Krys v. Aaron

• Decision Date: 12 June 2015
• Docket Number: Civil Action No. 14–2098 (JBS/AMD).
• Citation: 112 F.Supp.3d 181
• Parties: Kenneth M. KRYS, Margot Macinnis, and the Harbour Trust Co. Ltd., Plaintiffs, v. Robert AARON, Derivative Portfolio Management LLC, DPM–Mellon, LLC, Derivative Portfolio Management, Ltd., DPM–Mellon, Ltd., and Bank of New York Mellon Corporation, Defendants.
• Court: U.S. District Court — District of New Jersey

112 F.Supp.3d 181

Kenneth M. KRYS, Margot Macinnis, and the Harbour Trust Co. Ltd., Plaintiffs,

v.Robert AARON, Derivative Portfolio Management LLC, DPM–Mellon, LLC, Derivative Portfolio Management, Ltd., DPM–Mellon, Ltd., and Bank of New York Mellon Corporation, Defendants.

Civil Action No. 14–2098 (JBS/AMD).

United States District Court, D. New Jersey.

Signed June 12, 2015.

David J. Molton, Esq., Mason C. Simpson, Esq., Brown Rudnick LLP, New York, NY, and Leo R. Beus, Esq., L. Richard Williams, Esq., Thomas A. Gilson, Esq., Lee M. Andelin, Esq., Beus Gilbert PLLC, Phoenix, AZ, for Plaintiffs.

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

OPINION

SIMANDLE, Chief Judge:

Contents

I.	INTRODUCTION	187
II.	BACKGROUND	188
III.	STANDARD OF REVIEW	189
IV.	DISCUSSION	190

A. The Parties' Experts on Segregation Issues 190

1.	Defendants' Motion to Exclude I. Michael Greenberger	191
2.	Plaintiffs' Motion to Exclude Anthony J. Leitner	195

B. The Parties' Experts on Damages/Valuation Issues 197

1.	Defendants' Motion to Strike Joan A. Lipton, CPA/ABV/CFF, Ph.D	197
2.	Plaintiffs' Motion to Strike Avram S. Tucker	199

C. The Parties' Experts on Industry Practices 201

1.	Defendants' Motion to Exclude Peter U. Vinella	201
2.	Plaintiffs' Motion to Exclude Certain Testimony by Raymond O'Neill	205

D. Defendants' Motion to Exclude R. David Wallace, CPA, CFF 206

V.	REDACTIONS TO EXPERTS' REPORTS	208
VI.	CONCLUSION	208

I. INTRODUCTION

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.

II. BACKGROUND

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.)

III. STANDARD OF REVIEW

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, 113 S.Ct. 2786, 125 L.Ed.2d 469 (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, 113 S.Ct. 2786, 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.3d 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, 113 S.Ct. 2786.

IV. DISCUSSION

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...