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What Lawyers Don't Get About Finance

 

Robert Ambrogi, Editor of IMS ExpertServices' BullsEye Newsletter

 

   This article was originally published in BullsEye, a newsletter distributed by IMS ExpertServices. IMS ExpertServices is the premier expert witness and litigation consultant search firm in the legal industry, focused exclusively on providing custom expert witness searches to attorneys. Please visit IMS ExpertServices at www.ims-expertservices.com or call us at 877-838-8464.


 
 
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IMS ExpertServices8 May 2008. There are two kinds of people in the world, says finance expert Tom E. Greene: word people and number people. Most lawyers fall into the first group, which explains why they either panic or gloss over when faced with financial concepts in litigation.

But Greene himself a lawyer as well as a financial consultant says lawyers' fear of finance often stems from their failure to grasp a simple concept. His job as an expert, he believes, is to help them see through that seeming complexity.

"I find that most attorneys tend to believe that financial concepts can't be boiled down into an understandable narrative," Greene explains. "What I try to do is to help them go through the translation process. I help to take the numbers and turn them into a narrative."

Greene is president of Liberty Street Financial Group, which he founded in New York in 1980 and later moved to Athens, Ga., near the campus of the University of Georgia Terry College of Business. He has also held positions as senior investment banker with Goldman, Sachs & Co., senior vice president of Lehman Brothers, and principal of Paine Webber.

In addition to providing investment and banking services, Greene serves as an expert witness and consultant in cases involving a range of financial matters, including securities, corporate finance and financial and retirement planning. He is a graduate of Emory University Law School.

Searching for Simplicity

While the array of financial matters lawyers confront is broad, lawyers' responses share a common theme, Greene believes. They let their lack of financial fluency interfere with their perception of the facts. As a result, they see complexity where the bottom line is actually quite simple.

To illustrate his point, Greene recounts a case he worked on that involved a bank's action to recover its alleged losses in a series of hedging transactions. Based on the documents submitted, the transactions appeared to be quite complex. Greene was brought in to help evaluate the numbers and find a way to make the complex calculations understandable.

As he went through the documents, he discovered that what had been made to look complex really was not. In fact, he concluded, the transactions were not even hedges.

A hedge allows a business to manage risk by shifting it elsewhere. Here, the business had never actually shifted the risk. Rather, it had manipulated its internal bookkeeping to create the appearance of a hedge through dual sets of books. If there was a loss on one set, it would be offset by a gain on the other.

"So it was very simple to convert these seemingly complex numbers into a narrative," Greene recalls. "Out of that jumble of numbers came a very simple fact."

The Human Factor

Lawyers share another common misunderstanding about corporate finance, Greene says, which is that they forget the human factor.

"Attorneys think that large financial institutions have agnostic, computer-based models for financial transactions," he explains. "Usually, that's not true. Usually, it's a couple of individuals somewhere and it is very much subject to manipulation."

Consider the example of a financial professional preparing an Excel projection model. Because such a model is complex and involves a multitude of assumptions, one small change can rip through and alter all the numbers.

"It's the human factor very much at work," Greene says. "Just because someone sends you print-outs from computers and pictures of computer screens, as if all this involved some financial magic, it isn't magic at all."

Greene points back to his earlier example, where the purported hedge losses presumably involved a daunting number of complex calculations. The truth turned out to be that the case was not at all about the math.

"That's usually the case there's a simple story that underlines what happened. What the attorney needs is to work with someone who can help bring out that simple story."

Complex numbers often are little more than a smokescreen, he believes, obscuring the straightforward narrative that lies just out of view.

"The second you say derivative, SWOT or option, lawyers' minds glaze over and they assume there's a titanium black box that can't easily be cracked. It's our job to show them the narrative story and it's usually not in a black box."

For Greene, lawyers involved in financial cases too often overlook the fact that behind every transaction, there is the work not of computers and calculators, but of humans. In every case, that means, there is the possibility of human manipulation, fault and fallibility.

The human factor, in other words, almost always provides the basic story a trial lawyer hopes to hone in on, even in the seemingly complex realm of high finance.


 
 

2008 IMS ExpertServices all rights reserved.

Robert J. Ambrogi is a lawyer and media consultant in Rockport, Mass. He writes the blog LawSites, www.legaline.com/lawsites.html.


 
 

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Created: 8 May 2008
Revised:
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