An alter ego is a corporation, organization, or other entity set up to provide a legal shield for the person or entity actually controlling the operation. Proving that such an organization is a cover or alter ego for the real defendant breaks down that protection, in which case the owners may be found personally liable for the actions of the alter ego. In the case of corporations, proving one is an alter ego is one way of “piercing the corporate veil.” Accounting experts are not expected to render a legal opinion as to whether one company is the alter ego of the other, but to provide information needed by the trier-of-fact to determine this.
Alter ego cases often are document-intensive (hence expensive) because they involve tracing cash flows among entities. If all the information needed is already stored in an accounting software package (e.g., QuickBooks), this may save significant effort and expense.
The first step in an alter ego analysis is to determine whether the subject company adhered to all corporate formalities, namely whether the company had:
- Filed articles of incorporation
- Issued stock
- Adopted corporate by-laws
- Appointed officers
- Held and documented meetings of shareholders and the board of directors
- Obtained an employer identification number
- Filed corporate tax returns.
The next step is to perform accounting analyses to determine whether the party had:
- Invested sufficient capital to conduct business
- Documented and maintained at arm’s length all related-party transactions
- Maintained separate accounting records
- Segregated corporate and personal funds
- Treated as compensation all personal use of corporate assets.
The last steps are to summarize this information and to prepare easy-to-understand trial exhibits.
Representative Alter Ego Engagements:
- Havas Interactive, Inc. v. CNA Consulting, Michael T. Williams, Heller Ehrman White & McAuliffe, 1999 (pierce corporate veil)
- Network Pharmaceuticals, Inc. v. e-Medsoft.com, Inc., et al., Luan K. Phan, PB Law Group, 2002 (pierce corporate veil)
- Southern California Edison Company v. Mega Network, Inc., Rodney R. Patula, Squire Sanders & Dempsey, 2003 (defend corporate veil).
The first two cases settled on the courthouse steps on terms favorable to our client. In the third case, the judge ruled against plaintiff’s motion to piece the corporate veil (i.e., our client won).
What is A Ponzi Scheme?
Thomas Neches Appears on ‘Getting Schooled’ Podcast w/Abby Hornacek
What is a Ponzi scheme? Who do they affect and how do they happen? Thomas sits down with Abby Hornacek to discuss these questions and more following the recent death of one of the most infamous Ponzi schemers of all time, Bernie Madoff. Madoff’s name roared into the headlines in 2008 when he was arrested for conning 65 billion dollars out of as many as 37 thousand people. (more…)
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