Controlling Legal Fees and Expert Fees

With the challenging economy we’ve had over the last couple of years, people are constantly asking me how business is going. The assumption is that people and companies don’t have money for litigation, and so my business is probably suffering. Fortunately, that is not the case, as my business has been growing tremendously over the last few years.

It is true that businesses and individuals don’t have as much money for litigation, but they still have money and they still have to litigate some things to keep their businesses and lives intact.  However, there is a legitimate concern about the legal fees and expert fees that are going to be incurred, and so consumers are choosing wisely.

One common concern is what I call “the black hole of legal fees.” Clients go into litigation with expectations about legal fees, and many times, those expectations and budgets are blown out of the water with hourly fees that keep piling up. It would be easy to blame the attorneys, but litigation takes time, and the lawyers have to bill for their time.

But concerns about legal fees are even greater in cases in which parties seek to preserve as much money as possible for the payment of claims. Cases like bankruptcy and receivership, investment schemes, and Ponzi schemes are great examples of these types of cases.

Consider the case of Allen Stanford’s (alleged) Ponzi scheme. The lawyers went to work to recover as much money as possible to pay victims with legitimate claims. It is alleged that he took $7 billion from unwitting investors, and only a fraction of that will be recovered.

But in the process of litigating this case, Stanford needs legal counsel, and where will that money come from? It is reported that Lloyd’s of London paid $8.2 million toward Stanford’s defense before a judge decided the insurance company was not obligated to continue paying. One lawyer charged as much as $1,000 per hour for his representation of Stanford.

And now Stanford is on the government dole, as he is being represented by the public defender’s office since his assets were frozen and he has no money to pay for his defense. Litigating white collar crime cases costs a lot of money. To quote one article:

White-collar crime prosecutions and related civil actions are enormously expensive to defend, and defense costs can reach the tens of millions of dollars fairly quickly. One reason is the complexity of the cases, which require defense lawyers to spend months digging through piles of documents while trying to interview dozens of witnesses. It is fairly common for cases to come to trial a year or more after the criminal indictment, and there are often dozens of pretrial motions that will have been briefed and argued in that time.

How much can it cost?

The costs of defending these cases can be staggering. Jeffrey K. Skilling, the former Enron chief executive, spent approximately $70 million through the conclusion of his trial, and the subsequent appeals have probably pushed that total past $100 million, with the prospect of another trial if the Supreme Court rules in his favor. A filing in the prosecution of Gregory Reyes, the former chief executive of Brocade Communications, showed that as of early 2008 the company paid out almost $65 million to lawyers for various corporate officers and employees, including $46 million for Mr. Reyes’s defense in criminal and S.E.C. cases. Mr. Reyes won a new trial after an appeal, so his costs may well exceed $100 million by the time the case is over.

What does any of this have to do with Sequence Inc. Forensic Accounting? Since I started this company nearly 11 years ago, I have used fixed fees for most of my work. Clients know exactly how much their projects are going to cost, and they are appreciative of this.

How does it work? I sit down with counsel and the client and determine exactly what needs to be done. I find out:

  • What are the issues that must be addressed?
  • What documents are available?
  • What is the timeline for finishing the forensic accounting work?
  • What company personnel is available to provide information and documentation, and how much of the legwork will they do?
  • What are the current unknowns related to the project?
  • What form should my final report take?

Once these things are fully understood, I quote the client a fixed fee for the engagement, up to and including the expert report. We can then negotiate about the scope of work and the fees, if necessary.

I dare you to find a large forensic accounting firm that will do this for a client. The closest they will come is a budget, in which they will say “we expect our fees to be X, but we’ll bill you for the actual time, times our hourly billing rates.” And in most cases, the actual fees will far exceed that original budget.

This is what I’m referring to when I talk about runaway fees or the black hole of legal fees. The client has no way to gauge what they’ll ultimately pay for the financial investigation, and they often get a raw deal. Simply put, the budget and the expectations are often a long way from the final bill.

How can I provide fixed fees when so few in my industry are willing to do that? There are a few things that go into my ability to accurately come up with a fixed fee:

  1. Experience – I know how long these investigations take, and I know who will be doing the work…. me. I know what I’m able to accomplish and I know how long it takes. I’m not relying on a junior associate who might fumble around for days (while billing the client) before coming up with an approach to analyze a set of documents. I know what investigative techniques work, and I know what is appropriate in these cases. I get down to work immediately and complete the forensic accounting engagement efficiently.
  2. Systems – Over the last 11 years, I have developed a process for investigating fraud that I call the Sequence Forensic Accounting System.  The processes, tools, and software that I use have helped me standardize my forensic accounting engagements to a certain extent, and that makes it easier for me to calculate appropriate fees and complete the work accordingly. I have gained efficiencies by systematizing my work.
  3. Risk-taking – I’m willing to take the risk that I am able to accurately calculate a proper fee. The key is in making sure that I know all of the inputs and all of the expected outcomes. It’s dangerous to quote a fee before I know about all the documentation I’ll have to analyze or places I’ll have to travel. I resist the temptation to quote too soon or too aggressively. And when I’m ready, I quote the fee and I assume the risk that the project might be completed faster or slower than I expected.

Cost control in litigation and fraud investigations provides a significant advantage to clients, especially in cases where one of the goals is preserving funds for eventual payment to creditors or victims. The larger the case, the greater the chance that a forensic accountant will blow their budget and spend far more money than the client was prepared to spend. My systems and my fixed fees have helped clients better manage their litigation expenses, and along the way, I have provided them with exceptional results.

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