at which the stock sold and the price at which the stock would have sold absent any artificial inflation cause by a defendant’s alleged misrepresentations or omissions.” 8 That is sufficient to meet Plaintiffs’ obligations at the class certification stage. While any calculations or formulas need not be precise, as information obtained in discovery over the course of the litigation may affect them, the model supporting a plaintiff’s damages must be consistent with the theory of liability. 38The Value Examiner Legal InsightsAllocation of damages among wrongdoers. Deloitte also argued that the expert’s analysis should be excluded because it would not allocate damages attributable to Deloitte’s alleged misrepresentations separately from those attributable to the alleged misrepresentations of the company and its officers. The court dismissed this argument, finding that “at the class certification stage in a securities fraud class action, a methodology is not required to make an allowance for any damages caused by things other than the defendants’ alleged fraud.” 9 Despite Plaintiffs not being obligated to provide such a refined damages methodology at this early stage of the litigation, the court found the expert’s testimony regarding the flexibility of event studies convincing. The expert’s report indicated that where reliable evidence is introduced to show that a material portion of the artificial inflation may be attributed to non-fraud-related factors, the impact of such “confounding information” on the price of SCANA securities can be determined on a common, classwide basis using accepted methodologies. The district court agreed, finding “[i]ndeed, courts have rejected the suggestion that an event study is incapable of disaggregating the effects of confounding information because if that were the case, nearly every securities fraud class action would fail.” 10 The district court denied the motion. The Takeaways Although plaintiffs proposing class certification are obligated to demonstrate that their damages are capable of being calculated on a classwide basis, the early stage of the litigation must be considered. Plaintiffs are not obliged to proffer a damages methodology that addresses every possible contingency that may arise over the course of the lawsuit. Similarly, while ultimately responsible for distinguishing the losses arising from the defendant’s actions from those arising from other causes (including the actions of other wrongdoers), a plaintiff seeking class certification need only show that the parsing of causation can be done; it need not be done at the time of class certification. 9 2024 U.S. Dist. LEXIS 205201 at *20 (internal punctuation omitted), citing KBC Asset Mgmt. NV, 2017 U.S. Dist. LEXIS 159781, 2017 WL 4297450 (D.S.C. Sept. 28, 2017). 10 2024 U.S. Dist. LEXIS 205201 at *21 (internal punctuation omitted), citing In re Signet Jewelers Ltd. Sec. Litig., No. 16 Civ. 6728 (CM) (RWL), 2019 U.S. Dist. LEXIS 114695, 2019 WL 3001084, at *20 (S.D.N.Y. July 10, 2019); see also Smilovits v. First Solar, Inc., No. CV12-0555-PHXDGC, 2019 U.S. Dist. LEXIS 221424, 2019 WL 7282026, at *9 (D. Ariz. Dec. 27, 2019) (concluding that an expert's proposed methodology of conducting an event study that purports to account for confounding information meets Rule 702’s admissibility threshold). Globus Medical—Nature of Claim The Facts Globus Medical, Inc. (“Plaintiff”) is a manufacturer of spinal surgery products. Plaintiff sells its products through a network of authorized distributors. Plaintiff’s distributor for Southeastern Virginia was Sky Surgical, Inc. (“Sky”). Under its “exclusive distributor” agreement with Plaintiff, Sky received the exclusive right to market, sell, and distribute Plaintiff’s products in the region. The “Sales Rep Defendants” include 10 former Sky employees who each signed noncompetition, nondisclosure, and nonsolicitation agreements (“NCNDAs”) before being able to sell Plaintiff’s products in the region. Among other claims, Plaintiff asserts that the Sales Rep Defendants violated their NCNDAs by selling products produced by Plaintiff’s competitors to doctors and hospitals in the territory to which they had previously sold Plaintiff’s products. Plaintiff sued the Sales Rep Defendants, among others, claiming breach of contract, unjust enrichment, tortious interference with contractual relationships, and breach of duty of loyalty. Plaintiff retained a damages expert, whose analysis quantified Plaintiff’s lost sales by customer. The Sales Rep Defendants moved to exclude the damages expert’s testimony based on the reliability and relevance requirements of FRE 702. The Analysis The Sales Rep Defendants’ argument focused on four theories: • The expert’s analysis was irrelevant because Plaintiff was merely an assignee of, not a party to, the NCNDAs; • The expert’s testimony failed to apportion the alleged damages to individual defendants and, therefore, was not helpful to the fact finder; • The expert’s analysis calculated alleged damages by facility, not by individual surgeon and, therefore, was unreliable and unhelpful; and • The expert’s analysis failed to establish a causal link between the defendants’ alleged behavior and Plaintiff’s lost profits. 39March | April 2025 A Professional Development Journal for the Consulting DisciplinesNext >