Sec. & Exch. Comm'n v. Nutmeg Grp., LLC
| Decision Date | 28 April 2017 |
| Docket Number | No. 09-cv-1775,09-cv-1775 |
| Parties | SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. THE NUTMEG GROUP, LLC; RANDALL GOULDING; and DAVID GOULDING, Defendants, DAVID GOULDING, INC.; DAVID SAMUEL, LLC; FINANCIAL ALCHEMY, LLC; PHILLY FINANCIAL, LLC; and ERIC IRRGANG, Relief Defendants. |
| Court | U.S. District Court — Northern District of Illinois |
MEMORANDUM OPINION AND ORDER
Before the Court are Plaintiff's Motion to Exclude Proposed Testimony by Anthony Garvy ("SEC's Motion") [ECF No. 847] and Defendants' and Relief Defendants' Motion in Limine to Bar the Testimony of Mari Reidy and Peter Hickey and the Admission of Their Respective Reports ("Defendants' Motion") [ECF No. 852]. For the reasons stated below, the SEC's Motion [ECF No. 847] is granted in part and denied in part, and Defendants' Motion [ECF No. 852] is granted in part and denied in part.
Plaintiff Securities and Exchange Commission (the "SEC") sued three defendants and five relief defendants. In a nine-count complaint, the SEC alleged that the defendants—The Nutmeg Group, LLC ("Nutmeg"); Randall Goulding ("Randall"); and David Goulding ("David")—violated the Investment Advisers Act of 1940 (the "Advisers Act"), 15 U.S.C. § 80a- 1 et seq., and the rules promulgated thereunder. Amended Complaint, [ECF No. 314]. The SEC also asserted an equitable claim for unjust enrichment against the relief defendants—David Goulding, Inc.; David Samuel, LLC; Financial Alchemy, LLC; Philly Financial, LLC; and Eric Irrgang. Id. Throughout this Memorandum Opinion and Order, the Court will refer collectively to the defendants and the relief defendants as the "Defendants."
Several of the claims in this case where resolved in the Court's ruling on the parties' cross-motions for summary judgment. SEC v. Nutmeg Grp., LLC, 162 F. Supp. 3d 754 (N.D. Ill. 2016), reconsideration denied, 2016 WL 3023291 (N.D. Ill. May 24, 2016). Specifically, the Court granted summary judgment in favor of the SEC on all of the alleged primary violations except for the portions of Count I that alleged misvaluation and misappropriation, on which the SEC did not seek summary judgment. Id. at 761-62, 777-78, 780, 782. But the Court also denied summary judgment to any party on all of the aiding and abetting counts. Id. at 784. No party sought summary judgment on Count IX, which is the only count against the relief defendants. Id. at 761-62.
The parties are now preparing to try the remaining claims in this case. Toward that end, both parties have filed Daubert motions asking the Court to limit expert testimony that can be admitted during trial. The SEC has moved to exclude the testimony of Defendants' expert Anthony Garvy. SEC's Motion, [ECF No. 847]. Defendants have returned the favor by moving to exclude two of the SEC's witnesses, Mari Reidy and Peter Hickey. Defendants' Motion, [ECF No. 852].
Federal Rule of Evidence 702 and Daubert v. Merrell Dow Pharmaceuticals, 509 U.S. 579 (1993) govern the admissibility of expert testimony. Hall v. Flannery, 840 F.3d 922, 926(7th Cir. 2016). Expert testimony is admissible only "if the testimony is relevant to a fact in issue, is based on sufficient facts or data, and is the product of reliable scientific or other expert methods that are properly applied." Stuhlmacher v. Home Depot U.S.A., Inc., 774 F.3d 405, 409 (7th Cir. 2014). It is the role of the district court to serve as "the gatekeeper of expert testimony" by admitting only testimony that is reliable and relevant. Id. The court will admit expert testimony only where the expert "(i) is qualified to offer opinion testimony under Rule 702, (ii) has employed a reliable methodology, (iii) proposes to offer opinions that follow rationally from the application of his knowledge, skill, experience, training, or education, and (iv) presents testimony on a matter that is relevant to the case at hand, and thus helpful to the trier of fact." Mintel Int'l Grp., Ltd. v. Neergheen, 636 F. Supp. 2d 677, 684-85 (N.D. Ill. 2009) (internal quotation marks omitted). The proponent of expert testimony bears the burden of proving the testimony is admissible. Fail-Safe, L.L.C. v. A.O. Smith Corp., 744 F. Supp. 2d 870, 887 (E.D. Wis. 2010).
An expert may be qualified "by knowledge, skill, experience, training or education." FED. R. EVID. 702. An expert need not have any "particular credentials" to be qualified. Tuf Racing Prod., Inc. v. Am. Suzuki Motor Corp., 223 F.3d 585, 591 (7th Cir. 2000). The court must consider "'a proposed expert's full range of practical experience as well as academic or technical training when determining whether that expert is qualified to render an opinion in a given area.'" Trustees of Chicago Painters & Decorators Pension, Health & Welfare, & Deferred Sav. Plan Trust Funds v. Royal Int'l Drywall & Decorating, Inc., 493 F.3d 782, 788 (7th Cir. 2007) (quoting Smith v. Ford Motor Co., 215 F.3d 713, 718 (7th Cir. 2000)). When assessing whether an expert is qualified, the court is "not concerned with [her] general qualifications." Hall, 840 F.3d at 926. Instead, the court examines whether the expert has thenecessary qualifications to support "'each of the conclusions [she] draws.'" Id. (quoting Gayton v. McCoy, 593 F.3d 610, 617 (7th Cir. 2010)). In other words, the expert must be "qualified to offer opinions in the specific area of his or her proposed testimony." Bone Care Int'l LLC v. Pentech Pharm., Inc., 2010 WL 3928598, at *1 (N.D. Ill. Oct. 1, 2010).
To be reliable, an expert's testimony must be "based on sufficient facts or data" and be "the product of reliable principles and methods" that the expert has "reliably applied . . . to the facts of the case." FED. R. EVID. 702(b), (c). Put more succinctly, the expert's testimony must demonstrate "'the same level of intellectual rigor that characterizes the practice of an expert in the relevant field.'" Lapsley v. Xtek, Inc., 689 F.3d 802, 805 (7th Cir. 2012) (quoting Kumho Tire Co. v. Carmichael, 526 U.S. 137, 153 (1999)). This standard is not satisfied when an expert "simply assert[s] a 'bottom line'" or bases her opinion on "subjective belief or speculation." Metavante Corp. v. Emigrant Sav. Bank, 619 F.3d 748, 761 (7th Cir. 2010). The court has broad latitude when deciding whether an expert's testimony is reliable. Higgins v. Koch Dev. Corp., 794 F.3d 697, 704 (7th Cir. 2015).
To be relevant, an expert's testimony must "assist[] the jury in determining any fact at issue in the case." Stuhlmacher, 774 F.3d at 409. Expert testimony must be "pertinent to an issue in the case." Id. at 410. If "the jury is able to evaluate the same evidence and is capable of drawing its own conclusions," then the expert's testimony is not helpful. Sanders v. City of Chicago Heights, 2016 WL 4398011, at *4 (N.D. Ill. Aug. 18, 2016). The relevance standard for expert testimony is a liberal one. Hale v. State Farm Mut. Auto. Ins. Co., 2016 WL 6947065, at *2 (S.D. Ill. June 2, 2016).
The court's application of these admissibility standards for expert testimony "is not intended to supplant the adversarial process." Ortiz v. City of Chicago, 656 F.3d 523, 536 (7thCir. 2011). Even "shaky" testimony may satisfy Rule 702 and Daubert. Bielskis v. Louisville Ladder, Inc. , 663 F.3d 887, 894 (7th Cir. 2011). It remains for the jury to determine the accuracy of admissible expert evidence that has been "tested" through "'vigorous cross-examination, presentation of contrary evidence, and careful instruction on the burden of proof.'" Lapsley, 689 F.3d at 805 (quoting Daubert, 509 U.S. at 596).
The Court will discuss the SEC's Daubert motion first and then turn to Defendants' motion.
The SEC has moved to exclude the testimony of Anthony Garvy. The SEC argues Garvy is unqualified, and that his opinions are unreliable and irrelevant.1 The Court will address each of these arguments in turn after providing some background information.
Garvy prepared an expert report in this case, which the Court will refer to as "Garvy's Report." Garvy's Report, [ECF No. 849-1]. Various opinions are scattered throughout the report, but they largely can be sorted into three categories. First, Garvy opines as to the fair value of the Mercury Fund on December 31, 2008. Most of the report is devoted to calculating this number, which Garvy determines is $7,051,642. Id. at 13. Second, Garvy opines on the adequacy of how Nutmeg calculated the value of the Mercury Fund. He concludes Nutmeg engaged in "unacceptable discounting," and thus ended up with a value that was too low. Id. at 15. But Garvy also says Nutmeg's valuation was "in good-faith" and "reasonably objective and approximate to the Fair Value of the assets." Id. 13, 15. Third, Garvy opines on the adequacy ofCrowe Horwath's calculations of the value of the Mercury Fund.2 He asserts Crowe Horwath "aggressively discounted" assets "with no understandable basis per their limited discussion of their discounting of these fair value assets" and improperly determined the value of certain securities by extrapolating from the value of others. Id. at 13 n.7, 18-19. Garvy further claims Crowe Horwath did not comply with the Appraisal Foundation's Uniform Standards of Professional Appraisal Practice, the American Institute of Certified Public Accountants' Statement of Standards of Valuation Services, or the Fair Value Standards. Id. at 16-17. Garvy even contends one of Crowe Horwath's reports does not conform with the Federal Rules of Civil Procedure. Id. at 16. Although this is not a complete summary of every opinion contained in Garvy's report, it is sufficient for background purposes.
The SEC contends Garvy is not qualified to render an opinion in this case because he does not have experience calculating the fair value of securities, particularly the type of illiquid or restricted microcap securities...
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