Court Excludes the Testimony of Finance Expert Witness for its inconsistency with GAAP Principles

Court Excludes the Testimony of Finance Expert Witness for its inconsistency with GAAP Principles

This case involved Plaintiffs Fischler Kapel Holdings, LLC, Richard Fischler, and Paula Kapel (collectively “Plaintiffs”) and Defendants Flavor Producers, LLC (“FPI”) and Jeffrey Harris (collectively “Defendants”). Plaintiffs filed a motion in limine to exclude the expert report and testimony of Defendants’ expert, Timothy S. Ramey.

The Defendants engaged in a fraudulent scheme by providing false financial information about certain companies. Their goal was to persuade Fischler and Kapel to enter employment contracts with lower salaries, relying on bonus expectations tied to the deceitful financial data. The losses incurred by Fischler and Kapel amounted to at least $1.2 million. Additionally, in a related transaction, the Defendants misrepresented the value of corporate stock to convince the Plaintiffs to relinquish their controlling interest in another company and invest in the failing company. This scheme also targeted third-party investors who were induced to invest in the same failing company. Overall, the deceptive actions of the Defendants resulted in losses totaling at least $7.5 million for both the Plaintiffs and the third-party investors through common law and securities fraud.

Fischler and Kapel owned Creative Flavor Concepts, Inc., (“CFC”) a company that designed, formulated and manufactured flavors as food ingredients, and also manufactured certain food and supplement products. In conjunction with FPI’s purchase of a majority share in CFC, FPI induced Fischler and Kapel to enter into employment contracts as part of the purchase price.

The Plaintiffs attempted to exclude the expert report and testimony of Timothy Ramey, the Defendants’ expert. They argued that Ramey’s report contained impermissible legal opinions, lacked a proper foundation, and made it difficult to ascertain whether the documents cited were disclosed during discovery. In response, the Defendants sought to admit Ramey’s report and testimony, aiming to educate the jury on mergers and acquisitions within the food, beverage, and nutrition industries, including the transactions relevant to the case.

Timothy S. Ramey, C.F.A., obtained his chartered financial analyst (“CFA”) designation in 1986. His professional experience included roles at Deutsche Bank, NatWest Securities, and Kidder, Peabody & Co. in equity research, with ten years served as the Director of Food, Wine, and Agribusiness Research at Deutsche Bank. Between 2000 and 2002, Ramey held the position of Vice President of Strategy and Corporate Development at Sara Lee Corporation. Subsequently, he served as the Senior Vice President of Equity Research for D.A. Davidson & Co., specializing in the food and beverage industry, before joining Post Holdings. In 2014, Ramey became the Director of Strategic Ventures for Post Holdings and, from 2014 to 2019, held the role of Senior Analyst – Food, Beverage, and Nutrition at Pivotal Research Group. Throughout his career, Ramey received various awards for his contributions as an equity research analyst.

During the October 5, 2023 hearing, Ramey testified about his expertise, emphasizing his knowledge in the food, beverage, and nutrition industry, particularly in the context of mergers and acquisitions. He explicitly stated that he lacked expertise in analyzing legal agreements and was not an attorney. Citing Ninth Circuit precedent, United States v. Diaz, 876 F.3d 1194, 1197 (9th Cir. 2017), which prohibits expert witnesses from offering legal conclusions, the Court found that Ramey’s opinions on pages 3, 4, 5, 6, 7, 9, and 13 of the expert report constituted impermissible legal opinions. These opinions purported to interpret the Asset Purchase Agreement, Stock Purchase Agreement, October 31, 2016, Termination Letter of the Stock Purchase Agreement, and the Administrative Services Agreement based on the Court’s evaluation of the record.

The Court granted the Motion, specifically concerning the opinions detailed on pages 3, 4, 5, 6, 7, 9, and 13 of the expert report. The Court referenced legal precedents, emphasizing that expert testimony cannot be used to provide legal meaning or interpret policies as written. Additionally, it cited Crow Tribe of Indians v. Racicot, 87 F.3d 1039, 1045 (9th Cir. 1996), noting that the interpretation of a contract is a matter of law, and expert testimony is not suitable for issues of law. The Court also cited Energy Oils, Inc. v. Mont. Power Co., 626 F.2d 731, 737 (9th Cir. 1980), highlighting that admitting expert testimony on the legal effect of agreements and subjective intent of parties is erroneous, but in this case, the error was considered harmless due to justifiable findings based on custom and usage evidence.

The Court proceeded to evaluate the reliability of Ramey’s remaining opinions, encompassing his views about the financial information for Creative Flavor Concepts and Creative Concepts Holdings, LLC, among other things. Recognizing the flexible nature of the reliability test and the discretion afforded to the trial Court emphasized that Daubert’s specific factors are neither exclusive nor universally applicable.

The Court, having conducted oral argument and received testimony from Ramey during the October 5, 2023 hearing, focused on the methodology underlying his opinions regarding the financial information for Creative Flavor Concepts and Creative Concepts Holdings, LLC. Ramey asserted that his opinions were derived from his industry experience, CFA training, and adherence to Generally Accepted Accounting Principles (GAAP).

Despite Ramey’s affirmation during the Daubert hearing that his methodology relied on his industry experience, CFA background, and GAAP, the Court found his opinions lacked consistent and adequately demonstrated reasoning or methodology. Referring to United States v. Holguin, 51 F.4th 841, 854 (9th Cir. 2022), the Court highlighted the need to assess the expert’s reasoning or methodology, considering factors like testability, publication in peer-reviewed literature, known or potential error rate, and general acceptance.

The Court noted a deficiency in Ramey’s report, citing the absence of sufficient details on the relevant GAAP principles, their application, and the connection to his ultimate opinions. Additionally, for opinions purportedly not relying on GAAP, the report lacked an adequate explanation of the methodology employed to reach those conclusions. The Court concluded that without a clear demonstration of the applied methodology, the expert’s conclusions were essentially unsupported assertions.

After a thorough examination of the expert report and considering Ramey’s testimony during the Daubert hearing on October 5, 2023, the Court determined that the Defendants failed to adequately establish the reliability of Ramey’s methodology in forming his opinions regarding the financial information for Creative Flavor Concepts and Creative Concepts Holdings, LLC. The Court concluded that each of Ramey’s opinions appeared conclusory, lacking a satisfactory explanation of the applied methodology and how it was used to form each respective opinion. Upon determining that Ramey’s methodology for the remaining, non-stricken opinions in his report lacked sufficient reliability, the Court opted not to consider the relevance of these opinions. After striking Ramey’s legal opinions regarding the agreements at issue and finding the remaining opinions in the report lacking sufficient reliability, the Court granted the Motion in its entirety.

The Court ultimately granted Plaintiffs’ motion in limine in its entirety, excluding Ramey’s expert report and testimony from being admitted as evidence. This fulfilled the Court’s gatekeeping role under Daubert to ensure expert testimony meets certain standards of reliability before it is presented to the jury. The Court issued a final ruling on October 10, 2023 dismissing the action without prejudice.

This case demonstrates several important requirements for expert witness testimony to be admissible under Daubert standards and Federal Rule of Evidence 702. First, experts cannot offer legal opinions or interpretations of contracts and agreements. The Court struck opinions from the expert report that amounted to improper legal analysis. Second, experts must demonstrate their reasoning and methodology clearly and consistently. Even if an expert is qualified based on experience and training, they must reliably apply expertise to the facts using sound methodology explained in their report and testimony. Here, the Court found the expert’s opinions conclusory, as he failed to sufficiently show his methodology. Third, the proponent of an expert witness has the burden to prove by a preponderance of evidence that the testimony is reliable and relevant. The party could not establish a reliable methodology to support this expert’s opinions. Fourth, Courts serve a gatekeeping role in screening unreliable expert testimony from reaching a jury, which the Court fulfilled by excluding this inadmissible testimony altogether.