Erhart v. Bofi Holding Inc.Erhart v. Bofi Holding Inc.
Case Information
*1 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF CALIFORNIA
CHARLES MATTHEW ERHART, Case No. 15-cv-02287-BAS-NLS consolidated with 15-cv-02353-BAS-NLS Plaintiff, ORDER GRANTING IN PART
v. AND DENYING IN PART CHARLES ERHART’S BOFI HOLDING, INC., MOTION TO EXCLUDE EXPERT TESTIMONY Defendant.
(ECF No. 128) And Consolidated Case
Presently before the Court is Charles Erhart’s motion to exclude the opinions of two experts that BofI Federal Bank plans to call at trial. (ECF No. 128.) BofI opposes. (ECF No. 152.) The Court finds this motion suitable for determination on the papers submitted and without oral argument. See Fed. R. Civ. P. 78(b); Civ. L.R. *2 7.1(d). For the following reasons, the Court GRANTS IN PART and DENIES IN PART Erhart’s motion.
BACKGROUND
The Court and the parties are well versed in the background of these consolidated actions. The Court incorporates its summary of the parties’ evidence and their remaining claims from the Court’s order resolving the cross-motions for summary judgment (“Summary Judgment Order”). ( See ECF No. 192.) The Court further provides below a snapshot of the parties’ claims and additional background regarding the two proposed experts.
Charles Erhart was an internal auditor for BofI Federal Bank. [1] After Erhart discovered conduct he believed to be wrongful, he reported it to BofI’s principal regulator. BofI responded by allegedly defaming and terminating him. Erhart then brought federal and state whistleblower retaliation claims against the Bank. At the heart of Erhart’s federal claims is whether he reasonably believed the conduct he was reporting violated certain enumerated laws. His state law retaliation claims are broader; they hinge on whether Erhart disclosed a reasonable belief of a violation of any law. For the reasons explained in the Summary Judgment Order, there are triable issues on all of Erhart’s whistleblower retaliation claims.
To confront these claims, BofI has designated a retained expert, Guido van Drunen, as its “Internal Audit Expert.” (Rule 26 Expert Disclosure (Nov. 26, 2018), ECF No. 188-1.) Van Drunen is expected to offer various opinions at trial, including his opinion that Erhart’s allegations of wrongdoing “are not supported with information and/or evidence.” ( Ex. A.) Erhart moves to exclude all of van Drunen’s testimony, arguing he is unqualified to render these opinions. (Mot. 14:8– 16:4.) Erhart also claims van Drunen’s opinions are improper because they *3 impermissibly invade the province of the jury, contain disguised legal conclusions, and speculate about Erhart’s motivations. ( 8:6–21:17.)
In addition, after Erhart sued the Bank, it filed a countersuit against him, which the Court has consolidated with Erhart’s action. The Bank’s countersuit portrays Erhart as an internal auditor gone rogue—a loose cannon who recklessly handled confidential information and conducted unauthorized investigations. BofI claims it suffered harm when Erhart took confidential information outside the Bank’s controlled systems, disclosed confidential information to third parties, and deleted data from a Bank-owned computer. The Court similarly determined there are triable issues on the Bank’s lone federal claim and all but one of its barrage of state law claims.
To support these claims, the Bank has disclosed that its Chief Financial Officer (“CFO”), Andrew Micheletti, is expected to testify as an expert at trial. (Rule 26 Expert Disclosure (Nov. 5, 2018), ECF No. 135-2.) The proposed expert testimony will involve the damages the Bank has purportedly suffered due to Erhart’s conduct. ( ) Erhart moves to exclude this testimony, arguing it is not expert testimony, Micheletti is not qualified to testify as an expert, and his damage assessments are improper. (Mot. 17:22–19:9.)
ANALYSIS
Both of Erhart’s challenges involve the requirements for expert opinion testimony under Federal Rule of Evidence 702. However, in resolving his challenge to Micheletti’s testimony on damages, the Court reasons that some of the proposed testimony may be admitted as lay witness opinion testimony under Rule 701. Hence, the Court reviews the two types of opinion testimony before assessing BofI’s proposed experts.
*4 I. Opinion Testimony
A. Lay Witnesses
The Federal Rules of Evidence differentiate between opinion testimony provided by lay and expert witnesses. Fed. R. Evid. 701, 702. Under Rule 701, a lay witness may provide opinion testimony if it is: “(a) rationally based on the witness’s perception; (b) helpful to clearly understanding the witness’s testimony or to determining a fact in issue; and (c) not based on scientific, technical, or other specialized knowledge within the scope of Rule 702.” 701.
“Rule 701(a) contains a personal knowledge requirement.”
United States v.
Lopez
,
B. Expert Witnesses Whereas Rule 701 governs lay opinion testimony, Rule 702 covers expert opinion testimony. Fed. R. Evid. 702. This rule establishes several requirements for this testimony: (1) the witness must be sufficiently qualified as an expert by knowledge, skill, experience, training, or education; (2) the scientific, technical, or other specialized knowledge must “assist the trier of fact” either “to understand the evidence” or “to determine a fact in issue”; (3) the testimony must be “based on *5 sufficient facts and data”; (4) the testimony must be “the product of reliable principles and methods”; and (5) the expert must reliably apply the principles and methods to the facts of the case.
Under
Daubert
and its progeny, the trial court is tasked with assuring that
expert testimony “both rests on a reliable foundation and is relevant to the task at
hand.”
Daubert v. Merrell Dow Pharm., Inc.
,
The tests for admissibility in general, and reliability in particular, are flexible.
Primiano
,
Further, Rule 703 “relaxes, for experts, the requirement that witnesses have
personal knowledge of the matter to which they testify.”
Claar v. Burlington N. R.
*6
Co.
,
II. The Proposed Damages Expert—Micheletti
The Court first considers Erhart’s challenge to BofI’s non-retained expert CFO Micheletti. BofI discloses that Micheletti “is expected to present evidence under Federal Rules of Evidence 702, 703, or 705” on the subject matter of “BofI’s damages.” (Rule 26 Expert Disclosure (Nov. 5, 2018) 1:26–2:1.) There are two parts to this testimony.
BofI’s Expenses and Costs. First, Micheletti seeks to testify regarding the economic injury BofI suffered “in the form of expenses and costs that BofI incurred in responding to, investigating, and assessing” Erhart’s alleged removal and deletion of confidential information. (Rule 26 Expert Disclosure (Nov. 5, 2018) 2:3–6; see also Micheletti Dep. 70:20–71:21, ECF No. 135-4.) BofI identifies two types of costs that Micheletti will discuss. (Rule 26 Expert Disclosure (Nov. 5, 2018) 2:7–14.) The first cost is the amount BofI paid to an outside firm for “digital forensic examination and analysis” to help BofI assess and mitigate the harm purportedly caused by Erhart’s conduct. ( 2:7–10; see also Micheletti Dep. 71:17–21.) The second cost is the “internal labor” that BofI expended “in assessing and mitigating harm caused by” the alleged misconduct. (Rule 26 Expert Disclosure (Nov. 5, 2018) 2:10–13; see also Micheletti Dep. 71:10–16.)
In the Summary Judgment Order, the Court recognized that BofI may be able to recover these costs as damages on its remaining claims. ( Summary Judgment *7 Order 74:7–28; 85:11–26; 87:1–11; 88:6–17.) For example, there is a triable issue as to whether Erhart knowingly accessed and deleted data from one of BofI’s computers outside the scope of his employment. ( 84:1–85:10.) A jury could conclude BofI is entitled to recover the costs “reasonably and necessarily incurred by [BofI] . . . to verify that . . . data was or was not altered, damaged, or deleted by the access.” See Cal. Penal Code § 502(e)(1); see also Copart, Inc. v. Sparta Consulting, Inc. , 277 F. Supp. 3d 1127, 1162 (E.D. Cal. 2017) (denying summary judgment where company submitted evidence indicating it had spent over eighty hours investigating the defendants’ unauthorized access to its computer systems). Accordingly, Micheletti’s testimony is relevant to BofI’s claims.
That said, just because Micheletti’s testimony involves the subject of damages does not mean it requires either expert or lay opinion testimony. For instance, opinion testimony is unnecessary to prove that BofI paid an outside firm for digital forensic services to investigate Erhart’s “data breach.” Micheletti is not providing lay opinion testimony when reporting the amount the Bank paid for these services. Fed. R. Evid. 701. Nor is Micheletti relying on his “scientific, technical, or other specialized knowledge” to do so. See id. 702. BofI can prove these damages through other means, including a witness with personal knowledge of the expense or appropriate documentary evidence.
Erhart argues Micheletti’s proposed testimony regarding the second cost BofI identifies—its internal labor costs—similarly does not fall under Rule 702. Erhart argues Rule 702 is inapplicable because Micheletti’s analysis is not “based on scientific, technical, or other specialized knowledge.” (Mot. 19:2–6.) The Court agrees. To summarize BofI’s labor costs, Micheletti claims he “obtained the hours by day of specific individuals who worked in the process of mitigating and determining the cause/and or magnitude of Mr. Erhart’s taking of confidential information.” (Micheletti Dep. 71:11–16.) Micheletti provides a spreadsheet where he tallies up the time allegedly spent on these tasks. (Summary of Personnel Costs, *8 BofI’s Opp’n Ex. G, ECF No. 152-8.) Micheletti then multiplies the employees’ respective costs by the time they spent and adds all the costs together—to reach a sum of $147,981.71 in internal labor costs. ( )
This summary of personnel costs does not fall under Rule 702. BofI argues
Micheletti’s “model” involves technical or specialized knowledge because the
“internal cost must itself be derived mathematically from other data” and requires
“familiarity with employee compensation data.” (Opp’n 20:2–5.) The Court is
unconvinced. BofI fails to demonstrate that Micheletti’s summary of its alleged
employee costs involves anything other than basic arithmetic.
Cf. LifeWise Master
Funding v. Telebank
,
In the same vein, the Court finds it inappropriate to allow Micheletti to place
this evidence before the jury by taking advantage of Rule 703’s relaxed personal
knowledge and hearsay requirements. Fed. R. Evid. 703;
see also Jinro Am. Inc.
,
Lost Profits. Aside from describing its costs, BofI proposes that Micheletti provide expert testimony under Rule 702 regarding its lost profits. (Rule 26 Expert Disclosure (Nov. 5, 2018) 2:15–22.) BofI claims it “suffered economic injury in the form of [a] lost investment opportunity caused by the withdrawal and loss of deposited funds . . . as a result of Erhart’s” alleged misconduct. ( 2:15–17.) BofI claims it “earned less net interest income than it would have earned absent loss of the deposit funds.” ( 2:20–21.) Specifically, Micheletti testified that “[t]he lifetime history of” the type of account lost is “approximately four years,” and the “difference between the four-year fixed rate” and the amount that would have been paid had BofI retained the account “for that period was approximately $1,022,000.” (Micheletti Dep. 74:9–14.)
The Court did not address this component of BofI’s alleged damages in its Summary Judgment Order. And there is an issue of fact as to whether these “damages” were caused by Erhart’s protected whistleblower activity. If, however, the Bank can demonstrate these damages are not speculative and flow from Erhart’s purportedly wrongful conduct, then it may be able to recover its lost profits. ( See Summary Judgment Order 67:4–22; 74:7–28.)
Even though this evidence may be relevant, Erhart contends Micheletti’s proposed testimony should be excluded because he “is not qualified as an expert” *10 under Rule 702. (Mot. 18:13.) BofI does not submit evidence to address this point. [2] Erhart also argues Micheletti’s testimony is improper because it is based “on mere hearsay and his own legal conclusions and interpretations of what he was told.” ( 18:14–16.)
The Court agrees that this testimony should not be admitted under Rule 702.
Beyond neglecting to provide the Court with Micheletti’s qualifications, BofI does
not give the Court sufficient information to assess the remaining considerations under
Rule 702. The Court thus will not permit Micheletti to testify as an expert under Rule
702.
See Daubert
,
That said, the Court recognizes that Micheletti may be able to testify regarding
the Bank’s lost profits under Rule 701 instead. “[T]here is an abundance of case law
where corporate employees are permitted to testify about damages or company
valuation without qualifying as an expert.”
Joshua David Mellberg LLC v. Will
, 386
F. Supp. 3d 1098, 1105 (D. Ariz. 2019);
see also
McCormick on Evidence § 10 (8th
ed. 2020) (collecting cases). As the advisory committee notes to Rule 701 recognize,
“most courts have permitted the owner or officer of a business to testify to the value
or projected profits of the business, without the necessity of qualifying the witness as
an accountant, appraiser, or similar expert.” Fed. R. Evid. 701 advisory committee’s
note to 2000 amendment. This opinion testimony is admitted “because of the
particularized knowledge that the witness has by virtue of his or her position in the
business.” ;
see In re Palmdale Hills Prop.
, LLC,
Moreover, the Court’s decision to funnel Micheletti’s testimony under Rule
701 addresses Erhart’s complaints about Micheletti grounding his opinion in
“unsubstantiated assumptions.” (Reply 5:20–21, ECF No. 159.) The Court will
require opinion testimony under Rule 701 to be based on “personal and particularized
knowledge of the facts” underlying any opinions.
See Bright Harvest Sweet Potato
Co.
,
In sum, the Court concludes allowing BofI’s CFO Micheletti to provide expert testimony under Rule 702 is neither appropriate nor necessary. However, for the reasons described above, the Court’s conclusion does not prevent the Bank from seeking to prove its alleged damages through other evidence, including potentially lay opinion testimony.
III. The Proposed Internal Audit Expert—Van Drunen
The Court next considers Erhart’s challenge to Guido van Drunen—BofI’s retained internal audit expert. Van Drunen’s opinions and qualifications are set forth in his amended expert report (ECF No. 188-1). Erhart raises an assortment of challenges to van Drunen’s proposed testimony.
*12 A. Qualified as an Expert
Preliminarily, Erhart argues van Drunen is not qualified to testify as an expert
on the subjects his opinions address. (Mot. 14:18–15:4.) As mentioned, a witness
who will offer expert opinion testimony must be “qualified as an expert by
knowledge, skill, experience, training, or education.” Fed. R. Evid. 702. This inquiry
depends on whether the witness has “expertise and experience” that “is relevant to
the issues on which” the witness will opine.
See Pyramid Techs., Inc. v. Hartford
Cas. Ins. Co.
,
Erhart argues van Drunen is unqualified because he “does not appear to have any specialized knowledge about internal audits or whistleblowing, and certainly no specialized knowledge about how BofI specifically ran its internal audit department.” (Mot. 15:24–26.) The Bank counters that van Drunen is “no doubt qualified” because he “has worked in the internal audit department of a Fortune 100 company and, as a Principal in KPMG’s Forensic Advisory Services practice, has performed and supervised engagements directly for, or in conjunction with, internal audit departments at Fortune 500 companies.” (Opp’n 4:16–19 (citing Am. van Drunen Report Ex. 2).)
The Court rejects Erhart’s qualification challenge. Given his experience, credentials, and education, van Drunen is plainly qualified to testify about internal auditing standards and practices. Van Drunen has been a Certified Internal Auditor since 1997. (Van Drunen Decl. ¶ 2, ECF No. 152-15.) And his resume reflects over thirty-five years of internal auditing and investigatory experience. (Am. van Drunen Report Ex. 2.) Further, although Erhart raises other objections to van Drunen’s *13 testimony while discussing his qualifications, ( see Mot. 16:5–17:21), the Court will instead consider these arguments while discussing van Drunen’s opinions below.
B. Reliable and Admissible Opinions
Beyond challenging whether van Drunen is qualified, Erhart raises a storm of objections to van Drunen’s opinions. To guide its analysis, the Court will summarize and categorize van Drunen’s opinions. The Court will then rule on the admissibility of the opinions in each category.
1. Internal Audit Objectives and Standards Van Drunen’s report initially provides opinions regarding the purpose of an internal audit system. (Am. van Drunen Report §§ 3.0–3.1) In doing so, van Drunen relies on guidance from the Institute of Internal Auditors (“IIA”) and the International Standards for the Professional Practice of Internal Auditing (“IIA Standards”). ( Id. ) He explains that the goal of an “effective internal audit function” is to provide “assurance to an organization’s board of directors, audit committee, and senior management as to the quality and effectiveness of the organization’s internal control, risk management, and governance systems and processes.” ( Id. § 3.1.)
Further, van Drunen notes that BofI’s Internal Audit Policy “specifically references the IIA Standards’ definition for internal auditing” and that guidance from the Bank’s primary regulator similarly describes the “primary role” of internal auditors. (Am. van Drunen Report § 3.1.) He then opines that internal auditors “should be independent from the activities they audit, thereby enabling them to perform their assignments with objectivity.” ( ) In addition, van Drunen opines that the “development and implementation of internal controls should also remain the responsibility of management and the internal audit function should not be involved in designing . . . or operating specific internal control measures.” ( )
Van Drunen further describes the duties and responsibilities of internal auditors. (Am. van Drunen Report § 3.1.) He opines that internal auditors “commonly have access to sensitive and confidential information . . . and thus have *14 an enhanced obligation to maintain confidentiality of that information.” ( Id. ) In relying on the IIA Code of Ethics, van Drunen also opines that internal auditors should “not use information for any personal gain” and should “respect the value and ownership of information they receive and . . . not disclose information without appropriate authority unless there is a legal or professional obligation to do so.” ( )
The Court finds van Drunen’s opinions regarding internal audit objectives and standards are admissible under Rule 702. Many of the events underlying these consolidated actions occurred while Erhart was working as an internal auditor in the Bank’s Internal Audit Department. The objectives and standards for internal audit systems are not matters of common knowledge. Hence, van Drunen’s specialized knowledge about these topics “will help the trier of fact to understand the evidence.” Fed. R. Evid. 702. Further, these opinions are reliably derived from van Drunen’s specialized knowledge and experience and the IIA Standards.
Erhart, however, claims van Drunen’s opinions improperly rely on
publications by the IIA. (Mot. 16:5–25.) He argues “there is no evidence that [he]
was ever trained on or required to apply the IIA’s guidelines and publications in his
job, and his own supervisor, Mr. Ball, admitted that he did not directly require his
auditors to adhere to the IIA best practices standards.” ( ;
see also
Erhart Dep.
357:6–16, ECF No. 152-2; Ball Dep. 50:19–51:1, ECF No. 135-5.) Erhart’s
challenge is unpersuasive. There is evidence suggesting that BofI’s internal audit
system incorporated the IIA Standards. Hence, Erhart’s disagreement bears on the
weight of these opinions rather than their admissibility.
See Primiano
, 698 F.3d at
565. Erhart can challenge the applicability and persuasiveness of these standards
through cross-examination and the presentation of contrary evidence.
See Daubert
,
2. Internal Audit Procedures The next category of van Drunen’s opinions consists of his description of internal audit procedures. (Am. van Drunen Report § 3.2.) He describes the “typical *15 phases and procedures for conducting internal audits,” including “pre-fieldwork procedures, fieldwork procedures, and reporting results.” ( Id. §§ 3.2.1–3.2.3.) For example, van Drunen opines that upon completing the fieldwork portion of an internal audit, “internal auditors typically prepare a draft report which describes the scope of the procedures performed, the information gathered, the observations, and [the] recommendations and basis for such observations.” ( Id. § 3.2.3.) He also opines that there is usually then a meeting “with the auditee and other internal stakeholders (which can include senior management) to share and review the draft report.” ( ) Van Drunen explains that “it is not unusual to have disagreements regarding the accuracy of the potential audit observations.” ( )
The Court similarly finds van Drunen’s opinions regarding internal audit procedures are admissible under Rule 702. The parties’ evidence involves these procedures at BofI, and several of Erhart’s allegations concern draft audit reports and his interactions with senior management concerning these reports. Van Drunen’s testimony about these specialized topics “will help the trier of fact to understand the evidence.” Fed. R. Evid. 702. And his testimony is reliably derived from his specialized knowledge and experience, making it admissible.
3. Erhart’s Conduct Next, van Drunen’s opinions turn to discussing Erhart’s conduct in this case. For example, van Drunen opines that Erhart’s allegations of “malfeasance” at the Bank are not founded “on information and/or evidence as required by IIA Standards.” (Am. van Drunen Report § 4.1.) Most of Erhart’s objections concern these particularized opinions. He argues van Drunen’s opinions “directly invade[] the province of the jury” and “consist merely of legal conclusions, speculation, and his own assessment of facts.” (Mot. 8:6–14:17.) BofI responds that van Drunen’s opinions are “highly probative of the issues” at hand and should be permitted because they address whether “a reasonable person in Erhart’s internal auditing position under *16 the same circumstances [would] have formed the same” beliefs about BofI’s purported wrongdoing. (Opp’n 1:12–18.)
Having reviewed these opinions, the Court agrees that some of them should be
excluded. Because these opinions largely concern the allegations underlying Erhart’s
whistleblower retaliation claims, the Court incorporates its discussion of the
standards for these claims from the Summary Judgment Order. (
See
Summary
Judgment Order 19:6–22:18; 51:3–52:5; 53:1–54:8; 63:10–64:2.) To recap, Erhart’s
Sarbanes–Oxley whistleblower retaliation claim requires him to demonstrate he
“provide[d] information . . . regarding any conduct which [he] reasonably believe[d]
constitute[d] a violation of section 1341 [mail fraud], 1343 [wire fraud], 1344 [bank
fraud], or 1348 [securities or commodities fraud], any rule or regulation of the
Securities and Exchange Commission, or any provision of Federal law relating to
fraud against shareholders . . . .” 18 U.S.C. § 1514A(a)(1). Hence, Erhart does “not
have to prove that he reported an actual violation.”
See Wadler v. Bio-Rad Labs.,
Inc
.,
The “reasonable belief” standard includes both a subjective component and an
objective component.
E.g.
,
Wadler
,
Moreover, “[t]o encourage disclosure, Congress chose statutory language
which ensures that ‘an employee’s reasonable but mistaken belief that an employer
engaged in conduct that constitutes a violation of one of the six enumerated
categories is protected.’”
Van Asdale
,
Accordingly, the jury will be tasked with determining whether Erhart
reasonably believed he was reporting a violation of the laws listed in Sarbanes–
Oxley’s whistleblower retaliation provision. Similarly, for Erhart’s state law
whistleblower retaliation claim, the jury will have to determine whether Erhart had
“reasonable cause to believe that the information” he disclosed to the government
revealed “a violation of [a] state or federal statute, or a violation of . . . a local, state,
or federal rule or regulation.” Cal. Labor Code § 1102.5(b);
see also Ross v. Cty.
of Riverside
, 36 Cal. App. 5th 580, 592 (2019) (noting an employee engages in
conduct “protected by the statute when the employee discloses ‘reasonably based
suspicions’ of illegal activity” (quoting
Green v. Ralee Eng’g Co.
,
Topic No. 1: Erhart’s Allegations Are Not Supported by Evidence. First, under the guise of internal audit and fraud investigation standards, van Drunen opines that Erhart’s complaint “includes a number of allegations that do not appear to be founded on information and/or evidence.” (Am. van Drunen Report § 4.1.) To support this opinion, van Drunen first references IIA Standards that provide internal auditors: (1) are to “identify, analyze, evaluate, and document sufficient information to achieve the engagement’s objectives”; and (2) “must identify, sufficient, reliable, relevant, *18 and useful information to achieve the engagement’s objectives.” ( Id. ) It is questionable whether these standards even apply in those circumstances where Erhart’s beliefs did not arise in the context of an assigned audit with “objectives,” but that concern alone does not doom these opinions’ admissibility.
Curiously, however, van Drunen also introduces a second set of standards in this section—the Certified Fraud Examiners (“CFE”) Standards. (Am. van Drunen Report § 4.1.) One of these CFE Standards requires that “[c]onclusions shall be supported with evidence that is relevant, competent and sufficient.” ( ) Further, van Drunen notes the CFE Standards state that “[t]he Certified Fraud Examiner’s objective shall be to obtain evidence and information that is complete, reliable and relevant.” ( Id. (emphasis added).) Van Drunen then goes on to examine Erhart’s various allegations, and he concludes based on his review of testimony and documentary evidence that Erhart’s allegations “are not supported with information and/or evidence.” ( )
This proposed testimony does not pass muster under Rule 702. For one, van
Drunen references CFE Standards to critique Erhart’s conduct, but Erhart
indisputably was not a Certified Fraud Examiner. He was an entry-level internal
auditor that had previously not done internal audit work. (Summary Judgment Order
3:25–4:5.) Whereas van Drunen’s report at least feasibly connects the IIA Standards
to Erhart’s circumstances, there is no explanation for why Erhart’s beliefs should be
assessed in the context of CFE Standards.
See Wadler
, 916 F.3d at 1188 (“The
objective reasonableness component . . . ‘is evaluated based on the knowledge
available to a reasonable person in the same factual circumstances with
the same
training and experience as the aggrieved employee
.” (emphasis added) (quoting
Sylvester
,
Moreover, aside from this standards issue, the Court will not permit van
Drunen to simply rehash the evidence and assert that his analysis of the evidence
leads to a particular conclusion. On this point, the Court finds helpful the district
court’s decision in an analogous case,
Sharkey v. J.P. Morgan Chase & Co.
, 978 F.
Supp. 2d 250 (S.D.N.Y. 2013). There, an employee brought suit under Sarbanes–
Oxley’s whistleblower retaliation provision, alleging she reported fraudulent activity
because she believed a suspicious bank client “was violating one or more of the [laws
enumerated in Sarbanes–Oxley] in addition to money laundering.”
Id.
at 252. She
thus had also recommended that the banking relationship with this client be
terminated.
See id.
at 253;
see also Sharkey
,
To support her whistleblower retaliation claim, the plaintiff sought to rely on
an expert under Rule 702 who had “vast experience” in Sarbanes–Oxley compliance
and “other areas of financial compliance.”
Sharkey
,
The defendants moved to exclude these opinions for a host of reasons,
including that the opinions improperly usurped the jury’s factfinding function.
Sharkey
,
Van Drunen’s proposed opinions are more skillfully drafted than the expert’s
opinions in
Sharkey
, but they are still unacceptable. Like the expert in
Sharkey
, van
Drunen proposes to testify whether the documents and evidence in the case support
Erhart’s beliefs.
[4]
This testimony is both improper and unnecessary under Rule 702
for the same reasons expressed in
Sharkey
.
Topic No. 2: Erhart Made Improper Legal Conclusions. Next, van Drunen opines that Erhart “appears to have made legal conclusions regarding the Bank’s *21 compliance with state and federal regulations, outside his skills, experience, and role as an internal auditor within the Bank which is inconsistent with the IAA Standards.” (Am. van Drunen Report § 4.2.) Van Drunen explains that internal audit “is not responsible for drawing any legal conclusions as to whether the Bank has violated any laws, as this is the responsibility of management and the Audit Committee assisted by qualified legal counsel.” ( ) Thus, van Drunen opines that it was not “appropriate” for Erhart to draw legal conclusions regarding the Bank’s compliance with laws. ( )
While this analysis may ring true in the corporate arena, its relevance and
helpfulness to the jury is questionable. The federal whistleblower retaliation statutes
at issue expressly protect Erhart’s disclosures that provide information regarding
believed violations of certain laws,
see
15 U.S.C. § 78u-6(h)(1)(A), 18 U.S.C. §
1514A(a)(1), and California’s whistleblower retaliation statute similarly protects
Erhart’s disclosures of reasonably believed violations of law, “regardless of whether
disclosing the information is part of [Erhart’s] job duties,”
see
Cal. Labor Code §
1102.5(b). Indeed, these statutes require that Erhart demonstrate he subjectively
believed the conduct he reported violated either enumerated laws or any law,
respectively.
See Van Asdale
,
Topic No. 3: Erhart Raised Issues Unrelated to Assigned Audits. Van Drunen next opines that based on his review of the evidence, “there appears to be a number of instances where Mr. Erhart appears to either insert himself into audits or conduct adhoc, random inquiries.” (Am. van Drunen Report § 4.3.) Van Drunen opines that when internal auditors “act in this manner without the approval or knowledge of senior management, it can result in:” (1) “Duplication of efforts,” (2) “Negative results with respect to achieving and completing the annual audit plan,” (3) “Confusion amongst auditees,” (4) “Reduced audit quality, and” (5) “A variety of other issues that could negatively impact the audit process.” ( ) Van Drunen then summarizes his interpretation of the evidence and the instances where he believes Erhart improperly inserted himself into audits. ( )
The Court will permit van Drunen to testify that Erhart appeared to deviate
from auditing practices and to discuss the impacts this type of conduct may have on
an internal audit system and audit results. The Court cautions, however, that it will
not permit van Drunen to merely rehash the evidence and bolster BofI’s anticipated
testimony regarding Erhart’s assigned job duties and the Bank’s internal policies
under the guise of expert testimony.
See Sharkey
,
Topic No. 4: Erhart Lacked Independence. Van Drunen opines that “[t]he IAA Standards require internal audit activity to be independent” and that internal auditors “be ‘objective in performing their work.’” (Am. van Drunen Report § 4.3.) He further opines that Erhart’s “allegations into Bank activities appear to be influenced by personal reasons, which has the potential to impact his impartiality and independence.” ( ) Van Drunen then reviews some of Erhart’s allegations and auditing conduct and explains why he believes Erhart’s conduct lacked the independence required by IIA Standards. ( ) For example, van Drunen concludes *24 that Erhart appears to have targeted certain individuals in his Lottery and Structured Settlements Audit. ( Id. ) Van Drunen opines that “the likelihood of both of these individuals being selected as part of a random sample is remote.” ( )
The Court will permit this testimony under Rule 702. Erhart’s alleged lack of independence in conducting his audits may bear on the objective reasonableness of his beliefs, and therefore this testimony may help the jury determine a fact in issue. The Court also finds this testimony is based on sufficient information and is reliably derived from the IIA Standards and van Drunen’s specialized knowledge. Finally, this testimony is not otherwise subject to exclusion under Rule 403.
Topic No. 5: Failure to Close Out Audits and Improper Remediation Efforts. Van Drunen provides several opinions on this topic. He initially opines that in “year 2014,” Erhart “completed four audits, in comparison to his [two] colleagues . . . who completed 14 and 16 audits, respectively.” (Am. van Drunen Report § 4.5.) Further, van Drunen expresses that “[i]t appears that the reason for [Erhart’s] failure to close out and/or delay [in] filing his audit reports may be because he was not doing what he was assigned and authorized to do and he was taking on unauthorized management responsibilities.” ( )
The Court finds this testimony is not admissible under Rule 702. Determining
whether Erhart completed less audits than his colleagues does not involve “scientific,
technical, or other specialized knowledge.” Fed. R. Evid. 702. Similarly, the
Bank can introduce admissible evidence regarding what Erhart was assigned and
authorized to do at the Bank. There is no need for expert testimony on this subject.
See Jinro Am. Inc.
,
In contrast, van Drunen also opines about the role of remediation efforts in internal auditing based on “his experience and understanding.” (Am. van Drunen *25 Report § 4.5.) Van Drunen opines that “if remediation is required as a result of findings that an internal auditor has noted in the audit reports, there is a process to be followed.” ( Id. ) He explains that “internal audit’s role in the remediation process is to report on whether the other [organizational] functions are making required changes within a defined time period.” ( Id. ) Van Drunen further opines that because Erhart directed remedial actions in some instances, he placed “the internal audit department in a position where in the future it might [have been] required to audit its own work.” ( Id. ) He also opines it is unusual for an auditor like Erhart “to make recommendations to remediate issues that have already been or are in the process of being remediated.” ( Id. )
This proposed testimony regarding the role of an internal audit system and Erhart deviating from common practice is adequately based on van Drunen’s specialized knowledge. Fed. R. Evid. 702. The Court also finds it will help the jury to understand the evidence and Erhart’s role in the Bank’s internal audit system. Hence, the Court finds this testimony is admissible.
Topic No. 6: Failure to Conform to Chain of Command. Van Drunen next opines that Erhart “failed to conform to chain of command / reporting structure in various ways.” (Am. van Drunen Report § 4.6.) He highlights that Erhart “sent information to regulators” regarding certain allegations of believed wrongdoing. ( ) Van Drunen opines that he believes Erhart did not take “the appropriate action by escalating the matters to regulators” and that he should have instead presented his concerns to the Bank’s audit committee “per normal protocols and per the instructions in the Bank’s Employee Handbook.” ( )
The Court will not admit this proposed testimony for the same reasons the Court discussed above. The laws at issue protect Erhart’s disclosures to appropriate regulators regarding believed wrongdoing, and these laws and the value judgments Congress made are not on trial. The issue for the jury is whether Erhart’s beliefs of wrongdoing were reasonable, not whether BofI’s Employee Handbook or auditing *26 protocols made it “inappropriate” for him to reach out to regulators directly. The Court finds this testimony will not assist the jury in the task at hand. Moreover, the probative value of these opinions is substantially outweighed by their potential to confuse the issues and mislead the jury. See Fed. R. Evid. 403. Hence, the Court excludes these opinions.
Topic No. 7: Failure to Comply with IIA’s Confidentiality Requirements. Finally, van Drunen references the IIA’s Code of Ethics discussed above and its confidentiality requirements. (Am. van Drunen Report § 4.7.) Van Drunen then opines that Erhart “failed to apply and uphold the IIA’s Code of Ethics with respect to confidentiality,” including by storing confidential bank information in a bag buried in his closet. ( )
The Court will admit this testimony under Rule 702. Van Drunen’s testimony
is relevant to BofI’s claims in its countersuit regarding Erhart’s alleged mishandling
of confidential bank information. This testimony also may assist the jury in
determining whether Erhart breached his duty of care to the Bank on this basis. Last,
the testimony is based on sufficient information and is reliably derived from van
Drunen’s experience and his application of the IIA’s Code of Ethics and industry
standards. That said, the Court will not permit van Drunen to opine on the
interpretation of BofI’s Confidentiality Agreement and whether Erhart breached the
contract. ( Am. van Drunen Report § 4.7.)
See, e.g.
,
McHugh v. United Serv.
Auto. Ass’n
,
Overall, the Court grants in part and denies in part Erhart’s request to exclude all of van Drunen’s proposed testimony under Rule 702.
CONCLUSION
In light of the foregoing, the Court GRANTS IN PART and DENIES IN PART Erhart’s motion to exclude expert testimony. BofI fails to demonstrate that its non-retained expert CFO Micheletti’s proposed testimony is admissible under *27 Rule 702. Consequently, the Court grants Erhart’s request to preclude Micheletti from testifying as an expert, but the Court recognizes that Micheletti may be able to provide lay opinion testimony on the Bank’s lost profits under Rule 701.
The Court also grants in part and denies in part Erhart’s request to exclude BofI’s retained expert Guido van Drunen. The Court finds van Drunen’s proposed testimony regarding (1) internal audit objectives and standards and (2) internal audit procedures is admissible under Rule 702. This testimony is reliably based on van Drunen’s specialized knowledge and will help the jury understand the evidence. As for van Drunen’s more specific opinions on Erhart’s conduct, the Court reaches a mixed result. Some of these opinions are appropriate under Rule 702; other opinions either fail to meet Rule 702’s requirements or are subject to exclusion under Rule 403 for the reasons outlined above.
IT IS SO ORDERED.
DATED: April 1, 2020
Notes
[1] The Court uses “BofI” and “the Bank” to refer to either BofI Holding or BofI Federal Bank. ( Summary Judgment Order 2 n.1.)
[2] Although Erhart briefly argues Micheletti is not qualified to testify as an expert, the Bank
25
does not submit a declaration from Micheletti or otherwise demonstrate he is qualified under Rule
702. The Bank’s opposition mentions that Micheletti has “finance and accounting knowledge” and
26
that he “is qualified to give [his opinion],” but these statements are insufficient under Rule 702.
( Opp’n 1:23–26; 20:21.)
See also Daubert
,
[3] In contrast, the court determined that in light of the plaintiff’s expert’s qualifications, the expert could “testify as to the type of transactions which might be subject to concern as an accountant, and those matters which she believes, and why, are worthy of [Sarbanes–Oxley] consideration (or so called ‘red flags’).” Sharkey , 978 F. Supp. 2d at 254. Further, the court permitted the expert to testify “why these various types of conduct would be considered ‘red flags’ within the industry, and the types of fraudulent activity they suggested.”
[4] ( See, e.g. , Van Drunen Report § 4.1 (“Based on the documentation provided to me, I have not observed information and/or evidence that Mr. Erhart provided to support his allegations.”) (“I 27 also did not observe evidence that other employees of the Bank thought Mr. Tolla’s changes were 28 material/inappropriate.”) (“After reviewing these allegations, I note that Mr. Erhart’s allegations are not supported by audit evidence.”).)
[5] The Court notes that the Bank has claimed Erhart was an employee who should have been 26 expected to know “whether the conduct [he] reported in fact constituted an enumerated violation” because he was “an internal auditor.” ( See BofI’s Summ. J. Mot. 30 n. 25, ECF No. 127-1.) 27 Interestingly, the Bank now oscillates to relying on testimony that it was improper for Erhart to 28 make “legal conclusions regarding the Bank’s compliance with state and federal regulations.” (Am. van Drunen Report § 4.2.)