A shareholder of a closely-held hedge fund was not receiving the appropriate level of compensation per agreement with the controlling interest shareholder. As a result of this dispute, the minority interest shareholder was removed from employment and an offer was made by the investment firm to buy back the ownership interest. The hedge fund hired a well known accounting firm to perform a study which was represented to the minority shareholder as a valuation in compliance with the shareholders’ agreement signed by both parties. We were asked to review the quality of the analysis without access to management information and provide guidance to counsel on potential options for the minority shareholder.

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Financial professionals performing appraisal services are bound by the Uniform Standards of Professional Appraisal Practice (“USPAP”). Our review of the study revealed numerous errors, omissions and oversights that violated the standards of USPAP. Moreover, our in-depth experience with private investment advisory firms allowed us to assess the market multiples selected by the accounting firm to value the hedge fund. When we compared the multiples in the study to our proprietary database of closely-held hedge fund transactions, we found misapplication of valuation techniques. As a result of our review, counsel adopted the legal position that a “freeze-out” of the minority interest shareholder had occurred.

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