Securities and Exchange Com'n v. Lipson, 97 C 2661.

• Decision Date: 16 December 1998
• Docket Number: No. 97 C 2661.,97 C 2661.
• Citation: 46 F.Supp.2d 758
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. David E. LIPSON, Defendant.
• Court: U.S. District Court — Northern District of Illinois

46 F.Supp.2d 758

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v.David E. LIPSON, Defendant.

No. 97 C 2661.

United States District Court, N.D. Illinois, Eastern Division.

December 16, 1998.

Order Denying Reconsideration March 5, 1999.

COPYRIGHT MATERIAL OMITTED

Gregory Paul Von Schaumburg, Securities & Exchange Commission, Chicago, IL, Yuri B. Zelinsky, Robin W Sardegna, Securities & Exchange Commission, Washington, DC, James A Kidney, Christopher F Robertson, Yuri B. Zelinsky, Securities and Exchange Commission, Washington, DC for Securities and Exchange Commission, plaintiff.

Dean A. Dickie, Vanessa L. Vargas, D'Ancona & Pflaum, Chicago, IL, Lowell E. Sachnoff, Sachnoff & Weaver, Ltd., Chicago, IL, Kathleen Helen Klaus, D'Ancona & Pflaum, Chicago, IL, for David E Lipson, defendant.

MEMORANDUM OPINION AND ORDER

SCHENKIER, United States Magistrate Judge.

This case comes before the Court on the motion by Plaintiff Securities and Exchange Commission("SEC") to bar Defendant's expert, Ben W. Perks, from testifying at trial and to strike Mr. Perks' Rule 26 report.¹The parties have extensively briefed this motion, and at a status conference on November 19, 1998, this Court asked the parties a number of questions about various issues raised in the briefs.For the reasons set forth below, the Court finds that Mr. Perks' report and proffered testimony fail to meet the requirements of Fed.R.Evid. 702, and thus grants the SEC's motion.

I.

In 1995, DefendantDavid E. Lipson served as Chief Executive Officer of Supercuts, Inc.The SEC alleges that in March and April 1995, Defendant traded some 365,000 shares of Supercuts stock on the basis of internal company reports revealing poor sales performance.The SEC alleges that this internal financial information was not publicly available at the time, and thus allowed Defendant to sell these shares before the price of Supercuts shares dropped in 1995, when the public learned of the company's poor sales performance.

The SEC alleges that Defendant's use of this non-public information violated Section 17(a) of the Securities Act(15 U.S.C. § 77q(a));Section 10(b) of the Exchange Act(15 U.S.C. § 78j(b)), and Rule 10b-5 thereunder; and Section 16(a) of the Exchange Act(15 U.S.C. § 78p(a)), and Rules 16a-2and16a-3 thereunder.As one of his defenses, Defendant states that he did not rely on or even consider this internal financial information, because he believed that Supercuts' accounting department was "in shambles" and was unable to produce reliable financial reports (4/29/98Deft. Resp. to Motion to Bar("Dft.Resp."), at 2).

In support of this defense, Defendant seeks to offer testimony from a retained expert, Ben W. Perks.Mr. Perks, a certified public accountant licensed in Illinois, California and Arizona, is a partner in the Chicago Office of Price Waterhouse.Mr. Perks also possesses a law degree, and is admitted to the Ohio bar.

Defendant has produced a written expert report from Mr. Perks (Dft.Resp., Ex. A).Although Mr. Perks' expert report is lengthy, spanning 36 pages (including appendices), his two basic opinions may be summarized more succinctly: (1) that Mr. Lipson and others in management at Supercuts in March and April 1995 considered the internal financial reports unreliable, and (2) that those internal financial reports in fact were unreliable (Deft. Resp., Ex.A: Perks Report 1-2).

In reaching those opinions, Mr. Perks did not prepare an audit of the internal financial reports (Deft. Resp., Ex. B: PerksDep. 188).Mr. Perks was not asked to perform, and did not perform, any analysis of whether the internal financial reports were reliable in reporting corporate revenues or how those revenues compared to budget (id. at 32).Nor did Mr. Perks compare the accuracy of the internal reports to the reports that were filed publicly in May 1995(id. at 34-35).

Mr. Perks testified that he did not attempt to determine the accuracy of the internal financial reports, because "the mere fact that they were or were not accurate does not consider the environment in which they were prepared over the last couple years where you had in the previous year, 1993, a material weakness in internal accounting control because of numerous errors"(Deft. Resp., Ex. B: PerksDep. 101).The "material weakness" to which Mr. Perks referred was set forth in an Arthur Andersen report in April 1994, which addressed the 1993 audit period and which Mr. Perks discussed in his report.Mr. Perks acknowledged in his deposition that Arthur Andersen did not issue a material weakness letter for the 1994 or 1995 audit reports (id. at 92-95).

In his deposition, Mr. Perks reiterated the opinion in his Rule 26 report that Mr. Lipson "didn't think the [internal financial] reports were very reliable"(Deft. Resp., Ex. B: PerksDep. 69), and thus "didn't pay much attention to them, didn't read them since the middle of 1994"(id. at 68).Mr. Perks said that not only Mr. Lipson but also certain others in management considered the information in the internal financial reports to be "useless.They felt the information was unreliable"(id. at 103).Mr. Perks acknowledged that there was deposition testimony from another individual in Supercuts management, Mr. Conlisk, indicating that the internal reports were reliable, and in his deposition Mr. Perks stated why that did not alter his opinion (id. at 44):

I am also aware of testimony by Mr. Conlisk which seems to contradict other statements made by him.And, again, I took that information into consideration not only his testimony, but the testimony of other operating executives in terms of the background and the use of the information that was prepared.

Mr. Perks' Rule 26 report identified numerous sources of information that he relied upon in reaching his opinions, including various pleadings, deposition transcripts and exhibits in this lawsuit; various financial reports, documents and information of Supercuts; documents prepared by Arthur Andersen in performing services for Supercuts between 1993 and 1995; transcripts of testimony and exhibits from a separate lawsuit between Mr. Lipson and Supercuts and from an SEC action; and telephone discussions with former Supercuts' employees (Deft. Resp., Ex.A: Perks Report 25-27).During the status conference on November 19, 1998, counsel for Defendant acknowledged that the information relied upon by Mr. Perks, if relevant, all could be (or could have been) reduced to a form admissible at trial.

In addition, counsel for Defendant acknowledged that at trial, Mr. Lipson will testify to fundamentally the same points that are the subject of Mr. Perks' opinion (that is, that the internal financial reports were not reliable and that he did not consider them reliable).Mr. Lipson also will cite in substance the same considerations identified by Mr. Perks in his report.Counsel for Defendant candidly acknowledged that Defendant wishes to call Mr. Perks because the jury might view Defendant's testimony with skepticism due to his obvious interest in the outcome of the case.In other words, Defendant would like to have the credibility of Mr. Lipson's testimony enhanced by Mr. Perks' "independent" expert testimony.

II.

Federal Rule of Evidence 702 provides:

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.

In Daubert v. Merrell Dow Pharmaceuticals, Inc.,509 U.S. 579, 113 S.Ct. 2786, 125 L.Ed.2d 469(1993), the Supreme Court established a framework for determining whether proffered expert testimony meets the standard established by Rule 702.As interpreted by the Seventh Circuit, Daubert requires a two-step analysis: first,the District Court must determine whether the expert testimony is reliable, and second,the Court must determine whether the expert testimony would assist the trier of fact in understanding the evidence or in determining a fact in issue.Cummins v. Lyle Industries,93 F.3d 362, 367-68(7th Cir.1996);see alsoRoback v. VIP Transport, Inc.,1994 WL 548197(N.D.Ill.1994)(Holderman, J.).The proponent of expert testimony bears the burden of establishing its admissibility.Bradley v. Brown,852 F.Supp. 690, 697(N.D.Ind.), aff'd,42 F.3d 434(7th Cir.1994).²

In considering the reliability prong of the Daubert analysis, the Court must consider whether the principles and methodology underlining the testimony are valid.As the Seventh Circuit has put it in the context of scientific evidence, the Court"must determine whether the evidence is genuinely scientific, as distinct from being unscientific speculation offered by a genuine scientist."Cummins,93 F.3d at 368(quotingRosen v. Ciba-Geigy Corp.,78 F.3d 316, 318(7th Cir.1996)).Thus, the fact that Mr. Perks is a certified public accountant—and thus generally possesses the "specialized knowledge" to qualify as an expert witness under the proper circumstances—does not automatically render his opinions in this case reliable.E.g., Frymire-Brinati,2 F.3d at 186-88(testimony by certified public accountant held improperly admitted because his valuation testimony did not employ the methodology that experts in valuation find essential);De Jager Construction, Inc. v. Schleininger,938 F.Supp. 446, 449-455(W.D.Mich.1996)(excluding certified public accountant expert opinion testimony).If the opinion is not squarely grounded in the principles and methodology of the relevant discipline, the opinion is "inadmissible no matter how imposing [the] credentials of the proffered expert."Rosen,78 F.3d at 318-19(opinion testimony "expressing what may be an insightful, even an inspired, hunch" was properly excluded because it "lacks scientific rigor").

Daubert also makes it clear that even if proffered expert...