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The Nutmeg Group, LLC – Mercury Fund
Fair Value Report As of December 31, 2008
Case: 1:09-cv-01775 Document #: 297 Filed: 06/06/11 Page 2 of 26 PageID #:5176
Table of Contents
EXECUTIVE SUMMARY ENGAGEMENT OVERVIEW NATIONAL ECONOMIC OUTLOOK FAIR VALUE ANALYSIS FAIR VALUE OF SUBJECT INTEREST CRITIQUE OF CROWE HORWATH’S REPORTS ASSUMPTIONS AND LIMITING CONDITIONS CERTIFICATION OF THE REPORT STATEMENT OF APPRAISER’S QUALIFICATIONS
1 2 5 8 12 13 16 18 19
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Table of Exhibits
Fair Value of Subject Interest
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Corporate Valuation Services, Inc. (“CVS” or “We”) was retained to perform an analysis and submit a fair value report (“Report”) concerning The Nutmeg Group, LLC’s Mercury Fund (the “Fund” or the “Subject Interest”) as of December 31, 2008.
The fair value of The Nutmeg Group, LLC’s Mercury Fund as of December 31, 2008 is:
Seven Million Fifty-One Thousand Six Hundred Forty-Two Dollars $7,051,642
The findings of this Report are bound by the Assumptions and Limiting Conditions and Certification of the Report, both of which are found towards the end of this Report.
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Engagement We were retained to by Mr. Randall Goulding, Esq. (or “Client”) to provide a fair value opinion and write a report presenting our analysis concerning fair value calculation report of The Nutmeg Group, LLC’s Mercury Fund as of December 31, 2008.1 We understand this Report will be used in the matter of Securities and Exchange Commission v. The Nutmeg Goup, LLC, Randall Goulding, David Goulding, Case No. 09-CV-1775.
Standard of value The standard of value is fair value under the premise of a going concern3 and the highest use of the Company’s assets.
Our analysis is in conformance with various administrative pronouncements, including FAS 157, which is now referred to as ASC 820. ASC 820 defines fair value as: the price that would be received to sell an asset or paid to transfer a liability (i.e., the exit price) in an orderly transaction between market participants at the measurement date. Some assets are readily valued, while others are more difficult and in some cases, no current market price may be available. ASC 820 establishes a hierarchy of three levels for assets. This hierarchy ranks the quality and
The date of valuation is 12/31/2008. Per the Client, this was the last date that the Fund assessed fees for its management of the investments. 2 Calculation reports are permissible under both the Uniform Starts of Professional Appraisal Practice (“USPAP”) of the Appraisal Foundation and Statement of Standards of Valuation Services 1 (“SSVS 1”) of the American Institute of Certified Public Accountants.
The International Glossary of Business Valuation Terms defines "Going Concern" as "an ongoing operating business enterprise," and "Going Concern Value" as "the value of a business enterprise that is expected to continue to operate into the future. The intangible elements of going concern value result from factors such as having a trained work force, an operational plant, and the necessary licenses, systems, and procedures in place." The International Glossary of Business Valuation Terms has been jointly adopted by the AICPA, American Society of Appraisers (or “ASA”), Canadian Institute of Chartered Business Valuators and National Association of Certified Valuation Analysts.
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reliability of the information (i.e. observable and unobservable inputs) used to determine fair values. Inputs to fair value determinations refer broadly to the assumptions that market participants would use to price an asset or liability and its risk. ASC 820 describes inputs as observable or unobservable, and directs statement preparers to “maximize” the use of observable inputs and “minimize” the use of unobservable inputs. Below is a description of the difference between these two inputs:
readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment. ASC 820 defines active markets as that which trades at least enough “to provide pricing information on an ongoing basis.” Examples would be securities with prices derived from the major exchanges.
Level II: Valuations are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets
1. Observable inputs: reflect market participants’ assumptions in pricing the asset or liability based on market data obtained from sources independent of the reporting entity.
that are not active and model-based valuations for which all significant assumptions are observable or can be corroborated by observable market data. Examples would be securities with prices derived from market
corroborated sources such as indices and yield curves; and matrix pricing, 2. Unobservable inputs: reflect the reporting entity’s own assumptions about the market participants’ assumptions that they would use to price an asset or liability based on the best information available under the circumstances. such as for most debt securities. Level III: Valuations are based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Additionally, ASC 820 establishes a fair value hierarchy with three levels for these input valuations. The three levels are defined below: Values are determined using pricing models and
discounted cash flow models and includes management judgment and estimation which may be significant. Examples would be prices derived from investment managers or other advisors for securities such as private
Level I: Valuations are based on quoted prices in active markets for identical assets or liabilities. Since valuations are based on quoted prices that are
equities, hedge funds, and private placements. Our conclusion of value
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reflects these findings, our judgment and knowledge of the marketplace, and our expertise in valuation.4 The procedures employed in valuing the Subject Interest included such steps as we considered necessary, including, but not limited to: In performing our work, we were provided with and/or relied upon various sources of information, including, but not limited to: An analysis of the financial performance of the Fund; Assessment of the trading price as of December 31, 2008 and Assets and securities statements supplied from The Nutmeg Group LLC, as of December 31, 2008; Reports to Leslie Weiss as submitted in the matter of Securities and Exchange Commission v. The Nutmeg Group, LLC, Randall Goulding, David Goulding et al, - dated: September 28, 2010, October 20, 2010 and November 16, 2010; Volume and trading prices for the Fund’s assets as of December 31, 2008 as provided by Aegis Capital; US Economic Outlook; Speeches and presentations by members of the Securities and Exchange Commission (“SEC”) regarding Fair Value. Data on publicly traded securities similar to those held within the Fund; and Other miscellaneous information.
See Assumptions and Limiting Conditions and Certification of the Report sections at the end of this Report.
average trading volume for the fourth quarter of 2008 for each publicly traded security; Determination of whether the asset is categorized as a Level I, Level II or Level III per FASB 157 / ASC 820. Assessment of discounts allowable under Fair Value / ASC 820 and apply where determined; An analysis of the general economic environment as of the valuation date; and An analysis of other pertinent facts and data resulting in our conclusion of value.
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National Economic Outlook
In fourth quarter 2008, the National Bureau of Economic Research (“NBER”) officially announced the U.S. was in a recession. Citing
In a December 2008 press release, the Board of Governors of the Federal Reserve (“Committee”) made the following statements with regard to the overall condition of the U.S. Economy:
continued deterioration in the labor market throughout 2008 ─ an estimated three million jobs lost ─ the NBER stated the recession began in December 2007; making it one of the longest downturns in the post-World War II era. Exact reasons or causes for the recession were not given, although the housing market crisis, which started in 2006, is widely accepted as the primary cause of the broader economic downturn.
In the latter part of 2008, credit markets in the U.S. and worldwide froze, financial markets began a series of free-falls, and governments and central banks scrambled to respond to the growing instability. A $700 billion
financial rescue plan, the Emergency Economic Stabilization Act of 2008 (“EESA”), passed both houses of Congress, and was signed into law by President Bush on October 3, 2008. The primary focus of the EESA was to be the purchase of “troubled assets” from financial institutions, through the Troubled Assets Relief Program (“TARP”). Two weeks after EESA became law, the program’s focus was revised to allow the Treasury Department to purchase equity stakes in banks, rather than purchasing troubled assets outright. Through the end of December 2008, approximately $300 billion had been authorized and spent by the Treasury Department under TARP. •
Labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further. Meanwhile, inflationary pressures have diminished appreciably. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters. The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.
A summary of major points concerning the nation’s economic condition as of December 31, 2008, follows:
In fourth quarter 2008, the NBER officially announced the U.S. was in a recession. Citing continued deterioration in the labor market
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National Economic Outlook
throughout 2008 ─ an estimated three million jobs lost ─ the NBER stated the recession began in December 2007; making it one of the longest downturns in the post-World War II era. Exact reasons or causes for the recession were not given, although the housing market crisis, which started in 2006, is widely accepted as the primary cause of the broader economic downturn. • • In the latter part of 2008, credit markets in the U.S. and worldwide froze, financial markets began a series of substantial selloffs, and governments and central banks scrambled to respond to the growing instability. A $700 billion financial rescue plan, the EESA, passed both houses of Congress, and was signed into law by President Bush on October 3, 2008. Through the end of December 2008, •
from private inventory investment and federal government spending. For the year GDP growth was 1.3%. GDP is projected to contract sharply in 2009, with growth declining by as much as 2.0%. Weak growth was projected for 2010; estimates for GDP growth ranged from 0.6% to 1.4%.
Energy prices at both the consumer and producer levels fell sharply in 2008, while food prices increased for the year. Core consumer inflation decelerated in 2008. Inflation at the consumer level was expected to slow in 2009 before accelerating in 2010, while producer price inflation was expected to decline in 2009 before rising in 2010.
Fourth quarter 2008 consumer spending dropped by a record 8.9%, making it the worst quarter for spending since 1947. December 2008 marked the sixth-straight month that consumers reduced spending, a decline that increased dramatically in the final months of the year.
approximately $300 billion had been authorized and spent by the Treasury Department under TARP. •
Fourth quarter 2008 real GDP decreased at an annual rate of 3.8%, compared to 0.2% a year earlier. The decline reflected negative contributions from exports, personal consumption expenditures, equipment and software, and residential fixed investment. The
Spending on durable goods fell by 4.4% for the year, and spending on nondurable goods fell by 0.4%. Consumers remained very
concerned about the short-term outlook and employment, as well as future expectations.
negative contributions were partly offset by positive contributions
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National Economic Outlook
Interest rates fell in fourth quarter 2008, with both short-term rates and long-term rates declining. Both the federal funds rate and the discount rate were lowered by 4.0% in 2008, to 0.25% and 0.5%, respectively. •
sectors in fourth quarter 2008, as well as for the year. Overall, an estimated 3.0 million jobs were lost in 2008.
Agricultural conditions were mixed in fourth quarter 2008, due in part to widely-varied weather conditions across the country. Prices
Financial markets declined on a year-over-year basis in 2008, with investors reacting to increasingly negative economic news. The
received by farmers were down in 2008, as decreases for fruits and nuts, commercial vegetables, food grains, feed grains and hay, and oil-bearing crops more than offset the increase for cotton and potatoes and dry beans. Year-over-year, prices paid by farmers for fuels and livestock and poultry were lower, while prices increased for feed, fertilizer, chemicals, and machinery. The national economic outlook appears to mirror the performance of the Fund’s investments. It reflects high volatility and a slower growth
financial bail-out package failed to ease investor concern and stocks fell sharply in the fourth quarter. For the year, the Dow was 33.8% lower, the NASDAQ was down 40.5%, and the S&P 500 was 38.5% lower. •
Housing continued to decline in 2008, with housing starts and newhome sales down 45% for the year. The value of nonresidential construction increased in 2008. Monthly average mortgage rates were somewhat lower than a year earlier. Rates were expected to remain the same or increase slightly in 2009 and 2010.
environment with less volatility and a very gradual recovery hoped for in the future. We view the downward volatility as being magnified in the Fund’s assets which comprise mostly of lower capitalized equities.
In December 2008, the unemployment rate increased, to 6.9%, approximately 2.3% higher than a year earlier on a seasonallyadjusted annual basis. Employment declined in most major industry
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Fair Value Analysis
We were provided a listing of the securities held within the Fund. Additionally, we were supplied average trading volumes and pricing for each asset held within the fund. We then analyzed each security to determine if under ASC 820 the asset held was a Level I, Level II or Level III. We then assessed for possible discounts from the stated prices based on the following assumptions:
comparable determinate of value and a lack of recovery of value under the Fair Value premise. 3. Level III assets are assessed for discounts to compensate for recovery to Fair Value. These assets are are based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
1. Level I assets were to be assessed no discounts per the Fair Value definition within ASC 820. Blockage discounts are expressly forbidden in ASC 820.5 For Level I and Level II assets, where there is a quoted price equivalent, 2. Level II assets were assessed for possible discounts. Any such discounts are forbidden under Fair Value. This includes blockage discounts, illiquidity discounts, marketability discounts and discounts for minority positions. Fair Value tries to approximate the market stated value regardless of other equity factors; whereas, Fair Market Value, as defined by Revenue Ruling 59-60, makes adjustments and compensation for factors that lie
Discounts and Fair Value
discounts should be in good faith and as a result of not finding a
See November 2010 Presentation SEC Staff Review of Common Financial Reporting Issues Facing Smaller Issuers , Wayne Carnall, Chief Accountant Steven Jacobs, Associate Chief Accountant Andrew Mew, Accounting Branch Chief Ryan Milne, Accounting Branch Chief Brian K. Bhandari, Accounting Branch Chief Jennifer Thompson, Accounting Branch Chief Joel Parker, Accounting Branch Chief Cicely LaMothe, Accounting Branch Chief Kevin Woody, Accounting Branch Chief Division of Corporation; November 13, 2008 letter from Florence E. Harmon, Acting Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549–1090; April 11, 2001 letter from Mr. Mark V. Sever Chair, Accounting Standards Executive Committee American Institute of Certified Public Accountants 1211 Avenue of the Americas, New York, NY 10036-8775
outside the market quoted price.
With the data supplied to us, we analyzed each security and ascertained whether it was market quoted or had a quotable equivalent. If it was market quoted with trades then it is deemed a Level I asset. If it has a market quoted equivalent, then the security is a Level II asset. Lastly, for those securities that did not have a market quote or market quote equivalent, then those
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Fair Value Analysis
securities were deemed to be Level III assets. companies’ equities are Level III assets.
Most privately held
The remaining assets were discounted due to clear and objective nonperformance. For example, out of the money warrants and loans that were not receiving timely payments and therefore were completely written
For each security we also analyzed their trading volume, too. While Fair Value does not allow for blockage discounts, we thought it would be appropriate to analyze the securities absorption rate. For most of the equities that were debentures we applied the underlying market pricing to assess their value. However, these securities often trade at a premium to their common stock equivalents due to the liquidation preferences that are usually inherent in the convertible equity status.
off.Based on our analysis and review of the securities held within The Nutmeg Group LLC’s Mercury Fund, we determined the Fair Value of that fund’s assets on December 31, 2008 is $7,051,642.
In assessing this level of fair value we believe that the valuation previously submitted by The Nutmeg Group, LLC was in object and in good-faith but may have unnecessarily discounted their assets too much. Any discounts above the spirit of the objective quoted price is not allowable under Fair
In our analysis we discounted all the privately held securities by 45% for marketability. These Level III assets would be appropriately discounted to account for their lack of liquidity. Since there is not a quoted market to sell these securities they are essentially illiquid. There are numerous studies regarding restricted stock and pre-IPO equities that have consistently demonstrated discounts between 18% and 74% for lack of marketability. For these current issues we determined a 45% discount is appropriate for these level III assets.
It is only under Level III assets or under a different valuation
premise, such as Fair Market Value, that discounts are utilized to adjust the value indication. To illustrate the differences between Fair Value and Fair Market Value we have inserted discounts that we would assert under a Fair Market Value premise.7
A complete write-up of our discount for lack of marketability asserted here in is in our workfile.
In reviewing the documentation the Gouldings submitted and the reports submitted by Crowe Horwath, it appears that both parties either simply didn’t understand Fair Value or employed discounting from a fair market value premise. The Gouldings’ valuation, however, seemed reasoned, objective and appropriate but still in certain instances too conservative as they too did apply certain unwarranted discounts. Crowe Horwath’s valuation, which will be commented on in a later section, aggressively discounted on what we can only conclude was from a Fair Market Value premise and with no understandable basis per their limited discussion of their discounting of these fair value assets.
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Fair Value Analysis
Fair Market Value Analysis (For Comparison to the Fair Value Premise)
The volatility is assumed to be 80% which is normally a very high level of volatility but these smaller, penny-stocks can have extremely high volatility.
We also assessed the securities for Fair Market Value premise. Under Fair Market Value blockage discounts are allowable for all securities. Additionally, discounts for lack of marketability and lack of control are also permissible. To approximate a Level I or Level II asset’s blockage discount and lack of marketability we used put option pricing modeling. Utilizing Black Scholes option modeling we computed these discounts. For each security that was Level I or Level II we used the following inputs within our Black Scholes calculation.
In reviewing data we observed volatility between 40% to over 100% in certain instances. In modeling all of the Fund’s securities we have assumed a 80% volatility in our put option modeling analysis.
The duration is specific to the absorption time for each security.
The European put option price expressed from this modeling equates to a percentage of value (since it is based on a $100 strike price) to hold the security though sale. The range of value derived was from 0% to 80% for
Black Scholes Input Type Stock Price Strike Price Risk Free Rate Volatility Years (duration)
Input $100 $100 3.05% 80% Absorption Time
those securities that had an extremely long absorption time.
For Level III assets we added a 15% discount for lack of control to the 45% discount for lack of marketability asserted in our Fair Value determination.
The result of our analysis was an imputed combined discount of 40.5% of the Fund’s securities based on fair market value premise as compared to the
The modeling assumes both a stock price and a strike price of a $100 a share which makes the modeling “at par.” The risk free rate of 3.10% was the 20 year U.S. Treasury rate as of December 31, 2008 per the Federal Reserve’s H.15 statistical release.
12.0% discount we determined under a Fair Value premise.
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Fair Value Analysis
Based on our analysis we believe that there was an unacceptable discounting in The Nutmeg Group LLC’s previous Fair Value determination and even more so Crowe Horwath’s analysis. By demonstrating the difference in discounting under the Fair Value premise versus the Fair Market Value premise we have demonstrated the narrow width of allowable discounting under Fair Value and the wide breath of latitude of discounting under Fair Market Value.
On balance our valuation is closer to the values submitted by The Nutmeg Group LLC. Further we view their analysis as having been reasonably objective and approximate of the Fair Value of the assets, with certain unnecessary discounting aside.
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Fair Value of Subject Interest
Corporate Valuation Services, Inc. was retained to perform an analysis and submit a Fair Value Report concerning The Nutmeg Group, LLC’s Mercury Fund as of December 31, 2008.
The Fair Value of The Nutmeg Group, LLC’s Mercury Fund as of December 31, 2008 is:
Seven Million Fifty-One Thousand Six Hundred Forty-Two Dollars $7,051,642
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Critique of Crowe Horwath’s Reports
We were supplied three reports that Crowe Horwath furnished Leslie Weiss, as Court-appointed receiver for the Fund. These reports are dated September 28, 2010, October 20, 2010 and November 16, 2010. We have reviewed these reports and analyzed the valuation methodologies therein and have the following comments and critiques on these reports:
whether there is any basis, consistent with the Fair Value Standard, to assert so substantial a discount. Additionally, this is why we also showed our analysis of Fair Market Value. Without any specifics we believe that the level of discounting asserted by Crowe Horwath is more indicative of Fair Market Value rather than Fair Value. Fair Value is the appropriate Standard in this matter.
In terms of valuation conclusions and reporting, the report on October 20, 2010 is not in conformity with The Federal Rule 26(a)(2)(B). In terms of valuation conclusions and reporting, the report on October 20, 2010 is neither in conformity with the Appraisal Foundation’s Uniform Federal Rule 26(a)(2)(B) lists required disclosures that an expert witness is bound to submit. Ms. Reidy, the reports signatory
Standards of Professionl Appraisal Practice (“USPAP”) nor American Institute of Certified Public Accountants’ Statement of Standards of Valuation Services (“SSVS 1”)
professional failed to show the analysis where she concluded a 59% weighted variance discount on seven of the Fund’s securities.
Further there were no exhibits detailing this analysis nor her attached curriculum vitae or compensation in this matter – all of which are required under Federal Rule 26(a)(2)(B).
USPAP, which is the standard for appraisal reporting of equities adopted in most federal and state courts, states clearly in Standards Rule 10-1 (c): “Clearly and accurately disclose all assumptions, extraordinary assumptions, hypothetical conditions and limiting
From our perspective, Ms. Reidy’s approach of not revealing how she arrived at a 59% discount provides no opportunity to analyze
conditions used in the assignment.” [Emphasis added].
SSVS 1, which is a required reporting Standard for all Certified
October 20, 2010 Report to Leslie Weiss submitted by Crowe Horwath, pages 31 – 32. Ms. Reidy, the sole signatory to the reports, is not accredited to perform valuations and the report improperly fails to reference any germane Standards or valuation premises for her conclusions.
Public Accountants, states in paragraphs 40 – 46 and paragraphs 73 76 that calculation engagements should have a clear articulation of the standard of value, describe the calculation procedures involved
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Critique of Crowe Horwath’s Reports
and the valuation premise. Crowe’s analysis appears to contain none of these elements.
Crowe’s report analysis does not appear to be in compliance with Fair Value Standards.
Notably, on page 31 of Crowe’s October 20, 2010 report, it states:
In analyzing the Fund’s underlying securities, nowhere did we observe that Crowe actually understood the Fund’s assets in relation
Based on Crowe’s preliminary valuation, Nutmeg significantly over-valued these investments. [Emphasis added]. Therefore, it is logical to conclude that Crowe understood they were applying valuation concepts that would necessarily be bound by the nationally recognized standards of USPAP and SSVS1 but yet nowhere in our review do we see the set of calculations or assumptions displayed in arriving at a 59% discount from the values originally reported by the Fund.
to Fair Value premise. anywhere in their
We did not see Fair Value be defined analysis or even mentioned.
Additionally none of the underlying assets were categorized into Level I, Level II or Level III assets which is proscribed by FASB 157 / ASC 820. Without compliance to these Standards it is hard to understand the basis, if any, for Crowe’s valuation conclusion. However, as previously discussed, due to the large “variance” which we view as a discount, it is hard to understand how Crowe’s premise could be Fair Value as opposed to some other value premise (including but not limited to a Fair Market Value premise).
Crowe’s report analysis extrapolates a conclusion on seven of thirty six positions, or 66% of the Fund’s assets, by value, upon all of the Fund’s
Should those calculations exist or should we have missed them in our analysis of the three reports provided, we would like to have the opportunity to analyze and understand them better. Absent our missing these calculations in these reports or other court furnished documents, we strongly feel that any trier of fact should have been furnished these calculations and assumptions in compliance with Federal Rule 26(a)(2)(B), USPAP and SSVS 1.
Each of the fund’s securities are unique with their own unique attributes. Each security is an investment in a unique company with
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Critique of Crowe Horwath’s Reports
different management, industries, risks and growth profiles. We see no basis for comparison and extrapolating based on a sampling, which is not comparable and is too small. The securities should have been allocated by Level I, Level II or Level III assets and then analyzed based on the proscribed valuation premise, Fair Value. Thereafter any extrapolation should be done only by grouping of similar securities as opposed to a simple, large extrapolation that Crowe asserted within their October 20, 2010 report.
In sum, we find serious deficiencies in terms of compliance and analysis disclosure in Crowe’s reports in regards to the valuation of the Fund’s asset values. Our analysis and critique herein only applies to valuation and related assertion of discounts on the Fund’s assets. Within the three reports
submitted we only found four pages of valuation analysis concerning discounting of assets on pages 30 – 34 of the October 20, 2010 report. Should additional analysis be recognized or forwarded to our attention, our opinions expressed herein may change.
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Assumptions and Limiting Conditions
The primary assumptions and limiting conditions pertaining to this Report are summarized below. Other assumptions are cited elsewhere in this Report.
Unless stated otherwise in this Report, we express no opinion as to: 1) the tax consequences of any transaction which may result, 2) the effect of the tax consequences of any net value received or to be received as a result of a
Financial statements and other information provided by Fund or its representatives in the course of this engagement, have been accepted without any verification as fully and correctly reflecting the enterprise's business conditions and operating results for the respective periods, except as specifically noted herein. CVS has not audited, reviewed, or compiled the financial information provided to us and, accordingly, we express no audit opinion or any other form of assurance on this information. The approaches and methodologies used in our work are not an examination in accordance with generally accepted accounting principles, the objective of which is an expression of an opinion regarding the fair presentation of financial statements or other financial information, whether historical or prospective, presented in accordance with generally accepted accounting principles.
transaction, or 3) the possible impact on the market value resulting from any need to effect a transaction to pay taxes. We express no opinion on matters that require legal or other specialized expertise, investigation, or knowledge beyond that customarily employed by business appraisers.
The conclusions and opinions arrived at herein is based on the assumption that the current level of management expertise and effectiveness would continue to be maintained and that the character and integrity of the enterprise through any sale, reorganization, exchange, or diminution of the owners' participation would not be materially or significantly changed.
This Report and the opinions herein are for the exclusive use of our client(s) for the sole and specific purposes as noted herein. Furthermore, this Report and opinions herein are not intended by the author and should not be
Public information and industry and statistical information have been obtained from sources we believe to be reliable. We have also received information from Company management or their representatives that we believe to be reliable. However, we make no representation as to the
construed by the reader to be investment advice in any manner whatsoever. The opinions herein are the considered opinion of CVS, based on information furnished to CVS by the client(s) and their representative(s) and other sources. This Report and opinions herein may not be used in conjunction with any other appraisal or study. The value conclusion(s) stated in this appraisal is based on the program of utilization described in this Report, and may not be separated into parts.
accuracy or completeness of such information and have performed no procedures to corroborate the information.
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Assumptions and Limiting Conditions
Future services regarding the subject matter of this Report, including, but not limited to testimony or attendance in court, shall not be required of CVS unless previous arrangements have been made in writing. However, CVS may elect at its discretion to provide updated reports for the Client(s), if such updated reports are needed and desired by the Client(s). No change of any item in this Report shall be made by anyone other than CVS, and we shall have no responsibility for any such unauthorized change(s).
future events may or may not occur as anticipated, and actual operating results may vary from those described in our Report.
In all matters that may be potentially challenged by a court or other party, we do not take responsibility for the degree of reasonableness of contrary positions that others may choose to take, nor for the costs or fees that may be incurred in the defense of our recommendations against challenge(s). We will, however, retain our supporting work-papers for your matter(s), and
CVS is not an environmental consultant or auditor, and it takes no responsibility for any actual or potential environmental liabilities. Any person entitled to rely on this Report, wishing to know whether such liabilities exist, or the scope and their effect on the value of the property, is encouraged to obtain a professional environmental assessment. CVS does not conduct or provide environmental assessments and has not performed one for this Report.
will be available to assist in defending our professional positions taken, at our then current rates, plus direct expenses at actual, and according to our then current Standard Professional Agreement.
The Report assumes all required licenses, consents, or legislative or administrative authority from any local, state or national government, or private entity or organization have been or can be obtained or reviewed for any use on which the opinion contained in the Report is based.
We did not make an onsite visit to the Fund’s location of business. The obligations of CVS are solely corporate obligations, and no officer, This Report is issued based on an Engagement Agreement signed by the Client(s). restrictions. The Engagement Agreement may have additional rights and director, employee, agent, contractor, shareholder, manager, member, owner or controlling person shall be subject to any personal liability whatsoever to any person, nor will any such claim be asserted by or on behalf of any other party to this agreement or any person relying on the Report. Any projections of future events described in this Report represent the general expectancy concerning such events as of the Report date(s). These
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Certification of the Report
Valuation Representation/Certification The analyst has no obligation to update the Report or the opinions herein for information that comes to our attention after the date of the Report. I represent and certify that, to the best of my knowledge and belief, under penalties of perjury, executed May 26, 2011
The statements of fact contained in this Report are true and correct. The reported analyses and opinions are limited only by the reported assumptions and limiting conditions, and is my personal, impartial, independent, unbiased, objective professional analyses, opinions and conclusions. I have no present or prospective/contemplated financial or other interest in the business or property that is the subject of this Report, and I have no personal financial or other interest or bias with respect to the property or the parties involved. My engagement in this assignment was not contingent upon developing or reporting predetermined results. My compensation for completing this assignment is fee-based and is not contingent upon the development or reporting of a predetermined opinion or direction in value that favors the cause of the client, the outcome of the analysis, the amount of the value opinion, the attainment of a stipulated result, or the occurrence of a subsequent event directly related to the intended use of this appraisal. I was paid at a rate commensurate with my billable rate of $375 an hour. The economic and industry data included in the valuation Report have been obtained from various printed or electronic reference sources that the valuation analyst believes to be reliable. The valuation analyst has not performed any corroborating procedures to substantiate that data.
Tony Garvy, ASA, CPA/ABV/CFF, CVA, FCPA Corporate Valuation Services, Inc.
Case: 1:09-cv-01775 Document #: 297 Filed: 06/06/11 Page 22 of 26 PageID #:5196
Statement of Appraiser’s Qualifications
TONY GARVY, ASA, CPA/ABV/CFF, CVA, FCPA
Mr. Garvy is President of Corporate Valuation Services, Inc. (“CVS”). Prior to forming CVS, he was Managing Partner for valuation and litigation support services at the firm Chadwick & Garvy LLC. He has appraised billions of dollars of equity interests throughout the country and given court testimony in taxation, partnership disputes, divorce matters, intellectual property litigation, rendered fairness opinions and solvency opinions. Mr. Garvy is a Director for several corporate and charitable institutions. Notably, Mr. Garvy was Chair of the Board of Directors for Vegetable Juices, Inc., a closely held food ingredients manufacturer. Recent Engagements: In 2010, Mr. Garvy was the lead appraiser and / or expert witness in the following engagements: An appraisal of a futures and commodities trading company which had $250 Million in annual revenue and gross assets of $35 Billion. The report was submitted to the Company’s Board of Directors for corporate planning purposes. An appraisal of a worldwide logistics company. The solvency report of this $215 Million company was used as part of an equity recapitalization. Subject to two Motion in limine (Daubert challenges) both which failed and the cases were settled prior to his testimony. A $40 Million estate holding 16 different partnerships and companies involving discounts for lack of control, lack of marketability and trapped capital gains.
An appraisal that was submitted in a U.S. Tax Court dispute regarding the personal versus enterprise goodwill arising out of the sale of a $80 Million propane company sold to a publicly traded acquirer. An appraisal of a large 13 member Orthopaedic surgical practice in family law court. An appraisal of a $5 Million executive recruiting firm. Notably, Mr. Garvy was retained as a post-closing appraiser as an arbiter of the Company’s value that settled the parties’ litigation. The settlement was executed on the value that Mr. Garvy opined.
Recent Articles Published: Mr. Garvy has authored numerous articles in various publications. In the last 10 years he has published the following: The Evolving Role and Impact of the CPA Appraiser / Expert Witness - DuPage County (IL) Bar Association’s Brief Magazine, January 2009. Appraisal Opportunities and Challenges in a Down Market - Illinois State Bar Association’s Trusts & Estates Quarterly Newsletter, April 2009. Recent Cases Shed Light on the Use of Valuation Discounts – Estate Planning Magazine, July 2010. Estate Planning Magazine is a nationally recognized, peer-reviewed trade magazine to tax attorneys.
Case: 1:09-cv-01775 Document #: 297 Filed: 06/06/11 Page 23 of 26 PageID #:5197
Statement of Appraiser’s Qualifications
Presentations Made: Mr. Garvy has traveled nationally in presenting current issues concerning valuation concepts. In particular, Mr. Garvy has spoken to conferences of attorneys and accountants about business valuation, tax planning and their associated discounts. In the last 24 months he has given the following presentations: “Business Valuations and Marital Dissolution – Compounding the Fun!” – Divorce Illinois Organization, February 2010 “Business Valuations for Tax Planning and Current Discounts” – DuPage Bar Association, Estate & Probate Committee, February 2010 “Business Valuations for Tax Planning and Current Discounts” – CCH Tax Forums, Nashville, TN, June 2009 “Business Valuations in Corporate and Shareholder Matters” – An internal Continuing Legal Education (CLE) for a large law firm in Chicago, September 2009. “Business Valuations and Current Discounts” – CCH Tax Forums, Chicago, IL, November 2009 “Business Valuations and Current Discounts” – CCH Tax Forums, Orlando, FL, December 2009 “Current Business Valuation Issues with a Tax & Discounts Focus” – DuPage Bar Association, DuPage County, IL February 2010
Representative Engagements: Mr. Garvy has rendered a range of appraisals in many industries for companies of less than $1 million to over $35 Billion in assets. Among the notable industries served: food processing, construction, media, financial institutions, manufacturing, professional services, technology, metal forming. Below are representative engagements that Mr. Garvy has executed on behalf of clients within the last two years: Fairness Opinions & Solvency Opinions Fairness opinion: $15 Million door and window installer. Fairness opinion: $5 Million technical search firm – shareholder buyout Fairness opinion: $15 Million media company – sale of assets. Solvency opinion: $35 Million woodworking mill - management buy-out. Solvency opinion: $215 Million Logistics Company.
Tax Planning Numerous appraisals for closely held businesses for gifting and estate planning with assets of over $1 Billion in certain engagements Dozens of discount Studies within the last two years S-Corp conversion appraisals Numerous S-Corp and pass-thru entity appraisals Tax appeals before IRS on personal versus enterprise goodwill on $80 Million asset sale to a publicly traded company (Ohio). Appraisal of publicly traded stock options Complex estate with 16 partnerships and holding companies Numerous blockage studies
Case: 1:09-cv-01775 Document #: 297 Filed: 06/06/11 Page 24 of 26 PageID #:5198
Statement of Appraiser’s Qualifications
Financial Reporting Purposes & Corporate Planning Numerous appraisals for fair value standards Numerous appraisals for goodwill testing Numerous appraisals for shareholder redemption Numerous appraisals of private equity group holdings
Report submitted in DuPage County: Fertilizer Company (family law).
Recent Litigation Testimony: In the last 4 years, Mr. Garvy has been involved in the following matters of litigation: re Marriage of James R. Lutz and Sarah Lutz, Family Law Court, DuPage County, IL, 2009 (report testimony). Commissioner v. Mr. Volney L. Wright, II, Moulton Gas, Inc., U.S. Tax Court, 2010 (report testimony). In re the Marriage of Armen S. Kelikian v. Toula D. Kelikian No. 2009 D 267 (report testimony). Kuly v. Kuly 09 d 1651. Family Law Court, DuPage County, IL (report testimony). Mary B. McLaughlin v. Brian J. Dilger, Sr. No. 08 D 269, DuPage County, IL Family Law Court. Report and testimony was subject to failed Motion in-limine. 2008. Adam Kooperman v. Scott Patchett 2010 – L – 001122, Cook County, IL Law Divison. (Appointed by both sides in post-litigation binding settlement). Ten X Capital Partners, LLC v. Rafiq Kiswani, Al Hasan, Joel Warady and Mahmoud Ismail No. 2006 L 013179, Cook County, IL Law Division Court, (report, depositional and trial testimony), 2008 Estate of Clara Minnis, 2007-P-008528, Cook County, IL Probate Court (report testimony), 2009. Bank of America v. Carpenter NOS. 1-08-2647 IL Probate Court and Appeals, financial analysis report (report testimony). In Re Marriage of Pevitz, Lake County (report and depositional testimony), 2007.
Forensic Accounting: Shareholder Litigation and Family Law Forensic accounting engagement as part of 12.56 claim to multimillion dollar construction distribution company. Forensic accounting yielded double the reported income and settled within two days of report being issued. Report submitted to Court in DuPage County -
Litigation: Shareholder Litigation, Intellectual Property Litigation & Family Law Shareholder litigation under Illinois Business Corporation Act 12.56 claim Shareholder litigation and immediate redemption under reverse merger Trial Testimony on intellectual property / patent claim against a venture capital firm Report submitted & depositional testimony in DuPage County: Orthopaedic surgical practice based in Chicago (family law). Report submitted & depositional testimony in Lake County: Mortgage Company (family law).
Case: 1:09-cv-01775 Document #: 297 Filed: 06/06/11 Page 25 of 26 PageID #:5199
Statement of Appraiser’s Qualifications
Accreditations: Mr. Garvy’s accreditations include: Accredited Senior Appraiser (ASA) – American Society of Appraisers Certified Public Accountant (CPA) / Accredited in Business Valuation (ABV) / Certified in Financial Forensics (CFF) – American Institute of Certified Public Accountants Certified Valuation Analyst (CVA) – National Association of Certified Valuation Analysts Forensic Certified Public Accountant (FCPA) – Society of Forensic Certified Public Accountants Certified Divorce Financial Analyst (CDFA) – Institute of Certified Divorce Financial Analysts
Membership in Professional & Civic Organizations: Mr. Garvy’s professional and civic participation includes: American Institute of Certified Public Accountants American Society of Appraisers National Association of Certified Valuation Analysts Institute of Certified Divorce Financial Analysts Chicago Planned Giving Council Association for Corporate Growth Business Valuation Association Adult Congenital Heart Association, National Board Advisor
Education: Mr. Garvy’s education includes: Master of Business Administration, Kellogg School of Management (Northwestern University) Master of Accountancy (Graduate Candidate), Kellstadt School of Business (DePaul University) Graduate Level Course work in Economics, Booth Graduate School of Business, (University of Chicago) Bachelor of Arts, History, Loyola University of Chicago
Case: 1:09-cv-01775 Document #: 297 Filed: 06/06/11 Page 26 of 26 PageID #:5200
Exhibit I The Nutmeg Group, LLC - Mercury Fund Fair Value as of December 31, 2008
Company Name Accesskey, Inc. Physicians Healthcare Management, Inc. HotWeb, Inc. Apple Rush, Inc. NuState Energy Holdings, Inc. Niveous Intellimedia, Inc. Morrison, McClendon & Partners Celsia Technologies, Inc. Physicians Healthcare Management, Inc. GoIP Global, Inc. Spooz, Inc. Startech, Inc. H3 Enterprises, Inc. ICC Worldwide, Inc. Rushnet, Inc. Mainstream Holdings, Inc. Cinemaya, Inc. Genesi, Inc. QPC Lasers, Inc. Andover Medical, Inc. North Bay Resources, Inc. Real American Brands, Inc. Inverso, Inc. Rushnet, Inc. Long E, Inc. American Diversified Holdings Corp. American Lorain, Inc. Premiere Mortgage Resource World Transport Authority, Inc. NuState Energy Holdings, Inc. Apple Rush, Inc. Virogen, Inc. Apple Rush, Inc. USA Technologies, Inc. Spooz, Inc. American Diversified Holdings Corp. World Transport Authority, Inc. IMD Companies Taj Systems, Inc. SEVM, Inc. Simulated Environment Concepts, Inc. American Lorain, Inc. Andover Medical, Inc. Celsia Technologies, Inc. Global Resource Corp. Long E, Inc. North Bay Resources, Inc. QPC Lasers, Inc. Startech, Inc.
AKYI PHYH HWBI APRU NSEH
CSAT PHYH GOGB SPZI 2 STHK HTRE ICCW RSHN
QPCI ADOV NBRI RLAB
RSHN LOGE ADHC ALRC PMRS WTAI NSEH APRU VRGI APRU USAT SPZI ADHC WTAI ICBU TJSS SEVM SMEV ALRC ADOV CSAT GBRC LOGE NBRI QPCI STHK
Class Debenture Preferred Debenture Debenture Debenture Common Preferred, LLC Debenture Debenture Debenture Debenture Common Legal Claim Note Note Common Common Common Note Debenture Debenture Debenture Common Common Debenture Debenture Common Common Debenture Common Common Debenture Restricted Stock Common Common Common Common Common Common Common Common Warrants Warrants Warrants Warrants Warrants Warrants Warrants Warrants
Share Equivalency Owned Trade Price 228,660,043 $0.00900 146,768,760 0.01200 381,054,070 0.00320 25,461,519 0.01100 218,933,690 0.00120 0 0 8,061,461 0.01300 16,666,665 0.01200 9,269,658 0.00800 728,125,000 0.00020 231,482 0.35000 0 389,809,995 0.00020 0.00010 0 89,372,261 0.00110 0 166,679,269 227,824 0.16000 823,468 0.01600 35,852,055 0.00100 0 329,615,385 0.00010 382,500 0.02000 7,669 3.75000 25,340 1.05000 211,711,000 0.00010 29,471,781 0.00050 7,926,700 0.00120 665,788 0.01100 95,000 0.05000 367,874 0.01100 1,800 2.16000 8,500,000 0.00020 298 3.75000 985,000 0.00050 200,000 0.00200 525,596 0.00040 1,112 0.03000 90,000 0.00020 17,668 428,550 0.35000 800,000 250,000 382,500 0.40000 625,000 238,087 0.95000 462,963 -
Average Absorption Trading Volume in Days Extended $2,057,940 928,797 246 1,761,225 278,959 526 1,219,373 3,492,000 109 280,077 843 30,203 262,720 236,000 928 250,000 N/A N/A 200,000 N/A N/A 104,799 16,129 500 100,000 146,350 114 74,157 15 617,977 145,625 4,882,500 149 81,019 27,096 9 80,000 257,291 0 77,962 106,195 3,671 70,019 N/A N/A 100,000 N/A N/A 98,309 N/A N/A 40,500 N/A N/A 150,000 3,932,100 42 36,452 13,429 17 35,917 83,128 10 35,852 8,340 4,299 34,133 N/A N/A 32,962 782,254 421 31,671 14,350 27 28,759 0 N/A 26,607 22,500 1 21,171 0 N/A 14,736 138,633 213 9,512 171,013 46 7,324 843 790 4,750 4,000 24 4,047 843 436 3,888 40,976 0 1,700 4,882,500 2 1,118 0 N/A 493 138,633 7 400 390,757 1 210 60,665 9 33 65 17 18 311,758 0 0 22,500 1 149,993 13,429 32 0 16,129 50 0 68,213 4 153,000 14,350 27 0 83,128 8 226,183 3,932,100 0 0 27,096 17 $8,014,653
Deternined Level of Asset: I II III X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X
Discount Determined Fair Value FMV* 0% 24% 0% 41% 0% 29% 0% 80% 0% 44% 45% 60% 45% 60% 0% 34% 0% 17% 0% 80% 0% 16% 0% 5% 0% 0% 20% 20% 20% 20% 45% 60% 45% 60% 0% 60% 75% 75% 0% 6% 0% 5% 0% 80% 0% 60% 0% 32% 0% 8% 0% 80% 0% 1% 0% 80% 0% 23% 0% 10% 0% 39% 0% 5% 0% 35% 0% 0% 0% 1% 0% 80% 0% 2% 0% 1% 0% 5% 0% 4% 0% 0% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 12.0% 40.5%
Adjusted Value Fair Value FMV* $2,057,940 $1,564,035 1,761,225 1,039,123 1,219,373 865,755 280,077 56,015 262,720 147,123 137,500 100,000 110,000 80,000 104,799 68,748 100,000 83,200 74,157 14,831 145,625 122,325 81,019 77,373 80,000 80,000 62,370 62,370 56,015 56,015 55,000 40,000 54,070 39,324 40,500 16,200 37,500 37,500 36,452 34,265 35,917 34,121 35,852 7,170 34,133 13,653 32,962 22,414 31,671 29,137 28,759 5,752 26,607 26,341 21,171 4,234 14,736 11,347 9,512 8,561 7,324 4,497 4,750 4,513 4,047 2,630 3,888 3,888 1,700 1,683 1,118 224 493 483 400 396 210 200 33 32 18 18 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 $7,051,642 $4,765,495
Note: *Fair Market Value is shown for illustrative purposes only. 23
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