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Krys v. Aaron

United States District Court, D. New Jersey

June 12, 2015


David J. Molton, Esq., Mason C. Simpson, Esq., BROWN RUDNICK LLP, New York, N.Y., and Leo R. Beus, Esq., L. Richard Williams, Esq., Thomas A. Gilson, Esq., Lee M. Andelin, Esq., BEUS GILBERT PLLC, Phoenix, A.Z., Attorney for Plaintiffs.

B. John Pendleton, Jr., Esq., Andrew O. Bunn, Esq., Kristin A. Pacio, Esq., Gina Trimarco, Esq., DLA PIPER LLP (US), Short Hills, N.J., Attorney for Defendants.


JEROME B. SIMANDLE, Chief District Judge.


In this lengthy multi-district securities litigation, the parties move to exclude in whole or in part the following experts:[1]

1. I. Michael Greenberger, Plaintiffs' expert on Commodity Futures Trading Commission (hereinafter, "CFTC") and Commodities Exchange Act (hereinafter, "CEA") issues [see Docket Item 580];
2. R. David Wallace, CPA, CFF, Plaintiffs' expert on the audit and advisory services rendered to Refco [see Docket Item 581];
3. Peter Vinella, Plaintiffs' expert concerning Defendants' alleged knowledge of Refco's failure to segregate SMFF's excess cash [see Docket Item 582];
4. Joan Lipton, CPA/ABV/CFF, Ph.D., Plaintiffs' expert on PlusFunds' valuation [see Docket Item 583];
5. Raymond O'Neill, Defendants' expert on the practices of fund administrators [see Docket Item 584];
6. Anthony Travers, Defendants' expert on the standards for directors under Cayman Islands' Law [see id.];[2]
7. Anthony J. Leitner, Defendants' expert (in rebuttal to I. Michael Greenberger) on segregation issues under the CEA and the CFTC [see Docket Item 585]; and
8. Avram S. Tucker, Defendants' damages expert [see Docket Item 586]

The principal issue before the Court concerns whether the proposed testimony of these expert witnesses meets the qualification, reliability, and fit requirements under Federal Rule of Evidence 702.

For the reasons that follow, Defendants' motions will be granted in part and denied in part with respect to Mr. Greenberger, granted in part and denied in part with respect to Mr. Wallace, granted in part and denied in part with respect to Mr. Vinella, and denied with respect to Dr. Lipton.

Plaintiffs' motions will be denied with respect to Mr. O'Neill, deferred with respect to Mr. Travers, granted in part and denied in part with respect to Mr. Leitner, and denied with respect to Mr. Tucker.


For purposes of the pending motions, the Court need not retrace the parties' complex history.[3]

Rather, the Court notes that this action generally arises from the complex financial and brokerage relationships between, and ultimate dissolutions of, three entities (and the multitude of affiliates associated with each): PlusFunds Group, Inc. (hereinafter, "PlusFunds"), SPhinX Funds (hereinafter, "SPhinX"), and Refco, Inc. (hereinafter, "Refco").

As relevant here, in 2002, PlusFunds created SPhinX, a global hedge fund consisting of approximately seventy Cayman Islands funds, as an investment vehicle to track the Standard & Poor's hedge fund index. One of the seventy SPhinX funds, SPhinX Managed Futures Fund (hereinafter, "SMFF"), in turn, maintained brokerage accounts with the onshore and offshore affiliates of Refco, a then-existing financial services and brokerage firm. In connection with such accounts, PlusFunds agreed to sweep any of SMFF's excess cash on deposit with Refco, LLC, the onshore affiliate in New York, to Refco Capital Markets, Ltd, the offshore affiliate in the Cayman Islands.

After the revelation that several of Refco's officers and directors participated in a wide-scale, fraudulent underreporting of corporate liabilities, however, Refco filed for bankruptcy on October 17, 2005. At that time, Refco held $312 million of SMFF's excess cash in unsegregated accounts, all of which the bankruptcy proceeding placed beyond the reach of PlusFunds or SPhinX, and ultimately caused these entities to file their own bankruptcy proceedings.

In this action, Plaintiffs Kenneth M. Krys and Margot Macinnis, the Joint Official Liquidators of the SPhinX Trust, and The Harbour Trust Co. Ltd., the Trustee of the SPhinX Trust (collectively, "Plaintiffs"), allege that Defendants, [4] all SPhinX Funds' and PlusFunds' agents and fiduciaries, allowed and/or facilitated the unauthorized diversion of SMFF's excess cash from protected, customer-segregated accounts to non-regulated and unsegregated offshore accounts with Refco and failed to take certain corrective steps in the face of Refco's potential insolvency.[5] (See generally Joint Final Pretrial Order.)


Federal Rule of Evidence 702 governs the admissibility of expert testimony, and specifically permits a witness qualified as an expert to testify in the form of an opinion if: (1) the expert's knowledge will assist the factfinder in understanding the evidence or an issue of fact; (2) the testimony relies upon sufficient facts or data; (3) the testimony resulted from "reliable principles and methods; and (4) the expert "reliably applied the principles and methods to the facts of the case." See FED. R. EVID. 702. In other words, Rule 702 "embodies a trilogy of restrictions on expert testimony: qualification, reliability, and fit." Schneider v. Fried, 320 F.3d 396, 404 (3d Cir. 2003) (citing In re Paoli R.R. Yard PCB Litig., 35 F.3d 717, 741-43 (3d Cir. 1994)).

Qualification refers to the requirement that the witness possess specialized knowledge, skills, training, or expertise. See id. at 404 (citation omitted). The requirement, however, encompasses "a broad range of knowledge, skills, and training.'" Id . (citation omitted). Indeed, the Court of Appeals eschews "overly rigorous requirements of expertise" and therefore permits witnesses to testify as experts even in the absence of formal qualifications (as opposed to simply specialized knowledge and training). In re Paoli, 35 F.3d at 741.

The reliability restriction requires that the testimony be based upon "the methods and procedures of science' rather than on subjective belief or unsupported speculation'" and that the expert have "good grounds' for his or her belief." Calhoun v. Yamaha Motor Corp., U.S.A., 350 F.3d 316, 321 (3d Cir. 2003) (quoting Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579, 589 (1993)). In that respect, reliability requires, in essence, an examination "into the expert's conclusions in order to determine whether [the conclusions] could reliably flow from the facts known to the expert and [the] methodology used.'" In re Diet Drugs (Phentermine/Fenfluramine/Dexfenfluramine) Prod. Liab. Litig., 706 F.3d 217, 225 n.7 (3d Cir. 2013) (quoting Oddi v. Ford Motor Co., 234 F.3d 136, 146 (3d Cir. 2000) (internal quotation marks omitted)).[6] The rule does not, however, require the party proffering the expert to demonstrate the "correctness" of their expert's opinion. In re Paoli, 35 F.3d at 744 (concluding that the "evidentiary requirement of reliability" amounts to a lower burden "than the merits standard of correctness"). Rather, the party need only demonstrate "by a preponderance of the evidence" that the expert's opinion bears adequate indicia of reliability. Id . Indeed, "[a] judge will often think" that an expert "has good grounds to hold the opinion, " even if the judge finds the opinion otherwise "incorrect." Id.

The third requirement, whether the expert testimony would assist the trier of fact, "goes primarily to relevance, " Daubert, 509 U.S. at 591, and specifically requires that the testimony "fit'" the disputed issues in the case. Schneider, 320 F.3d at 404 (citation omitted). "In other words, the expert's testimony must be relevant for the purposes of the case and must assist the trier of fact." Id . (citation omitted). This "helpfulness' standard, " accordingly, requires "as a precondition to admissibility" that that the expert testimony possess a valid and specialized connection to the pertinent inquiries in the litigation.

In applying these considerations, "the district court must act as a gatekeeper, " preventing the admission of opinion testimony that does not meet these three requirements. ZF Meritor, LLC v. Eaton Corp., 696 F.3d 254, 294 (3d Cir. 2012) (citation omitted). Nevertheless, Rule 702 prescribes "a liberal policy of admissibility.'" Pineda v. Ford Motor Co., 520 F.3d 237, 243 (3d Cir. 2008) (quoting Kannankeril v. Terminix Int'l, Inc., 128 F.2d 802, 806 (3d Cir. 1997)). Indeed, "vigorous cross-examination, presentation of contrary evidence, and careful instruction on the burden of proof" serve as "the traditional and appropriate means of attacking shaky but admissible evidence." Daubert, 509 U.S. at 595.


A. The Parties' Experts on Segregation Issues

This action will turn, in large part, upon the jury's assessment of various parties' involvement in, knowledge of, and/or responsibility for the unsegregated manner in which Refco held SMFF's excess cash. As a result, the parties intend to proffer competing experts on the regulatory requirements and industry practices with respect to segregation.

As set forth in greater detail below, I. Michael Greenberger and Anthony J. Leitner, specifically produced lengthy reports, for Plaintiffs and Defendants respectively, discussing the laws and industry practices relevant to segregation and their opinions concerning the propriety of various parties' conduct.

Following submission of the briefing associated with the pending motion, however, the parties acknowledged at oral argument that Berckeley Inv. Grp., Ltd. v. Colkitt, 455 F.3d 195, 217 (3d Cir. 2006) precludes either expert (and indeed any expert) from testifying on questions of law or from stating ultimate conclusions of law, particularly with respect to whether any individual and/or entity (including, Defendants) violated and/or complied with applicable legal requirements. (See Hr'g Tr. at 7:8-19.) The parties further conceded that their experts' reports run afoul of this preclusion in certain respects, and confirmed that the experts would not be called to proffer those opinions.

The remaining inquiry presented by the parties' motions therefore concerns whether these experts have the qualifications necessary to offer helpful testimony on segregation issues. Despite the parties' concessions (and because this issue presents a common thread throughout several of the disputed expert reports), however, the Court will first address, with greater specificity, the prohibited areas of conclusory legal testimony, prior to turning to the issue of qualifications.

1. Defendants' Motion to Exclude I. Michael Greenberger

Mr. Greenberger, a law professor and a former Director of Trading and Markets at the CFTC from September 1997 through September 1999, produced a 96-page expert report on June 29, 2012, in which he generally discusses the CFTC and CEA segregation requirements as they pertained to SMFF's excess cash held on deposit with Refco. [See generally Docket Item 580-3.]

In moving to exclude Mr. Greenberger, Defendants argue that his Report amounts to an "impermissible opinion on governing law, " because he offers little more than legal opinions concerning the meaning and application of the CEA and CFTC regulations regarding segregation of customer cash. [Docket Item 580-1 at 1, 5-7; see also Docket Item 651 at 1-2.] Moreover, even if certain select sentences constitute "helpful expert opinion" regarding industry customs, practices, and segregation, Defendants assert that Mr. Greenberger lacks the qualifications necessary to discuss these issues, because he was not employed in the futures' industry during the relevant period. [Docket Item 651 at 2-3.]

Plaintiffs counter, however, that Mr. Greenberger's Report provides admissible "background information'" on segregation, including the relevant "industry standards and the regulatory regime, " that supports Plaintiffs' position that SPhinX and PlusFunds had "reason to expect" that the SPhinX assets on deposit with Refco remained "protected."[7] [Docket Item 634 at 2-4.] Plaintiffs further argue that excluding Mr. Greenberger's testimony "would be patently unfair, " given the fact that Defendants have proffered a rebuttal expert (Mr. Leitner, discussed below) who opines on substantively identical issues. [Id. at 6-8.]

The Court "has discretion to determine whether expert testimony" will prove helpful to the trier of fact. Berckeley Inv. Grp., Ltd. v. Colkitt, 455 F.3d 195, 217 (3d Cir. 2006) (citation omitted). In utilizing that discretion, however, the Court "must ensure that an expert does not testify as to the governing law of the case." Id . Indeed, although Federal Rule of Evidence 704 permits an expert to provide testimony that "embraces an ultimate issue to be decided by the trier of fact, " an expert may ...

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