32 F. Supp. 3d 453 | S.D.N.Y. | 2014
OPINION AND ORDER
I. INTRODUCTION
On August 30, 2013, in accordance with the discovery schedule, plaintiffs served their expert report on the remaining de
Palaschuk subsequently expressed concern that plaintiffs raised new arguments in their summary judgment briefing that Bell had not been given the opportunity to address. I granted Palaschuk permission to file a ten-page supplemental expert report addressing solely those allegations that were not raised in either the Complaint or plaintiffs’ interrogatory responses.
For the reasons that follow, plaintiffs’ motions to exclude the reports and testimony of Bell and Siefert are GRANTED in part and DENIED in part.
II. BACKGROUND
A. The Bell Report
1. Bell’s Credentials
Bell is a certified public accountant (“CPA”) licensed in Texas.
Palaschuk states that he selected Bell largely based on his knowledge of Generally Accepted Accounting Principles (“GAAP”), since many of plaintiffs’ allegations centered on Longtop’s allegedly improper accounting for social welfare obligations and its relationship with a third party entity that directly employed most of Longtop’s staff (“XLHRS”).
2. Bell’s Opinions
The Bell Report summarizes various third party audits and reports on Long-top’s finances during the class period, and concludes that it was reasonable for Palas-chuk to “rely” on them.
Bell concedes that DTT’s audit for fiscal year 2006 identified deficiencies in Long-top’s internal controls, but concludes that any problems must have been corrected because the subsequent audit identified no such deficiencies.
Bell makes the same point with respect to the “fraud risk factors” DTT identified in 2007 and 2008. According to Bell, “[t]he identification of risk factors is not an indication of fraud; it is part of the audit process” and therefore did not put Palas-chuk on notice of fraud or accounting irregularities.
Bell also addresses plaintiffs’ allegations that Longtop failed to conduct sufficient month-end bank reconciliations and lacked effective internal controls over cash and loan balances. According to Bell, DTT did not find any problems with bank reconciliations or control over cash during the class period.
While plaintiffs allege that Palasehuk talked DTT out of doing certain revenue contract confirmations that could have uncovered the fraud, Bell explains that confirmation of revenue contracts is not required under Generally Accepted Auditing Standards.
Plaintiffs argue that DTT’s resignation letter acknowledged that Longtop’s financial statements, including cash and loan balances, were materially false. In response, Bell asserts that DTT withdrew the financial statements because it could no longer rely on Longtop’s management, not because it concluded that the statements were inaccurate.
3. Plaintiffs’ Arguments
Plaintiffs make four main arguments in support of excluding the Bell Report. (1) The report is untimely because Palasehuk missed the expert discovery deadline by five days. They note that Bell also submitted a supplemental expert report in the form of a lengthy affidavit to Palaschuk’s reply memorandum of law, which plaintiffs argue is even more untimely and improper. (2) Because Bell has never served as a CFO or advised companies in the Information Technology field, and is not an expert on the legal and regulatory obligations of public company CFOs, he is not qualified to provide an expert opinion.
B. The Siefert Report
1. Siefert’s Credentials
Siefert has been licensed as a CPA for
2. Siefert’s Opinions
Siefert’s expert report (the “Siefert Report”) addresses: 1) whether Palaschuk confirmed Longtop’s cash and loan balances in a timely manner, 2) whether Pa-laschuk properly investigated the October 2010 Needham email, and 3) whether Pa-laschuk properly investigated the February 2011 “Anonymous Report.” Siefert explains the general duties of a CFO, the need for CFO’s to delegate certain tasks, and the definition and purpose of internal controls.
According to Siefert, no official standards or protocols govern a CFO’s response to allegations of fraud or wrongdoing.
3. Plaintiffs’ Arguments
Plaintiffs move to exclude the Siefert Report on multiple grounds. (1) Siefert is not qualified to issue his opinions because he has never been a CFO and has no specialized knowledge regarding a CFO’s responses to allegations of fraud. (2) Sie-fert’s opinions are not reliable because he provides no explanation of the standards used to evaluate Palaschuk’s conduct and ignores contradictory record evidence. (3) Siefert regurgitates Palaschuk’s version of the facts rather than citing to the record. (4) Siefert speculates about third parties’ subjective beliefs or states of mind. (5) Siefert cannot opine that Palaschuk engaged in no conscious wrongdoing, since intent is not the theory of liability in this case and such terminology could confuse the jury. (6) Siefert’s statements about the timeliness or reasonableness of Palas-chuk’s conduct usurp a quintessential jury function.
III. APPLICABLE LAW
The proponent of expert evidence bears the initial burden of establishing admissibility by a “preponderance of the evi
Furthermore, the expert’s knowledge must be of the type that will “help the trier of fact to understand the evidence or to determine a fact in issue[.]”
It is also well-established that expert witnesses are not permitted to testify about legal standards or conclusions of law, which are properly the domain of the trial judge and jury.
To be admissible, the proposed expert testimony-must be based “on a reliable foundation.”
*461 (1) the testimony is based upon sufficient facts or data, (2) the testimony is the product of reliable principles and methods, and (3) the witness has reliably applied the principles and methods to the facts of the case.53
Although the Supreme Court has instructed district courts to focus “on [the] principles and methodology” employed by the expert and “not on the conclusions that they generate,”
District courts are charged with acting as “ ‘gatekeeper[s] to exclude invalid and unreliable expert testimony’ ”
IY. DISCUSSION
A. The Bell Report
1.Bell’s Initial Expert Report Is Admitted
Expert reports were due on August 30, 2013, yet Palaschuk did not file his report until September 4, 2013 — five days after the deadline. Plaintiffs have not demonstrated any prejudice resulting from Palaschuk’s relatively minor delay. Moreover, Palaschuk’s tardiness appears to be the result of his own confusion regarding the distinction between an expert report and a rebuttal report. Because such confusion is understandable for a pro se litigant, and there is no evidence that Palas-chuk acted in bad faith, the Bell Report will not be excluded on timeliness grounds.
2.Bell’s Supplemental Report Is Excluded
Palaschuk attempts to submit a thirty-page affidavit from Bell in the form of an exhibit to his memorandum of law. Bell’s affidavit responds to concerns raised in plaintiffs’ memorandum of law and attempts to further bolster his initial opinions. The deadline for expert discovery passed long ago, and experts may not unilaterally supplement their conclusions months after the deadline. Therefore, Bell’s supplemental report is excluded.
3.Bell’s Opinions Are Excluded in Part
Many of Bell’s opinions are irrelevant or unreliable. The parties agree that the portions of the Bell Report addressing Longtop’s social welfare payments and use of XLHRS are now moot given that plaintiffs do not plan to pursue those allega
Additionally, a significant portion of the Bell Report summarizes the findings of various audit opinions, the actions allegedly taken by Palaschuk, and the contents of other documents in the record. Bell is precluded from summarizing facts and documents in the record that the jury is capable of understanding on its own. He is permitted to summarize the contents of technical financial documents only to the extent that the documents would not be comprehensible to the average layperson. Bell may not testify to facts that he learned directly from Palaschuk if he cannot cite to other support in the record.
Bell is also precluded from testifying that Longtop’s internal controls and financial statements were free from error based upon the results of DTT’s audits. In its resignation letter, DTT explicitly stated that “continuing reliance should no longer be placed on our audit reports on the previous financial statements.”
Similarly, Bell’s interpretation of DTT’s resignation letter is inadmissible. First, the jury can easily read and comprehend the text of the short letter without expert assistance. Second, Bell bases his interpretation of the letter largely on DTT’s memorandum of law in support of its motion to dismiss the complaint in this action, which is not record evidence.
Bell devotes a substantial portion of his expert report to DTT’s audit procedures. The. sufficiency of those procedures is relevant to Palaschuk’s state of mind because a clearly deficient audit might have put a diligent CFO on notice of the need for further inquiry. Therefore, Bell may opine briefly on the adequacy and propriety of DTT’s audit procedures. However, Bell’s lengthy assessment of the technical features of DTT’s audit is excessive and unlikely to assist the jury. Because the relevance of such detailed technical testimony is substantially outweighed by the danger of confusing the jury and wasting time, Bell’s testimony on the sufficiency of DTT’s audit procedures must be limited to an overview of the adequacy of the audit.
4. Bell’s Opinions Are Admitted in Part
While many of Bell’s opinions are irrelevant or unreliable, Bell is qualified to opine, on limited topics. The standard for expertise in the Second Circuit is permissive, and courts rely on cross-examination
Bell has over thirty years of experience auditing financial records and internal controls and is a licensed CPA, which qualifies him to testify about auditing and accounting practices. For example, Bell may explain what normally occurs when an auditor identifies “fraud risk factor[s].”
Similarly, Bell may evaluate the operations of Longtop’s finance department based upon his own review of the relevant documents. For example, he may state that Longtop conducted month-end reconciliations if he personally reviewed the reports. He may also testify that Longtop’s monthly reports were consistent with the company’s publicly released financial statements if he personally examined both sets of documents. However, any such opinions must be reliable. Bell may not testify that Longtop’s internal reports established the accuracy of the financial statements, since the process involved no external corroboration. Moreover, as previously stated, Bell may not base his opinions on DTT’s audits or Palaschuk’s unsubstantiated version of the facts unless phrased as a hypothetical.
Bell may also explain the common duties of a public company CFO, as well as which tasks are frequently delegated to subordinates. Bell may not state whether Palaschuk’s behavior was “reasonable” or “reckless,” as that is the ultimate legal conclusion for the jury. Nor may he opine that it was reasonable for Palaschuk to “rely” on the DTT audits. Instead, he may explain what procedures a CFO is generally expected to undertake, in accordance with industry standards, to corroborate the accuracy of a company’s financial statements and to prevent fraud. He may also explain, in his experience, what steps a CFO would not normally undertake in the face of a clean audit report. The jury will ultimately decide whether Palaschuk’s behavior constituted an “extreme departure from the standards of ordinary care” under the circumstances.
B. The Siefert Report
Like Bell, Siefert is qualified as an ' expert by his ten years as an auditor and thirty years as a CPA. As such, Siefert may explain accounting and auditing terms like “internal controls,” “unqualified audit opinions,” “confirmations,” and “reconciliations,” as well as who normally performs each procedure.
However, Siefert may not testify about any party’s state of mind, as such testimony would be speculative. He may not testify that Longtop’s management considered its finance employees to be competent, or that the clean audits gave Palaschuk comfort, or that Palaschuk’s response to the Needham report was “antithetical to [that] of someone attempting to cover up wrongdoing.”
Additionally, Siefert may not testify that Palaschuk or his employees took certain steps, particularly if his conclusion is based solely on those individuals’ affidavits.
y. CONCLUSION
For the foregoing reasons, plaintiffs motions to exclude the reports and testimony of Bell and Siefert are GRANTED in part and DENIED in part. The Clerk of Court is directed to close these motions (Dkt., Nos. 166,198).
SO ORDERED.
. I denied Palaschuk’s motion for summary judgment in an Opinion dated June 1-6, 2014.
. Specifically, the supplemental report was permitted to address: "1) whether Palaschuk confirmed Longtop’s cash and loan balances in a timely manner, 2) whether Palaschuk properly investigated the October 2010 Need-ham email, and 3) whether Palaschuk properly investigated the February 2011 email from an investor.” 2/16/14 Order, Dkt. No. 193.
. See Expert Report of Alan D. Bell (the "Bell Report") at 4.
. See id.
. See id.
. See id. at 40.
. See id. at 4, 40.
. See'id. at 42.
. Id. at 40.
. See Defendant Derek Palaschuk’s Memorandum of Law in Opposition to Plaintiffs’ Motion to Exclude Report and Testimony of Alan D. Bell ("Opp. Mem.”) at 4.
. See Memorandum of Law in Support of Plaintiffs’ Motion to Exclude Report and Testimony of Alan D. Bell (“PL Mem.”) at 25 ("Plaintiffs will not pursue at trial claims against Palaschuk related to Longtop’s accounting for XLHRS or the adequacy of its social welfare payments.”).
. See, e.g., Bell Report at 6 ("It was reasonable for Palaschuk as CFO to place reliance on these audits and quarterly reviews.”).
. See ¿d. ató, 9-10, 17-18.
. See id. at 6, 9-10.
. See id. at 16.
. Id. at 17.
. Id. at 20.
. Id. at 21.
. See id. at 21.
. See id.
. Id.
. See id. at 38.
. See id. at 24.
. See id.
. See id. at 24-25. Bell's conclusion is based largely on the arguments in DTT’s Reply Memorandum of Law in Support of Its Motion to Dismiss, Dkt. No. 106.
. See id.
. See id. at 39.
. See PL Mem. at 14.
. See, e.g., Bell Report at 19 (calling plaintiffs’ claim that DTT made certain statements "incorrect” based solely on Palaschuk’s deposition testimony).
. See PI. Mem. at 22.
. See Plaintiffs’ Reply Memorandum in Further Support of Their Motion to Exclude Report and Testimony of Alan D. Bell at 5.
. See Expert Report of Roger D. Siefert in Response to the 2/6/14 Order (the “Siefert Report”) at 1.
. See id.
. See id.
. See id.
. See id. at 1-2.
. Id. at 1.
. See id. at 2-3.
. Id. at 3.
. See id. at 4.
. Id.
. United States v. Williams, 506 F.3d 151, 160 (2d Cir.2007).
. Fed.R.Evid. 702.
. United States v. Tin Yat Chin, 371 F.3d 31, 40 (2d Cir.2004).
. Crown Cork & Seal Co., Inc. Master Ret. Trust v. Credit Suisse First Boston Corp., No. 12 Civ. 5803, 2013 WL 978980, at *1 (S.D.N.Y. Mar. 12, 2013) (quotation marks and citations omitted). Accord Nimely v. City of New York, 414 F.3d 381, 395 (2d Cir.2005) ("It is a well-accepted principle that Rule 702 embodies a liberal standard of admissibility for expert opinions.... ”).
. Fed.R.Evid. 702.
. See United States v. Escobar, 462 Fed.Appx. 58, 62 (2d Cir.2012) (noting that expert may not testify to facts "well within the grasp of the average juror”) (quotation marks and citations omitted). See also United States v. Amuso, 21 F.3d 1251, 1263 (2d Cir.1994) ("A district court may commit manifest error by admitting expert testimony where the evidence impermissibly mirrors the testimony offered by fact witnesses, or the subject matter of the expert's testimony is not beyond the ken of the average juror.”).
. Arista Records LLC v. Usenet.com, Inc., 608 F.Supp.2d 409, 424 (S.D.N.Y.2009). Accord United States v. Mejia, 545 F.3d 179, 197 (2d Cir.2008) (noting that expert may not "repeat[ ] hearsay evidence [to the jury] without applying any expertise whatsoever”).
. Highland Capital Mgmt., L.P. v. Schneider, 379 F.Supp.2d 461, 469 (S.D.N.Y.2005).
. See In re Methyl Tertiary Butyl Ether (MTBE) Prod. Liab. Litig., 725 F.3d 65, 114 (2d Cir.2013). See also Nimely, 414 F.3d at 397.
. Kidder, Peabody & Co., Inc. v. I AG Int'l Acceptance Grp., N.V., 14 F.Supp.2d 391, 404 (S.D.N.Y.1998). Accord Crown Cork, 2013 WL 978980, at *7 (excluding expert opinions regarding parties' knowledge, state of mind, and intent); In re Xerox Corp. Sec. Litig., 746 F.Supp.2d 402, 415 (D.Conn.2010) ("Inferences about the intent or motive of parties or others lie outside the bounds of expert testimony.”) (quotation marks and citations omitted).
. Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579, 597, 113 S.Ct. 2786, 125 L.Ed.2d 469 (1993). Accord Kumho Tire Co., Ltd. v. Carmichael, 526 U.S. 137, 147-49, 119 S.Ct. 1167, 143 L.Ed.2d 238 (1999).
. See Opp. Mem. at 13.
. See, e.g., Bell Report at 19 (calling plaintiffs’ claim that DTT made certain statements "incorrect” based solely on Palaschuk’s deposition testimony).
. DTT Resignation Letter, Ex. W to Declaration of Plaintiffs’ Attorney Kimberly A. Justice in Support of Plaintiffs' Memorandum of Law in Opposition to Defendant Derek Palaschuk’s Motion for Summary Judgment, Dkt. No. 175.
. Id.
. See Fed. R. Evid. 403.
. Fed.R.Evid. 702.
. Daubert, 509 U.S. at 595, 113 S.Ct. 2786.
. Kumho Tire, 526 U.S. at 157, 119 S.Ct. 1167 (quotation marks and citations omitted).
. Baldwin v. EMI Feist Catalog, Inc., 989 F.Supp.2d 344, 349 (S.D.N.Y.2013) (quoting Bickerstaff v. Vassar Coll., 196 F.3d 435, 449 (2d Cir.1999)).
. Louisiana Wholesale Drug Co., Inc. v. Sanofi-Aventis, No. 07 Civ. 7343, 2008 WL 4580016, at *6 (S.D.N.Y. Oct. 14, 2008) (quoting McCullock v. H.B. Fuller Co., 61 F.3d 1038, 1042 (2d Cir.1995)).
. Amorgianos v. National R.R. Passenger Corp., 303 F.3d 256, 267 (2d Cir.2002) (quoting Daubert, 509 U.S. at 596, 113 S.Ct. 2786).
. Bell Report at 21.
. See id. at 20.
. City of Pontiac Policemen's & Firemen's Ret. Sys. v. UBS AG, 752 F.3d 173, 184 (2d Cir.2014) (quoting Novak v. Kasaks, 216 F.3d 300, 308, 312 (2d Cir.2000)).
. Siefert Report at 3, 8.
. See id. at 4, 7, 8.