Expert Witness Profiler

Category: Finance Expert Witness

  • Economics Expert Witness Theory on Investment Performance Admitted 

    Economics Expert Witness Theory on Investment Performance Admitted 

    Plaintiff Joanna P. Mattson filed a legal action, both individually and on behalf of the Milliman, Inc. Profit Sharing and Retirement Plan, along with a class of participants and beneficiaries affected by the alleged misconduct of the Milliman Defendants. The lawsuit is based on a claim of breach of fiduciary duty under the Employee Retirement Income Security Act (ERISA). The named Defendants include Milliman, Inc., the Board of Directors of Milliman, Inc., “the Investment Committee” responsible for selecting investment options for the Plan and its members, as well as “the Administrative Committee” in charge of Plan administration and its members (collectively referred to as “Milliman” or “Milliman Defendants”).

    The Plaintiff asserted that three Wealth Preservation Strategy Funds (the “WPS Funds” or “Funds”) should not have been used in the Milliman, Inc. Profit Sharing and Retirement Plan (the “Plan”). These funds, managed by Unified Trust Company (“Unified”), included the Milliman Managed Risk Strategy (MMRS), an equity risk management approach. Unified, as the investment manager, opted to invest the WPS Funds’ underlying assets in exchange-traded funds (ETFs) representing different segments of equity markets (i.e., small-cap, mid-cap and large-cap, international and emerging market) and various fixed-income products (i.e., bonds and government obligations). Subsequently, Unified engaged Financial Risk Manager (FRM) as a sub-advisor to implement MMRS, which aimed to manage volatility and preserve capital. MMRS comprised two distinct components: a volatility management component using futures contracts to adjust exposure to underlying equity investments and moderate volatility, and a capital protection component utilizing futures contracts to replicate a five-year rolling put option, creating a cash cushion to offset significant market losses.

    To conclude, Plaintiff Joanna Mattson only worked at Milliman, Inc. (“Milliman”) from 2002 to 2004. She enrolled in the Milliman, Inc. Profit Sharing and Retirement Plan (the “Plan”), a 401(k) plan governed by the Employee Retirement Income Security Act of 1974 (“ERISA”). Despite having
    not worked for Milliman for nearly two decades, she commenced this action claiming that three Wealth Preservation Strategy Funds (“WPS Funds” or “Funds”) should have been removed from the Plan before 2016.

    The Defendants sought to exclude the opinions and testimony provided by the Plaintiff’s experts, Horacio A. Valeiras and Arthur B. Laffer.

    Finance Expert Witness

    Horacio A. Valeiras is the CEO and Co-Founder of Frontier Global Partners LLC, an entity specializing in managing private funds and separate accounts, including multi-asset and retirement accounts. As an SEC-registered investment adviser, he holds a Master of Business Administration degree with a focus on Finance from the University of California, Berkeley, and a Master’s Degree in Chemical Engineering from the Massachusetts Institute of Technology. With a wealth of experience spanning 31 years, Valeiras has been actively engaged in the management of large investment portfolios for institutional money managers. His expertise includes the evaluation and selection of investment products for multi-asset accounts.

    Economics Expert Witness

    Arthur B. Laffer holds the position of Chairman and Chief Economist at Laffer Associates, an economic research and consulting firm he founded. Graduating from Yale University in 1963, he furthered his education by obtaining a Master of Business Administration and a Ph.D. in Economics from Stanford University. Laffer’s expertise in fiduciary responsibility stems from his advisory roles for governments, extensive service on various boards of trustees, boards of directors for both private and publicly traded companies, and his leadership as Chairman and Chief Economist of Laffer Investments. 

    Discussion by the Court

    The Defendants contested the reliability of Horacio Valeiras’ damages opinions and anticipated testimony on two grounds.

    The Defendants argued that Valeiras’ damages calculations and testimony regarding the Plan were not reliable, asserting that his damage models were not tailored to the only component of MMRS that he challenged, the capital protection component. They maintained that damages should be tailored to the accumulation phase of retirement savings. In response, the Plaintiff argued that Valeiras had incorporated both the capital protection and volatility management components into his calculations, as the Defendants had used both components of the overall overlay of MMRS simultaneously. The Plaintiff further contended that Valeiras’ damages calculations could be considered reliable, as he integrated the overlay into his calculations in a manner consistent with how the Defendants might have employed it in practice. Despite Valeiras expressing concerns about the volatility management component, the Plaintiff asserted that his testimony was not necessarily unreliable, as he contended that the overlay as a whole adversely affected the Plan. Valeiras stated that the overlay’s attempts to manage volatility were costly and ineffective. The Plaintiffs argued that Valeiras’ testimony remained reliable, as they contended that his inclusion of the volatility management component of the overlay in his damages calculations did not necessarily undermine its reliability.

    The Defendants contested Valeiras’ inclusion of the Funds’ investors who were in the draw down phase in his damages calculations. In response, the Plaintiffs argued that Valeiras’ opinion was relevant as ERISA damages encompassed all damages incurred by the Plan. The Court determined that the “returns of the Plan as a whole” were a reasonable approximation of losses to the plan, asserting that the Defendants’ challenges to Valeiras’ testimony pertained to weight and not admissibility. The Court concluded that the amount of damages, if any, would be best determined after considering the evidence at trial.

    The Defendants’ motion aimed to exclude the opinions and testimony of Arthur Laffer, focusing on four specific issues.

    The Defendants sought to exclude Laffer’s testimony regarding the removal of the three Wealth Preservation Strategy Funds from the Milliman, Inc. Profit Sharing and Retirement Plan before January 2016, arguing that the performance history was not sufficiently long for him to opine on such a decision. The evaluation of ERISA breach of fiduciary duty claims is fact intensive. Despite other Courts rejecting ERISA claims based on only three years of performance data, the Court stated that this challenge addressed the weight of Laffer’s testimony rather than its admissibility, as the factual nature of the inquiry warranted consideration of the evidence at trial.

    The Defendants sought to exclude Laffer’s testimony on any conduct predating January 2016, including the alleged “seeding” of the Funds with Plan money in 2012, citing ERISA’s statute of repose which barred it. The Plaintiff argued that such testimony should be admissible, contending that the Defendants’ conduct constituted a singular, ongoing breach. According to 29 U.S.C. § 1113(1), any ERISA action brought more than six years after “the date of the last action which constituted a part of the breach or violation” is barred. The Court acknowledged that the duty to exercise prudence in selecting investments at the outset of the Plan exists “separate and apart from” from the duty to prudently monitor Plan investments and remove underperforming investments, as established in Tibble v. Edison Int’l, 575 U.S. 523, 529, 135 S. Ct. 1823, 191 L. Ed. 2d 795 (2015). While recognizing that the selection and retention are not a continuous breach, the Court decided not to exclude Laffer’s testimony about the Defendants’ selection of the Funds. Defendants’ selection of the Funds, regardless of whether such selection was prudent or not, is distinct from the Plan’s retention of the Funds. ERISA fiduciaries were obligated to continually monitor their plan’s investments, with the specific requirements dependent on various factors such as the plan’s nature, investments, and the plan sponsor. In the present case, the process employed by the Plan in selecting the Funds could shed light on whether the subsequent decision to retain the Funds was prudent. Consequently, Laffer’s testimony regarding the initial investment in the Funds was deemed relevant, and the Plaintiff was permitted to present it to support the claim that the Defendants acted imprudently in retaining the Funds.

    The Defendants argued that Laffer’s opinions on the Plan’s investment policy statement (IPS) were legally unsound. Laffer was presented as an expert to assess whether the Defendants demonstrated an appropriate level of prudence and fiduciary responsibility toward managing the Plan and its participants. The Court acknowledged that Laffer’s testimony regarding the Plan’s IPS could be beneficial in assessing whether the Defendants fulfilled their fiduciary duties. Furthermore, since the case would be a bench trial, the Court reasoned that there was no prejudice risk as there was no jury to potentially give undue weight to Laffer’s testimony.

    The Defendants contended that Laffer’s remaining opinions lacked proper support and were characterized as mere ipse dixit. They argued that Daubert and the Federal Rules of Evidence do not mandate a district court to admit opinion evidence solely supported by the expert’s assertion without a connection to existing data.The Court, exercising its discretion in assessing the analytical gap between data and opinions, noted that for non-scientific testimony, reliability rested heavily on the expert’s knowledge and experience rather than a specific methodology or theory. Given Laffer’s substantial expertise in evaluating investments and advising retirement plans and their fiduciaries, as well as other trusts, the Court deemed his knowledge and experience appropriate to provide a sufficiently reliable basis for his expert testimony. The Defendants argued that Laffer’s opinions lacked reliability as he did not cite specific surveys, studies, or documentation supporting his views. The Court deemed this argument as pertaining to the weight of his testimony rather than its admissibility. Similarly, the Defendants’ claim that Laffer’s experience with other types of retirement plans and fiduciary investors was insufficient went to the weight of his testimony. As Laffer based his opinions on extensive experience in the investment industry and as a fiduciary advisor, the Court concluded that these opinions could not be excluded before trial.

    Held 

    The Court denied both of the Defendants’ motions to exclude the opinions and testimony of Plaintiffs’ experts Horacio A. Valeiras and Arthur B. Laffer.

    Key Takeaways

    In the legal proceedings involving Plaintiff Joanna P. Mattson and the Milliman Defendants, the Court addressed key issues related to the expert testimonies of Horacio A. Valeiras and Arthur B. Laffer. The Plaintiff’s claims were centered around the contention that three Wealth Preservation Strategy Funds should have been removed from the Milliman, Inc. Profit Sharing and Retirement Plan before January 2016. The Court considered challenges to the reliability of Valeiras’ damages opinions, with the Defendants arguing that his calculations did not address the capital protection component of MMRS adequately. The Court ruled that these challenges pertained to the weight of the testimony, not its admissibility. Similarly, the Court addressed Laffer’s opinions on the Plan’s investment policy statement (IPS) and other issues, ruling that the objections raised by the Defendants went to the weight of his testimony rather than its admissibility. The Court highlighted Laffer’s extensive experience and knowledge in the investment industry as a basis for deeming his expert testimony sufficiently reliable. Ultimately, the Court denied the Defendants’ motions to exclude the expert testimonies, allowing them to be presented at trial.

    Case Details

    Case Caption Mattson v. Milliman, Inc.
    Docket Number 2:22cv37
    Court United States District Court, Washington Western
    Citation 2024 U.S. Dist. LEXIS 16413
    Order Date January 30, 2024
  • Royalty Analysis Conducted by Finance Expert Witness Deemed Reasonable

    Royalty Analysis Conducted by Finance Expert Witness Deemed Reasonable

    On June 11, 2021, Utherverse filed a patent infringement complaint against Epic, alleging that four Fortnite events (the “Accused Events”) violated the ‘071 Patent and the ‘605 Patent, collectively known as the “Asserted Patents.” These patents relate to enabling numerous participants to connect in a virtual computer-generated environment for shared virtual experiences. The current issue before the Court involves Epic’s Daubert motion to exclude Utherverse’s damages expert, Michele Riley. Judge Theresa L. Fricke, United States Magistrate Judge, issued a Report and Recommendation, which pushed for denying the motion to exclude the testimony of Michele Riley.

    Finance Expert Witness

    Michele Riley is a Managing Director at Stout, specializing in complex litigation consulting for breach of contract, unfair competition, investigations, and compliance. She holds certifications as a Certified Public Accountant, Certified Fraud Examiner, and is Certified in Financial Forensics.
    Riley specializes in assessing intellectual property damages and valuation. She has testified in cases involving patent, trademark, and copyright infringement, as well as trade secret misappropriation.

    Discussion by the Court

    According to the Court’s decision in Exmark Mfg. Co. v. Briggs & Stratton Power Prods. Grp., LLC, 879 F.3d 1332, 1347 (Fed. Cir. 2018), it was established that when reviewing damages in patent cases, the Federal Circuit applies regional circuit law to procedural issues and Federal Circuit law to substantive and procedural issues related to patent law. In reviewing motions to exclude expert testimony related to patent royalties, the Federal Circuit has applied its own law.

    Judge Fricke, citing Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1324 (Fed.Cir.2009), observed that two alternative methods exist for calculating damages in a patent case; they “are the patentee’s lost profits and the reasonable royalty he would have received through arms-length bargaining.” To calculate the reasonable royalty, patentees generally consider a hypothetical negotiation, in which the asserted patent claims are assumed valid, enforceable, and infringed, and attempt “to ascertain the royalty upon which the parties would have agreed had they successfully negotiated an agreement just before infringement began.” This hypothetical negotiation “necessarily involves an element of approximation and uncertainty.” In determining the reasonable royalty that would have been agreed to at the hypothetical negotiation, parties in patent cases frequently utilize the fifteen factors enunciated in Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F.Supp. 1116, 1120 (S.D.N.Y.1970).

    In Lucent Technologies Inc. v. Microsoft Corporation, 580 F.3d at 1326, it was established that a hypothetical negotiation can result in either a lump-sum license or a running royalty license. A lump-sum license is an up-front payment in full for the invention that involves uncertainty about “whether the technology is commercially successful or even used.” In contrast, a running royalty license is directly tied to how often the invention is incorporated into products by the licensee and is calculated by multiplying the proposed royalty rate by the proposed royalty base. The burden of proving damages falls on the patentee.” To properly carry this burden, the patentee must sufficiently tie the expert testimony on damages to the facts of the case. 

    Judge Fricke stated that Riley’s analysis began with a general overview of the parties’ industries, the parties themselves, and the Accused Events. She explained that, based on her discussions with Craig Rosenberg, Utherverse’s technical expert, she understood that the Asserted Patents involved enabling a large number of participants to connect in a virtual computer-generated environment for shared virtual experiences. She calculated the royalty base by determining the revenue attributable to the Accused Events, including microtransaction purchases made by Fortnite users through the in-game currency. This encompassed items specifically available for the Accused Events in the Fortnite Item Shop, incremental revenue from microtransaction purchases related to the Accused Events, and the value to Epic of new and returning users due to the Accused Events.

    For determining the royalty rate, Riley analyzed Utherverse Digital agreements, explaining their relevance in a hypothetical negotiation. After reviewing various data points and assessing their significance in a hypothetical negotiation, Riley made her conclusions about the royalty rate range known. She partially relied on the 2020 Royalty Rate Industry Summary from IPSCIO Reports.

    Georgia-Pacific factor 1 considers: “The royalties received by the patentee for the licensing of the patent in suit, proving or tending to prove an established royalty.” Judge Fricke citing Wordtech Sys. v. Integrated Networks Solutions, Inc., 609 F.3d 1308, 1320 (Fed.Cir. 2010), held that a patentee may not rely on license agreements that are ” ‘radically different from the hypothetical agreement under consideration’ to determine a reasonable royalty.” Further, “comparisons of past patent licenses to the infringement must account for ‘the technological and economic differences’ between them.”

    Ephere was engaged in computer graphics and software development, specializing in designing and implementing software solutions for computer graphics, film, and games, extending existing software for new functions, and providing consulting and support in the film and games industry. Epic argued that Riley inappropriately used the Ephere license as a substitute for apportionment, as she did not demonstrate sufficient comparability. Specifically, Epic contended that Riley failed to analyze the technological comparability between the ‘962 Patent from the Ephere license and the Asserted Patents. The Court was urged to conclude that Riley had not established a baseline comparability between the technology in the Ephere License and the Asserted Patents.

    But Judge Fricke observed that in addition to providing a summary of the ‘962 Patent and the background of the invention itself, Riley also discussed the relationship between the patent from the Ephere license and the Asserted Patents. Judge Fricke determined that, according to Federal Circuit precedent, Riley needed to demonstrate baseline comparability between the ‘962 Patent and the Asserted Patents. It was noted that she had fulfilled this requirement in her report. Any further examination of the similarities and differences between the two was considered a factual matter rather than a methodological one and could be addressed during cross-examination.

    Epic asserted that Riley couldn’t rely on Epic’s internal document about payment to an artist of one of the Accused Events, Epic’s merchandise agreements, a published industry report, and a Utherverse Digital license agreement to establish her royalty base. Judge Fricke, referencing Microsoft Corp. v. Motorola, 904 F.Supp.2d 1109, 1118 (W.D. Wash. 2012), found that these documents provided some indication of the appropriate initial royalty rate, making Riley’s testimony admissible. For instance, the merchandise agreements involved Epic and certain artists linked to the Accused Events, while the Utherverse Digital agreement supported Riley’s opinion on a suitable royalty rate.

    Regarding Epic’s internal document and the IPSCIO industry report, these were among various data points Riley used in her royalty rate analysis. Judge Fricke asserted that she clarified the relevance of these documents and their connection to her analysis, leaving the degree of comparability for cross-examination rather than a Daubert motion.

    Defendant Epic Games, Inc. (“Epic”) respectfully objected to the Report and
    Recommendation concerning the motion to exclude the testimony of Riley on the following grounds:

    1. The R&R had erroneously recommended that the Court find Riley demonstrated the required baseline technological comparability between the license agreement she relied on and the technology at issue in this case. The record did not support such a finding, and holding otherwise on this record would have been contrary to binding Federal Circuit precedent.
    2. The R&R had not addressed Epic’s motion to exclude Riley’s royalty rate opinion for failing to apportion damages. Adopting the R&R and allowing Riley to present a damages theory that failed to apportion damages would have been contrary to established Federal Circuit law.
    3. The R&R’s finding that certain “comparable transactions” would inform the starting point of a royalty rate was clearly erroneous because those transactions were not patent licenses and were in no way economically or technologically comparable to the facts of this case.

    After reviewing the Report and Recommendation of Judge Fricke as well as the objections to the Report and Recommendation, the Court adopted the Report and Recommendation.

    Held

    The Court denied Epic Games, Inc.’s motion to exclude Utherverse Gaming, LLC’s damages expert, Michele Riley. The Court has not arrived on an outcome for this case since the remaining issues involved in this case still await resolution.

    Key Takeaways:

    The Court scrutinized Riley’s analysis, noting her thorough examination of industry, parties, and events involved. The analysis included determining the royalty base and rate, involving a hypothetical negotiation and reliance on Utherverse Digital agreements. The Court acknowledged the inherent approximation and uncertainty in such assessments but deemed Riley’s methodology admissible. This demonstrates the Court’s consideration of the application of established principles in patent cases.

    Concerns were raised by Epic regarding Riley’s use of the Ephere license and other documents for establishing the royalty base. The Court, citing Federal Circuit precedent, required Riley to demonstrate baseline technological comparability, which was found to be fulfilled in her report. The Court acknowledged that further exploration of similarities and differences could be addressed during cross-examination, highlighting the importance of factual matters in such evaluations.

    Epic’s objection to the use of certain documents, including an internal document, merchandise agreements, and industry reports, was addressed by the Court. The Court, referencing relevant legal precedent, found these documents provided indications of an appropriate initial royalty rate, supporting the admissibility of Riley’s testimony. The Court emphasized the role of cross-examination in assessing the degree of comparability, showcasing a balanced approach to the admissibility of evidence.

    In summary, the Court’s decision underscores the importance of adherence to established legal principles in patent cases, including the use of regional circuit law and Federal Circuit law, the consideration of two primary methods for calculating damages, and the scrutiny of expert testimony methodologies. The decision reflects a nuanced approach, allowing for cross-examination to address factual matters while ensuring the admissibility of expert opinions based on sound methodology.

    Case Details:

    Case Caption: Utherverse Gaming Llc V. Epic Games Inc
    Docket Number: 2:21cv799
    Court: United States District Court, Washington Western
    Citation: 2023 U.S. Dist. LEXIS 232999
    Order Date: January 12, 2024

  • Finance expert witness excluded since opinion did not rely on specialized or technical knowledge

    Finance expert witness excluded since opinion did not rely on specialized or technical knowledge

    In February 10, 2023, Defendants, consisting of Varsity Brands, LLC; Varsity Spirit, LLC; Varsity Spirit Fashions & Supplies, LLC and U.S. All Star Federation, filed a Motion to Exclude the Testimony of James H. Aronoff. The motion sought to prevent the admission of Aronoff’s expert testimony, which was disclosed by the Indirect Purchasers, Jessica Jones and Christina Lorenzen, on June 20, 2022.

    Aronoff’s expert report, submitted by the Indirect Purchasers, comprised three parts. The first part detailed the history of Varsity, encompassing its growth, ownership structure, and product and service offerings. The second part outlined Varsity’s operational model, alleging that the company created barriers to entry and utilized its dominant market share and access to capital to stifle competition in various segments of the Competitive Cheer market. The third part of Aronoff’s report provided specific, pragmatic recommendations for structural relief within the Competitive Cheer market.

    In response to arguments propounded by other experts, the Indirect Purchasers disclosed a rebuttal report from Aronoff on December 14, 2022.

    Finance Expert Witness

    James Aronoff has more than thirty-eight years of professional experience, primarily in the financial services industry. He has held several senior positions within highly regulated financial institutions that operate in competitive markets. He is currently a Managing Director of Cohn Reznick’s Restructuring and Dispute Resolution practice. He provides advisory services to clients, offering guidance on matters related to regulatory compliance, best practices, restructuring and workouts, dispute resolution, and enterprise risk management.

    Discussion by the Court

    The Defendants’ motion contested the admissibility of Aronoff’s opinions, presenting three main arguments. Firstly, they argued that Aronoff lacked relevant experience. Secondly, they asserted that the majority of his report consisted of factual narration. Lastly, the Defendants contended that Aronoff’s recommendations for structural relief were inappropriate subjects for expert testimony.

    The Defendants initially asserted that Aronoff lacked the qualifications to serve as an expert. They argued that Aronoff’s background did not include any relevant experience in sports or sports management, he was not an economist, and had no prior involvement in antitrust litigation before this assignment. Despite Aronoff’s claim of expertise in compliance programs, the Defendants contended that his opinions were not directly linked to those programs but merely suggested potential remedies such as forbidding Varsity and/or USASF from engaging in practices complained about by the Plaintiffs or other proffered experts. In contrast, the Indirect Purchasers argued that Aronoff’s extensive curriculum vitae demonstrated his experience and expertise in corporate governance and compliance within large and complex business organizations. The Court ultimately determined that Aronoff’s background in corporate governance and compliance qualified him to provide testimony on the topic.

    The Defendants contended that the majority of Aronoff’s reports constituted a “factual narrative” devoid of any technical or scientific conclusions. In response, the Indirect Purchasers argued that Aronoff’s report not only presented historical facts but also provided context and analysis, making it admissible as expert testimony. The Court, citing cases such as Highland Capital Mgmt., LP v. Schneider, 379 F. Supp. 2d 461, 469 and Tillman v. C.R. Bard, Inc., 96 F. Supp. 3d 1307, 1330 emphasized that expert testimony should not be solely for constructing a factual narrative based on record evidence, as such evidence could be appropriately presented through percipient witnesses and documentary evidence. However, an expert, like Aronoff, was allowed to articulate the “factual underpinning” on which his opinions were based, distinguishing it from a mere recitation of facts.

    In the case, the Court noted that Aronoff’s opening report contained a section titled “Background,” constituting nineteen pages out of a total of forty-one. This section provided a comprehensive history of competitive cheer, detailed Varsity’s corporate and acquisition history, discussed Varsity’s interactions with governing bodies in competitive cheer, and outlined the ownership of Varsity by private equity firms. These facts were supported by footnotes to deposition testimony, documents, and Indirect Purchasers’ Complaint.

    The Court determined that while this information might be appropriate when presented by fact witnesses or through documentary evidence, it was not relevant or necessary to contextualize or support Aronoff’s opinion testimony in his opening report regarding Varsity’s operational model. As a result, the Court excluded any testimony from Aronoff that intended to cover these factual details.

    The Defendants contended that the remaining portion of Aronoff’s opinions, specifically his recommendations for structural relief, should be excluded as they were deemed irrelevant. The Defendants argued that Aronoff’s recommendations, offered in both his opening report and rebuttal reports, failed to meet the requirements of Rule 702, asserting that the testimony lacked relevance and reliability. The Defendants specifically claimed that Aronoff’s opinions, focusing on injunctive relief, did not contribute to the understanding of evidence or the determination of facts in question.

    In response, the Indirect Purchasers argued that Aronoff’s recommendations served as guideposts for the trier of fact, aiding in the analysis of the competitive effects of the Defendants’ business practices and proposing mitigating practices grounded in corporate governance to restore and maintain competition in the relevant market.

    However, the Court determined that Aronoff’s recommendations did not appear to rely on specialized or technical knowledge. Additionally, the recommendations were deemed non-specific, and Aronoff himself acknowledged during deposition that they were intended as a starting point for crafting actual procedures, lacking specific rules for embodiment in an agreement or order. Consequently, the Court found Aronoff’s testimony not clearly derived from specialized knowledge and lacking specificity, and as a result, excluded his testimony in its entirety. The Court did note the possibility of reconsideration if the Defendants presented proof related to Aronoff’s testimony, with a potential allowance for his testimony as a rebuttal expert at that time.

    Held

    The Court granted the Defendants’ Motion to Exclude the Testimony of James Aronoff.

    The Court has not arrived on an outcome for this case since the remaining issues involved in this case still await resolution.

    Key Takeaways:

    The admissibility of expert testimony hinges on several key considerations, as illustrated in the case involving Aronoff. First and foremost, the qualifications of the expert play a crucial role. In this instance, the Defendants challenged Aronoff’s expertise, contending that his background lacked relevance to the subject matter. The Court underscored the significance of an expert’s qualifications in determining admissibility. Additionally, the purpose of expert testimony must surpass presenting a mere factual narrative, a task better suited for percipient witnesses or documentary evidence. The Court emphasized that expert opinions should articulate the “factual underpinning” supporting their conclusions. Furthermore, the relevance of information presented in an expert’s report is paramount. In this case, a section of Aronoff’s report providing historical context and corporate details was excluded as irrelevant. Specificity in recommendations is another critical factor; non-specific recommendations lacking in specialized knowledge may be deemed irrelevant and unhelpful to the trier of fact, leading to exclusion. The Court also considered the linkage of recommendations to specialized knowledge, ultimately excluding Aronoff’s testimony as it appeared not to rely on such knowledge.

  • 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.

    Finance Expert Witness

    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.

    Discussions by the Court

    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.

    Held

    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.

    Key Takeaways

    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.

  • Court admits the testimony of SEC’s Finance Expert Witness affirming its relevance in assessing the Defendant’s violation of federal securities law

    Court admits the testimony of SEC’s Finance Expert Witness affirming its relevance in assessing the Defendant’s violation of federal securities law

    The United States Securities and Exchange Commission (SEC) filed a lawsuit against Ian Balina for allegedly offering and selling securities without proper registration and disclosures, in violation of federal securities laws.

    The United States Securities and Exchange Commission (SEC) accused Ian Balina, a self-described crypto asset investor, promoter, and influencer, of violating Sections 5(a), 5(c), and 17(b) of the Securities Act, 15 U.S.C. §§ 77e(a), 77e(c), 77q(b). According to the SEC, in May 2018, Balina entered into a $5 million investment contract with Sparkster Ltd. for its initial coin offering (ICO) of a crypto asset security called SPRK Tokens. Allegedly, Balina promoted the ICO on social media, receiving a 30 percent bonus in tokens. The SEC contends that Balina organized a Sparkster investment pool, allowing individual investors to participate by purchasing SPRK Tokens from his allocation. The distribution of SPRK Tokens through this pool, facilitated by a smart contract program, is alleged to constitute an unregistered offering of securities. Consequently, the SEC pursued legal action seeking injunctive relief, disgorgement, civil penalties, and any other necessary equitable remedies.

    Balina denied controlling the investor pool. He moved to exclude the testimony of SEC’s designated expert witness, Shimon Kogan, on the basis that his principles and methodology were unreliable. Kogan, provided four opinions after analyzing documents from the SEC and blockchain data:

    1. Balina controlled the smart contract used by the Sparkster investment pool;
    2. Balina’s control of the Sparkster investment pool is consistent with documentary and blockchain evidence of his control;
    3. Balina invested at least $104,883 in the Sparkster investment pool and received a bonus of 30% on his investment; and
    4. Promoters played a significant role in ICOs between 2016 and 2018.

    Finance Expert Witness

    Dr. Shimon Kogan has a Ph.D. in finance and is an associate professor of finance at the Wharton School, the University of Pennsylvania, and the Arison School of Business, Reichman University. His primary research interest is in financial technology, and he has researched, written, and taught on crypto markets and blockchain technology.

    Discussions by the Court

    The SEC enlisted Shimon Kogan, an expert with a Ph.D. in finance and a focus on financial technology, to provide testimony on Ian Balina’s Ethereum blockchain transactions related to the Sparkster ICO and the broader context of ICOs, cryptocurrency, and blockchain technology. Kogan asserted four opinions, including Balina’s control of the Sparkster investment pool and his financial involvement. Balina sought to exclude these opinions under Rule 702.

    Balina contested the admissibility of Kogan’s first opinion, asserting it was irrelevant, flawed, internally inconsistent, and lacked sufficient factual basis. The Court, however, deemed Kogan’s opinion that Balina controlled the Sparkster investment pool as relevant, especially in light of the SEC’s allegation that Balina’s actions with the pool constituted an unregistered offering of securities. The Court acknowledged that Kogan’s testimony could assist the trier of fact in evaluating the SEC’s claim of federal securities law violations related to the Sparkster investment pool.

    Balina contested the reliability of Kogan’s testimony, asserting a lack of clear methodology and reliance on snippets from other documents. Balina argued that Kogan’s report, based on SEC-provided documents and publicly available blockchain data, lacked a clear set of “principles and methods”
    of analysis. Kogan collaborated with Integra FEC, a forensic data analytics and litigation consulting firm, to analyze the blockchain and transaction details. Kogan and Integra gathered transaction details from the Ethereum blockchain related to the Sparkster investment pool. They cross-referenced these transactions with documents supplied by the SEC and reportedly used by Balina, aligning blockchain addresses with an investors’ Google Forms spreadsheet and the pool provider’s database. In other words, they cross-checked Ethereum blockchain data with SEC-provided documents, attributing contributions in the investment pool to personal identities in the process. Balina objected, claiming the SEC failed to demonstrate the reliability of Kogan’s methodology under Daubert. However, the Court found Kogan’s methods, including cross-checking public information and SEC documents, sufficiently reliable. The Court noted that the immutability of record of transactions made on the Ethereum blockchain supported the analysis of past transactions with a high degree of confidence, and thus, Kogan’s testimony should not be excluded under Daubert.

    Balina contested Kogan’s opinion, arguing that it should be excluded because Kogan did not personally obtain the public blockchain data or create the summarizing tables, and was assisted by Integra in writing his report. Kogan acknowledged the collaborative nature of the report, stating it would be “impossible for him to disentangle” sections prepared by Integra from his own. Federal Rule of Evidence 703 allows experts to base opinions on data they have been made aware of, even if they didn’t personally observe it. The Court observed that expert opinions are admissible when based on information reasonably relied upon in the field. Thus, the Court found that Integra’s assistance did not render Kogan’s opinions inadmissible.

    Balina also contended that Kogan’s first opinion lacked sufficient facts or data, but he failed to specify the missing details. The Court noted that if contradictory facts existed, they would affect the weight of Kogan’s opinion, not its admissibility, leaving such considerations for the jury. Citing Primrose Operating Co. v. Nat’l Am. Ins. Co., 382 F.2d 546, 562 (5th Cir. 2004), the Court denied Balina’s motion to exclude Kogan’s first opinion for these reasons.

    Kogan’s second opinion asserted that blockchain evidence pointing to Balina’s control over the Sparkster investment pool aligned with other documentary evidence, including Telegram messages from Balina as well as a Google Form Balina sent to potential investors. Balina acknowledged the interconnected nature of Kogan’s first and second opinions and argued for the exclusion of the second opinion based on the same reasons as the first. The Court, consistent with its previous decision, denied Balina’s motion to exclude Kogan’s second opinion.

    Kogan’s third opinion asserted that Balina invested a minimum of $104,883 (150 ETH) in the Sparkster investment pool and received a 30% bonus on his investment. Kogan also implied the possibility of Balina investing more, citing five unidentified Ethereum addresses. Balina sought to exclude this opinion, arguing that the stated $104,883 figure was undisputed, and Kogan’s speculation about Balina investing more money in the pool was unfounded. The Court, invoking Rule 702, found that the SEC successfully demonstrated the reliability of Kogan’s testimony regarding Balina’s $104,883 investment in the pool.

    The parties disagreed on whether Kogan should be allowed to suggest that Balina might have invested more than $104,883 due to five unidentifiable Ethereum addresses. Balina argued that Kogan provided no methodology for linking these addresses to Balina’s account. The SEC countered that Kogan did not speculate about the owners of these addresses but rather highlighted the investigative facts and acknowledged limitations. The Court sided with the SEC, noting that Kogan refrained from speculating on the ownership of the unidentified Ethereum addresses. Kogan’s third opinion was grounded in his analysis of blockchain evidence, utilizing public Ethereum data and SEC-provided documents.

    Kogan’s fourth opinion asserted that promoters played a significant role in ICOs from 2016 to 2018. Balina sought to exclude this opinion, contending it was unrelated to either Balina or Sparkster and was designed to confuse or prejudice the jury. Additionally, Balina requested the exclusion of any testimony related to the “Background” section of Kogan’s report, which covered terms like “Ethereum Blockchain and ETH,” “Ethereum Addresses and Wallets,” and “Smart Contracts and ERC-20 Tokens.” Balina argued that such terms were common and could be defined by agreement, rendering testimony on these topics unnecessary.

    The Court acknowledged that experts are allowed to provide testimony on the background or “general principles” of their fields if Rule 702 requirements are met. Even if terms addressed by Kogan are commonplace in the financial technologies field, they may still be “beyond the comprehension of an average juror.” The Court found that offering background information on the terms and topics in Kogan’s fourth opinion and the background section of his report could be helpful to the jury.

    Held

    The Court denied Ian Balina’s Motion to Exclude the Testimony of the SEC’s Expert, Shimon Kogan. The Court has not arrived on an outcome for this case since the remaining issues involved in this case still await resolution.

    Key Takeaways

    This order demonstrates how courts evaluate the admissibility of expert opinions under the flexible Daubert standard. The main issues courts consider are the relevance, reliability, and helpfulness of the expert testimony to the trier of fact. 

    Here, the Court found Kogan’s testimony relevant because his opinions were related directly to the core allegations against Balina regarding the Sparkster investment pool. It deemed his methodology reliable because he used a process of cross-checking public blockchain data against documents provided by the SEC. This synthesis demonstrated internal consistency.

    The Court also clarified that under Rule 703, experts can rely on facts and data collected by assistants, as long as the expert reviews everything and stands by the final work product. Additionally, it refused to exclude any testimony related to the “Background” section of Kogan’s report, which included topics such as the “Ethereum Blockchain and ETH,” “Ethereum Addresses and Wallets,” and “Smart Contracts and ERC-20 Tokens”, deeming it helpful to the jury.

    Overall, this demonstrates Courts’ relatively permissive gatekeeping standard for expert opinions under Daubert and illustrates what factors determine admissible expert testimony in federal court. Disputed opinions often get presented to the jury rather than being excluded outright.

  • Experts are not obligated to present invoices, statements and documents in support of their testimony; Court refuses to exclude the testimony of Finance Expert Witness

    Experts are not obligated to present invoices, statements and documents in support of their testimony; Court refuses to exclude the testimony of Finance Expert Witness

    Plaintiffs Rearden LLC and MOVA LLC (collectively “Rearden”) sued Defendants The Walt Disney Company and related entities Walt Disney Motion Pictures Group, Inc.; Walt Disney Pictures; Buena Vista Home Entertainment, Inc.; Marvel Studios LLC; Mandeville Films, Inc.; Infinity Productions LLC; and Assembled Productions II LLC (collectively “Disney”) for contributory copyright infringement, vicarious copyright infringement, and trademark infringement.  

    The record-breaking success of Disney’s Beauty and the Beast was expressly attributed to a unique Oscar-winning visual effects (“VFX”) technology called MOVA Contour Reality Capture. MOVA was used to do the facial capture of the Beast, the romantic hero at the emotional center of the film. Everyone, from the director to the actors, acknowledged how crucial a role MOVA played in grasping every human subtlety of the beast’s facial performance. 

    Plaintiff, Rearden accused Disney of stealing its patented and copyright-protected MOVA Contour technology. Between February 2013 and March 2017, Disney contracted with DD3 to use the patented MOVA Contour system and copyrighted Contour Program for availing facial performance capture services. This included capturing actor Dan Stevens’ performance as the Beast character in Disney’s projects. Rearden alleged that Digital Domain 3.0 (“DD3”) directly infringed on Rearden’s copyright to its MOVA Contour Reality Capture program (“MOVA”). Rearden claimed Disney contracted with DD3 to use MOVA to create the character Beast in the 2017 film Beauty and the Beast without authorization.   

    Disney moved for summary judgment on all of Rearden’s claims related to Beauty and the Beast. Disney intended to offer expert testimony from Robert Wunderlich on apportionment of profits and damages. Rearden tried to prevent Wunderlich from testifying about Disney’s net income after taxes for “Beauty and the Beast” and Disney’s income taxes linked to the film, calculated based on federal corporate tax rates for each relevant year. 

    Finance Expert Witness 

    Robert Wunderlich is an experienced expert witness who has testified in over 150 cases. He has obtained his B.A. from Columbia University. He has a PhD in chemical physics from Harvard University and a MBA in finance from UCLA Anderson School of Management. Robert Wunderlich is currently the Principal and Co-Founder of Discovery Economics, Inc. and he is also the Lecturer of Corporate Finance at the University of California, Los Angeles, School of Law. He has worked for over 25 years in economic, financial, and accounting analysis, including as a senior manager at the consulting firm Deloitte and Touche LLP. 

    Discussions by the Court 

    Rearden moved to exclude portions of Disney expert Robert Wunderlich’s expert report and testimony. The Court applied the Federal Rules of Evidence 702 and Daubert standards in assessing admissibility of expert testimony. Under these standards, the proponent of expert testimony has the burden to establish its reliability and relevance. The Court serves as a gatekeeper, ensuring expert opinions have a valid connection to the issues in the case and a reliable factual basis. The focus is on the soundness of the methodology rather than the correctness of the conclusions.   

    In his opening expert report, Wunderlich provided a chart that calculated Disney’s net income after taxes for “Beauty and the Beast,” excluding consumer products and music. He stated that these figures were obtained from Disney’s “SAP accounting system,” where revenue and expenses were recorded in a general ledger. These records were subject to regular audits by PricewaterhouseCoopers (“PwC”) to verify internal controls. Additionally, Wunderlich noted that revenues were audited by various guilds, and production costs were audited by production incentive authorities in different locations. 

    During his deposition, Wunderlich testified that the numbers in the chart came from Disney’s system, although he did not have access to the underlying data for certain calculations and expense breakdowns. Rearden contested the substantiation of Wunderlich’s expert report, arguing that he did not independently verify specific financial figures. In response, Disney maintained that Wunderlich had explained his reasoning, reviewed documents from the SAP accounting system, and interviewed Disney employees. 

    The key question revolved around whether Wunderlich had relied on the type of facts or data that experts in his field typically use. It appeared to the Court that he had met this standard, and there was no requirement for him to independently validate the figures. The First Circuit rejected arguments against admissibility that sought detailed supporting data, citing the principle that an expert’s factual basis goes to the testimony’s credibility, not its admissibility. This view aligned with the Ninth Circuit’s stance that it was the opposing party’s responsibility to examine the factual basis during cross-examination as was held in International Adhesive Coating v. Bolton Emerson. 

    Wunderlich calculated Disney’s income taxes for “Beauty and the Beast” each year using federal corporate tax rates. He defended this approach by stating that it was appropriate since the film’s tax liability wouldn’t be influenced by Disney’s overall corporate losses or gains. Rearden disputed the relevance of this tax deduction, arguing it was against the law, while Disney countered that the real dispute was over Disney’s internal tax accounting methodology. 

    Both parties acknowledged that Disney could only deduct the taxes it actually paid. Wunderlich explained the method he used to determine Disney’s actual tax payments related to the film and why he considered it reasonable. Rearden’s objection centered on the belief that Disney, as a corporation, paid only one tax rate. 

    Rearden contended that the exclusion of Wunderlich’s opinions in eight previous cases was relevant to the reliability of his expert report and testimony in this case. However, as there was no indication that the opinions rejected in those prior cases were the same as the one Wunderlich presented here, this argument was deemed irrelevant. 

    Held 

    The Court denied Rearden’s motion to exclude Robert Wunderlich’s expert testimony. The Court has not arrived on an outcome for this case since the remaining issues involved in this case still await resolution.   

    Key Takeaways:

    This case illustrates several important principles regarding admissibility of expert witness testimony.

    • Experts are not required to independently verify or provide documentation for the facts and data they rely on, as long as it is the type reasonably relied upon in their field. The accuracy of the underlying information goes to credibility, not admissibility.  
    • Disagreements with an expert’s facts or conclusions are issues for cross-examination, not exclusion. The court serves a gatekeeping role focused on methodology, not conclusions. As long as the expert explains their reasoning and relies on sound methodology, exclusion is unwarranted.  
    • An expert’s exclusion in other cases does not automatically render their testimony inadmissible in a different case with different issues. The analysis depends on the specific opinions offered and issues in the instant case. 
    • Framing disagreements with an expert’s factual assumptions as a Daubert challenge usually fails. Methodological soundness is key, not accuracy of underlying facts. The appropriate way to contest shaky assumptions is through cross-examination and presentation of contrary evidence at trial. 
  • FTX Founder’s Experts Face Exclusion in Cryptocurrency Fraud Case

    FTX Founder’s Experts Face Exclusion in Cryptocurrency Fraud Case

    FTX Trading Ltd. was a cryptocurrency exchange founded in 2019 by Sam Bankman-Fried. It quickly grew to become one of the largest crypto exchanges. Bankman-Fried also founded Alameda Research, a cryptocurrency trading firm. Federal prosecutors alleged that starting in 2019, Bankman-Fried orchestrated a scheme to defraud FTX customers by misappropriating their deposits to support Alameda’s trading activity.

    Specifically, he was accused of diverting billions in customer funds to Alameda without disclosing this practice. Alameda allegedly used the funds to make speculative crypto trades. Prosecutors said Bankman-Fried made false statements about FTX’s financial condition and operations to attract more customer deposits as well as investments into FTX and loans to Alameda.

    In November 2022, concerns about Alameda’s financial condition led to mass withdrawals from FTX. This caused a liquidity crunch at FTX, which did not have sufficient funds to meet withdrawal demands. FTX filed for bankruptcy on November 11, 2022. An estimated 1 million customers and investors suffered billions in losses.

    In December 2022, federal prosecutors filed criminal charges against Bankman-Fried, including wire fraud, commodities and securities fraud, and money laundering conspiracy. Bankman-Fried was arrested in the Bahamas and extradited to face charges in the United States. He pleaded not guilty. Jury selection for his trial is scheduled to begin on October 2, 2023, in New York. Bankman-Fried might face up to 115 years in prison if convicted.

    To summarize, Bankman-Fried is faced with 12 criminal charges, which will be spread across two trials scheduled to begin on October 2, 2023, and March 11, 2024. He has pleaded not guilty to all counts.

    Government Seeks to Exclude 7 Defense Experts in FTX Collapse Case

    Lawrence Akka

    The Government argued that the testimony of all seven experts should be excluded for various reasons. The Government contended that the testimony of Lawrence Akka, an English barrister, should be excluded because he intended to interpret FTX’s terms of service and opine on the legal obligations created by the contract which, according to the Government, usurped the role of the judge in instructing the jury on the law and the jury’s role in applying the law to the facts. The Government also argued that his testimony was also unreliable because it did not consider the full context for interpreting the agreement, and he had not reliably established that there was a uniform definition of “trust” that he could apply. The Government added that his testimony should also be excluded under Rule 403 because it was likely to mislead and confuse the jury about the relevant legal standards.

    Joseph M. Pimbley

    The Government also pushed for excluding the testimony of Joseph M. Pimbley concerning problems with FTX’s software infrastructure, specifically its database and computer code because considering the notice did not adequately disclose his opinions, his testimony would not be relevant to the issues at trial, and it would be an improper attempt to imply through an expert that Bankman-Fried lacked knowledge of alleged infrastructure deficiencies at FTX.

    Bradley A. Smith

    The Government also demanded the exclusion of the proposed testimony of Bradley A. Smith regarding campaign finance laws and practices because not only was it improper for an expert to testify about the legal framework that applied to political contributions at the federal level, it was also irrelevant since the campaign finance charges had been dropped, and his opinions about Defendant’s “good faith” compliance with campaign finance laws constituted inadmissible state of mind testimony under Rule 704(b).

    Pietro (Peter) Umberto Vinella

    The Government asserted that the proposed expert testimony of Pietro (Peter) Umberto Vinella warranted exclusion because he lacked qualifications to opine about cryptocurrency markets and FTX considering much of his proposed testimony was irrelevant or speculative, and his opinions about financial services industry customs and the reasonableness of FTX’s actions were misleading and unfairly prejudicial.

    Andrew Di Wu

    The Government challenged the background testimony of Andrew Di Wu on cryptocurrency’s history and markets which also drew comparisons between FTX and other cryptocurrency exchanges deeming it irrelevant, speculative, and dismissive of the Court’s legal instructions.

    Moreover, the Government also argued that the testimony of Thomas E. Bishop and Brian Y. Kim should be excluded because the defense failed to provide sufficient disclosure about their anticipated expert opinions and the bases for those opinions, as required by Rule 16. The notices for these two experts only identify general topics but do not state any actual opinions or analysis.

    In summary, the Government argued that the seven proposed defense experts had either failed to provide adequate notice of their opinions, intended to provide irrelevant or improper legal opinions and testimony on industry practice, lacked qualifications, or intended to provide speculative and unreliable testimony that was substantially more unfairly prejudicial than probative. For these reasons, Daubert hearings were requested to assess relevance, qualifications, and reliability.

    As the start date of the trial of FTX co-founder Sam “SBF” Bankman-Fried approached, new court filings indicated that SBF could pay his expert witnesses more than $1,000 an hour should they testify on his behalf.

    Some of the witnesses, such as former Federal Election Commission Chairperson Bradley Smith, charged SBF’s legal team $1,200 an hour to testify about issues such as the United States’ campaign finance laws and straw donors, according to a court filing on August 28. Bradley Smith clarified that he had no financial stake in the case’s outcome. He was receiving compensation solely for his time and services, billed at a rate of $1,200 per hour. He emphasized that his compensation was not based on the opinions he provided in the case or on the final outcome of the legal proceedings.

    Additional expert witnesses, such as Akka and Pimbley, might charge £800 (equivalent to $1,000) and $720 per hour, respectively, if they testify, as indicated in the court filings. The hourly rates for other potential expert witnesses for SBF’s case vary, ranging from $400 to $650.

    On the other hand, Peter Easton, an accounting professor at the University of Notre Dame, who is a proposed witness for the prosecution, would charge $1,175 per hour as per the court data.

    SBF seeks to request a trial postponement. If the request is submitted by September 1 and is approved, SBF’s trial will be rescheduled to March 11, 2024.

    Key Takeaways:

    • Experts cannot testify to legal conclusions, interpret contracts, or opine on whether the Defendants had the requisite mental state to commit the crimes. This improperly usurps the role of the judge and jury.
    • Experts noticed by the defense failed to provide adequate disclosure of their opinions and analysis as required by the rules of evidence. Vague topics are insufficient.
    • Proposed testimony on background information, industry practices, actions of third parties, and regulatory uncertainty from several experts is irrelevant to the issues the jury must decide. It is also likely to mislead and confuse the jury.
    • Testimony opining that the Defendants acted reasonably or in good faith compliance with laws and regulations is impermissible state of mind evidence.
    • Some experts lack qualifications to testify about cryptocurrency markets and exchanges. Their opinions are unreliable and speculative.
    • Expert testimony that is cumulative of facts that can be established through percipient witnesses is unnecessary and improper. In summary, the government argues the proposed experts either lack proper qualifications, offer legal opinions and testimony irrelevant to the facts at issue, or provide unreliable and prejudicial opinions. The testimony should therefore be excluded or limited through Daubert hearings.