Landmark Outcome in Shareholder Dispute: How Innovative Forensic Techniques Helped Win the Case

 

 

Issue

In a complex forensic accounting investigation, our team addressed a shareholder dispute involving allegations of fraud, misappropriation of funds, and stolen shareholder distributions.

The case centered around Terra-Magic, Inc., a family-owned wheat farming and seed processing business. The Plaintiff (“the Sister”) was 50% a Shareholder and Defendants included her co-owner brother (“the Brother”) and other close family members involved in the business.

The Plaintiff claimed misappropriation and self-dealing between 2009-2019 because she had received zero profit distributions for a decade. She filed legal action in 2019 after discovering financial irregularities. Brother responded by filing a shareholder buy-out claim, attempting to buy out Sister at Fair Value and circumvent Sister’s case.

 

Our Assignment

We were retained by Sister’s counsel, Jeff Pitzer of Pitzer Law, to identify and quantify self-dealing transactions using detailed forensic analysis. Key data sources included:

• Company bank statements and check copies
• Vendor invoices
• Internal financial records
• Quicken accounting records

Our investigation began with a “bottom-up” analysis, tracing cash flows and categorizing personal versus business expenses, as well as other varieties of alleged theft. However, incomplete and inconsistent records, along with limited cash flow transparency, posed significant challenges. Due to these limitations, we shifted to a “top-down” damages approach, which proved more practical and defensible in court.

Forensic Techniques Applied

1. Bottom-Up Analysis:

• Traced cash flows and matched records to identify personal vs. business expenses, cash withdrawals and diverted income
• Investigated vendor invoices, regulatory filings, and internal documentation

2. Top-Down Analysis:

• Obtained comparative farm operator data from neighboring agricultural businesses
• Estimated normal farm profits using Owner Operating Profit (OOP) metrics based on actual business performance
• Cross-verified profitability projections with testimony from the Brother and government published market data

 

Findings

Misappropriations Identified (Bottom-Up Analysis)

Our bottom-up analysis uncovered $1.5 million in misappropriated funds. Examples of financial misconduct included:

• Use of company funds for personal expenses, such as home improvements and personal loans
• Unsupported cash withdrawals
• Diversion of company funds to purchase real estate through shell entities
• Misuse of business assets, including crop supplies diverted for personal use
• Revenue diversion to personal accounts and bogus charities

Top-Down Financial Analysis

Our top-down approach estimated shareholder losses of $3.32 million, providing a comprehensive assessment of damages.

 

Resolution

In October 2024, the court awarded damages based on our top-down lost profits analysis. This damage amount was added to Fair Value of the farm assets, previously awarded to Sister. The addition of lost profits from self-dealing to Statutory Fair Value not only provided justice for the Plaintiff but also may have set a new precedent in Oregon case law.

The court’s decision underscored the validity and effectiveness of using an overall lost profits analysis in shareholder disputes involving allegations of self-dealing and limited records.

“One of the potential case law implications is this may prevent dishonest business partners from using the buyout mechanism in the Oregon Oppression Statute as a means to escape responsibility for misappropriating corporate funds and/or assets.” – Jeff Pitzer, Pitzer Law, Attorney for Plaintiff

 

Our Keys to Success

This case is yet another example of why it’s important for us to adapt our investigative methods when faced with data limitations. Our best practices encompass:

• Holistic Financial Analysis: Examining all available financial data to uncover inconsistencies and support claims of self-dealing.
• Cross-Verification: Validating findings with third-party records and independent testimony.
• Consider Alternative Measures of Damage: Keep an open mind regarding the most fair, supportable way to measure losses.

 

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Have questions about this type of lost profits analysis? Reach out to Kevin Marold.
[email protected]