Forensic Support in a Shareholder Dispute
FAZ was engaged to provide forensic consulting services to a defendant in a shareholder dispute, in which plaintiff and defendant were both 50% owners of an entity which managed real estate properties and also performed certain maintenance work at those properties. In addition to conducting our own analysis, we were engaged to rebut plaintiff’s expert report regarding damages sustained by the plaintiff for breach of fiduciary duty by the defendant. Our rebuttal report needed to be prepared within 30 days of receipt of plaintiff’s expert report.
We worked closely with our client to understand the important details and nuances of the engagement, as well as the nature of the business from the perspective of our client. The plaintiff’s expert report alleged that our client misappropriated nearly $2 million from the entity owned equally by the plaintiff and defendant by taking excess distributions from the entity. We reviewed bank account statements of both the business and personal records of our client to determine the nature of transfers to and from the business.
Our client was operating a small business, where recordkeeping and internal controls are often limited due to resource constraints. In this instance, our client was infusing substantial personal funds to the business via personal checks, transfers from a bank account of a business solely owned by the client, payments made to purchase properties on behalf of the business directly by our client, transfers from their personal bank accounts, or payments for made for business expenses using personal funds. It is common in small businesses for owners to consider the business an extension of themselves. In this case, the defendant made substantial infusions of personal funds to support of the business, but had not been properly recognizing those infusions on the books and records of the business as either loans or amounts due to the defendant. Many of the transfers to the defendant in the plaintiff’s expert report were, according to our client, return of capital they had loaned to the company.
Through our document review and analysis, we were able to determine that our client contributed substantially more funds to the business than had been disbursed to them over the same time period. We identified many cash infusions to the business that had been overlooked by the plaintiff’s expert. Subsequent to the issuance of our report, plaintiff and defendant were able to settle their dispute without proceeding to trial. The analysis and report we prepared played a key role in facilitating this resolution.