England and Wales High Court (Family Division) Decisions

IN THE HIGH COURT OF JUSTICE
FAMILY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		15/02/2016

Mrs Justice Roberts :

1. This is a wife's application for a financial remedies order after a divorce. She is represented by Mr Timothy Bishop QC and Mr Michael Bradley. The husband is represented by Mr Nicholas Cusworth QC and Richard Castle.
2. The parties in this case are American nationals who have lived an international lifestyle since the early days of their marriage in March 1995 although, with their two children, they have made their home in central London for most of the last decade. The husband ("H") will shortly be 50. He has created significant wealth over the course of this marriage through his work in private equity investments. The wife ("W") is 46. She has devoted her time and energy to the care of the family. The marriage broke down in the early months of 2013 and was dissolved formally on 26^th March 2015. Whilst each has continued to live in London following the breakdown of the marriage, H is non-domiciled for tax purposes. He is now an Irish national. W, too, is non-domiciled having acquired citizenship in St Kitts and Nevis.
3. For present purposes, H remains living in the former family home in Kensington which is worth in the region of £30 million. W, who is now in a new relationship, has purchased a house in Marylebone. The two children, now 16 and 13 years old, divide their time between their parents' two homes when they are not at their boarding schools.
4. The husband issued a petition seeking dissolution of the marriage in May 2013. The financial proceedings began on 17^th December 2013. No agreement was forthcoming and the matter was set down for final hearing.
5. On 10 March 2015, at the conclusion of that final hearing which occupied a full eight days of court time, Holman J made a raft of orders in respect of the financial provision which was to be made for W. That hearing had addressed the issues of entitlement and computation. It has been referred to in these proceedings as "the Phase I hearing". Throughout its course, H's case had been that, notwithstanding the length of the marriage (some 21 years), W's claims should be very significantly restricted in value because of (a) the effect of a post-nuptial agreement (PNA) into which they had entered some five years into the marriage; and (b) his 'special contribution' in terms of the generation of wealth. His position falls into stark focus when that case is translated into figures. From assets of c.$240 million^[1], he was offering her not one penny over and above those assets which she already held in the sum of c.$5 million (approximately £3 million). Notwithstanding the fact that the marriage had lasted for over 20 years and two children had been born during its course, H's case was that W's financial entitlement on her "exit" from the marriage was contractually dictated by her unwillingness to accept a sum of $71 million which he had offered to pay in accordance with the provisions of the PNA. The fact that, on his case, she would be leaving the marriage with no more than about 2% of the available wealth was, he contended, an inevitable consequence of her intransigent stance in relation to the pursuit of the litigation to a final hearing.
6. Holman J rejected both limbs of H's case. His decision in relation to special contribution, reported as Gray v Work [2015] EWHC 834 (Fam), is currently the subject of a pending appeal, permission having been given as recently as last week. It is agreed that the further journey which this case will take to the Court of Appeal in October or November 2016 does not in any way prevent me from dealing with the remaining aspects of this "Phase II hearing".
7. The issues with which I am concerned focus on computation and extraction: in other words, the means of delivering full value to W in terms of her 50% share of the available net wealth so as to produce a fair outcome for both parties. The principal area of dispute is the application of discounts to the value of H's interests in various investments. The case was released to me pursuant to an order which the judge made at the pre-trial review on 9 December 2015. I have within the material in the bundles before me a complete transcript of the judgment which Holman J delivered on 6 March 2015. It includes, as one would expect from this judge, a detailed and careful exposition of the facts relating to the background history and the arguments which were advanced by leading counsel for both parties at the Phase I hearing. I do not propose to rehearse those facts in this judgment which should be read in conjunction with that delivered by Holman J for a full understanding of the case.

The outcome of the Phase I hearing

8. Under paragraph 2(a) of Holman J's substantive order dated 10 March 2015, H and W were each entitled to receive an equal share of the net assets as valued on the agreed date of 31 December 2014. For the purposes of the hearing, the judge had been given a schedule of assets which demonstrated this couple's net wealth to be in the order of $240 million. That figure took no account of the substantial discounts for which H was then contending in terms of the valuations of a number of his assets. Helpfully, the asset schedule provided to Holman J also set out values on a discounted basis. H and W were both then in their mid- to late forties. Neither was working in remunerative employment. H had retired some seven years earlier having taken the decision that he had by then accumulated sufficient wealth to enable the family to live extremely comfortably for the rest of their lives. His unearned income at the time of the Phase I hearing was several millions of dollars a year (para 115 judgment). W had made her contribution to this long marriage as a wife, mother and homemaker.
9. The asset base was complex, but certainly not atypical for this type of case. With his investor's eye H had, over the course of several years, invested the parties' accruing wealth in a number of different assets. In addition to liquid cash deposits and their homes in London and Aspen, there were a significant number of marketable securities, hedge funds, venture capital and private equity investments, as well as direct and single asset investments. Most of this wealth was held within a structure of offshore trusts and other entities designed to maximise tax efficiency for the benefit of H and W, although there was no issue between them as to the reality of his/their beneficial entitlement to the underlying wealth.
10. Of the gross available wealth (approximately $240 million as at 31 December 2014), some $180 million (c.75%) was invested in property or liquid cash deposits. In broad terms, the remaining $60 million was invested in 36 individual securities, hedge funds, private equity investments and venture capital partnerships. Thus, in terms of the underlying composition of the asset base, some 25% was tied up in assets which, by their nature, were risk laden and partially illiquid. It is these assets which were the principal target of W's Wells^[2]-sharing approach. To her section 25 statement, the basis of her case before Holman J in Phase I, she had exhibited a schedule in which she set out those assets which she wished to receive by way of distribution in specie at the conclusion of the case. Together with a share of the cash funds and the property in Aspen, she was then claiming a full half share of the assets which were available for distribution.
11. H (through his then leading counsel, Mr Charles Howard QC) was arguing strenuously for a discount of some $20 million in relation to the value of his interests in the various illiquid entities and investments. That level of discount was appropriate on his case because of the inherent risks and lack of marketability in relation to a significant number of them. In a sharing case (which the judge decided this to be), the appropriate level of discount was obviously crucial since it was likely to impact upon W's award by several millions of pounds.
12. I am told that the judge had made it plain from the outset that he had insufficient time to deal with the issue of extraction and the assessment of discount (if any) since the arguments in relation to the PNA and special contribution had absorbed most of the time allocated to the case. There was simply insufficient time for the judge to hear evidence or argument about discounts. Without that evidence, his lordship felt unable to test Mr Bishop's submission that W's list contained what he called "duffs" as well as "plums". For that reason, he announced at a relatively early stage of the hearing that, apart from W's claim to one of the properties (which he rejected) and to a share of their art collection, he would make his award on a lump sum basis and, for these purposes, would treat the assets as having the discounted value which was then being asserted by H (i.e. $225 million, per paragraph 2 of the judgment). He deliberately left open for the purposes of this hearing further forensic investigation by W into H's case in relation to discounts. At paragraphs 122 and 123 of his judgment, Holman J said this:

"122. It will be left expressly open to the wife to investigate whether the true and appropriate net worth of the husband should ignore the discounts for which he contends, and should be taken at the higher, undiscounted figure of around $245,000,000^[3]. The wife will receive the same percentage of the difference between the two figures as I award her in this judgment of the admitted net worth.

123. It was in part because of this dispute as to discounts that I so strongly urged upon the parties the advantages of negotiation and settlement. It could have been very easy, in negotiation, to identify a range of assets which might be transferred to the wife in specie, as part of settlement of her claim. After the major issues as to the agreement and as to special contribution have been determined by this judgment, and in the light of the very bruising and painful experience of the past two weeks, I fervently hope that the parties will, indeed, now resolve the lingering issue as to discounts by sensible negotiation and give and take. I hereby urge and encourage them, very strongly indeed, to do so."

13. In the absence of such agreement as to a sharing in specie, and in terms of liquidity and H's ability to pay a cash sum to W by way of her half share of the assets, the judge found that H needed very little time to raise the funds. In paragraph 106, his Lordship said this:

"Not only does the husband have considerable wealth and a huge surplus over his own reasonable requirements, but he also has considerable liquidity. Indeed, in his final submissions this week Mr Howard, on instructions, said that if the husband was ordered to pay a substantial lump sum, he would pay $60 million within 28 days and the balance within 62 days thereafter, i.e. the entire sum within three months starting from today."

14. Reflecting his intentions and pursuant to paragraph 2(b) of his order, the judge provided as follows:-

"2. (a) …

(b) In the absence of agreement by the wife and the husband that those assets should be divided in specie, to the extent that they are not so divided, the husband shall pay to the wife a series of lump sums such that, together with her own assets and any assets divided in specie, she receives 50% of the net value as at 31 December 2014."

15. Paragraph 2(e) made provision for H's discounted figures to form the basis for the calculation of the two lump sums for which his lordship was to provide later in the order but this was a qualified basis of calculation in these terms:-

"(e) In the first instance, the figure for calculating the initial two lump sums payable by the respondent to the applicant pursuant to paragraphs 8.1 and 8.2 below ('Phase I') shall be the husband's discounted figure for the net value of the assets. This is without prejudice to the wife's case that in the light of her willingness to take assets in specie so as to achieve a sharing of all the assets (in accordance with the case of Wells v Wells), there was no justification for applying the discounts for which the husband contends; and it is also without prejudice to the husband's case that the wife's proposal put forward for in specie division was not appropriate." [my emphasis]

16. As I have said, this particular proposal was one which had been advanced by W in the run up to the Phase I hearing. Because the judge declined to go down the route of an in specie division of assets at the conclusion of Phase I, there is no analysis in his judgment of the feasibility or appropriateness of the specific proposal which W was then advancing. However, it is perfectly obvious to me from paragraph 123 (quoted above) that he saw the door to an in specie division as one through which the parties could "very easily" walk.
17. Paragraph 2(f) of the order provided as follows:-

"(f) The remaining computational issues of (a) the transferability of certain assets within the schedule, and (b) whether it is reasonable to calculate the value of certain assets after discounts, and (c) if so, the appropriate discounts to be applied, shall be determined at a further hearing ('Phase II') at which the Court will quantify the value of the further lump sum, if any, to be paid by the husband to the wife THE COURT REMINDING THE PARTIES OF THE OVERRIDING OBJECTIVE AND URGING THE PARTIES TO NEGOTIATE WITH A VIEW TO [N]ARROWING THE ISSUES AND, IF POSSIBLE, ELIMINATING THE NEED FOR A PHASE II HEARING."

18. Whilst I do not know, I suspect that those words of capital emphasis were added by the judge himself to the draft order which was submitted to him for approval.
19. On the basis of the judge's ruling that H was to retain the two family properties with their art collection being split, paragraph 8 of the order required H to pay three separate lump sums to W. The first (a sum of $59,502,000) was payable (and paid) on or before 3 April 2015. The second ($49,358,968) was payable (and paid) on or before 2 August 2015. Thus, W received a total of $108,860,968^[4] within 21 weeks of the order. That sum (which included her own, very modest, assets and her 50% share of the art) represented half of the wealth in the case on the basis of H's discounted values. In order to bring her up to what she was contending to be her full 50% entitlement on an undiscounted basis (should the court find that case made out), paragraph 8(3) of the order required H to pay "such further lump sum, if any, as is equal to 50% of such sum by which the net value as at 31 December 2014 of the total assets (excluding fine art) in the attached asset schedule exceeded the husband's discounted figure of US$218,266,659 as determined by the court" at the Phase II hearing. W's entitlement to receive periodical payments at the rate of £130,000 per month until was to continue until she had received the second lump sum.
20. H paid the first tranche of money without liquidating any of his assets. He used a combination of cash and a sum of $16 million which was available to him under the terms of a draw down facility which was available in respect of the Aspen property [2/C:25]. In order to pay the second tranche, he liquidated four of his investment funds^[5] which, together, produced a total of approximately $59 million. It is not without significance on Mr Bishop's case that these liquidations were achieved at short notice and delivered full face value notwithstanding H's case in the Phase I hearing that each should attract a discount of 25%.
21. By Holman J's second order of 10 March 2015, a raft of directions was made in relation to expert evidence from the accountants instructed by the parties. Enquiries were to be put in hand and directed towards the General Partner or other relevant officer of a number of H's investment entities enquiring whether or not they would consent to a transfer of the asset in specie to W should the parties consent and the court so order. Once again, that order was prefaced with a clear recital that the judge had reminded the parties "very strongly" of their duty to negotiate and resolve the remaining issues by consent. That reminder was further emphasised by the judge's reference to these issues being "proportionately relatively small".
22. Shortly after receipt of the first lump sum, W's solicitors wrote to H's solicitors in relation to this hearing which had by then been set down for 5 days some nine months hence. By that stage, W was advancing a claim for a further (third) lump sum payment of $10.43 million. The letter, which is dated 17 April 2015, continues in this vein:

"As you know it has always been our client's position that she is willing to take her share of the family assets in specie, rather than require those assets to be liquidated to realise a cash lump sum. In light of (a) the overriding objective and (b) the Judge's exhortations to our clients to reach a compromise, we write now to reiterate her willingness to Wells-share, and thereby avoid the need for a further expensive and disruptive hearing.

As a further and final attempt to compromise, our client is willing to attend a round table meeting with a view to taking part of her remaining 50% entitlement in specie. This will avoid the need for further extensive liquidation of investments and of course, further litigation on this issue.

With this in mind, please let us have dates on which you and your client would be able to attend a round-table meeting at our offices. We look forward to hearing from you."

23. It is accepted that there was no response by H or his solicitors to that offer. Instead, throughout the course of May 2015, his solicitor continued to pursue enquiries of the various investment entities as to whether or not they would be prepared to sanction a transfer of the various assets to W.
24. By this point in time, H had lodged his appeal against the order of Holman J insofar as it dealt with the issue of 'special contribution'.
25. Through his solicitors, H did make an open proposal on 15 June 2015 shortly before he was due to make the second lump sum payment to W. That offer was said to be in respect of a resolution of Phase II of these proceedings. It recorded the fact that the parties' respective accountants were by that stage just over $11 million apart in their estimate of the sum which should be "added on" to the value of discounted estate which formed the basis of Holman J's substantive order. H offered to split the difference between them and notionally adjust the bottom line figure by an increase in value of just over $5.5 million. On this basis, he proposed that his third payment to W due on 3 August 2015 could be calculated at just over US$1.96 million subject to any adjustment which might be necessary depending on the outcome of his appeal.
26. In advance of the pre-trial review, W's solicitors wrote on 2 December 2015 to H's solicitors setting out her position in relation to the issue of discounts which they described as "the sole purpose" of the five day hearing in 2016. They said this:

"At [the hearing before Holman J] it was your client's case that the value of the majority of the investments in his name should be discounted from their net asset value. Our client's position throughout was that the whole issue of discounts was irrelevant and could be avoided by sharing the investments in specie, so that each took 50% of the assets, In response your client asserted that such Wells-sharing was impossible because the investments could not be transferred from your client to mine."

27. The letter pointed out that subsequent events and the responses from the managers of the relevant investments had cast doubt on H's case in relation to the discounts. First, since the February 2015 hearing, he had been able to liquidate approximately $59 million worth of investments at short notice and with no discount whatsoever. Secondly, the responses from the various investment managers demonstrated that, in the majority of cases, the assets were indeed capable of being transferred to W despite his earlier assertions that they were not. A schedule appended to that letter set out the 29 investments which were transferable. They had a combined gross value of just over $54.7 million or a discounted value of just under $43.8 million. The letter pointed out that, because of H's continued unwillingness to contemplate any division of the assets in specie and his refusal to engage in negotiation despite the earlier offer of a round table meeting, the single remaining issue was the quantification of the final payment due to W. W's figure in respect of that final payment was therefore predicated on the basis of the undiscounted value of the net assets (i.e. c. $240 million) since, on her case, there was no justification for applying the discounts for which H was contending. Despite the fact that she would be entitled to a sum of just under $10.5 million on this basis, she offered to accept a reduced sum of $8.2 million in full and final satisfaction of her claims. That time-limited offer remained open for acceptance for a period of two weeks. By the time H's open counter-proposal was received, it had lapsed.
28. H's counter-proposal was dated 20 January 2016. By this stage each of the parties had set out their respective cases in relation to discounts and Wells-sharing in narrative statements. H remained unpersuaded by W's case. Having paid two of the cash lump sums, he proposed a third and final payment which reflected his earlier proposal to split the difference between the experts in relation to the discounts and increase the value of the discounted assets by some $5.5 million. That offer was not acceptable to her.
29. Thus have we found ourselves in court over five days despite the very clear exhortations of Holman J and his warning to both parties that each was under a duty to negotiate. I am told that their combined costs bill in respect of this litigation is now in excess of £1 million and that figure takes no account of H's Phase I costs or the substantial disbursements he has incurred in respect of his experts.
30. In addition to reading the contents of two substantial lever arch bundles containing what I suspect is but a small part of the written material which this case has generated, I heard oral evidence from each of H, W and three accountants, two of whom had flown to London from Texas for the specific purpose of giving their evidence. Before considering that evidence, I need to say something about the respective positions which each of the parties has advanced before me at this Phase II hearing.

The parties' respective cases

(a) The case advanced on behalf of W by Mr Bishop QC and Mr Bradley

31. At the heart of W's case lies what she contends is the inherent unfairness of forcing her to accept a cash "buy out" of her financial claims on the basis of the discounted figures put forward by H. She contends that the reason why he has fought "tooth and nail" (to use her expression) to avoid an in specie division is because he knows very well that it is in his financial interests to retain the bulk of the portfolio of assets which, together, they built up over the course of the marriage. W told me (and I accept) that she is no financial ingénue. Her evidence (which was not challenged) was that, as a couple, they had always discussed what investments should be made during the marriage. Her evidence was that she was very familiar with the structure of their assets and the performance of the underlying investments. She told me that she had never wanted to be bought out of her share of those assets because of the significant value embedded in the portfolio.
32. Her case is that it takes time and effort to build a mature portfolio such as the one they owned as a couple. An award which is comprised entirely of cash is, on her case, inherently unfair because, in a climate of zero interest rates, she now has to go out into the market and begin again from scratch. Not only does she have to find the investments, she has to pay teams of lawyers and accountants to assist her in building a new investment portfolio. There are risks inherent in that exercise to which she would not be exposed if she had been allowed to take her half share of the matrimonial portfolio. Significant costs would have been avoided. These are risks and costs to which H is not exposed since he has retained the bulk of their joint assets in tact save for those which he has liquidated in order to meet the lump sums payable under Holman J's order. On her case, receipt by her of those cash sums does not deliver value which is equal to the value retained by H in the investment portfolio.
33. She accepts that there is an element of compensation^[6] in the claim which she now advances but contends that the fault lies entirely at the door of H. It is he who has forced her to crystallise the discounts and it was his choice not to negotiate with her at the conclusion of the Phase I hearing, despite the judge repeatedly urging that course upon them. She points to the fact that H has chosen to take substantial loans against the equity in the former matrimonial home in order to pay the lump sums. That alone, she says, is a clear indication of the importance he attaches to preserving the portfolio of investments intact.
34. In terms of approach to the Phase II exercise, the parties are poles apart. On behalf of H, Mr Cusworth QC says that this is a simple and straightforward accountancy exercise. He submits that my task, having listened to expert evidence from the accountants, is restricted to making findings as to the appropriate discounts to be applied to the various assets and thereafter performing a straightforward computation of the balancing lump sum due to W: no more and no less. On his case, Holman J has made the decision to deliver value to W by means of a series of lump sum payments and that is an end to the debate about Wells-sharing and/or any division in specie.
35. On the basis of his open proposal, H offers to pay a further sum representing the mid-point of the discounts being 50% of $5,504,346 (i.e. c.$2.75 million), subject to any adjustment which may subsequently be necessary should his pending appeal in relation to special contribution succeed.
36. That approach is resisted head on by Mr Bishop. He maintains that the order of 10 March 2015 has to be read in conjunction with the clear terms of Holman J's judgment. It is, he contends, a clear and carefully crafted order which imports the judge's intentions that his client should not be precluded from running the case which she was advancing throughout and at the Phase I hearing in relation to the obvious merits of sharing the assets in specie. He points, in particular to paragraphs 122 to 123 of the judgment and recital 2(b), (e) and (f) of the order, all of which I have set out already in this judgment.
37. If W is to receive a full half share of the value of the assets as Holman J intended, H should pay a further lump sum of $10,434,888 being 50% on the basis of undiscounted figures.

The argument as it was developed before me at the Phase II hearing

38. Mr Bishop contends that three questions lie at the heart of this case. First, should there have been an in specie sharing ? Secondly, could there have been an in specie sharing? And thirdly, if the answer to those questions is 'yes', is it fair to allow H to take advantage of the discounts on which he seeks to rely ?
39. He develops his case in this way.

(i) Should there have been an in specie sharing ?

40. In relation to the first question, he points to the clear recital at paragraph 2(b) of the judge's order. He reminds me that W was willing from the outset of these proceedings to take an in specie division. Because of the underlying composition of the matrimonial portfolio, this was easily achieved. What they were seeking to divide was not a single substantial block of illiquid shares but a portfolio of many different investments which readily lent themselves to a consensual or judicial distributive exercise. Neither would be involved in the future management of the other's investments and each would leave the marriage with personal control and autonomy over their individual portfolios. This, says Mr Bishop, is the very essence of Wells-sharing and he reminds me of the words used by Thorpe LJ in the seminal authority of Wells v Wells [2002] 2 FLR 97 at para [24]:-

"In principle it seems to us that the separation of the family does not terminate the sharing of the results of the company's performance. That is easily achieved in any case in which the wife's dependency is met by continuing periodical payments. It is less easy to achieve in a clean break case. In that situation, however, sharing is achieved by a fair division of both the copper-bottomed assets and the illiquid and risk-laden assets."

41. This is precisely the exercise which was envisaged by W's solicitors when, on 17 April 2015, they wrote to H's solicitors inviting him to attend a round table meeting. On Mr Bishop's case, his refusal to engage in that exercise (to the point of refusing to acknowledge the letter) was explained only by his wish to pay the second lump sum as a cash payment. His (late) offer to split the difference on the accountants' discounts was still predicated on the basis of his discounted figures with the result that all that would be due to W at the conclusion of Phase II was a (relatively) small balancing payment of cash.

(ii) Could there have been in specie sharing ?

42. In order to emphasise the weight of the evidential basis for his case in relation to H's strategy of reducing W's award in these proceedings, Mr Bishop points to the following:-

(i) H's initial presentation of his net worth in 2013 was not $240 million but a reduced sum of $176 million. This lower figure was based upon a spurious claim that he would have future tax of $22 million.

(ii) He claimed at the Phase I hearing that an in specie division would have adverse tax consequences for W; and that

(iii) some of the assets which she wanted were incapable of transfer.

43. The issue of transferability was not raised by H with Citigroup when, through his 'in house' investment manager (Kitano), he sought its opinion on discounts for the purposes of his financial presentation in Form E. More importantly, prior to the Phase I hearing, it was not raised with the managers of the various investment funds.^[7] That approach only occurred pursuant to the directions made by Holman J at the conclusion of the Phase I hearing. In his section 25 statement, H had stated that, in relation to the "vast majority" of the investments, her proposal was, quite simply, "impossible to implement".
44. The specific 'basket' of investments which were the target of W's aspirations in relation to Wells-sharing are grouped on the asset schedule as numbers 3, 4(a), (b) and (c), and 5. They include the four hedge funds which he has since liquidated (without discount), 24 separate investments in hedge funds and private equity funds, two investments in venture capital funds (one of which was held in W's name), and 20 separate investments in direct and single asset investments. The portfolio is diverse and ranges from Brazilian private equity to London commercial real estate. A sum of just under $4.87 million is held in H's personal Lone Star funds in respect of which he claims a discount of almost 40% on the basis that he cannot control or easily sell these assets. That level of discount in relation to the Lone Star funds finds reflection in a reduction of the asset base by some $2 million and the consequent loss to W of c.$1 million.
45. The total value of the discount claimed by H in respect of these forty-three separate assets is just under $21.1 million. Now that the exercise of writing to the various fund managers has been completed, it is Mr Bishop's case that the vast majority, both by number and value, have indicated that they would consent to transfer. Thus, he argues, a substantial platform for H's earlier objection to Wells-sharing has simply fallen away and the case which he sought to run before Holman J was wrong.
46. I have been provided with a schedule of those investment funds in respect of which consent to transfer has been obtained [2/C:387]. Together, those twenty-seven entities represent just under $55.7 million of potential value in specie which could have been transferred to W. On the basis of H's proposed discounts, that value is reduced by just under $11 million. Thus, says Mr Bishop, a cash payment to W in respect of her half share of these assets imports into her side of the balance sheet an immediate "loss" of some $5.5 million. Whilst receipt of a share of the assets in specie would come to her pregnant with whatever risks they attracted, she would have had complete control of the timing of any future realisations and could thereby have managed those risks on the basis of whatever investment strategy she chose as being in her best interests.
47. Now that it is clear that the majority of these potentially illiquid assets are in fact transferable, it is plain that, in terms of hard value, only about $19.5 million of the total value of just over $136.7 million would have to stay with H because of non-transferability (i.e. c.14%). Mr Bishop contends that this would have left ample opportunity for W to have received her fair share in specie and the scope for discounting would thereby have been reduced to less than $5 million.
48. Notwithstanding this analysis, H continues to assert in his updated statement sworn in support of this 'Phase II' hearing that a fair division in specie would be almost impossible. At paragraph 7 he says this:

"… [W's] proposal would not of itself have us sharing the risks in the portfolio evenly, since our returns would be determined by the investments that we happened to select / be left with. For such a course to be fair, at the very least, each of us would have to play a part in the selection process, which she does not propose. In any event, the diversity of the portfolio … would alone have rendered fair equal distribution by value impossible to achieve."

49. On behalf of W, Mr Bishop submits that this "defence" to Wells-sharing is nothing of the sort. W's list as presented to the court shortly before the 'Phase I' hearing was her attempt to provide the court with a framework, or starting point, for the equitable division she was proposing. It was not, says Mr Bishop, fixed in stone and, had H engaged in the process as a matter of principle, it would have been feasible to produce a division of the assets which reflected a broadly equal and fair spread of both value and risk. If that could not be achieved by agreement (as the judge clearly wished), it could have been achieved by means of a judicial determination reflected in a series of property adjustment orders. The fact that there were outstanding future capital calls of some $16.6 million in respect of some of the assets would not have prevented an in specie division since assets pregnant with those future capital calls could have been distributed on a broadly even basis in circumstances where each party would have had more than sufficient liquid resources (or access to such resources) to meet those liabilities.

(iii) Is it fair for H to take advantage of discounts ?

50. Looked at in the round, and for the reasons I have set out above, Mr Bishop invites me to find that H's stance in relation to Wells-sharing was entirely unreasonable. If his valuations and discounts were genuine and reliable predictors of true underlying value, it would have been wholly immaterial to H whether he took the asset or cash (as he requires W to do). Mr Bishop contends that H's overarching and unshakeable resistance to the principle of sharing is reliable evidence from which I can, and should, infer that he knows it is to his financial advantage to retain the assets. In rejecting the principle, he left the court with no option but to make the lump sum orders it did. That unreasonable stance should now find reflection in the manner in which I approach Phase II and the computation of the remaining balance due to W in respect of a full half share. The 'ship has now sailed' in terms of the opportunity to share in specie. Some of the assets which were available for sharing as at the end of December 2014 have now been sold. Even if those liquidations had not occurred, the passage of time which has since intervened would mean that another round of due diligence would be required in order to ascertain what had happened to the various funds during the thirteen months since the last valuation date. Since there is no way to provide a reliable benchmark as to current value, the only way to achieve a fair result, he submits, is to undertake the computation exercise from the foot of gross and undiscounted figures as at the agreed valuation date (i.e. 31 December 2014).
51. Mr Bishop took me to the well-known decision of Mostyn J in GW v RW (Financial Provision: Departure From Equality) [2003] 2 FLR 108 (a judgment delivered when he was sitting as a Deputy High Court judge). In that case many of the assets held by the husband were tied up in deferred stock and option plans. In presenting his finances to the court, the husband had included within his Form E a significant liability in respect of various loans which he had incurred in order to invest in deferred rights in these schemes, yet he had failed to ascribe any value to the schemes themselves, present or future. That omission gave rise to a forensic debate in relation to the appropriate level of discount which should be applied to H's existing wealth. That dispute, which the judge described as "peculiarly arid", would have disappeared in the event of a specific sharing of those assets pursuant to Wells and G v G (Financial Provision: Equal Division) [2002] EWHC 1339 (Fam), [2002] 2 FLR 1143.
52. At paragraph 65 of his judgment, the judge said this:-

"I have explained above that the adoption of a Wells sharing eliminates the controversy over the discount to apply to H's deferred assets to reflect risk and payment over time. Discounts crop up in a number of areas when the valuation of assets is undertaken in ancillary relief proceedings … as here, where it is said that the assets are illiquid, risky or deferred. Although the technique has a respectable pedigree it must be recognised that it is one that is devoid of any science and is never more than a guess by the expert valuer of what lesser price than face value a hypothetical purchaser would pay for the asset in question. And it is almost invariably the case that the expert will align his guess with his client's interests, so that the expert for the owning party will almost always suggest a higher discount than the expert for the claiming party. So the court is asked to choose between less than disinterested guesses. Here H argues for a discount of 25%. W says it should be 15%. How and by reference to what considerations can I possibly decide this dispute ? It is impossible, and any decision made by me would almost certainly be wrong. It is for this reason that I am clearly of the view that a Wells sharing is particularly appropriate where the asset in question is the subject of a dispute about discounts."

53. That passage is relied on by Mr Bishop as tantamount to a bespoke foundation for outcome in this case. The difference, of course, is that it is an outcome which is not now achievable in this case other than by an adjustment to the cash sums which W has received, or will receive. On this basis, and to properly compensate W for the absence of opportunity to share in specie without an artificial reduction of her full half share, the sum she should receive as her third tranche of the assets is, on her case, just under $10.5 million.
54. If I am against him on his primary case, Mr Bishop contends that the only discounts which should be applied are those relating to the seven non-transferable assets. The dispute between the accountants in relation to those assets is c. $1.34 million. On this basis, W's entitlement would be reduced to $8.63 million. Insofar as replies have not been received from a few fund managers, he invites me to proceed on the basis that H has not made out his case in relation to non-transferability and to work from the foot of undiscounted values.

(ii) The case advanced on behalf of H by Mr Cusworth QC and Mr Castle

55. With equally robust submissions, Mr Cusworth and Mr Castle advance H's case from the foot of a preliminary submission that receipt of W's skeleton argument a matter of days (if not a single working day) before this hearing was the first time upon which any concession in relation to discounts had been made by W. Whilst Holman J had before him for the purposes of the 'Phase I' hearing some input from W's accountant, FTI Consulting, it was no more than a note in the form of a 'Memorandum' and did not descend into any (let alone any detailed) consideration of the position relating to discounts. The author of the note, Mr Mark Bezant, was merely supporting W's case for a discount-free in specie division of assets.
56. W's position, they contend, was fixed on a particular schedule of assets in respect of which she sought a transfer. Had those assets been transferred, and on the basis of H's discounted figures, she would have left the marriage with an uplift of $7 million over and above the value of the assets which H was retaining.
57. In more general terms, Mr Cusworth acknowledges that H did not respond to W's invitation to attend a round table meeting but he nevertheless paid, on time, the first lump sum which was due under the Phase I order. There had been no movement in W's case by August 2015 when the second lump sum was due, and H paid in full what he had been ordered to pay. As late as December 2015, W's position at the pre-trial review continued to find reflection in a full in specie division without provision for any discount. Based upon her approach to the litigation thus far, Mr Cusworth submits that H had no expectation that she would adopt a more reasonable stance and, if she was prepared to sit down and talk on the basis that discounts were appropriate, she should have said so. His offer to split the difference between the figures advanced by the two sets of accountants was his best attempt to compromise in advance of the Phase II hearing.
58. As I said during the course of argument, I do not believe that this was a case where all lines of communication were effectively dropped between the two hearings, at least as far as the parties' respective solicitors were concerned. Each has the benefit of extremely experienced lawyers who had heard the clear terms of Holman J's advice to the parties in March 2015. I am quite sure that careful discussions will have been ongoing between the lawyers throughout this process in an attempt to narrow the issues, if not settle the case in the round. However, those discussions are privileged. I cannot know the extent to which either party was prepared to shift his or her position during the intervening months. Whilst W was prepared to waive her privilege in respect of those discussions, that offer only came at the very end of the hearing whilst Mr Cusworth was making his final submissions. I accept that it was unrealistic at that stage to expect him to take H's instructions and thereby re-open the evidence. I am therefore not reaching any conclusions on the basis of H's failure to waive his own privilege. Those discussions, whatever their nature, must remain private and I cannot speculate about how reasonable or otherwise either of these parties was being in maintaining their open positions merely on the basis that W now says she has nothing to fear from laying before the court what was said during negotiation.
59. Mr Cusworth contends on behalf of his client that this is a case which obviously attracts a discounted approach. W has received the vast bulk of her award in cash and is not seeking anything other than a further tranche of cash at this hearing. If discounts are ignored, as she contends they should be, she will have received as her share of these investments a substantial cash payment which, in relation to the illiquid assets left in H's hands, ignores the facts of deferred receipt, illiquidity, uncertainty and H's lack of control. Significantly, he points to the fact that W's own expert accepts, in principle, that there should be some discounting in order to achieve a fair cash equivalent value.
60. He submits that the element of compensation inherent in her proposal, which W accepts to a lesser degree, is framed not simply as compensation for the loss of the opportunity to share in assets in specie but also as a punitive outcome reflecting H's alleged unwillingness to negotiate. Why, Mr Cusworth asks rhetorically, should his client be punished for not accepting a proposal which was (and is) inherently unfair ?
61. In relation to the independence and underlying integrity of the discounts relied on by H, he points to the fact that they were initially quantified in February 2013 not by H but by Kitano (the asset management company which administers his finances). Citigroup had played an important role in that exercise. Its advice in relation to discounts and/or likely bids had informed and underpinned the figures which were subsequently presented to H's experts. The discounts were independently reviewed in November 2013 by Ernst & Young and the remainder in December that year by Deloittes. Mr Cusworth points to the impeccable pedigree of those firms. The individual accountants instructed, Mr Tullis and Mr Morris, carefully analysed the investments, cross-checked them against other valuation methods and concluded that the discounts applied were reasonable. Despite his genuine belief that the figures approved by Ernst & Young and Deloitte were fair and accurate, H was still prepared to accommodate W by agreeing to accept lower discounts in an attempt to bridge the gap between the experts.
62. Following receipt of the experts' joint statement on 24 December 2014 (by which time it was clear that none was prepared to shift prom their previous positions), H had reinstated his offer to W and proposed the pragmatic solution of a mid-way point in terms of the discounts to be applied. Whilst W responded with an open offer to accept a reduced payment of c.$8.2 million, that sum was greater than that to which she would be entitled in the event that her own accountant's discounts were accepted in their entirety. Thus, contends, Mr Cusworth, W's criticisms of H's stance are unfounded. Far from being unwilling to negotiate, his client was throughout trying to tread a middle ground in an attempt to achieve a final compromise and avoid further litigation.
63. In response to W's contention that there should be no discounting at all, H, through Mr Cusworth, makes the following succinct points:-

(i) W's case is predicated on the basis not of her own accountant's evidence in relation to discounts, but on the basis there should be no discounting at all. Mr Bezant's expert evidence is that the net value of the assets on the basis of an application of discounts at appropriate levels to some, but not all, of the investments is just under $230 million. This figure is c.$10.23 million less than the gross undiscounted value.

(ii) Even if Holman J had had the time during the course of the Phase I hearing to deal with the issue of extraction, consideration would necessarily have had to be given to the discounts to be applied in relation to each of the assets even in the context of an in specie division. That exercise would have been required in order to ensure a fair outcome for both parties since 'plums' would have to be distinguished from 'duffs'.

(iii) The very fact of disagreement between the accountants in relation to the discounts demonstrates that W's proposal could not have been implemented at the time without a determination as to the appropriate discounts.

(iv) It was never part of W's case that individual assets should be shared on a 50/50 basis. Rather, she sought outright transfers of particular investment funds.

(v) W has failed to demonstrate that any division of the assets in accordance with the restrictions on their transferability, as well as her preference, would result in a fair and equitable division.

64. In these circumstances, the exercise of assessing the true net value of the assets prior to any division was an inevitable part of the process of extraction whether those assets were divided in specie on the basis of Wells-sharing, on a purely cash basis, or a mixture of the two. In circumstances where H finds himself once again faced with a case where W says there should be no discounts at all, he has had no option but to proceed with a full Phase II hearing.
65. Thus were the battle lines drawn when I was invited to hear the evidence.

The oral evidence

(i) The wife

66. W's Phase II statement is dated 7 January 2016. It is in the bundle at [2/D:109]. To that statement she exhibited a copy of the open proposal set out in her section 25 statement. In justification of her approach, she said this:-

"As to the actual make-up of my share, I accept that I should receive assets in specie and thereby take my share of all classes of assets, both liquid and less liquid, risk-free and risk-laden. I certainly do not accept that [H] should retain all the assets, and buy me out with a cash lump sum based on heavily and artificially discounted values. I can simply take my picks across all asset classes and discount ranges and if his valuations are truly accurate then he surely cannot object to me choosing the individual make-up of my half of the portfolio. He who cuts the cake shouldn't get to choose the piece."

67. In response to questions from Mr Cusworth, W told me that her approach as reflected in that statement was merely one way of dealing with sharing. She spoke about the embedded values in the various investments. She gave me the example of similar embedded values in the art work they had divided in accordance the order made by Holman J. I heard about how she had successfully sold one piece of art which she retained for a sum far in excess of that which Christies had attributed to it in their valuation exercise. She told me that H had had similar success in relation to the auction price achieved for one of his pieces of art. She pointed to the figure he had been given by an estate agent in respect of the former matrimonial home at Phillimore Gardens. He had retained that property on the basis of an agreed value of c.£30 million. He had already had a preliminary indication from an estate agent that he should market the property for a sum which was $10 million in excess of its agreed valuation. She told me that exactly the same situation had arisen in relation to their property in Aspen. Initially H had said it was worth $21 million. W insisted on a joint valuation since a recent mortgage valuation had come in at $32 million. The joint valuation produced a figure of $29 million. Thus, in terms of embedded value, a sum of $8 million would have dropped out of the pot she was to share had she accepted H's original figure.
68. She was confident from what she knew about the composition and operation of the investment portfolio that there was a significant element of embedded value. H was wholly opposed to sharing that asset, just as he had been opposed to sharing anything, down to the contents of their home. Because of the manner in which his case was presented at the hearing before Holman J, the two hurdles of the post-nuptial agreement and special contribution had to be overcome before any consideration was given to sharing. In terms of his position at that hearing, she told me that his case was that she should be entitled to "nada; zippo; … nothing".
69. W impressed me as someone who attached significant importance to the principle of leaving the marriage with what she perceived to be a fair share of the wealth they had built up together over the course of many years. She sought with grace and elegance (if I am permitted to say so) to convey to me the strength of her feelings and the importance which she attached to the principle that the assets should be split in a fair way. That would have been achieved by a division of the assets in specie but, in this case, cash was not equivalent in value to the discounted value of the assets. She accepts that there is an element of compensation^[8] in the final sum she is seeking from H but says he has only himself to blame for any perceived penalty because he was given the choice by Holman J who stressed to them both that there were sufficient assets in the case to enable them to negotiate a solution acceptable to both. The fact that the whole portfolio had been accumulated during their marriage and was well-known to them both would have enabled them each to choose the underlying assets on the basis of alternate choices. Such a system was clearly, in this wife's mind, the fair outcome.

(ii) The husband

70. Having heard H at some length in the witness box, I do not consider it entirely fair to cast him in the mould of a husband who has left no stone unturned in order to reduce his financial obligations to W. He gave his evidence in a calm and measured way but, perhaps not surprisingly, his evidence was shaped and honed by his experience as a very sophisticated financial investor of many years' standing. He told me that the Lone Star funds (which lie at the centre of the current dispute between the accountants in terms of the value of the discounts claimed) were global investments comprised in the main of distressed assets. Those which remain are the "tail end" of restructured loan payments and properties which had been in negative equity. He accepts that he received a significant payment of some $22 million in 2014 from one of the funds but he told me that this was a "one off" and that there were unlikely to be any further windfall receipts from the Lone Star funds. Whilst the funds were nearing the end of their lives in terms of an "exit date", there was every possibility that the general partners (or fund managers) would simply extend that date (June 2016) with the result that H's period of risk in relation to these assets was extended into an uncertain future. H was keen to impress upon me that, because he had no control over investment strategy, his financial interests may not necessarily be aligned with those of the general partners. Whilst he accepts that he suffered no discount on the return he received from the four funds which were liquidated to meet the second lump sum payment to W, he told me that there were other funds which had not paid out despite the fact that he had submitted redemption notices some time ago.
71. He was critical of the analysis undertaken on behalf of W by Mr Bezant of FTI Consulting. First, H told me that he had approached his task from the foot of an assumption that most of H's investment funds were performing on an average basis for their particular class, which, in the main, they were not. Secondly, he had assumed that certain shares were transferable when, in H's view, they were not. He accepts that he had throughout approached the case as one where W would receive a cash payment on a clean break basis although he believed that her target had always been a cash payment based upon gross asset values rather than an in specie division. He sees her present stance of having been deprived of an in specie division as something of an artifice.
72. In this respect, and on the basis of the evidence which was before me, I am wholly persuaded that W was indeed committed to the principle of a division of the matrimonial assets in specie. I cannot know what may or may not have been said between them at various times but, at least in the weeks leading up to the Phase I hearing and during this hearing, she has been both steadfast and consistent in her approach. It is an approach which I find to be genuine in terms of her subjective conviction that a cash award on the basis of heavily discounted values is an award which 'short-changes' her in terms of a full 50% of the assets.
73. Whilst H agreed that it would have been a huge advantage had the parties settled, it was clear to me from his evidence that there was little serious negotiation in which he himself was engaged until the day before this hearing commenced, a day which I was using to read the papers. H told me that he was pursing his appeal in relation to special contribution (which was true) and that he assumed the lawyers would be speaking to one another about settlement. Because W had made it abundantly clear to him that she did not agree to discount any of the assets, he told me that a detailed negotiated settlement would have meant a further round of extensive due diligence before he felt she would be prepared to select which assets she wished to retain. By that stage he had already liquidated those assets which were readily capable of realisation in order to meet the payment of $60 million which she had received. He saw little prospect of recovering any significant part of that sum. There was no offer from W to sit down and talk until she received that first tranche of her award and he had no reason whatsoever to believe that she was likely to depart from her previous stance of intransigence over the discount issue. As he put it, "I could see no point in sitting down in a room with eight lawyers when she had never been reasonable before".
74. On the whole, I was not very impressed by H's explanation for the lack of progress in relation to ongoing discussion with a view to achieving overall settlement. That had been Holman J's clear and unequivocal injunction to the parties. His unwillingness to attend a meeting, or even to authorise his solicitor to attend a meeting on his behalf, seems to me to have been a lost opportunity to sit down and explore how an in specie settlement might have been achieved and the costs of this hearing avoided. I accept that H knew, and knows, W better than any of the lawyers in this case. His impression of the futility of achieving any shift in her position to reflect the need to factor in discounts at some level (if not his own figures) may well have been a view he held quite genuinely. I take on board the fact that he is probably right that, even if she had been prepared to countenance discounts for the purposes of a negotiated settlement, the accountants' work would not thereby have come to an end. There may well have been further expense involved in a fully negotiated outcome to this case which involved in specie sharing. However, I suspect the costs would have been significantly less than those which have now been incurred and we would not now find ourselves in the somewhat artificial situation of having to assume wholly undiscounted values (on W's case) simply because that is now, as she contends, the only fair way to deal with the case.
75. The state of mutual hostility between these two parties is perhaps best summed up by H's reference to W at one stage as "my counter-party". I have little doubt that W's perception of H as a litigant is equally fixed in the territory of his determination, as she sees it, to pay her as little as possible.

Transferability

76. When he was cross-examined by Mr Bishop about his case in relation to transferability, H told me that his principal opposition to Wells-sharing flowed from the inherent difficulty of creating two broadly equivalent portfolios in which there was an equal balance of risk, including future cash calls. The fact that he had no control over the funds would, he said, inevitably have led to demands from W for collateral security to counterbalance her inability to participate in their strategic management. It was no solution, on his case, to look to the alternative solution of paying her 50% of the net distributions as and when they were received since there would be complex tax issues to be considered, a further potential overlay on working through an equal division as to value. Whilst H was prepared to accept that an in specie division would have been possible, there was, in his mind, little prospect of agreement as to the mechanics of the division. As I have said, by the time the case had crystallised evidentially in relation to overall transferability, it seemed that we were down to only five or possibly seven investments which could not be transferred to W^[9].
77. For the purposes of his cross-examination, Mr Bishop had produced a detailed schedule based upon the underlying assets which purported to show exactly how a hypothetical adjustment could have been achieved leaving each of the parties with 50% of the underlying value. Whilst agreeing that such a scenario appeared to be fair and equitable, H was not willing to concede that this was anything more than a hypothesis or, as he put it, "a mathematical outcome in a vacuum". He remains convinced that he and W would never have been able to agree terms because of her unwillingness to look at a solution which did not involve a 50/50 split of the gross value of his assets. He told me that they are quite unable to communicate on any issue, let alone a division of their matrimonial estate. Furthermore, he did not accept that any method involving alternate choices would lead to a fair outcome since W was insisting on having the first choice.
78. In relation to the substance of H's case, at paragraph 70(b) of their opening Note, Mr Bishop and Mr Bradley say that these arguments are misconceived and disingenuous for the following reasons:-

"(a) First, the court is well used to adopting a broad and robust approach to allocation without getting bogged down in extraneous detail.

(b) Second, it would have been entirely possible, within an in specie division process, to adopt either H's or W's discounted figures which already took account of the individual features of each asset, and reduce them to a cash equivalent value. H's case is that the discounted value of the asset is its cash value. There is no advantage between one cash sum and another.

79. For my part, I regard it as a clear derogation of the parties' duty to heed the words of wisdom delivered so emphatically by Holman J. That this extraction schedule (or something very similar to it) did not come into existence until very shortly before this final hearing (albeit predicated on a hypothesis) was, in my judgment, yet another valuable missed opportunity. In this context, and having listened to all the evidence, I suspect that there may well have been a resistance on H's part to the idea of breaking up the structure of the underlying investment portfolio. When he was asked by Mr Bishop whether he accepted that these assets represented the fruits of their marriage partnership, he was reluctant to characterise them as such. He acknowledged that W had been a good wife and supportive of his career but he clung to the mantra that these were merely financial assets and this was no more nor less than a valuation exercise.

(iii) Expert evidence: the accountants

80. I heard from the three accountants over the course of a full day. As I have said, Mr Michael Tullis (Deloittes) and Mr Gregory Morris (Ernst & Young) had, at H's request, flown from Texas specifically for the purpose of attending this hearing. Mr Mark Bezant (FTI Consulting) is London-based. Each had prepared a written report and I had a joint statement which reflected their final positions following the exchange of those reports and their subsequent communication with one another.
81. Before turning to their evidence, I need to say something about the approach which has been adopted in this case in relation to the issue of the discounts. I have already touched upon this earlier in my judgment but I need to say more at this stage since it informs the approach of the experts and the criticism which each makes of the other.
82. For the purposes of compiling the valuations and discounts he had presented in his Form E, H (through Kitano) had approached various industry professionals for assistance. Within the material in the bundles I have a memorandum of a round of interviews which Kitano conducted in June 2013 with Mr Adam Graves (Deutsche Bank) and Mr Dave Schnur (Citigroup Global Markets). Mr Schnur, in particular, had provided assistance with the range of discounts applicable to the hedge fund investments. He provided his opinion on the basis of his knowledge and experience as the director of Citigroup responsible for fund research. With a team of fifteen professionals who were involved in active transactions concerning the buying and selling of private equity and hedge fund LP investments, Mr Schnur had discussed H's portfolio with Kitano and provided prices which were then available for the various types of investment.
83. In particular, he had regard to two industry "tools": the Cogent Partners Secondary Pricing Trends & Analysis Report (January 2013) ("the Cogent Report") and the ELM Capital Report (2012). These dealt with statistically collated information relating to the acquisition of existing investors' interests in private equity and related funds. Depending upon the particular nature of the fund, the reports provided helpful data on the average percentage discount to be applied. For example, buyout funds might typically attract on average a 90% discount of net asset value whilst mezzanine funds would attract a lower average discount to net asset value of 74%.
84. In relation to each of H's investments, Mr Schnur has provided a synopsis of the size of H's interest in the relevant fund, its fund strategy, and H's share of the management fee. Any particular features which called for particular comment were recorded, such as any discount applied for lack of marketability or control.
85. Having been instructed on the basis of the work which had already been undertaken in the preparation of H's Form E by Kitano, Mr Morris (Ernst & Young) subsequently conducted a "review" of that information and data in relation to H's investments in the private equity funds. His first report is dated 20 November 2013 and deals with his conclusions as to Kitano's figures for "fair market value" on the basis of a sale at arm's length to a willing seller where neither seller nor buyer was under any compulsion in relation to the transaction.
86. For the purposes of that work, Mr Morris and his team had looked at such financial data as was available, including what he describes as "research reports, third party discount studies and other documentation". Significantly, as Mr Morris was to confirm in his oral evidence, he did not look at, or rely on, the Cogent Report which had informed Kitano's initial valuation exercise. In section F of his report, Mr Morris sets out in relation to each of the eight entities with which he deals the basis for applying a particular discount. In two cases, the discounts he quoted reflected the transaction costs associated with liquidating H's interest in the fund; in another they were based on an actual bid to purchase his interest. Other funds attracted discounts because they were minority interests with lack of control or because they contained restrictions on transferability. In these instances, Mr Morris records that Kitano's original discounts appeared to be "within a reasonable range". In relation to funds to which discounts had been applied because of a perceived lack of control (i.e. minority or limited partnership interests), the report describes the underlying methodology which had been used to consider values and discounts. These involved an analysis of closed-end funds and a transaction review of acquisition premiums. Several industry studies were identified with brief descriptions of their pedigree and conclusions.
87. By way of his own conclusion, Mr Morris states again on the final page of his first report that the discounts which Kitano had applied to adjust the net asset value of H's limited partnership interests "appear[s] to be within a reasonable range". He does not state what that range is and qualifies his opinion in this way:-

"We did not independently investigate or otherwise verify the data provided and do not express an opinion or offer any other form of assurance regarding its accuracy or completeness. We understand that [Kitano] has consistently applied key assumptions to the investments and has not omitted any factors that may be relevant. In addition, [Kitano] understands that any such omissions or misstatements may materially affect our review of the fair market value estimates as prepared by [Kitano]."

88. I take that paragraph to represent no more nor less than an industry standard professional disclaimer.
89. Shortly after that report was produced by Ernst & Young, Mr Tullis (Deloittes) produced his first report. It is dated 3 December 2013. His remit was wider than that given to Ernst & Young and concerned the broader canvas of H's after tax net worth with particular reference to the post-nuptial agreement into which H and W had entered during the course of their marriage. In reaching his conclusions, Mr Tullis had considered (amongst the material with which he was provided) the market-based quotes from Citigroup in relation to the hedge fund, private equity and general and limited partnership interests held by H as well as the ELM Capital report relating to the second half of 2012 and the 2013 Cogent Report.
90. His conclusions appear under a heading, "Summary of Findings" which appears at the end of the report. Simply stated, Mr Tullis, on behalf of Deloittes, said that, from what he had seen, nothing had come to his firm's attention which would cause it or him to believe (i) that H's general approach to valuation and discounts as at May 2013 (the valuation date for his Form E exercise) was inconsistent with commonly accepted valuation practice; and/or (ii) that H's approach and the methods used were improperly applied; and/or (iii) that his estimates of discounted value were unreasonable. Put another way, Deloittes was prepared to "sign off" on H's figures and saw nothing unreasonable in either the figures or the route he had taken to reach them. Appended to the report were extracts of various industry standard tables based on empirical data showing how discounts for lack of control and marketability had been tracked over a number of years by date, volume of transactions and price in order to ascertain the implied discount in any one year in accordance with whatever formula was deployed by the particular study.
91. On behalf of W, Mr Bezant (FTI Consulting) produced the Memorandum dated 16 February 2015 (to which I have already referred). That was intended for the purposes of the hearing in front of Holman J in February / March 2015. At that point in time, H had ascribed to his business assets a total discounted value of $160 million. (This compared to a Form E value (March 2014) of $137 million.) Mr Bezant's view was that the discounts applied by H were excessive. In particular, he challenged the 39.5% discount which had been applied to his Lone Star interests and the discounts of c.24% which he applied in relation to his other equity investments. Mr Bezant had carried out his own valuation on the basis of the information provided to him and reached a preliminary conclusion that the assets were worth $175 million rather than $160 million. He criticised the work undertaken by Ernst & Young and Deloittes for its generic (rather than specific) approach to valuation. That approach had been driven by a review of general valuation literature rather than a bespoke approach dictated by the specific nature and characteristics of the underlying assets. He further took issue with the fact that Ernst & Young's conclusions failed to reflect the way in which the market for these types of investments varied with other comparable investments. In particular, he pointed to a demonstrable and marked change in the discounts market over the 12 months between 30 December 2013 and January 2015. Notwithstanding a material fall in the value of market discounts in the period between the preparation of H's Form E and the agreed valuation date of 31 December 2014, nowhere did this find reflection in the work of either of H's expert witnesses.
92. In terms of H's original methodology, Mr Bezant explained that H had valued his partnership interests by adopting the values estimated and reported from time to time by the various individual fund managers (the net asset values of the underlying investment funds) and had applied to those figures a discount to reflect the difference between the underlying assets within the fund and the market value of an interest in the fund itself. That methodology was based upon a fundamental assumption that a partnership interest in an investment fund is worth less than a proportionate share of the fund's underlying net asset value. Whilst Mr Bezant was prepared to accept that it is common to apply a discount in this way because empirical data suggests that, on average, partnership interests sell at discounts, he pointed out that such interests may also sell at premium to net asset value. Herein, in his view, lies the importance of a bespoke valuation exercise rather than the sort of "across the board" review which Ernst & Young had undertaken.
93. The first point to note is that Mr Bezant acknowledges and accepts that, in appropriate circumstances, discounts may be both appropriate and necessary if the ascertainment of fair market value is the object of the exercise in hand. He provided a number of reasons or justifications for his view. First, the "time value of money" will often require a discounted approach. In practice an investor is likely to see the return of his capital over a period of time and a purchaser of that fund interest will often require an inbuilt discount to reflect that delay in securing the return of capital. Secondly, there may well be a contractual requirement on an investor (transferred to a purchaser of that investment) to make further capital commitments to the fund. Thirdly, a marketability discount may well be appropriate if there is a limited market for the sale of the particular asset or where an individual investor is precluded by contractual restrictions from selling his asset. Fourthly, a discount may well be appropriate to reflect the ability of an owner from realising value once his investment is placed on the market for sale. In certain circumstances this discount for lack of liquidity may be no more nor less than the time value of money but Mr Bezant recognises it, in principle, as a legitimate basis for discounting. These are all scenarios and accounting procedures well known to professionals (lawyers, accountants, judges and investors) who have experience of these types of cases. Mr Bezant's approach emphasises the need to determine (i) whether or not a discount should be applied, and (ii) if so, the extent of such discount, by reference to the specific characteristics of the fund and the market conditions at the valuation date.
94. Mr Bezant's approach was informed principally by two external points of reference. He relied on the Cogent Report to ascertain the range of discounts applicable to the private equity funds and a report produced by Hedgebay for the hedge fund investments. (Hedgebay is a recognised market leader in secondary markets for hedge funds.) By reference to the most recent report from Cogent Partners (H2 2014), Mr Bezant has tracked the average discounts applicable to different types of private equity funds. He has reproduced the movement in those average discounts between 2010 and 2015 in a graph which is set out at internal page 6 of his first report. This shows clearly that, since the date of the Citigroup input in 2013, the average discount paid by reference to the net asset value of the fund has fallen. As Mr Bezant deduces, this correlates with a rise in the price of secondary interests in private equity funds. It was by applying the average net asset value reflected in that (most recent) Cogent Partners' report to each specific fund by type and in accordance with the underlying fund strategy that Mr Bezant and his team at FTI Consulting concluded that, as at 31 December 2014, H's interests were worth $175 million rather than the figure of $160 million contended for by H (and supported by Ernst & Young and Deloittes).

(iv) Updated evidence from the accountants

95. In anticipation of the Phase I hearing, both Deloittes and Ernst & Young produced updated reports. They are both dated 21 January 2015. The Deloittes report appears to be an identical reproduction of Mr Tullis's first report (prepared some 13 months earlier) save for the date of the report itself and the valuation date inserted in his "Summary of Findings" at the conclusion of the report. In his second report, Mr Tullis adopts 31 December 2014 as the appropriate valuation date but merely repeats the conclusions which he lifts in identical terms from his first report. Of particular note, at internal page 2 of his report, he makes reference to the information on which he has relied in compiling his updated report. That mirrors precisely the terms of his first report, including the reference to the Cogent Partners' report of January 2013. In other words, Mr Tullis did not make any reference to the updated information in the January 2015 Cogent Partners' report which informed much of the analysis carried out by Mr Bezant. Thus there is no reflection in Deloittes' updated report of the material change in the market during 2014 resulting in the fall in average discounts and the concomitant rise in the price of secondary interests in private equity funds.
96. Precisely the same observations apply in relation to the updated Ernst & Young report dated 21 January 2015. Aside from the date, it, too, appears to be a complete replica of Ernst & Young's November 2013 report. Mr Morris declined to accept that it was no more than a "cut and paste" exercise, as suggested to him in cross-examination by Mr Bishop, but that is what the major part of the document looks like to me in terms of format, if nothing else. It is true that the list of five entities which appear on the first page of the earlier report as the investments to be valued had expanded to a total of eight entities by the time of the second report, thereby demonstrating some input of new information into the updating exercise. However, when he was asked by Mr Bishop about two of these investments which should now more appropriately be considered as falling within the "marketable securities" category as paid up investments, Mr Morris appeared to be unaware of any change in the underlying composition of the asset base. As in his first report, and in the same terms, Mr Morris concluded that, as of 31 December 2014, H's own discounted value "appears to be within a reasonable range". No independent figures were provided in respect of that range; Mr Morris simply adopted H's range of discounts as "reasonable".
97. Ernst & Young prepared a third report in June 2015 by way of a specific response to, and commentary upon, Mr Bezant's original Memorandum which had been produced some four months earlier. By way of opening remarks, Mr Morris and his team prefaced the report in this way:-

(i) in the context of matrimonial disputes between former spouses, it was common for the parties to divide assets between themselves and, in the context of illiquid assets (such as these), it was common practice to apply a discount where there was no readily available to "open" market to exchange the illiquid assets for cash; and

(ii) FTI Consulting did not dispute the concept of applying discounts to illiquid assets.

98. The balance of the report is a critique of Mr Bezant's work and the conclusions which he draws in relation to valuation. That critique was supported by Deloittes who, on the same day, produced a memorandum which set out in tabular form a list of issues where the experts remained apart. For his part, and in answer the criticism advanced by FTI Consulting that his approach had been "generic" rather than "specific", Mr Morris said that he and/or his team had had numerous discussions with Kitano which had, in turn, informed the analysis which his firm had undertaken. They had also reviewed the terms and conditions of each partnership agreement, for each investment, with a particular focus on transferability restrictions. Superimposed upon this exercise, they had then reviewed various third party data sources relating to investments which attracted discounts because of a lack of either control or marketability. That information had been weighed and considered by the "combined and vast experience (approximately 60 years of valuation experience)" of the two partners involved in the work.
99. Their review of the publicly available data relating to discounts for lack of control revealed an overall average of 26%. In relation to the restricted stock, the band of discounts was fairly wide (between 13% and 45%) with an overall average of 29% (or 13% in relation to the more recent transactions). The discounts applicable to secondary markets were between 20% and 37%. These bands were used by Deloittes as a cross-check against H's own figures and formed the basis for their view that his figures were "not unreasonable".
100. Thus the absence of any reference in Ernst & Young's and/or Deloittes' work to either the Citigroup input or the Cogent reports (i.e. the basis of H's approach and methodology in his Form E) was justified by reference to the large body of alternative empirical evidence on which they had relied. They rejected as "naïve and unfounded" Mr Bezant's suggestion that H's interests in the Lone Star funds were aligned with the other partners in the funds and that the General Partner would simply approve and accept a new owner of H's limited partner interest. In relation to the five hedge funds (which were subsequently liquidated by H), Ernst & Young justified discounts of 7% on the basis of time value for money. H's discounts of 8% for these investments were thus not unreasonable. (Of course, at the time of producing that report Ernst & Young were not to know that H would subsequently redeem each of those interests on the basis of nil discounts in the total sum of c.$60 million.)
101. In similar vein, Deloittes responded to FTI Consulting's Memorandum on exactly the same date in June 2015. Mr Tullis pointed to his nineteen years' experience in valuing businesses and assets and asserted, in contrast, that Mr Bezant's expertise appeared to lie in corporate finance and restructuring transactions, not in the assessment of fair market value. The remainder of Deloittes' response is a tabular comparison of the issues and areas of disagreement which finds reflection to a large extent in the joint statement which was produced on 24 December 2015 following a telephone conference between all three experts on 2 October 2015. The teams supporting the three individual experts were also present for that conference call which was held on a without prejudice basis.
102. That joint statement is a fairly lengthy document which summarises the approach which each of the three experts adopted in relation to the valuation exercise. It concludes with a comparative table of areas of agreement and disagreement and a helpful schedule of discounts relied on by each of H and Mr Bezant in relation to each individual asset. The principal areas of disagreement in terms of discount are the Lone Star funds where H has applied a 39.5% discount across the board. In terms of approach, as the schedule makes plain, Mr Bezant has relied heavily on the updated information from the Cogent Partners' report of January 2015 which he has then applied by way of updating to H's original valuation methodology. That Form E presentation had itself relied heavily on both the Citigroup data and the earlier Cogent Partners report from 2013. By comparison, both Mr Tullis and Mr Morris spread their particular analytical nets wider in terms of generic market research. They rely on instances of lack of alignment in partner interests together with lack of marketability and control as steering the discounts into a higher bracket than that allowed for by Mr Bezant's alignment with the most recent Cogent Partners' research.
103. Before turning to the oral evidence which I heard from the three accountants, I should state at the outset of my analysis that all three impressed me as professionals at the very top of their fields. I had the considerable benefit of decades of collective professional experience to draw upon in reaching my conclusions and I remind myself of the oft-quoted maxim that "valuation is an art and not a science". Each of the accountants from whom I heard had formed a view as to the value of these assets and the appropriate discounts which the underlying investments attracted. Whilst Mr Bezant's views were reached independently by way of updating, he had started from the platform of information which had underpinned H's presentation in his Form E. The approach of H's two experts was to view all available data, informed by discussion with the various fund managers, by way of a cross-check of H's own figures. These, they concluded, were still reasonable as the basis for assessing relevant discounts. The opinions of H's two experts were shaped and informed by all the information and empirical research to which each has referred in his reports.
104. The fact that two of the three accountants reached different conclusions from the third does not of itself devalue or undermine the work which has been undertaken. That work is simply the product of differing expert views through which I must tread drawing such conclusions as the evidence will allow.
105. I remind myself that, if Mr Bishop's primary case on behalf of W is accepted, we do not need to enter the territory occupied by these expert witnesses because he asks me to undertake the final exercise in relation to computation of the balancing payment due to W from the foot of an assumption that all I need to look to is gross value. On W's case discounts can safely be ignored. This adds value of some $21 million to the bottom line figure in respect of which she seeks a further adjustment of 50%. However, Mr Bishop's fall-back position does require a consideration of discounts, even if only by reference to those five or seven assets which are agreed to be non-transferable. This scenario reduces the difference between the experts to just under $1.34 million.
106. Before embarking upon an analysis of the accountants' oral evidence, it will be convenient to set out the four broad categories of investments which I shall need to consider in terms of my approach to discounting on the basis of Mr Bishop's alternative case on behalf of W. They are these:-

(a) assets which are capable of immediate redemption without discount;

(b) Lone Star investments which are near the end of their lives;

(c) assets which are capable of transfer; and

(d) assets which are not capable of transfer.

(a) Assets which can be redeemed immediately without discount

107. Of the five hedge funds to which I have already referred in paragraph 20 of my judgment, H has redeemed all but one. These liquidations took place in 2015 and were applied in part to fund the cash payments which W has already received. Together, H had attributed to these assets a gross value of $58.3 million. On the basis of discounted values of between 5.625% and 7.5%, he sought to reduce that value by some $3.72 million. The rationale for these particular discounts was the time which it would take him to receive the funds (i.e. the time value of money) and the risk which pertained during that period. In fact, as we now know, H was able to redeem each of these investments without suffering any discount at all. By way of example, one particular fund (Catalysis) paid out in just over two weeks from his request and he received an uplift over and above the value he had given in his Form E.

(b) Lone Star investments

108. H has interests in five separate Lone Star funds. Together they are worth some c.$4.87 million to which H attributes a discounted value of just under $3 million, a discount approaching some $2 million. At a time when these investments were worth just over $12 million gross (the date of H's Form E in 2013), H sought to apply discounts which reduced their value to just under $6.5 million. Despite that level of discount, between March and September 2014, they paid out total cash distributions of over $23 million and still retained their current value of just under $5 million. The funds are at the end of their lives, according to Mr Bezant, and it is simply a matter of waiting for the final distributions before they are wound up. Mr Bishop points to the fact that it would have been a simple matter to agree to share the rump of these funds on the basis that H could have paid to W 50% of any net sums received. Instead, he continues to assert that the remaining value should be discounted by a full 39.5%.
109. That level of discount is justified by Mr Cusworth who contends that H's lack of control over these funds, their limited marketability and his inability to transfer them to a third party properly attract a substantial discount. He also relies on the fact that these funds are now well past their extended close date but have still not yet been wound down entirely. This points to a genuine uncertainty as to their effective realisation date and the risk to which H is exposed during this period warrants, in aggregate, the substantial discount of nearly 40%.

(c) Investments which are transferable

110. The schedule of transferable assets is in the bundle at [2/C:387]. The aggregate value of these assets is c.$55 million which H has discounted to just under $44 million (a difference of some $11 million). Included within this category is a small number of investments whose managers have yet to respond to the request made of them in relation to transferability. On behalf of W, Mr Bishop submits that I should nevertheless treat these as fully transferable assets.

(d) Investments which are not transferable

111. The aggregate value of the seven non-transferable assets is just over $19.5 million to which H applies a discount of just under $5 million.
112. Thus, of some forty-three investments, only seven are incapable of transfer and most are readily capable of liquidation in the foreseeable future. Translated into hard figures, of some $136.7 million, slightly less than $20 million must remain in H's hands. The primary thrust of Mr Bishop's argument on behalf of W is that Wells-sharing could (and should) have been achieved in the following manner:-

(a) cash and marketable securities could have been divided equally;

(b) properties could have been shared by value;

(c) the Lone Star investments and the cash returns they produced could have been divided on a 50/50 basis as and when funds were received;

(d) the proceeds of the four large hedge funds which were subsequently liquidated by H could have been divided on a 50/50 basis;

(e) all the remaining investments could have been divided in specie by category.

113. In contrast, the thrust of Mr Cusworth's attack upon the approach adopted by FTI Consulting is that it is based upon an incomplete analysis, inadequate comparative data and over-simplification (particularly in relation to the Lone Star funds). He submits that what Mr Bezant did was to "review the review" conducted by W's accountants. Rather than independently laying the groundwork for his valuation by applying a number of different approaches to asset division, he contends that Mr Bezant has applied two single pieces of research (the reports from Cogent and Hedgebay) to his task to two separate categories of assets. There was, says Mr Cusworth, no analysis of the particular investments concerned; instead Mr Bezant reached his conclusions on the basis of "a single, simplistic tool". Whilst Ernst & Young and Deloittes considered external data, they also read all the underlying agreements pertaining to the various investments and spoke directly to the managers/stewards of the separate funds. This made theirs a "bespoke" valuation exercise rather than an "off the peg" overview. In summary, he contends on behalf of H that the FTI Consulting exercise was no more than a desktop analysis which depended for its core validity on one set of industry standard data. Further, he submits that, by their nature, the Cogent and Hedgebay reports rely upon data extracted from completed transactions and specifically those for which there was an existing market. The band of discounts contained in the reports does not reflect those funds for which there is no ready market. These would be likely to attract a more significant discount and would operate (had they been included) to shift the market average away from the figures relied on by Mr Bezant. It is for this reason that the methodology adopted by H's accountants (i.e. the range of valuation cross-checks) is a more reliable approach when considering appropriate discounts.
114. The task which H's accountants have completed is an assessment of the value of H's assets as at 31 December 2014. For these purposes they have looked to 'fair market value' or the price at which the assets would change hands between a willing buyer and a willing seller if neither was under any compulsion to buy or sell and each had reasonable knowledge of all the relevant facts.
115. On behalf of H, Mr Cusworth submits that this is the value which I should be seeking to ascertain at the conclusion of this Phase II hearing. Holman J had made his award to W on the basis of discounted values but he had specifically left open arguments relating to Wells-sharing in relation to the quantification of any remaining balance due to her in respect of her half share of the matrimonial assets. That computation exercise must now take place from the foot of considering fair market value (rather than gross market value, as she contends) as at 31 December 2014.
116. For these purposes Mr Cusworth says that I must put from my mind any knowledge of events which have occurred since that date. For example, he submits that I may not apply any sort of hindsight to that assessment of value. I cannot take any account of the fact that H was able to realise full value when he cashed in the four main (heavily discounted) hedge funds in 2014. In computing discount for future risk, the fact that these assets delivered 100% value rather than something $3.72 million less (the value which he attributed to the discounts) is not a factor which can, or should, influence my approach to any future realisations. In addition, any increase or decrease in the actual current gross value of the underlying assets is immaterial to the exercise in hand since my focus must be upon the valuation date set by Homan J as 31 December 2014.

(v) Oral evidence from the accountants

117. I turn now to the oral evidence which I heard from the accountants.

Mark Bezant

118. Mr Bezant has nearly 30 years' experience as an expert valuer in matrimonial proceedings. He told me that most of his professional life is spent valuing business shares such as those in issue in this dispute. He told me that in the last 12 to 18 months, he had advised in two substantial cases which were very similar to this litigation and which had involved exactly this problem in relation to applicable discounts.
119. He confirmed that, in reaching his conclusions, he had taken account of all the material with which he had been provided. This included all the key documents generated in this litigation including replies to questionnaires and schedules of deficiencies with which had come the underlying partnership agreements and other core primary material. He had considered the methodology adopted by W's accountants and had access all the material in the public domain. He maintained that his research went considerably wider than the two reports he had referred to in the reports he had prepared for the court.
120. When asked to address the specific criticism that he had not approached the issue of appropriate discounts from the foot of an 'asset by asset' calculation, he told me that his starting point had been the methodology adopted by H in his Form E. Mr Bezant regarded that approach as the correct basis from which to begin. He had followed that framework, absorbing within in developments which had occurred in relation to each class of assets since 2013. He regarded his approach as a genuine "bespoke" approach. Neither of H's accountants had attempted to work out what discount should be applied on an asset by asset basis. Instead they had looked at a range of averages and had given their collective seal of approval to H's opting for a particular figure within that range. If their discussions with third party fund managers had fed into their conclusions, Mr Bezant said he could see no evidence of what, if any, influence these had brought to bear on those conclusions. All he could see were identical reports from each which reflected no movement in underlying market trends over the twelve months and more which had elapsed in between. The absence of any analysis of changes in market value and discount trends was, in his opinion, a significant omission and revealed a flawed approach.
121. He told me that the original input from Citigroup (which had informed H's Form E) came from two reliable sources of information. The first was current market data about appropriate levels of discount. The second was the price which Citigroup itself might be willing to pay to acquire the asset on behalf of one of its own clients. The discounts which H had given in his Form E were consistent at the time with those contained in the 2013 Cogent Report. That (now stale) information had informed the most recent conclusions expressed by Ernst & Young and Deloittes in their updated reports. Nowhere in these reports do they reflect the significant market shift which Mr Bezant had demonstrated by means of the graph he produced at [1/B:151]. That graph, or table, was based upon the most up to date information contained in the Cogent Report which had been prepared in January 2015. It had a fundamental and direct bearing on the figures appearing in the 31 December 2014 balance sheet. By contrast, Mr Tullis's figures were still predicated on the information which Cogent had produced some two years earlier.
122. By way of further defence of his methodology, Mr Bezant's evidence was that the approach adopted by H's accountants was far less relevant to the exercise in hand. He had focused specifically on the discounts applicable to private equity investments. He had taken his updated information directly from the source which H and his private in-house investment managers had recognised as their point of reference (i.e. the Cogent Report). The empirical data and studies which were referred to in the reports produced by Deloittes and Ernst & Young were more relevant to smaller companies than to sophisticated investments such as those held by H. He would not attach substantial weight to them and he regarded the updated Cogent Report as the single most relevant and important source of information for these specific categories of investments. Cogent was a tailored piece of research which most nearly reflected the underlying nature of H's assets. By contrast, the generic studies relied on by Messrs Tullis and Morris did not address the specific nature and character of the investments at the heart of this case nor did they address their value at a particular point in time. That data was inherently less reliable than the Cogent Report for a number of reasons.
123. First, whilst he recognised the underlying rationale for applying discounts in circumstances where a minority shareholder had legitimate concerns such as the payment of dividends, his ultimate "exit" route and the ability of majority shareholders to influence investment decisions, he distinguished H's funds as being ones where contractual provisions were embedded in the governance of the investment itself. H had an enforceable contractual entitlement to a share of the profit generated by the funds and there was a binding mechanism for winding up the funds at the end of the investment period so there was no prospect of his funds becoming "trapped". In these circumstances, H was not exposed to the same level of general risk as an individual investor in a general private equity fund.
124. He was taken by Mr Bishop to specific examples of the research tools relied on by H's accountants, such as a series of listed US investment funds which had been valued as at 14 May 2013 and 13 December 2014 and a table showing the calculation for adjusted discounts in respect of closed-end general equity funds where there were elements of both lack of control and lack of marketability (the "put" analysis). Mr Bezant told me that these were simple exercises of arithmetic based upon general equity funds. They did not "graft on" to those calculations the specific attributes of the underlying investments with which we were concerned in this case. That specificity had been absorbed within H's original valuation methodology by reference to both the Citigroup figures and the Cogent Report. That was the methodology adopted and updated by Mr Bezant.
125. In relation to the hedge funds, H's original discount had reflected the time value of money, or the delay in receipt of funds once a redemption notice had been served. Mr Bezant's approach had been to apply a 0% discount to these funds because of two factors. The first was the climate of very low interest rates which had pertained throughout the relevant period. There would have been minimal return on the funds even if H had been in a position to invest them as liquid cash in a bank account. The second was the nature of the hedge fund investments themselves which provided contractually for H's share of the net asset value of the individual funds. Once redemption notices had been served, H would know in about thirty to forty days what he could expect to receive and the exposure to risk was thus very low and did not attract a significant discount.
126. The Lone Star funds were, in Mr Bezant's view, in a separate category being funds at the very end of their lives. There was very little left to do to liquidate the remaining assets and his professional view was that the individual fund managers would want to ensure that the funds were wound up expeditiously in order to return the last of the capital to the investors who would then be free to look at new investments. These funds had been started in 2002, 2005 and 2008. They had contractually defined lives precisely to ensure the return of funds to the investors. They had already gone through permitted extensions and what remained (some $5 million) was the final tranche of the redemption funds. The fund manager's stated intention, coupled with the governing information which was available in relation to the Lone Star funds, was that the last of the funds would be realised and returned to investors by June 2016. In these very specific circumstances, the fact that these were non-transferable investments did not, in Mr Bezant's professional view, justify any discount, let alone the 39.5% for which H contended. Whilst a discount might have been justified back in 2013 (when H's Form E was sworn) when the investment period was materially longer and the level of funds invested significantly greater, we were now in a very different position. Whilst the precise sum which H would receive was not set in stone, there were few – if any - external factors operating on that entitlement and it was highly unlikely that there would be any further investment "churn" which might affect underlying NAV in the funds.
127. He was taken by Mr Bishop to the basis of H's calculation of his 39.5% discounts across the board in relation to these assets. This involved the aggregate of a 30% discount for lack of marketability and a 15% discount for lack of control. On this basis the investments were valued at 60.5% of NAV. Mr Bezant said that this approach ignored the contractual basis of guaranteed return and the terms of H's investment. There was already in place a mechanism for determining what entitlement the general partners had to salary and bonus. The rights of the limited partners (such as H) were governed by that arrangement but those rights did not affect H's own entitlement to withdraw funds at the end of the investment period whether that was fixed or governed by an entitlement to serve redemption notices. Mr Bezant maintained that his approach of not discounting these funds was appropriate because of a combination of the effects of very low interest rates, the clear expectation that the Lone Star funds would be closed in the very near future, and the guarantee which H had in terms of receiving his share of the underlying NAV. In 2014, the Lone Star funds had been worth c.$20 million. Those funds had been paid out more or less in their entirety to H by way of interim distribution with less than $5 million remaining. There were no further investment or strategic decisions to be made by the General Partners. In 2014 the expectation was that the entire Fund would be wound up within the next 18 months. On this basis, H could expect to recover his remaining funds by June 2016. On this basis, if interest rates were 0.5%, Mr Bezant told me that he would not expect to apply more than a 1% discount if he had to wait for two years and the period between December 2014 and June 2016 was less than that.
128. In response to a question from me, Mr Bezant said that, if he were pushed in relation to a maximum figure for percentage discount in respect of a perceived risk to the funds between 31 December 2014 and their anticipated date of return, his bracket would be 0% to 10% but under no circumstances could he see that anything in excess of that figure would be justified. He said that the empirical studies relied upon by Mr Morris and Mr Tullis as the basis of their work in relation to discounts become irrelevant if the best expectation you have founded on reliable primary information is that you will get paid in full. Here, there was available what Mr Bezant described as "superior information". That overreached any general statistics and informed his professional view about the Lone Star assets.
129. When he was cross-examined by Mr Cusworth on behalf of H, Mr Bezant accepted that the hedge fund investments fell into a different category of risk since there was no contractual entitlement underpinning H's return on his investment. Particularly in relation to those funds in respect of which redemption notices had been served but funds had not been paid out, he said it was entirely appropriate to apply a discount.
130. In terms of his overall approach to discounts, Mr Bezant said that he had not thought it appropriate to ascertain fair market values in relation to each and every one of the underlying investments although he had specifically examined some of the larger funds. He accepted that it was not permissible to look at events which had happened after the valuation date of 31 December 2014 in order to assess value or discount as at that date. However, he took the view that it was not only permissible but necessary to use information which subsequently comes to light in order to test the reliability and appropriateness of the assumptions which had been made at the date of valuation. In circumstances where he thought H's discounts had been sensible, he had adopted them. Where they were out of date, he had adjusted them. That 'tailored' approach had informed the discussion which he had with Messrs Tullis and Morris with a view to producing their joint statement dated 24 December 2015. He said that, whilst their discussions had been perfectly cordial, at no stage of those discussions had they been prepared to deal with the individual categories of assets and/or to consider each one on the basis of its particular characteristics. Theirs was very much an "across the board" approach. Thus, whilst the basis of their discounts is generically stated throughout to be "third party research reports pertaining to private equity LP discounts" supplemented in some categories by "third-party bids to purchase [H's] LP interest", Mr Bezant's approach had been tailored to the specific nature of the fund by category^[10]. He accepted in response to a specific question from Mr Cusworth that he had re-categorised one specific asset for these purposes (Vinci Capital) but said he had done that to reflect the reality of the situation as at December 2014.
131. When challenged about the application of average discounts extracted from the most recent Cogent report, he accepted that he could not know the specific nature of the funds used by Cogent as their data base since that was information which was confidential to Cogent. Nevertheless, he had confidence in that source as "a helpful tool". Not only was Cogent internationally recognised as a source of expertise in the field of secondary market transactions, they had also been recommended to H by Citigroup as a reliable predictor. He had merely refreshed H's own methodology on the basis of the most up to date information. The fundamental flaw in the analysis performed on behalf of H was that it represented as valid in 2014 figures which were by then completely out of date.
132. In relation to the Opus investment in respect of which H's 11% stake was worth $13.85 million, I heard evidence that this fund was taken to the market and went public in March 2014. As such it was more properly to be regarded as a marketable security although the volume of trades since the IPO appear to have been insignificant. H had applied a 3% discount. Mr Bezant accepted that, if H were to attempt to sell his entire holding as a single block, a discount was appropriate. However, if he chose to realise cash over time, the level of risk or discount could all but be eliminated. For these reasons, he had attributed a 0% discount because H had no immediate need to liquidate and the timing of any future realisation of this asset was entirely in his hands. Because he had not received any updated information which would have enabled him to consider the extent of any premium which now had to be attached to the investment as a result of the IPO, Mr Bezant had treated the two "unknowns" as neutralising the position and maintained his position that no discount should attach to this investment.

Mr Michael Tullis

133. Mr Tullis has spent the last twenty years working for Deloittes in Texas and is their current Valuation Director. He told me that he has general experience of valuing many different types of assets and performs on average five or ten valuation exercises each month. The majority of his time is taken up with internal corporate valuations with only 15% to 20% of his practice devoted to these types of hedge funds. He has limited experience of giving evidence as an expert witness and has never appeared as such in an English matrimonial context.
134. He told me that Deloittes' brief from Kitano in 2013 had been to review and assess the work which had already been undertaken "in house" in relation to the fair market value of H's assets and to report on whether there was a "comfort level" in respect of the figures provided by Kitano as a result of the work they had undertaken on H's behalf. Thus, the basis of Deloittes' work was, in reality, an assessment or review of what had already been done. Mr Tullis said that there was nothing in their initial approach to valuation with which he would take issue. The principal reason for the application of discounts by Kitano was its expectation that the hedge fund investments would be redeemed after a period of two years. Smaller discounts had been applied in relation to the funds which were to be liquidated in 2015. The fact that they had been wound up and funds repaid to H without any discount did not change Mr Tullis's view that it was appropriate to apply discounts in 2013.
135. In relation to the Lone Star funds, he justified a discount of almost 40% on the basis that these funds had a higher level of volatility and restrictions. H's interest as a limited partner gave him no control at all and he took issue with the approach adopted by Mr Bezant. Because the General Partner continued to maintain control over the funds, Mr Tullis believed it was still appropriate to factor in liquidity concerns. Even on the basis that June 2016 was the anticipated liquidation date in December 2014, it would still be appropriate to factor in a time value discount for money in his opinion since a period of eighteen months carried with it a level of asset risk. The fact that H was entitled to redeem during certain windows only provided limited certainty but no clarity as to the amount he would actually get back in terms of his contractual percentage entitlement to the underlying NAV of the funds. This risk arose principally because it was all too easy to envisage a situation in which the interests of the General Partner did not align with those of a limited partner or investor. He gave me the example of a general partner who wanted to liquidate a fund so as to create a new fund whereas the limited partner may want to stay in the old fund to maximise the value of any return due to him. In Mr Tullis's view, the aggregate discount to be applied was nearer 40.5% but he had not argued with H's figure since he could not say that 39.5% was unreasonable.
136. When cross-examined by Mr Bishop about the Lone Star funds, Mr Tullis accepted that the information available at the end of December 2014 was that the funds would be wound down and distributed by June 2016. There was nothing to suggest a delay at that stage. However, he confirmed that he had increased the level of discount over and above that which would apply to the time value of money specifically to reflect the fact that H's interests were not necessarily aligned with those of the general partner. He disagreed with Mr Bishop's proposition that, at the very end of the life of these funds, the fund managers would be unlikely to act to H's disadvantage. Whilst he did not tell me what factors might indicate a lack of alignment as at 31 December 2014, he did say that nothing had come to his attention from source (i.e. Lone Star) to indicate that an increase of 15% for lack of marketability was unreasonable. That and the discount to represent the time value of money were the two factors which underpinned the discount of 39.5% in his professional opinion.
137. As to the subsequent downward shift in discount values reported in the Cogent (2015) report, he justified the absence of any change in the level of discount in his second report on the basis that Kitano had not identified any underlying changes in the ownership of the funds. Whilst he accepted that the evidence of market movement which Mr Bezant had extracted from the later Cogent report could be relevant, he did not think it applied here because he did not consider the averages given by Cogent applied to these funds. Since they were not direct comparables, he had no cause to revisit his earlier conclusions about the reasonableness of the discount with had been applied for the purposes of H's Form E presentation. For the purposes of my conclusions I am simply not in a position to evaluate the substance or reliability of what Mr Tullis says about the correlation or comparability of the Cogent data with the underlying nature of H's investment funds. Clearly H and Kitano considered them to be reliable comparables for the purposes of his Form E. It appears that Citigroup also considered the Cogent figures to be relevant. Mr Bezant agrees that they are highly relevant. Thus, if forced to form a view about Mr Tullis's evidence that I should ignore Cogent's data and the figures which appear in the two reports, I am ultimately persuaded by the combined weight and reliance placed by others on that research. I regard it of particular relevance that H himself relied on the 2013 Cogent report for the purposes of his own presentation to the court.
138. Mr Tullis held to his view about the level of discount to be applied to the Opus stock because of the time which it would take H to realise his interest in the 11% which he held.
139. When cross-examined by Mr Bishop about the striking similarity of the content of his two reports, Mr Tullis accepted that the content had not changed but pointed to the differences in the appendices attached to the two reports. Because the reports related to the same subject matter, he saw no issue or problem arising out of the fact that he had simply repeated the content of his first report in his second (updating) report. He told me that there had been discussions between the Deloittes team and Kitano in the period between December 2013 and January 2015 although he accepted that those discussions found no reflection in his second report. He also accepted that his second report made reference to the existence of an asset^[11] which had been sold during the intervening period. When asked why the only reference in either of the two reports was to the 2013 Cogent report, Mr Tullis accepted that he had not looked at the 2015 report for the purposes of compiling his second updating report. He appeared to dismiss it as irrelevant for these purposes despite acknowledging that the earlier version of the report had informed the initial work undertaken by Citigroup on behalf of H and Kitano. When taken to the graph which appears in the 2015 report showing how discounts in relation to the secondary market in different types of private venture capital had moved over time (and specifically between 2007 and 2014), Mr Tullis accepted that this empirical research had not been taken into account in the preparation of his second report. Whether or not that information had been overlooked, it did not, in his professional view, warrant a review of his conclusions in relation to the appropriate levels of discount. Whilst it might have informed much of the content of Mr Bezant's report, he was unwilling to accept its relevance for the purposes of his own work.
140. He accepted that, within the scope of his work, he had not undertaken an analysis of discount on an asset by asset basis since his instructions had not extended beyond a consideration of whether the estimates provided by H were reasonable. When asked by Mr Bishop what had informed his views about reasonableness, Mr Tullis told me that as industry insiders, Deloittes was speaking to clients who "transacted" in this market on a daily basis. He did not regard it as any part of his role to "trade information" with Mr Bezant about his sources. Whilst that view might be informed by Mr Tullis's lack of familiarity with Part 25 of FPR 2010 (and he told me during the course of his evidence that he had not read it and knew nothing of its contents), I have to say that I would have found it helpful in deciding between the differing approaches of the valuers to have had a more detailed explanation about the precise nature of the evidence which underpinned Mr Tullis's conclusions. Whilst he appeared to be saying that he was entitled to ignore the 2015 Cogent report because he had access to superior information which enabled him to take a more informed view, I was left at the conclusion of his evidence not knowing what that superior information was. Where the range of discounts between the accountants produced a difference of more than $11 million overall, in my judgment that information would have been central to any evaluation of the expert evidence.

Mr Gregory Morris

141. Mr Morris is the executive director of Ernst & Young for Texas. He told me that he would perform about five or ten valuations of these types of funds in any one year. Whilst he clearly has very considerable experience in his field, this was the first occasion on which he had given expert evidence in an English divorce case.
142. He told me that he was aware of the existence of the Cogent reports but had not given them any consideration. Whilst he acknowledged it to be a very reputable firm, it was not, in his opinion, the industry "gold standard" for discounts. He referred to the many studies which were widely available in relation to discounts for lack of marketability and the time value of money. None of the studies to which he had referred contained any reference to Cogent. He had preferred instead to rely on the developing body of empirical data which had informed his work over the course of some 32 years. The fact that this data might not be completely up to date did not affect the relevance of his conclusions since the fundamental conceptual premise, regardless of the type of investment, was that they lacked liquidity and the necessary element of control.
143. Mr Morris was not able to help me any further in relation to Lone Star since he had not been asked to comment upon these investments. He was unaware of the contractual terms of H's interest in the funds.
144. When asked by Mr Bishop to explain why his two reports were more or less identical, he pointed to his firm's reputation for efficiency and the lack of any need to prepare a new report when there had been no underlying changes of substance. Since there had been no material changes to the figures in the period between November 2013 and January 2015, he could see no purpose in charging H for professional work which was unnecessary. When asked about the professional time and work which would have informed these reports, Mr Morris told me that this would have been recorded in the contemporaneous notes of telephone calls and discussions with Kitano following the firm's instructions to act. The absence of that underlying information from the body of his reports was not something which Mr Morris regarded as unusual. He, too, said that he had no obligation to provide any information to Mr Bezant.
145. He was pressed in cross-examination by Mr Bishop about his failure to take any account at all of Cogent's market research in relation to these particular markets and the prevailing market trends for discounts. Mr Morris accepted that he had "closed his eyes" to this data but justified its omission on the basis that Cogent did not exist before 2001 and it was not research which he had used for the purposes of his lengthy professional career. He had preferred to rely upon his own reference sources and his general experience in valuing the appropriate level of discounts to be applied to the assets he had been asked to consider. In any event, the Cogent report tended to cover transactions which were significantly larger than the majority of H's holdings. In his opinion, they would have been too small to have informed the analysis undertaken by Cogent.

Discussion and analysis

I. General principles

146. The starting point, in my judgment, is a consideration of the approach which I should take to the exercise in hand. On behalf of H, Mr Cusworth's primary submission is that this is a straightforward accountancy exercise and not an exercise of substantive discretion. He says that Holman J has already determined in the Phase I hearing that W should receive her award as a series of cash lump sums and she is only entitled to more if I am satisfied that the cash and other assets which she has retained and/or received to date are worth less than 50% of the excess beyond the level of assets which underpinned the judge's order (i.e. the discounted valuation of $218,266,659).
147. For these purposes, the questions I have to determine, says Mr Cusworth, are these:-

(i) Which discounts are appropriate to determine real value ? and

(ii) Can there be any basis for a payment in excess of 50% of this ?

On his case, any uplift in respect of compensation for W or financial penalty for H to reflect the absence of Wells-sharing is not only unjustified but impermissible.

148. Mr Bishop accepts on W's behalf that the time for an in specie division of the assets has passed but he submits that my task extends beyond the ascertainment of "true" value in the narrow sense. He invites me to take as my starting point the simple question, "Is it reasonable for there to be any discounts in this case and, if so, which, and to what extent ?". This question imports into its response a consideration of issues of fairness to both parties. Thus, whilst my deliberations may lead me to a conclusion about "fair values", the exercise is not one of mere accountancy alone.
149. On behalf of W, he points to three reasons why it would be unreasonable to incorporate discounts in this case. First, they are inappropriate because of the indications that there is embedded value in the portfolio. Second, the discounts relied on by H are arbitrary, artificial and unnecessary. Third, they are inappropriate in circumstances where W has been deprived of the outcome of Wells-sharing which could and should have happened but did not as a direct result of H's intransigence based on self-interest.
150. Mr Cusworth has pointed out, with some force, that W appears to wish to re-write history in this case. He reminds me that H first produced his evidence in relation to discounts in 2013. There was no challenge from W to these figures until the beginning of 2015. He points to the fact that, at the Phase I hearing, Holman J appears to have rejected W's case that discounts were entirely immaterial to Wells-sharing or an in specie division of the assets. The judge accepted that the discount issue had to be resolved in order to divide the assets in specie. H's position at the Phase I hearing was that transferability issues and the absence of agreed discounts precluded the judge from carrying out an in specie division at that point in time and the judge himself had already ruled that he had insufficient time to deal with the discount issue. He points to the fact that W's actual target in terms of the composition of her award has always been cash. I am told that at the conclusion of the Phase I hearing, she made an open offer to accept a further $9 million in cash so as to avoid the need for directions in relation to a Phase II hearing. Her letter of 17 April 2015 proposed a meeting but made no specific proposals. She did not respond to H's counter-proposal to split the difference between the accountants on the discounts and, by that stage, H had no option but to pay the second tranche of just under $50 million which was due on 2 August 2015. (The first payment was always going to be a cash sum because it represented less than 50% of her entitlement to the liquid cash assets.) He does not seek to underplay the reasons why she would want cash: the wealth which has been transferred to her since April 2015 has, and will, enable her to invest with maximum flexibility in whatever classes of assets she chooses and to spread the risk in whatever way she deems appropriate. Finally, Mr Cusworth contends that Holman J could easily have maintained her in specie claim but chose instead to deliver the entire value of her claims in cash lump sums.
151. It seems to me that the principle of fairness is one which must underpin each and every order made by the court pursuant to its powers under s 25 of the Matrimonial Causes Act 1973 since it is fundamental to the exercise of judicial discretion. Fairness will not always mean sharing on an equal basis since each case will turn on its own facts. However, Holman J has already decided that this wife and this husband will share their assets on an equal basis. That his intention was that W was not to be precluded from running her arguments about the appropriateness of discounts in computing her award seems self-evident to me from paragraph 122 of his judgment at the end of the Phase I hearing. He left "expressly open" W's ability "to investigate whether the true and appropriate net worth of the husband should ignore the discounts for which he contends". In my judgment, his Lordship's reference to the words "true" and "appropriate" in relation to H's net wealth connotes elements of both (i) actual fair market value, and (ii) a consideration of W's case that, even if discounts are applicable, fairness dictates that they are ignored because of the loss to her of receiving her share of the assets in specie. That much is clearly reflected in the recitals at paragraphs 2(e) and (f) of the order which he made on 10 March 2015 at the conclusion of the hearing.
152. Further, it seems to me that arguments about "embedded value" are, in one sense, no more than the other side of the coin in relation to "discounts" for lack of liquidity, marketability or the time value of money. As the respective cases advanced by these parties demonstrate very clearly, a particular asset or category of assets can be said to attract an element of both. In that sense, they are corollaries of one another. Just as an asset may have inherent qualities of risk, it may have equal potential for uplift or reward. In the same way, a category of assets which, by its nature is risk-laden, may well be counter-balanced elsewhere in the portfolio by assets, or a category of assets, which have the potential to deliver a premium. (This much was confirmed by Mr Bezant to be a perfectly principled approach in relation to the example he gave of the Lone Star funds.) It is scientifically impossible to attribute to a particular asset a fixed percentage in respect of risk or reward which is bound to be right. The experts from whom I heard, with all their wealth of experience, can do no more than express a view as to the likelihood of either and that is what they have done. As Mostyn J observed in GW v RW (above), any view which I express is almost bound to be wrong insofar as it does not coincide with the views of one or other body of experts. All that I can do in these circumstances is express a view in relation to factors emerging from the evidence or the respective approaches of the individual experts which pull me towards one direction or another.
153. In my judgment, W's primary case that I should ignore any potential discounts because of (i) embedded value, and/or (ii) her lack of opportunity to participate in full Wells-sharing across the board cannot succeed. In the first place, to rely on the existence of potential embedded value (from which she has been deprived of benefit in future) is to ignore the element of latent risk impressed upon the assets which H is retaining as a result of the manner in which the judge structured his order at the conclusion of the Phase I hearing. I do not accept that these assets are entirely risk free or the equivalent of cash in H's hands. The degree of risk may be small or it may be great; that has to be reflected in the percentage discount applied. Secondly, whilst W seeks to criticise that assessment of risk and the discounts H relies on as "arbitrary, artificial and unnecessary", her criticism in terms of the general principle is not supported by her own expert, Mr Bezant. He accepts that discounts should be applied to some of H's investments although he disagrees with the level of discount which has been applied by Ernst & Young and Deloittes.
154. Standing back, it seems to me that there were two alternatives open to Holman J when the case was before him in February 2015. He could have adjourned the entire hearing on the basis that the time estimate was wholly inadequate for a resolution of all the issues before him. That would have involved a great deal of wasted time and effort together with a significant waste of costs. His Lordship decided to proceed and make use of the time he had. He could have heard the evidence and restricted his conclusions at that stage to findings of fact in respect of H's case in relation to the PNA and special contribution. It would have been open to the judge at that stage to make a finding as to whether or not W was entitled to a full 50% share of the available assets. On that basis, the case might have been adjourned for further settlement negotiations and, if those were not successful, a further listing for an adjudication in relation to computation and extraction. He did not take that course but, instead, ruled on her entitlement to a full half share and provided for the manner in which, absent agreement, she was to receive value for her 50% share. Despite his encouragement to the parties to settle the remaining differences between them, he provided a default mechanism for how she was to receive her award and that was in the form of two (or possibly three) lump sum payments.
155. In rejecting W's primary case that I should proceed on the basis of no discounts at all (i.e. the gross values attributed to the assets), I bear in mind that W's open offer to sit down with H at a round table meeting did not come until some weeks after the conclusion of the Phase I hearing.
156. There is another important factor in my rejection of W's primary position (no discounting at all). What is clear to me now having heard the case over five days is that the evidence which was available to Holman J in February/March 2015 would not have enabled him to complete Phase II in its entirety (regardless of time) in order to determine finally either:

(i) how an in specie division was to be achieved so as to produce overall fairness and equality of division as between the parties; and/or

(ii) what discounts should properly be considered as applying to each individual asset or category of assets in circumstances where there was no suggestion that each individual asset would be shared on a 50/50 basis. This is not to say that it would not be open to W to argue in relation to a specific asset that a nil discount was appropriate in the context of Wells-sharing. It simply reflects my view that, in order to achieve fairness, the judge would have needed to reach certain conclusions in relation to the inherent degree of risk or potential latent value in each category of assets in order to determine a broadly fair distribution.

157. Holman J did not have the evidence which is now before me in terms of the experts' reports and/or their oral evidence in relation to the underlying methodology which each has deployed in reaching his conclusions. That is precisely why he made his second case management order on 10 March 2015. He could not sensibly or reliably have performed either of the two exercises which I have outlined above without that evidence.
158. That task has fallen to me and it is to that exercise that I now turn.

II. Specific accountancy evidence in relation to discounts

159. I accept that Mr Bezant is the only expert who has reached a conclusion about the specific discounts as they relate to specific assets at a specific valuation date (i.e. 30 December 2014). Mr Bishop and Mr Bradley seek to criticise the work of Ernst & Young and Deloittes because of what they perceive to be the limited nature of their respective briefs. In essence, what they have done, at one stage further into the valuation exercise, is to review the work undertaken by H and Kitano and conclude that the discounts applied appear to be within an acceptable, or reasonable, range. I collect no assistance from the written reports prepared by H's experts nor from their oral evidence as to what they consider to be an appropriate range or where within that range H's assets fall. In particular, I find no commentary on how the discounts which applied in 2013 are still appropriate in December 2014 when it appears to be accepted that there was a considerable downturn in the level of discounts applied to these types of investments over that period, as evidenced by the 2015 Cogent report.
160. I have already commented upon the high professional standing of all three experts in this case. In his closing submissions, Mr Bishop sought to highlight a number of points upon which he relies in order to establish the inherent unreliability of the work undertaken by Ernst & Young and Deloittes. Those points were explored at some length during the cross-examination of Mr Tullis and Mr Morris. I have set them out earlier in this judgment and do not propose to rehearse them again in any detail for the purposes of my analysis of the expert evidence. I bear in mind that there were some factual errors in Deloittes' report such as the transportation of one particular asset from the 2013 report to the 2015 updated report when it had, in fact, been sold during the intervening period. I accept that the 2013 quotes for market value supplied by Citigroup appear to have been relied on for the purposes of the 2015 update when these quotes were out of date. I accept, too, that there was no reference in Mr Tullis's report to the updated 2015 Cogent report despite the fact that he had referred to the figures in the 2013 report.
161. Whilst making allowances for the fact that they are American accountants, and both unfamiliar with giving expert evidence in an English divorce court, Mr Bishop criticises H's experts for "taking refuge in generalities". I have already referred to the absence of any direct evidence as to the particular source material each relied on. Without knowing what historical data and research informed their views, it is difficult for me to form a clear view as to how that material influenced the opinions they were expressing about these particular assets at this particular point in time. I accept without reservation that each has a wealth of personal and professional experience to bring to this exercise but I was nevertheless left without any clear evidential or forensic anchor for the opinions they conveyed to me.
162. I suspect that much of the dispute between the three experts is accounted for by the manner in which each side approached the discounting valuation exercise. The work undertaken by Mr Tullis and Mr Gregory was essentially an overview by way of cross-check of the initial exercise performed by Kitano on H's behalf. Mr Bishop describes it as "a largely passive exercise". Mr Tullis and Mr Gregory were able to tell me that nothing had been brought to their attention which caused them to suggest to Kitano and/or H that their original figures in respect of discounts were wrong or required adjustment for the purposes of the second phase of this litigation. They were unwilling to move from that position even when confronted with the fact that there had been a significant change in respect of an important element of the information which had informed and underpinned H's 2013 presentation in relation to discounts.
163. The exercise which Mr Bezant had performed was different. He has reached his own conclusions in relation to the discounts to be applied to the private equity and venture capital assets. He took as his starting point the body of work which H and Kitano had undertaken. That had involved input from Deutsche, Neuberger Berman and, more significantly, Citigroup which had actually provided quotes in relation to the prices which they would be prepared to pay for the assets in the secondary market. Those quotes were informed to a degree by both the Cogent and ELM reports. Mr Bezant's evidence was that this was a sound platform from which to perform the evaluation of discounts. He then undertook an independent review of the source data in order to provide his updated conclusions to the court. Having identified a clear downward trend in terms of the discounts on trading in the secondary hedge fund markets during the period from June 2013 to December 2014, Mr Bezant reflected those market conditions in his revised figures. On the basis of what he considered to be the best available information at the time, he took the analysis performed by Cogent in relation to each separate class of assets^[12] and extracted the average discount to NAV as reflected in the Cogent report.
164. This approach was criticised by Mr Cusworth on behalf of H because of the emphasis and degree of reliance placed by Mr Bezant on the Cogent data. It is said that he had not looked to alternative source materials by way of cross-check and he had not made allowances for dealing costs. Mr Cusworth pointed to an instance where he had been inconsistent in his classification of two particular investments and had fallen into error in reclassifying another fund on the basis of information he had gleaned from a third party source. He criticises Mr Bezant for using average discounts to update his presentation to the court. He argues that if an investment can be shown to be performing at a level above or below average in 2012, it is wrong to assume average performance in 2014.
165. In my judgment this latter criticism is slightly unfair to Mr Bezant. He took as his starting point the most recent and relevant index (because it had informed H's initial presentation); he differentiated between the various types of fund by strategy; and he applied the relevant (January 2015) Cogent figures to H's 2013 presentation. He told me during the course of his oral evidence that he was not able to "unpack" the larger and smaller deals which fell into each class but he was able to comment upon the fact that the end of 2014 was a very healthy and attractive environment in which to realise these types of investment. As he told me, it is not what happens over the passage of time which matters. Rather, it is the circumstances of the initial investment and the prevailing market conditions at the valuation date which are crucial. In terms of choosing between the approaches adopted by the experts, it is difficult to reach a conclusion that this was an unreasonable approach for Mr Bezant to take.
166. It is disappointing that the line of dialogue between the three experts in December 2014 was not more productive in terms of the areas in respect of which they felt able to agree, if only in relation to principles. Neither Mr Tullis nor Mr Gregory was familiar with English court procedures or the manner in which expert evidence is received under Part 25 of FPR 2010. Each expert has a duty to the court and not simply to the party instructing him. That obligation is designed to facilitate a more inquisitorial rather than adversarial approach to these finely tuned issues of valuation. Each of H's experts said during the course of his evidence that he did not regard himself as under any obligation to share information with Mr Bezant. I do not criticise them for that approach and I do not speculate on the reasons why they took that view. However, I suspect it may well be that their professional experience of commercial litigation in the United States is somewhat different from the forum of an English matrimonial hearing and the nature of the task which confronts me in determining the facts in that particular context.
167. On balance, I found Mr Bezant's evidence to be of greater assistance to me than that of Mr Tullis or Mr Morris. I have reached that view because I am able to see from Mr Bezant's written report (the Memorandum) and collect from his oral evidence the fundamental basis or rationale for the opinions he is expressing. To the extent that he has adopted an asset by asset approach, I can discern the various factors and empirical data which he has relied on to shape his conclusions. That holistic analysis is missing from the written evidence put before me by Ernst & Young and Deloittes and the oral evidence of Mr Tullis and Mr Gregory did not address that lacuna. In relation to the private equity and venture capital investments, in my judgment the approach which Mr Bezant adopted was an entirely reasonable one. He took the baseline established by H/Kitano in 2013 and reflected in his conclusions as to present value the changes and market movements which had occurred during the period to December 2014. I cannot determine whether he was right or wrong to reclassify one of these investments but I can understand the basis of his approach and the manner in which he used the information in the updated Cogent report to revisit the 2013 figures. I accept that this was relevant and reliable information and, to the extent that it was ignored altogether by Mr Tully and Mr Morris, I am inclined to place less reliance on their figures. It was, after all, information which H himself considered to be highly germane to the calculation of his original discounts. Mr Bezant did not have the advantage of updated information from Citigroup (the other evidential platform for H's original presentation) but he has done the best he can by absorbing into his conclusions the updated Cogent material which is, for the purposes of our valuation date, about as up to date as it could possibly be. Whilst his approach was criticised because of his use of average discounts to the various categories of investment held by H, I did not have the underlying evidential data which would have enabled me to test whether and, if so, the extent to which this was a material criticism. I have no idea which (if any) assets were performing above or below par in terms of the general market trend identified in the reports to which I have been referred. In the absence of this evidence (which neither of H's experts referred to with any specificity in their reports), I have to go on what I do have. The conclusion I have reached is that Mr Bezant's approach is not unreasonable in all the circumstances and, in the main, it is the evidence which I find to be of most assistance in determining the appropriate level of discounts to be applied to H's portfolio.
168. For these reasons, and on the basis of Mr Bezant's evidence, I do not accept that I should only apply discounts to those assets which H has demonstrated to be non-transferable. Having accepted that Mr Bezant's evidence has been of greater help to me than the expert evidence relied on by H, it is not for me to cherry-pick that evidence in terms of the clear position which Mr Bezant takes in relation to the applicability of discounts. W's position in terms of the underlying rationale for ignoring her own expert's view is that I have to look to the wider picture and H's alleged intransigence over an in specie sharing. Yet this leads me to a situation where she is asking me to disregard discounts where the expert evidence is that they should be applied. Because of my interpretation of the exercise which Holman J intended for the purposes of this Phase II hearing (see paragraph 151), I take the view that, having rejected W's primary case, it would be wholly artificial to take that course. In seeking to calculate what further sums may be due to her, my task is to establish on the basis of the best evidence available what level of discount should be applied to the assets which H has retained in order to reach a fair market value of those assets.

Lone Star funds (No. 3 on the mainframe asset schedule)

169. In relation to Lone Star (wherein lies the most significant area of disagreement between the three experts), I have reached the conclusion that Mr Bezant's approach is a reasonable one but I depart from his opinion that I should ascribe no risk whatsoever to these funds. Having listened carefully to all the evidence and submissions in relation to these funds, I have come to the conclusion that there ought to be some discount notwithstanding the fact that the intended distribution date is now only some four months away. These are "tail end" funds; the main value in Lone Star has already been distributed and I accept that there may be some risk in the final winding up of the rump of these investments. However, I do not accept that a discount for lack of marketability or liquidity is anywhere near as significant as that contended for by Deloittes and Ernst & Young. I accept, too, that any uplift in discount for the time value of money is more or less insignificant given the very low level of interest rates which are likely to prevail over the next four months. I cannot simply speculate or travel along the continuum between 0% and 39.5%. Because I regard Mr Bezant's opinion in relation to discounts to be the best and most reliable evidence I have, I propose to adopt a discount of 10% in relation to the Lone Star funds. That is the figure he told me he could accept as the maximum discount which could reasonably be applied to these funds although his personal view was that H would not in fact see a loss as great as 10% on the return of his funds. By my calculation, that reduces the value of the Lone Star funds to $4,382,195 once a discount of $486,910 has been applied.

Marketable securities (No. 2 on the mainframe asset schedule)

170. The difference between the experts here is the discounts applied for transaction costs. On behalf of H, his experts seek to apply various different percentages ranging from 0.03% to 0.30%. Mr Bezant takes as his baseline 0% discounts. In terms of monetary value, the difference between them is only $19,589 (or 0.0017% of the dispute in relation to discounts). In my judgment, fairness requires that there should be some discount to reflect the cost of liquidating the assets. Since the number is so small, I propose to adopt H's suggestion and split the difference. The figure for discounts in respect of the marketable securities will therefore be $9,795 leaving a net value of $15,444,792.

Hedge fund, Private Equity and Venture Capital Limited Partner investments (No. 4(a) on the mainframe asset schedule)

171. Four of these investments have been sold since 2014. They returned 100% value to H despite notional discounts of between 5.625% and 7.5%. H seeks to apply discounts of between 0% and 50% to the remaining investments. Mr Bezant accepts that quite substantial discounts are warranted in respect of at least four of these investments and, in this respect, his figures for those discounts coincide with those advanced by Ernst & Young and Deloittes on behalf of H. What separates the experts in respect of the lower end of the discount range is whether discounts should be applied now to those funds which returned 100% to H when they were sold.
172. These discounts are in the range of 7%. They reflect no more nor less than one factor which is the time value of money. They do not reflect any risk to H in the period between when he made his redemption requests and the date on which the funds paid out. H's discounts have been calculated by assuming a 30% discount for marketability over a two year period. This is based upon an assumption that the time value for money is 15% per annum. Mr Morris has assumed a 6 month liquidation period and a 15% investment return. Mr Bishop challenges this latter assumption on the basis that the time value of money is essentially the financial loss suffered by being kept out of funds to which you are entitled at an earlier date. That investment return must be calculated on the basis of what would have been received for cash or an equivalent very low risk return. That rate of return, given the low interest rate environment, could not properly be assessed at more than 0.25% or 0.5%. Furthermore, he challenges Mr Morris's use of a 6 month period to calculate the delay. Since payment in respect of these funds would typically have been made within 30 days of the redemption date on the basis of a 10% withholding payable some 90 days thereafter, the risk to the investor is minimal particularly in circumstances where the hedge fund in question can reasonably be expected to honour the redemption notice, which is what in fact happened in relation to all the four funds in issue.
173. It is agreed that I cannot use hindsight in order to reconcile the balance sheet as it stood in December 2014. I cannot look to the actual return received by H in order to conclude that Mr Bezant is right to apply a 0% discount to these four investments. That is not what he has done. He has based his view upon his consideration of the prevailing market trends at the end of 2014 in the period immediately before the redemption notices in respect of these funds were served. I have rehearsed at some length what those market trends were and the low interest environment in which the assets were liquidated. At that point in time, Mr Bezant regards the risk to have been negligible. He said during the course of his oral evidence that he was not taking the impermissible step of using hindsight to justify his conclusions but, rather, he was using what we now know has happened to test the reliability of those independent conclusions as they stood at the relevant time. I do not regard that as mere tautology. In these circumstances, I propose to adopt a value for these funds which reflects Mr Bezant's discounted value (a value agreed by Mr Tullis and Mr Morris all bar the four hedge funds which have been liquidated). The discounted value will be taken as $60,018,986 on the basis that I accept that the additional discount of $3.72 million which H seeks to ascribe to these funds is unwarranted.

Investment in Private Equity Funds (No. 4(b) on the mainframe asset schedule)

174. Because I have preferred Mr Bezant's methodology in relation to calculating the discounts to be applied to these investments based, as they were, on H's initial presentation updated by the 2015 Cogent report, I accept that the discounts attributed by H are c. $5 million too high. I am proposing to adopt Mr Bezant's discounted figure of $29,825,167 for the purposes of the final extraction calculation.

Direct and Single Asset investments

175. In relation to H's investment in Fjord Capital Partners, I have accepted Mr Bezant's discount of 20% (which is 10% less than the discount contended for by his expert). I have already explained by why I prefer Mr Bezant's methodology in relation to the calculation of discounts for lack of marketability and control. Thus, I attribute to this investment a discounted value of $3,004,746.

Direct and Single Asset Investments (No. 5 on the mainframe asset schedule)

176. The experts are agreed in relation to the applicable level of discount on all 21 investments which fall into this category save for Opus Bank where they are $415,549 apart. It is agreed that Opus should be treated as a marketable commodity following its public offering in March 2014, but they disagree about H's ability to liquidate his stock (which represents an 11% holding) other than in stages. His holding has been valued at $13,851,624 which Mr Bishop points to as evidence of embedded value which militates against discounting. H seeks to attribute a 3% discount to reflect the time it will take to cash in his investment. Mr Bezant applies a 0% discount on the basis that his 11% stake will be relatively easy to place since Opus did not appear to have any significant liquidity problems as at the agreed valuation date. He has also taken the view that it is legitimate to neutralise the discount by reflecting potential embedded value which would attract a premium to the quoted price.
177. There is very little to help me in relation to the time it would actually take to realise these publicly quoted shares. Mr Tullis had no particular input into this question other than to fall back upon generalised principles. Mr Bezant was not able to give me any greater assistance than that which I have set out in the preceding paragraph. In my view, this is a situation in which it would be fair to both parties to adopt H's formula of splitting the difference between the experts since I have little else to assist me. Accordingly, I propose to add to H's discounted value of this category of assets ($34,772,195) an uplift of $207,775 to reflect a 50% reduction in the discount which he seeks to apply to his Opus Bank shares. These I shall treat as having a discounted value of $13,643,850 so that the discounted value which I attribute to the entire category listed under section 5 will be $29,157,351
178. The only remaining area of dispute in relation to discounts are those applicable to W's private equity assets (Tailwind Oil & Gas Fund and her UPA Fund). Here, H applies discounts of between 25% and 30% whereas Mr Bezant considers that a 20% discount is appropriate. Because I have accepted his opinion as being the more reliable in relation to this category of assets insofar as it applies to H's investments, fairness requires me to adopt it in relation to the equivalent investments which remain in W's hands. Accordingly, I propose to attribute to these funds a discounted value of $1,196,301.

Conclusions in relation to Discounts and the Balancing Sum Due to W

179. I set out below in spreadsheet form a summary of my conclusions in relation to H's adjusted net wealth. This reflects the decisions which I have reached in relation to the issue of discounts but otherwise adopts the agreed figures on the mainframe schedule.

SUMMARY OF ADJUSTED NET WEALTH
Husband:		Mainframe schedule
Liquid assets (cash)	24,887,158	para 1
Marketable securities	15,444,792	para 2
Lone Star funds	4,382,195	para 3
Hedge Fund and Private Equity in GP investments	60,018,986	para 4(a)
Private Equity funds	29,825,167	para 4(b)
Investments in Venture Capital funds	3,004,746	para 4(c )
Direct and Single Asset Investments (inc Opus Bank)	29,157,351	para 5
Notes and other receivables	4,273,936	para 6
Real Estate	75,590,720	para 7
Personal property	819,182	para 8
TOTAL H's ASSETS (inc discounts but gross of liabilities)	247,404,233
less Liabilities	- 19,077,035	para 9
TOTAL H's ASSETS (inc discounts but net of liabilities)	228,327,198
Other	872,853	para 10
Add backs		para 11
Costs paid but not accounted for	- 355,084
Compromise adjustment	748,978
Costs paid by H pursuant to order	76,671
GRAND TOTAL H's ASSETS	229,670,616
Wife
Cash	15,546	para 1
Hedge fund and other investments	1,196,301	para 2
Direct and Single Asset investments	109,255	para 3
Personal property	657,661	para 4
less liabilities	- 2,539,037
W - TOTAL NET ASSETS	- 560,274
TOTAL NET VALUE OF THE MATRIMONIAL ESTATE	229,110,342

180. If these figures are transposed into the table which appears at the top of page 3 of W's open offer dated 2 December 2015 [2/C2:382], the balance due to W in terms of the sum which is still owed to her becomes $5,421,842. Thus:

Total discounted value of the net assets, excluding fine art	$ 229,110,342
Total discounted value per H at Phase I excluding fine art	(218,266,659)
Difference	10,843,683
50% (rounded)	5,421,842

181. I have not, at this stage, further adjusted that figure as W's solicitors did to reflect the element of difference already in her name and reflected in the three investments identified in the open offer (i.e. Brass Teapot, Tailwind and UPA) because, in reaching my total figure for the discounted value of the net assets, I have already absorbed Mr Bezant's discounted figures of $876,301 (Tailwind) and $320,000 (UPA). The experts are agreed upon the value of Brass Teapot.
182. Having looked again at the table which appears at paragraph 2(g) of the order made by Holman J on 10 March 2015 [1/A:4], it is not clear to me what, if any, further adjustment is now required to the balancing sum of $5,421,842 to reflect those items which appear on that table below the figure which represents 50% of the discounted sums less the fine art (i.e. $109,133,329). The figure for the value of the horses which W was to receive is already factored in to the net value of the matrimonial estate as I have calculated it to be. I suspect that the purpose of adding back the figure for her net discounted assets less liabilities was the methodology adopted for delivering full value in relation to the Phase I lump sums. If it has a further relevance to the calculation of the sum due at the conclusion of this hearing, I was not told why.
183. I have now recalculated the net wealth available to these parties on the basis of an application of what I consider to be appropriate discounts. Adopting the methodology used by W's solicitors in their open offer, she is due a further sum of just under $5.5 million. Since the lump sums which H has already paid were calculated on the basis of a half share based on his discounted figures (which were the figures adopted by Holman J for the purposes of Phase I), he owes her one half of the balance on the basis of the true net value of the discounted matrimonial estate. If either party wishes to make further submissions in relation to any other adjustments which may be required, I will consider them before settling the final figure which should appear in the Phase II order. For present purposes, my provisional judgment is that the balancing sum due to W at the conclusion of the Phase II hearing is $5,421,842.
184. By way of final cross-check, I stand back and ask myself whether this additional cash payment does, indeed represent a fair outcome for both parties. In my judgment, it is an entirely fair result. W is receiving the totality of her award in cash but that is the inevitable consequence of the decision which Holman J took when he provided the parties with a specific default mechanism for quantifying her entitlement in the absence of agreement as to an in specie division. Because he had pre-ordained the manner in which she was to receive value in relation to the most substantial part of her claim and the specific sum which should be paid to her (the first and second tranches of the lump sum payments), it is not now open to me to deliver the in specie division which she sought. In order to reflect fairness to both parties, the judge specifically provided that the door would be left open to W to investigate "whether the true and appropriate net worth of the husband should ignore the discounts for which he contends" (paragraph 122 of Holman J's judgment). As I have already said, the reference by the judge to "true and appropriate" net values has to incorporate a consideration of whether all, some or none of his assets would properly have attracted appropriate discounts as at the agreed valuation date. To ignore such discounts if they were properly applied to reduce his overall net wealth as at that date would be wholly unfair to H in calculating what sum represented 50% of that net wealth. For reasons I have already given, I do not regard it fair to override these basic principles and proceed on the basis of assumed gross values simply to reflect what is, in essence, an allegation by W of litigation conduct on his part. To the extent that he has overstated the appropriate level of discount, I have adjusted the position by means of an overall readjustment to the net asset base. In my judgment, the additional lump sum which I have found to be due to W properly reflects her full half share. It is an award which is fair to her and fair to H.

Note 1   The assets in this case have been computed in US dollars rather than a sterling equivalent figure.    [Back]

Note 2   Wells v Wells [2002] EWCA Civ 476, [2002] 2 FLR 97, CA.    [Back]

Note 3   The judge must plainly have meant $240,000,000.    [Back]

Note 4   The cash paid to W in the two separate tranches amounted to $108,860,968. The balance of her 50% (on the discounted basis) was reflected in the value of her own discounted assets less liabilities ($655,205), her share of the art collection and the horses.    [Back]

Note 5   Brown Bear, Catalysis Offshore, Coatue and Port Meadow (being items 3(i), 4(iii) and (iv) and (xi) on the schedule of assets).    [Back]

Note 6   This is not a reference to ‘compensation’ for relationship generated disadvantage in the context of the principles explained by the House of Lords in Miller v Miller;McFarlane v McFarlane [2006] UKHL 24; [2006] 1 FLR 1186, HL. Rather, it is compensation in terms of recompense for a financial loss.    [Back]

Note 7   Following receipt of his skeleton argument in relation to the Phase I hearing, H did raise the issue of transferability with the fund managers. By the time the hearing before Holman J concluded, some had replied.    [Back]

Note 8   As noted above, the term ‘compensation’ in this context is not a reference to ‘relationship generated financial disadvantage’ in the context envisaged by the House of Lords inMiller v Miller; McFarlane v McFarlane.    [Back]

Note 9   These were HBC Water-Resources LP (4(b)(xii)), Analog Test Engines (5(a)), Kato Pharmaceuticals (5(h)), Slingshot Ventures (5(r)), and Vadaro PTE Ltd (5(p)).    [Back]

Note 10   i.e. Cogent report (January 2015) in respect of real estate, buyout funds, venture funds (Table 2); Hedgebay discount to NAV in December 2014 or adoption of H’s own figures in respect of the hedge fund interests (Table 3).     [Back]

Note 11   CCI Healthcare    [Back]

Note 12   The Cogent reports (2013 and 2015) had provided an analysis of discounts applicable to four separate classes funds: (i) real estate; (ii) buyout; (iii) venture capital; and (iv) all funds.    [Back]