Wilkinson v. Rosenthal & Co.

• Decision Date: 11 April 1989
• Docket Number: Civ. A. No. 87-0068.
• Parties: James W. WILKINSON v. ROSENTHAL & CO., and Gregory F. Deutsch.
• Court: U.S. District Court — Eastern District of Pennsylvania

712 F. Supp. 474

James W. WILKINSON v. ROSENTHAL & CO., and Gregory F. Deutsch.

Civ. A. No. 87-0068.

United States District Court, E.D. Pennsylvania.

April 11, 1989.

Arnold Levin, Philadelphia, Pa., for plaintiff.

W. Scott Porterfield, Chicago, Ill., for defendants.

MEMORANDUM AND ORDER

HUYETT, Judge.

Plaintiff James W. Wilkinson is a disgruntled commodities investor who claims that defendant Gregory F. Deutsch ("Deutsch"), plaintiff's broker, churned and excessively traded his commodities account with defendant Rosenthal & Co. ("Rosenthal"). Plaintiff invested almost $78,000 in the account over a three month period. By the end of the period substantially all plaintiff's equity in the account was lost, and plaintiff owed Rosenthal an additional $18,000 plus interest.

Defendants move to exclude the testimony of plaintiff's expert witness, Jeffrey Jaffe, Ph.D., and to exclude portions of his report. The report concludes, inter alia, that the commodities account was an excessively risky investment given plaintiff's financial position, that the account was excessively traded, and that two types of statements furnished by Rosenthal to plaintiff "presented information that can easily be misinterpreted." Report of Jeffrey F. Jaffe, Court Exhibit 1, at 3, 6, 8, 10 hereinafter, CX 1.

Defendants attack Dr. Jaffe and his report on several fronts. First, they argue that Jaffe's lack of experience and knowledge about commodities and commodities regulation renders his testimony and report entirely inadmissible under Fed.R.Evid. 702. Second, defendants claim that the conclusions of his report are based on "novel" theories of commodities trading and churning and that when balanced against the possibility of misleading the jury, should therefore be ruled inadmissible under Fed.R.Evid. 702 and 403.¹

A hearing on defendants' motion in limine was held on March 23, 1989. Jaffe was questioned by the parties about the extent of his knowledge of commodities and the basis for the conclusions in his report. After reviewing the record, Jaffe's deposition and hearing testimony, I make the following findings of fact pursuant to Fed.R.Evid. 104(a):

1. Jeffrey F. Jaffe received a Bachelor of Arts from the University of Chicago in 1968, with a major in economics; a Master in Business Administration from the University of Chicago Graduate School of Business in 1971, with a major in finance; and a Philosophiae Doctor in Finance from the University of Chicago Graduate School of Business in 1972. Curriculum Vita of Jeffrey F. Jaffe, Court Exhibit 2 hereinafter, CX 2.

2. Since 1971, Jaffe has taught finance and related subjects at the undergraduate and graduate levels. Since 1973, Jaffe has taught full-time at the Wharton School at the University of Pennsylvania. From 1973 to 1979, Jaffe was an Assistant Professor of Finance, and from 1979 to the present, an Associate Professor of Finance. He is a tenured member of the faculty at the Wharton School. CX 2.

3. During the pursuit of his post-graduate degrees, Jaffe took no courses concerning commodity futures trading. Deposition of Jaffe, at 6-9 hereinafter Dep..

4. Of the numerous courses he taught in the past, or teaches currently, only one involves commodity futures. Dep. at 63-64. That course, entitled "Speculative Markets," includes, among other subjects, introductory principles of what commodity futures contracts are, how they are traded, and basic trading strategies. The course does not involve the rules or regulations of the commodities industry. Dep. at 10-16, 64. During the hearing, Jaffe testified that this course does not deal with excessive trading of a securities account "directly." He further testified that the course deals with excessive trading "indirectly" by including material on the movement of commodities prices over time and speculative strategies.

5. None of Jaffe's published scholarly works concern commodity futures, churning or broker reporting requirements. CX 2, Dep. at 7-15, 18-20.

6. In 1978, Jaffe conducted one study of agricultural commodity futures contract price cycles and returns. The study was not published, and Jaffe does not currently recall the specifies of the results. Dep. at 12-15.

7. In addition to his professorial duties, Jaffe regularly teaches seminars outside the Wharton School. He once taught a half-day seminar involving speculative strategies in the stock market, including stock index futures contracts. Dep. at 30-32.

8. Jaffe also serves as an editor or an ad hoc reviewer for numerous scholarly financial journals. Although he may have served as a reviewer of articles on commodities futures in the past, he has no present recollection of any involvement in any specific article involving commodities. Dep. 17-19.

9. Jaffe also engages in consulting on financial and investment matters. In that capacity, he has served as an expert witness for twenty six lawyers or law firms in matters involving the valuation of companies and real estate, risk and return in speculative markets, project finance, the impact of information on stock market prices, and churning and "unsuitability" standards in "the brokerage industry." CX 2 at 6.

10. However, this is the first matter in which Jaffe has been engaged that exclusively involves futures contracts. On only one or two other occasions has he been engaged to give an opinion on an entire investment portfolio which may have contained any futures contracts. However, Jaffe could not recall any portfolio which definitely contained commodity futures contracts. Dep. 38-58.

11. Jaffe admits that he has no knowledge of futures industry regulations, standards, practices, or laws concerning churning or suitability. Dep., passim. He has never read any caselaw, statutes, or regulations concerning commodities churning or suitability standards, except for one case furnished him by counsel for the plaintiff in connection with this action. Dep. at 93-96, 100-01, 143-50.

12. Jaffe has never worked in any capacity for any company engaged in the futures industry. Dep. at 94-96.

13. In preparing his report, Jaffe never spoke with plaintiff. Rather, he relied on information about plaintiff's financial position, investment objectives, and facts surrounding the opening of the account furnished to him by plaintiff's counsel. This information provides the basis for Jaffe's conclusion that the account was subject to "excessive and inappropriate risk" for plaintiff. CX 1, at 5-6; Dep., at 100.

14. Certain critical pieces of this information given to Jaffe are factually inaccurate. For example, the report states that Wilkinson planned to invest a total of $5,000 in the Rosenthal account. CX 1 at 2. In fact, it has been established that Wilkinson invested $10,000 when the account was opened.

15. Other financial and investment experience about Wilkinson provided to Jaffe is contrary to the information Wilkinson provided Rosenthal on the forms he completed when he opened the account.²

16. At the hearing, Jaffe testified that the methods he used in reaching the conclusions in his report concerning excessive trading did not come from the one commodities case he was provided by plaintiff's counsel. Further, he stated that any use of the methods he used to reach his conclusions were adapted from churning cases involving exclusively common stock portfolios.

17. Jaffe further testified that his techniques are good indicators of whether a commodities account was excessively traded. Further, Jaffe testified his techniques represent the "fairest approach" to providing a "figure reflective of trading" in the account.

18. Aside from Jaffe's testimony concerning the validity of his methods, plaintiff provides no commodities caselaw which approve of computations similar to Jaffe's methods. Plaintiff also provides no scholarly works, papers, articles, treatises, or evidence which otherwise support, confirm, adopt or make any reference to the use of techniques similar to those in the report.

Discussion

Federal Rule of Evidence 702 states:

If scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education may testify thereto in the form of an opinion or otherwise.

Fed.R.Evid. 702.

The bounds of admissible expert evidence are first defined by the claims in dispute. "Churning" is "the excessive trading of an account by a broker with control of the account for purposes of generating commissions, without regard to the investment or trading objectives of the customer." In re Lincolnwood Commodities, Inc., 1982-84 Transfer Binder Comm.Fut. L.Rep. (CCH) ¶ 21,986 at 28,246 (CFTC Jan. 31, 1984). Thus, the elements of the claim are 1) excessive trading 2) by a broker with control of the account 3) without regard to the investment objectives of the customer. See Bowley v. Stotler & Co., 751 F.2d 641, 644 (3rd Cir.1985); Chin v. Eastern Capital Corp., 1986-87 Transfer Binder Comm.Fut.L.Rep. (CCH) ¶ 23,785 at 34,058 (CFTC 1987); cf. Shad v. Dean Witter Reynolds, Inc., 799 F.2d 525, 529 (9th Cir. 1986) (churning claim under section 10(b) of the Securities exchange Act of 1934, 15 U.S.C. § 78j(b) (1982) has same three elements); Costello v. Oppenheimer & Co., Inc., 711 F.2d 1361, 1367 (7th Cir.1983) (to establish churning claim under securities laws, plaintiff must show broker control and excessive trading), accord Karlen v. Ray E. Friedman & Co. Commodities, 688 F.2d 1193, 1203 (8th Cir.1982).

Under Rule 402, expert testimony in a churning case is relevant. Shad v. Dean Witter Reynolds, Inc., 799 F.2d 525, 529-30 (9th Cir.1986); Chin, 1986-87 Transfer Binder Comm.Fut.L.Rep. (CCH) at 34,058. Expert testimony may be helpful to the jury under Rule 702 on each of the three elements of the claim. Shad, 799 F.2d at 530.

Defendants first argue that Jaffe is not qualified as an expert...