Blue Cross Blue Shield of Minnesota et al v. Wells Fargo Bank, N.A.
Filing
474
MEMORANDUM OPINION AND ORDER. 1. Plaintiffs' Motion for Partial Summary Judgment on Wells Fargo's Affirmative Defenses Based on the Business Trust (Doc. No. 231 ) is DENIED. 2. Wells Fargo Bank, N.A.'s Motion for Partial Summary Judgm ent and to Certify Question to Minnesota Supreme Court (Doc. No. 237 ) is DENIED. 3. Plaintiffs' Motion to Exclude the Expert Opinions of John J. McConnell (Doc. No. 224 ) is DENIED. (Written Opinion). Signed by Judge Donovan W. Frank on 6/4/2013. (BJS)
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
Blue Cross and Blue Shield of Minnesota, as
Administrator of the Blue Cross and Blue
Shield of Minnesota Pension Equity Plan;
CentraCare Health System, on Behalf of
Itself and the Sisters of the Order of Saint
Benedict Retirement Plan; Supplemental
Benefit Committee of the International Truck
and Engine Corp. Retiree Supplemental
Benefit Trust, as Administrator of the
International Truck and Engine Corp. Retiree
Supplemental Benefit Trust; Jerome
Foundation; Meijer, Inc., as Administrator of
the Meijer OMP Pension Plan and Meijer
Hourly Pension Plan, Participants in the
Meijer Master Pension Trust; Nebraska
Methodist Health System, Inc., on Behalf of
Itself, and as Administrator of the Nebraska
Methodist Hospital Foundation, the Nebraska
Methodist Health System Retirement
Account Plan, and the Jennie Edmundson
Memorial Hospital Employee Retirement
Plan; North Memorial Health Care; The
Order of Saint Benedict, as the St. John's
University Endowment and the St. John's
Abbey Endowment; The Twin Cities
Hospitals-Minnesota Nurses Association
Pension Plan Pension Committee, as
Administrator of the Twin Cities HospitalsMinnesota Nurses Association Pension Plan,
Plaintiffs,
v.
Wells Fargo Bank, N.A.,
Defendant.
Civil No. 11-2529 (DWF/JJG)
MEMORANDUM
OPINION AND ORDER
_______________________________________________________________________
Michael V. Ciresi, Esq., Munir R. Meghjee, Esq., Stephen F. Simon, Esq., Vincent J.
Moccio, Esq., and Brock J. Specht, Esq., Robins Kaplan Miller & Ciresi LLP, counsel for
Plaintiffs.
Lawrence T. Hofmann, Esq., Michael R. Cashman, Esq., Daniel J. Millea, Esq., James S.
Reece, Esq., Lindsey A. Davis, Esq., Richard M. Hagstrom, Esq., and Rory D.
Zamansky, Esq., Zelle Hofmann Voelbel & Mason LLP; Brooks F. Poley, Esq. and
William A. McNab, Esq., Winthrop & Weinstine, PA, counsel for Defendant.
_______________________________________________________________________
INTRODUCTION
This matter is before the Court on Defendant Wells Fargo Bank, N.A.’s (“Wells
Fargo”) Motion for Partial Summary Judgment and to Certify Question to the Minnesota
Supreme Court (Doc. No. 237), Plaintiffs’ Motion for Partial Summary Judgment on
Wells Fargo’s Affirmative Defenses Based on the Business Trust (Doc. No. 231), and
Plaintiffs’ Motion to Exclude the Expert Opinions of John J. McConnell (Doc. No. 224).
For the reasons set forth below, the Court denies all three motions.
BACKGROUND
Plaintiffs are a group of institutional investors who participated in Wells Fargo’s
Securities Lending Program (“SLP”) and suffered substantial losses during the course of
their participation in the SLP. (Doc. No. 200, Third Am. Compl. ¶¶ 11-24.) This action
stems from Wells Fargo’s purported improper and imprudent investment of Plaintiffs’
funds. As such, Plaintiffs assert the following claims against Wells Fargo: (1) Breach of
Fiduciary Duty (Non-ERISA and ERISA); (2) Breach of Contract; (3) Intentional and
Reckless Fraud and Fraudulent Nondisclosure/Concealment; (4) Negligent
2
Misrepresentation; (5) Violation of Minnesota Prevention of Consumer Fraud Act—
Minn. Stat. §§ 325F.69 and 8.31; (6) Unlawful Trade Practices—Minn. Stat. §§ 325D.13
and 8.31; and (7) Deceptive Trade Practices—Minn. Stat. §§ 325D.44 and 8.31. (Third
Am. Compl. ¶¶ 256-328.)
I.
Securities Lending Program and Business Trust
Wells Fargo established its SLP in 1982, and its participants have included large,
institutional investors with combined portfolios totaling billions of dollars. (Doc.
No. 240 (“Adams Aff. I”) ¶ 9.) As part of the SLP, Wells Fargo held the participants’
securities in custodial accounts and made temporary loans of those securities to brokers.
(See, e.g., Doc. No. 244 (“Cashman Aff. I”) ¶ 5, Exs. 1-2.) The brokers then posted
collateral, generally cash, which Wells Fargo invested until such time as the securities
were returned. (Id.)
Wells Fargo entered into Securities Lending Agreements (“SLAs”) and other
contractual agreements with each of the participants whereby Wells Fargo agreed to act
as the participants’ agent and agreed to follow certain restrictions with respect to its
investment of the cash collateral. (Doc. No. 250 (“Moccio Aff. II”) ¶ 3, Exs. 7-18.) In
particular, the SLAs stated that “[t]he prime considerations for the investment portfolio
shall be safety of principal and liquidity requirements.” (Id.) The Confidential
Memoranda and Investment Guidelines distributed to Plaintiffs also include similarly
worded investment objectives regarding safety of principal and daily liquidity
requirements. (Cashman Aff. I ¶ 5, Ex. 60, 62, 63.)
3
On October 24, 2000, Wells Fargo formed a Business Trust pursuant to the
Maryland Business Trust Act “for the investment and reinvestment of money” in
connection with the SLP. (Cashman Aff. I ¶ 5, Ex. 61.) Three Trust Series were
developed after the creation of the Trust, including the two at issue here: the Enhanced
Yield Fund (“EYF”) and the Collateral Investment for Term Loans Trust (“CI Term”).
On June 1, 2001, Wells Fargo sent notice to its SLP participants that it was “establishing
a business trust format” that would “function as an unregistered mutual fund” in order to
“contribute to better returns for [Wells Fargo’s] clients by increasing the effectiveness of
[Wells Fargo’s] daily process.” (See, e.g., Moccio Aff. II ¶ 3, Ex. 20.) According to
Wells Fargo, investors participating in the SLP at the time were given 30 days to opt out
of the Business Trust. (Doc. No. 261, Hruska-Claeys Aff. ¶ 23.) Thereafter, several
Plaintiffs signed Subscription Agreements with respect to a particular Trust Series,
whereby they consented to be bound by the terms of the Declaration of Trust. 1 (Cashman
Aff. I ¶ 5, Exs. 16-38.)
The Declaration of Trust states in part:
Section 8.1 Limitation of Liability. All persons contracting with or having
any claim against the Trust or a particular Series shall look only to the
assets of the Trust or such Series, respectively, for payment under such
contract or claim; and neither the Trustee nor any of the Trust’s officers,
employees or agents, whether past, present or future (each a “Covered
1
Those Plaintiffs that were participating in the program in 2001, however, claim
that they did not receive a copy of the Declaration of Trust when the notification was
mailed. (See Moccio Aff. II ¶ 3, Exs. 20-23.) Furthermore, Plaintiffs allege that some of
them were entered into a Trust Series without signing a Subscription Agreement. (See
Moccio Aff. II ¶ 3, Ex. 32.)
4
Person” and collectively the “Covered Persons”), shall be personally liable
therefor. No Covered Person shall be liable to the Trust or to any
Shareholder for any loss, damage, or claim incurred by reason of any act
performed or omitted by such Covered Person in good faith on behalf of the
Trust, or a Series thereof, and in a manner reasonably believed to be within
the scope of authority conferred on such Covered Person by this
Declaration, except that a Covered Person shall be liable for any loss,
damage or claim incurred by reason of such Covered Person’s bad faith,
gross negligence, willful misconduct or reckless disregard of the duties
involved in the conduct of his or her office.
...
Section 8.4 Contractual Modification of Duties. To the extent that, at law or
equity, a Covered Person has duties (including fiduciary duties) and
liabilities relating to the Trust or any Series thereof or to any Shareholder,
any such Covered Person acting under this Declaration shall not be liable to
the Trust or any Series or to any Shareholder for the Covered Person’s good
faith reliance on the provisions of this Declaration. The provisions of this
Declaration, to the extent that they restrict or limit the duties and liabilities
of a Covered Person otherwise existing at law or in equity, are agreed by
the parties hereto to replace such other duties and liabilities of such
Covered Person.
(Cashman Aff. I ¶ 5, Ex. 61 §§ 8.1, 8.4.)
The Trust subsequently began investing on July 1, 2001. (Id. ¶ 26.) At all
relevant times, the SLP’s business was conducted through Wells Fargo, as trustee. (See
Moccio Aff. II ¶ 3, Ex. 54 at 29.) The Trust was subject to a number of investment
guidelines established by Wells Fargo, as well as guidelines that were specific to each
Series. (Cashman Aff. I ¶ 5, Exs. 62-63.) The Trust invested strictly in fixed income
securities, whose interest rates changed throughout the investment period. (Adams Aff. I
¶¶ 80-81.) Those securities could be purchased from corporations, investment banks, or
structured investment vehicles (“SIVs”). (Adams Aff. I ¶ 57; Cashman Aff. I ¶ 5, Exs.
5
62-63.) Up to 30% of all assets were held in SIVs in 2007 and 2008, and were largely
backed by real estate. (Moccio Aff. II ¶ 3, Ex. 36 at 74.) A substantial number of the
securities in the Trust were issued by three entities: Cheyne Finance LLC (“Cheyne”),
Stanfield Victoria Ltd. (“Stanfield Victoria”), and Lehman Brothers Holdings, Inc.
(“Lehman Brothers”), all of which defaulted in the 2007 credit crisis. (See Cashman
Aff. I ¶ 5, Exs. 71-82.)
Cheyne assets were predominantly real estate holdings, with 42% in subprime
mortgage-backed securities. (Moccio Aff. II ¶ 3, Ex. 52 at 91.) Although Cheyne went
into receivership on September 5, 2007, the Trust Committee chose to keep all Cheyne
securities, as two bidders were considering a purchase of Cheyne, which would have
increased value in the securities. (Cashman Aff. I ¶ 5, Exs. 72-73.) The potential
purchasers ultimately withdrew their bids, and Cheyne experienced “an enforcement
event” on October 17, 2007, at which time Cheyne securities became unsaleable.
(Adams Aff. I ¶¶ 107-09.) Plaintiffs were notified of this loss on November 20, 2007.
(Cashman Aff. I ¶ 5, Ex. 74.)
In turn, due to the credit freeze, there were few purchasers for short-term fixed
income notes, such as those provided by Stanfield Victoria, which subsequently defaulted
on January 10, 2008. (Adams Aff. I ¶ 116.) Prior to the default, a Wells Fargo executive
evaluated the Stanfield Victoria assets and found a “possibility for a horrible scenario.”
(Moccio Aff. II ¶ 3, Ex. 57.) Still, the SLP continued to hold Cheyne and Stanfield
Victoria securities through at least the summer of 2008. (Moccio Aff. II ¶ 3, Exs. 54, 58.)
6
Wells Fargo contends that, in light of these two defaults, it monitored Lehman
Brothers throughout 2007 and 2008, but believed that the government’s assistance of
Bear Stearns indicated that Lehman Brothers faced a low risk of default. (Cashman Aff. I
¶ 5, Exs. 80-82; Adams Aff. I ¶ 120.) Plaintiffs, however, argue that internal memoranda
suggest that Wells Fargo anticipated the collapse of Lehman Brothers, concealed the
information from Plaintiffs, and chose to favor certain clients to Plaintiffs’ detriment.
(Moccio Aff. II ¶ 3, Exs. 59-64.) They also allege that the EYF and CI Term Series’ net
asset value began declining in early 2007, which should have suggested a serious
problem in the investment, and which Wells Fargo did not disclose to Plaintiffs. (Moccio
Aff. II ¶ 3, Ex. 87 at 31 & Ex. 88 at 17.) Furthermore, as late as October 2007,
Wells Fargo was letting preferred clients exit the SLP “at the same price they got in,”
regardless of fair market value of the assets, ultimately increasing the losses Plaintiffs
incurred. (Moccio Aff. II ¶ 3, Ex. 102.) In March 2008, Wells Fargo ultimately changed
the SLP exit policy to “Distribution in Kind,” or a pro-rata distribution of the illiquid
securities. (Moccio Aff. II ¶ 3, Exs. 112-13.)
On September 15, 2008, Lehman Brothers declared bankruptcy. (Moccio Aff. II
¶ 3, Exs. 83-84; Adams Aff. I ¶¶ 125-28.) Following Lehman Brothers’ collapse, the
Committee opted to disaggregate the remaining Trust assets on September 19, 2008.
(Cashman Aff. I ¶ 5, Ex. 68; see Doc. No. 242, Ahlstrand Aff. ¶ 24.) Ultimately, the
Trust was drained of all assets, and Plaintiffs have been unable to resell their portion of
the assets to an appreciable value. (Moccio Aff. II ¶ 3, Ex. 24 at 1734, 2262.) Six of the
7
Plaintiffs are still participating in the SLP, as Wells Fargo requires that they each pay the
collateral shortfall on their accounts in order to exit. (Moccio Aff. II ¶ 3, Ex. 131.)
II.
McConnell’s Expert Opinions
Plaintiffs have also moved to preclude the testimony and opinions of
Wells Fargo’s expert, Professor John H. McConnell (“McConnell”). (Doc. No. 224.)
McConnell is an economist and professor at Purdue University, and has submitted an
expert report in the course of this litigation. (Doc. No. 254, McConnell Aff. ¶¶ 1-2.)
McConnell’s report offers his opinions as “to what extent, if any, Plaintiffs suffered
losses as a result of their participation in the Wells Fargo Securities Lending Program.”
(Doc. No. 227, Moccio Aff. I ¶ 3, Ex. 1 (“McConnell Report”) ¶ 2.)
McConnell’s methodology includes a three-stage approach to calculate the losses
Plaintiffs suffered by comparing their actual losses to those of a hypothetical investment
pool in the same position as the SLP during the 2007 credit crisis. (See McConnell
Report ¶¶ 49-50.) The first step of McConnell’s analysis is to calculate each Plaintiff’s
“shortfall” resulting from its participation in the SLP. (Id. ¶¶ 51-57.) In other words, the
shortfall is the amount a Plaintiff owed to its borrowers as of September 30, 2012, minus
the market value of the securities held by that Plaintiff on the same date. (Id.) Second,
McConnell calculates the “net shortfall”: each Plaintiff’s “respective shortfalls less
securities lending earnings received . . . over the time period of June 30, 2007 through
September 30, 2012.” (Id. ¶ 59.) Finally, McConnell compares this net shortfall to that
of an alternative, hypothetical benchmark SLP, and asserts that the difference between
8
the two numbers is each Plaintiff’s economic loss. (Id. ¶¶ 64, 85-86.) In constructing the
hypothetical portfolio, McConnell uses data from the Risk Management Association,
which compiles data from 15-20 securities lending intermediaries, including asset class
composition, size, and total interest paid from different securities. (Id. ¶¶ 69-80.) At
their core, McConnell’s calculations stem from his position that, “[f]rom an economic
perspective, Plaintiffs’ losses must be measured relative to an appropriate benchmark,”
thus requiring a comparison of Plaintiffs’ actual losses to the outcome that Plaintiffs
would have experienced had they participated in an alternative, hypothetical securities
lending program. (Id. ¶¶ 6-7.)
DISCUSSION
I.
Summary Judgment Motions
Summary judgment is proper if there are no disputed issues of material fact and
the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a). The
Court must view the evidence and the inferences that may be reasonably drawn from the
evidence in the light most favorable to the nonmoving party. Enter. Bank v. Magna Bank
of Mo., 92 F.3d 743, 747 (8th Cir. 1996). However, as the Supreme Court has stated,
“[s]ummary judgment procedure is properly regarded not as a disfavored procedural
shortcut, but rather as an integral part of the Federal Rules as a whole, which are designed
‘to secure the just, speedy, and inexpensive determination of every action.’” Celotex
Corp. v. Catrett, 477 U.S. 317, 327 (1986) (quoting Fed. R. Civ. P. 1).
9
The moving party bears the burden of showing that there is no genuine issue of
material fact and that it is entitled to judgment as a matter of law. Enter. Bank, 92 F.3d at
747. The nonmoving party must demonstrate the existence of specific facts in the record
that create a genuine issue for trial. Krenik v. County of Le Sueur, 47 F.3d 953, 957 (8th
Cir. 1995). A party opposing a properly supported motion for summary judgment “may
not rest upon the mere allegations or denials of his pleading, but must set forth specific
facts showing that there is a genuine issue for trial.” Anderson v. Liberty Lobby, Inc., 477
U.S. 242, 256 (1986).
A.
Plaintiffs’ Motion for Partial Summary Judgment
Plaintiffs move for summary judgment with respect to those of Wells Fargo’s
affirmative defenses that seek to limit its liability based on the Declaration of Trust.
Specifically, Plaintiffs seek judgment on affirmative defenses 18, 19 and 25. 2 (See Doc.
No. 207.)
2
The relevant affirmative defenses state the following:
18.
Plaintiffs’ claims are barred by the business judgment rule.
Any alleged liability of Wells Fargo is limited by the Declaration of Trust.
19.
Any liability under Plaintiffs’ claims is limited by the Md.
Corps. and Assns. Code §§ 12-401 et seq. and by the agreements of the
parties, including the Declaration of Trust for the Wells Fargo Trust for
Securities Lending.
...
25.
Plaintiffs’ breach of fiduciary duty claim is preempted by
their breach of contract claim because the parties’ contracts define the
scope of any duties owed by Wells Fargo.
(Doc. No. 207 at 57.)
10
Having considered the relevant provisions of the Declaration of Trust, as well as
the entire record, the Court finds that the Declaration of Trust does not unambiguously
eliminate all of Wells Fargo’s non-contractual duties to Plaintiffs. See COPIC Ins. Co. v.
Wells Fargo Bank, N.A., 767 F. Supp. 2d 1191, 1205-08 (D. Colo. 2011) (finding issues
of fact regarding the applicable standard of negligence and determining that Section 8.4
“does not unambiguously eliminate all non-contractual duties”). Questions of fact exist
as to whether Wells Fargo’s investment of collateral in risky securities “could fall under
the exclusion of liability for an act performed by a covered person in a manner
reasonably believed to be within the scope of authority conferred by the Declaration.”
Workers Comp. Reins. Assoc. v. Wells Fargo Bank, N.A. (“WCRA”), 2012 WL 1253094,
at *7 (Minn. Ct. App. Apr. 16, 2012), quoting COPIC, 767 F. Supp. 2d. at 1207.
Considering the relevant documents together, including the Declaration of Trust, the
SLAs, Subscription Agreements, and Confidential Memoranda, the relevant standard of
care is ambiguous and should be resolved by a fact-finder at trial. See COPIC,
767 F. Supp. 2d at 1207 (finding conflict between the “gross negligence” standard of the
Declaration and the simple negligence standard of the SLA and determining that
“[r]esolution of the interplay among these various provisions, and whether any should be
given primacy, should be done by a fact-finder.”).
The Court finds that Plaintiffs have neither demonstrated that Wells Fargo’s
affirmative defenses fail as a matter of law, nor the absence of any genuine issue of
material fact sufficient to warrant summary judgment. While the Court acknowledges
11
that Wells Fargo faces a high hurdle to establish that its conduct falls within any
exclusion of liability provision contained within the Declaration of Trust, it will be for
the jury to decide Wells Fargo’s liability, or lack thereof, based on the evidence presented
at trial. The Court further notes that other courts and juries that have examined this issue
have consistently found that the Declaration of Trust did not eliminate or modify Wells
Fargo’s fiduciary duties to its investors. 3 See, e.g. WCRA, 2012 WL 1253094, at *7. To
the extent Plaintiffs further contend that the Business Trust should be disregarded as a
“sham entity,” such an argument clearly presents questions of fact for the jury.
B.
Wells Fargo’s Motion for Partial Summary Judgment
Wells Fargo moves for partial summary judgment on the ERISA fiduciary duty
claim (Count I(b)), as well as the non-ERISA Minnesota Consumer Fraud Act (“MCFA”)
claim (Count V), Deceptive Trade Practices Act (“DTPA”) claim (Count VI), and
Unlawful Trade Practices Act (“UTPA”) claim (Count VII).
1.
ERISA Fiduciary Duty Claims
Plaintiffs assert an ERISA breach of fiduciary duty claim in Count I(b). ERISA
imposes a duty of loyalty, a duty of prudence, and a duty to diversify plan investments
upon fiduciaries. See 29 U.S.C. § 1104(a)(1). Wells Fargo claims that it complied with
the Trust’s investment guidelines and did not act imprudently, thus warranting summary
judgment in its favor.
3
The Court acknowledges that it may need to address the proper scope of opening
statements and other evidentiary issues at the pretrial hearing in this matter.
12
Plaintiffs have submitted evidence that could lead a reasonable fact-finder to
conclude that Wells Fargo failed to prudently and conservatively invest the SLP
collateral, that Wells Fargo abused its discretion as trustee, and that Wells Fargo failed to
comply with its own investment guidelines. Plaintiffs have also raised issues of fact with
respect to Wells Fargo’s alleged differential treatment of investors regarding their exit
options, and Wells Fargo’s purported failure to disclose material information to Plaintiffs
pertaining to their investments.
The Court finds that genuine issues of material fact exist as to whether a breach of
fiduciary duty occurred, and whether the loss to Plaintiffs was the result of such a breach.
See Roth v. Sawyer-Cleator Lumber Co., 16 F.3d 915, 917 (8th Cir. 1994). As such,
summary judgment on the ERISA fiduciary duty claim is not proper.
2.
Non-ERISA MCFA, DTPA, and UTPA Claims
Count V asserts a claim under the MCFA. Defendants claim that the non-ERISA
Plaintiffs’ MCFA claim must fail because this case serves no public benefit. With
respect to Count V, Wells Fargo asks the Court to certify the following question to the
Minnesota Supreme Court: “Under Minnesota Statutes §§ 325F.69, 325D.13, 325D.44
and 8.31, does the public benefit previously served by the Private AG claim in the WCRA
Litigation preclude Plaintiff’s current Private AG claims when no further public benefit
can be demonstrated?” (Doc. No. 239.) In response, Plaintiffs contend that this question
has already been answered in their favor by the Minnesota Court of Appeals in WCRA.
13
The Court addressed the public benefit issue in great detail in its order on
Wells Fargo’s motion to dismiss. (See Doc. No. 94 at 12-17.) The public benefit
requirement is not onerous. Kinetic Co., 672 F. Supp. 933, 946 (D. Minn. 2009). As was
the case at the time of the motion to dismiss, Wells Fargo is still engaged in securities
lending for some Plaintiffs that have not exited the SLP, and Plaintiffs seek an injunction
for return of those securities. Thus, there appears to be an issue of fact with respect to
any ongoing or future harm. Wells Fargo has not demonstrated the absence of genuine
issues of material fact on the MCFA claim. The Court declines to certify the question.
Wells Fargo contends that the DTPA and UTPA claims also fail on similar
grounds. To the extent Defendant argues that those claims do not serve a public benefit,
the Court finds this argument unpersuasive for the reasons discussed above. Defendant
further argues that the Private AG statute does not provide a private remedy for purported
violations of the DTPA and that Plaintiffs have failed to demonstrate any likelihood of
future harm. The Court concludes that Plaintiffs have demonstrated, at a minimum,
genuine issues of material fact with respect to ongoing or future harm and entitlement to
injunctive relief. See Minn. Stat. § 325D.45, subd. 1.
In light of the foregoing, Wells Fargo’s motion for partial summary judgment is
properly denied in all respects.
II.
Motion to Exclude McConnell’s Opinions
Plaintiffs also move to exclude the testimony and opinions of Wells Fargo’s
expert, Professor John J. McConnell. Plaintiffs contend that McConnell’s methodology
14
and conclusions are “speculative, against settled law, and devoid of necessary evidentiary
support.” (Doc. No. 224.) Plaintiffs take issue with McConnell’s hypothetical SLP and
contend that McConnell’s SLP contains the very types of investments that Plaintiffs
allege were improper in the Wells Fargo SLP; Plaintiffs thus claim that the hypothetical
SLP does not rise to the level of a prudent investor.
Plaintiffs seek to exclude McConnell’s testimony pursuant to Rule 702 of the
Federal Rules of Evidence and the United States Supreme Court’s decision in Daubert v.
Merrell Dow Pharms., Inc., 509 U.S. 579 (1993). Before accepting the testimony of an
expert witness, the trial court is charged with a “gatekeeper” function of determining
whether an opinion is based upon sound, reliable theory, or whether it constitutes rank
speculation. Daubert, 509 U.S. at 589–90. In Daubert, the United States Supreme Court
imposed an obligation upon trial court judges to ensure that scientific testimony is not
only relevant, but also reliable under the Rules of Evidence. Id. at 579.
The proposed expert testimony must meet three prerequisites to be admissible
under Federal Rule of Evidence 702. Lauzon v. Senco Prods., Inc., 270 F.3d 681, 686
(8th Cir. 2001). “First, evidence based on scientific, technical or other specialized
knowledge must be useful to the fact-finder in deciding the ultimate issue of fact.” Id.
“[I]t is the responsibility of the trial judge to determine whether a particular expert has
sufficient specialized knowledge to assist jurors in deciding the specific issues in the
case.” Wheeling Pittsburgh Steel Corp. v. Beelman River Terminals, Inc., 254 F.3d 706,
715 (8th Cir. 2001). Second, the proposed expert must be qualified. Id. Third, the
15
proposed evidence must be reliable. Id. The proponent of the expert testimony bears the
burden to prove its admissibility by a preponderance of the evidence. Daubert, 509 U.S.
at 592 n.10.
In determining whether the proposed expert testimony is reliable, the Court can
consider: (1) whether the theory or technique can be and has been tested; (2) whether the
theory or technique has been subjected to peer review and publication; (3) the known rate
of potential error; and (4) whether the theory has been generally accepted. Id. at 593–94.
The purpose of these requirements “is to make certain that an expert, whether basing
testimony upon professional studies or personal experience, employs in the courtroom the
same level of intellectual rigor that characterizes the practice of an expert in the relevant
field.” Kuhmo Tire Co., Ltd. v. Carmichael, 526 U.S. 137, 152 (1999).
In Kuhmo Tire, the Supreme Court determined, “the trial judge must have
considerable leeway in deciding in a particular case how to go about determining whether
particular expert testimony is reliable.” Id. In other words, a trial court should consider
the specific factors identified in Daubert where they are reasonable measures of the
reliability of expert testimony. Id. The objective of that requirement is to ensure the
reliability and relevancy of expert testimony. Id.
The Court’s focus should be on whether the testimony is grounded upon
scientifically valid reasoning or methodology. United States v. Dico, Inc., 266 F.3d 864,
869 (8th Cir. 2001). “As a general rule, the factual basis of an expert opinion goes to the
credibility of the testimony, not the admissibility, and it is up to the opposing party to
16
examine the factual basis for the opinion in cross-examination. Only if the expert’s
opinion is so fundamentally unsupported that it can offer no assistance to the jury must
such testimony be excluded.” Bonner v. ISP Techs., Inc., 259 F.3d 924, 929–30 (8th Cir.
2001).
Having considered the relevant factors, the Court finds that Wells Fargo has
demonstrated that McConnell’s opinions are sufficiently reliable to meet the threshold of
admissibility. While the Court questions the ultimate impact of McConnell’s findings, in
light of the entire record, the Court cannot conclude that McConnell’s opinions are so
fundamentally unsupported that they can offer no assistance to the jury; the Court thus
declines to exclude his testimony.
Central to Plaintiffs’ motion is Plaintiffs’ dispute of the investments selected by
McConnell for his hypothetical benchmark comparison analysis; Plaintiffs claim that the
investments included in that benchmark do not rise to the requisite “prudent” investor
standard. In this manner, Plaintiffs also challenge the reliability of McConnell’s
calculations and opinions. Whether McConnell’s benchmark portfolio selections are
“prudent” investments, however, is itself a question of fact for the jury. At their core,
Plaintiffs’ challenges appear to go to the weight of McConnell’s testimony, not its
admissibility.
As such, Plaintiffs may test the credibility of McConnell’s opinions—and
methodology—on cross examination, rebut the testimony with its own witnesses, and
submit its own contrary expert evidence; the jury can thus determine the credibility of,
17
and weight to be given to, McConnell’s testimony. See, e.g., Rockwood Retaining Walls,
Inc. v. Patterson, Thuente, Skaar & Christensen, P.A., Civ. No. 09-2493, 2011 WL
2845529, at *5 (D. Minn. July 18, 2011). Here, the Court resolves any doubts regarding
the overall value of McConnell’s testimony in favor of its admissibility. See Clark by
Clark v. Hendrick, 150 F.3d 912, 915 (8th Cir. 1998) (noting that “doubts regarding
whether an expert’s testimony will be useful should generally be resolved in favor of
admissibility”). Of course, the admissibility of McConnell’s testimony will be subject to
the proper foundation being laid, especially as it relates to the hypothetical benchmark
SLP. Therefore, Plaintiffs’ Daubert motion is denied.
ORDER
Based upon the foregoing, and the files, records, and proceedings herein, IT IS
HEREBY ORDERED that:
1.
Plaintiffs’ Motion for Partial Summary Judgment on Wells Fargo’s
Affirmative Defenses Based on the Business Trust (Doc. No. [231]) is DENIED.
2.
Wells Fargo Bank, N.A.’s Motion for Partial Summary Judgment and to
Certify Question to Minnesota Supreme Court (Doc. No. [237]) is DENIED.
3.
Plaintiffs’ Motion to Exclude the Expert Opinions of John J. McConnell
(Doc. No. [224]) is DENIED.
Dated: June 4, 2013
s/Donovan W. Frank
DONOVAN W. FRANK
United States District Judge
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