Klein v. TD Ameritrade Holding Corporation, et al

Filing 208

MEMORANDUM AND ORDER that the defendants' motion in limine to exclude the opinions and testimony of plaintiff's experts Haim Bodek and Shane Corwin, Filing No. 195 , is denied, without prejudice to reassertion as merits discovery progresses. Ordered by Senior Judge Joseph F. Bataillon. (ADB)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEBRASKA

GERALD J. KLEIN, on behalf of himself
and all similarly situated;
8:14CV396
Plaintiff,
MEMORANDUM AND ORDER

vs.
TD AMERITRADE HOLDING
CORPORATION, TD AMERITRADE,
INC., and FREDRIC TOMCZYK,
Defendants.

This matter is before the court on the defendants’ motion in limine to exclude the
testimony of the plaintiff's experts Haim Bodek and Shane Corwin under Daubert v.
Merrell Dow Pharms., 509 U.S. 579, 589 (1993), Filing No. 195. This is a purported
class action alleging wrongdoing in connection with stock trades. In this action, the lead
plaintiff1 alleges violations of federal securities laws in TD Ameritrade’s alleged failure to
route its clients’ equity orders for “best execution.”
I.

BACKGROUND
The defendants seek an order precluding consideration of the opinions of

plaintiff’s experts Haim Bodek, a securities consultant and former trader, and Shane
Corwin, a finance professor, in connection with the defendants’ pending motion for class
certification, and barring the experts from testifying at the class certification hearing
which is presently scheduled for March 27, 2018, before United States Magistrate
Judge Susan Bazis.

1

See Filing No. 27 (appointing lead plaintiff and lead counsel)

Haim Bodek was retained to perform a data analysis of the trading history of two
representative TD Ameritrade clients and to identify issues of economic harm. He will
testify to a method of proving economic loss by common proof that does not vary by
class member. He has created an algorithm and refined it to provide a method to be
applied across the class. Professor Shane Corwin was retained to opine on whether
Mr. Bodek’s analysis is capable of identifying economic harm arising from a failure of
best execution in line with academic and regulatory standards.2
Defendants argue that Bodek’s methodology is novel and untested and fails to
meet the “peer review” and “general acceptance” factors set forth by the Supreme Court
in Daubert.

They next argue that Professor Corwin’s opinions should be excluded

because he did not conduct his own analyses, his opinions are duplicative, and he is
nothing more than a “mouthpiece” for Bodek.

Further, the defendants attempt to

exclude any opinions proffered by the two experts that go to the merits of the plaintiff’s
case—that is, the best execution issue. They also argue that Corwin offers improper
legal opinions.
In opposition, the plaintiff argues that Bodek uses industry-standard metrics that
have been used by the Securities Exchange Commission to identify economic harm, the
metrics are simple equations with discrete data as input, are generally accepted in the
industry, and have been used in peer reviewed papers. Further, he argues that Bodek
uses an order book analysis to analyze depth of available liquidity and has proposed
exclusion of certain categories to avoid any doubt concerning the harm attributable to
2

Professor Corwin has provided similar expert testimony in In re NYSE Specialists Sec. Litig.,
260 F.R.D. 55, 69 (S.D.N.Y. 2009), a case involving algorithmic analysis to identify economic loss in the
context of a best execution case.

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defendant TD Ameritrade. The plaintiff also disputes the defendants' argument that
Bodek has “changed” his methodology in his rebuttal report, stating that Bodek
employed a limited order book analysis with certain exclusions in his initial report and
expanded on the analysis in his rebuttal report.
II.

LAW
Federal Rule of Evidence 702 governs the admissibility of expert testimony and

requires that: (1) the evidence must be based on scientific, technical or other
specialized knowledge that is useful to the finder of fact in deciding the ultimate issue of
fact; (2) the witness must have sufficient expertise to assist the trier of fact; and (3) the
evidence must be reliable or trustworthy. Kudabeck v. Kroger Co., 338 F.3d 856, 859
(8th Cir. 2003). Expert testimony assists the trier of fact when it provides information
beyond the common knowledge of the trier of fact. Id. at 860. When faced with a
proffer of expert testimony, trial judges are charged with the “gatekeeping” responsibility
of ensuring that all expert evidence admitted is both relevant and reliable. Kumho Tire
Co. v. Carmichael, 526 U.S. 137, 147 (1999); Daubert v. Merrell Dow Pharms., 509 U.S.
579, 589 (1993); United States v. Wintermute, 443 F.3d 993, 1000 (8th Cir. 2006). A
trial court is given wide latitude in determining whether an expert’s testimony is reliable.
See Kumho Tire, 526 U.S. at 152.
Proposed expert testimony must meet three prerequisites in order to be admitted
under Rule 702:

First, evidence based on scientific, technical, or other specialized

knowledge must be useful to the finder of fact in deciding the ultimate issue of fact;
second, the proposed witness must be qualified to assist the finder of fact; and third, the
proposed evidence must be reliable or trustworthy in an evidentiary sense. Lauzon v.
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Senco Prods., Inc., 270 F.3d 681, 686 (8th Cir. 2001). Expert testimony assists the trier
of fact when it provides information beyond the common knowledge of the trier of fact.
Kudabeck, 338 F.3d at 860. The district court's gatekeeper function applies to all expert
testimony, not just testimony based in science. Id.
Under Daubert, district courts apply a number of nonexclusive factors in
performing this role. Lauzon, 270 F.3d at 686-87. These are: whether the theory or
technique can be and has been tested; whether the theory or technique has been
subjected to peer review and publication; the known or potential rate of error; whether
the theory has been generally accepted; whether the expertise was developed for
litigation or naturally flowed from the expert's research; whether the proposed expert
ruled out other alternative explanations; and whether the proposed expert sufficiently
connected the proposed testimony with the facts of the case. Id. at 686-87. "This
evidentiary inquiry is meant to be flexible and fact specific, and a court should use,
adapt, or reject Daubert factors as the particular case demands." Unrein v. Timesavers,
Inc., 394 F.3d 1008, 1011 (8th Cir. 2005).
The proponent of expert testimony bears the burden of providing admissibility by
a preponderance of the evidence. Lauzon, 270 F.3d at 686. When the application of a
scientific methodology is challenged as unreliable under Daubert and the methodology
itself is otherwise sufficiently reliable, outright exclusion of the evidence is "warranted
only if the methodology was so altered by a deficient application as to skew the
methodology itself."

United States v. Gipson, 383 F.3d 689, 697 (8th Cir. 2004)

(brackets omitted) (quoting United States v. Martinez, 3 F.3d 1191, 1198 (8th Cir.
1993)).
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In the Eighth Circuit, "cases are legion that, correctly under Daubert, call for the
liberal admission of expert testimony." Johnson v. Mead Johnson & Co., LLC, 754 F. 3d
557, 562 (8th Cir. 2014). District courts are admonished "not to weigh or assess the
correctness of competing expert opinions."

Id.

Rather, expert testimony should

generally "be tested by the adversary process with competing expert testimony and
cross-examination, rather than excluded by the court at the outset." Id. Any doubts
regarding expert testimony “should generally be resolved in favor of admissibility.”
United States v. Finch, 630 F.3d 1057, 1062 (8th Cir. 2011) (quoting Sphere Drake Ins.
PLC v. Trisko, 226 F.3d 951, 954 (8th Cir. 2000)).
Courts apply the more lenient “focused Daubert” inquiry at the class certification
stage. In re Zurn Pex Plumbing Prod. Liab. Litig., 644 F.3d 604, 612 (8th Cir. 2011).
“Expert disputes ‘concerning the factual setting of the case’ should be resolved at the
class certification stage only to the extent ‘necessary to determine the nature of the
evidence that would be sufficient, if the plaintiff's general allegations were true, to make
out a prima facie case for the class.’” Id. at 611 (quoting Blades v. Monsanto Co., 400
F.3d 562, 567 (8th Cir. 2005). The district court is not required “to decide conclusively
at the class certification stage what evidence will ultimately be admissible at trial.” Id.
The court must determine if “questions of law or fact common to class members
predominate over any questions affecting only individual members [and if] a class action
is superior to other available methods for fairly and efficiently adjudicating the
controversy.” Fed. R. Civ. P. 23(b)(3); In re Zurn Pex, 644 F.3d at 613; see also Smith
v. ConocoPhillips Pipe Line Co., 801 F.3d 921, 925 n.2 (8th Cir. 2015) (declining to
revisit the Zurn Pex holding that only a focused Daubert analysis is required at the class
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certification stage). The district court must determine “‘whether, if [the plaintiff’s] basic
allegations were true, common evidence could suffice, given the factual setting of the
case, to show classwide injury.’” Zurn Pex, 644 F.3d at 612 (quoting Blades, 400 F.3d
at 575). Under Fed. R. Civ. P. 23(b)(3), damages must be susceptible of measurement
across the entire class. Comcast Corp. v. Behrend, 133 S. Ct. 1426, 1433 (2013). At
the class certification stage, it is not necessary that class damages be calculated to a
mathematical certainty, but “any model supporting a ‘plaintiff's damages case must be
consistent with its liability case.’” Id.; see Chavez v. Blue Sky Natural Beverage Co., 268
F.R.D. 365, 379 (N.D. Cal. 2010) (noting that “[a]t class certification, plaintiff must
present a likely method for determining class damages, though it is not necessary to
show that [this] method will work with certainty at this time.”).
Class certification “is inherently tentative.” Coopers & Lybrand v. Livesay, 437
U.S. 463, 469 n. 11 (1978).

A district court’s decision on admissibility of expert

testimony [or class certification] may “require revisiting upon completion of full
discovery,” Blades, 400 F.3d at 567. An exhaustive and conclusive Daubert inquiry
before the completion of merits discovery cannot be reconciled with the inherently
preliminary nature of pretrial evidentiary and class certification rulings. Zurn Pex, 644
F.3d at 613.
The main purpose of Daubert exclusion is to protect juries from being swayed by
dubious scientific testimony. In re Zurn Pex, 644 F.3d at 613. That interest is not
implicated at the class certification stage where the judge is the decision maker. Id.
“‘[T]here is less need for the gatekeeper to keep the gate when the gatekeeper is
keeping the gate only for himself.’” Id. (quoting United States v. Brown, 415 F.3d 1257,
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1269 (11th Cir. 2005)). The usual concerns of the Daubert rule—keeping unreliable
expert testimony from the jury—are not present in the class certification setting. In re
Zurn Pex, 644 F.3d at 613. “Expert opinions may have to adapt as such gaps are filled
by merits discovery, and the district court will be able to reexamine its evidentiary
rulings.” Id.
The court must determine that Rule 23 is satisfied, even when that requires
inquiry into the merits of the claim. Comcast, 133 S. Ct. at 1433; Blades, 400 F.3d at
567 (“The preliminary inquiry at the class certification stage may require the court to
resolve disputes going to the factual setting of the case, and such disputes may overlap
the merits of the case.”)
III.

DISCUSSION
The court finds that the defendants’ motion in limine to exclude the reports and

testimony of the plaintiff’s experts Bodek and Corwin should be denied at this time.
Both experts appear to be qualified to testify. The testimony and opinions are based on
methodology that appears reliable relevant—similar methods have been used in other
securities cases.

See, e.g., In re NYSE Specialists Sec. Litig., 260 F.R.D. 55, 66

(S.D.N.Y. 2009) (“In connection with the SEC's investigations of the Specialist Firms,
the NYSE designed and created a computer algorithm to identify specific stock
transactions where specialists had traded ahead of public orders, interpositioned
themselves between public orders, and failed to execute public limit orders by trading
for their own personal accounts.”).
The defendants have not shown that the experts’ methods are so lacking in
reliability as to require exclusion at this point in the litigation. The defendants’ challenge
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goes more to the weight of the experts’ testimony than to its admissibility. The court
finds the reports and testimony may be admitted for the limited purpose of determining
whether the requirements of Rule 23 have been met. The court should be allowed to
weigh the credibility of the experts on Rule 23 issues.
Of course, the defendants’ expert disagrees with the plaintiff’s experts’ methods
and conclusions. That, however, is not a reason to preclude the testimony. At his stage
of the case, the experts’ testimony and opinions will not be presented to a jury, but to a
judge who is capable of weighing the evidence and ignoring any irrelevant or duplicative
testimony or testimony that amounts to an improper legal opinion.
The defendants’ argument that some of the plaintiffs’ experts’ testimony goes to
the merits of the dispute rather than to the issue of class certification is similarly
unavailing. Class certification issues are often intertwined with merits issues. Touching
on the merits is not a reason to exclude the testimony. Again, the court is capable of
compartmentalizing the evidence and evaluating the evidence in context.
The court also rejects the defendants' contention that the evidence should be
excluded because Bodek allegedly altered the methods and conclusions in his original
report in response to Dr. Kleidon’s report. The parties are permitted, actually required,
to supplement their expert reports. To the extent the defendants wish to respond to any
purportedly “new” conclusions, they are free to seek leave to do so.
Further, the court rejects the defendants’ contention that Corwin’s testimony
should be excluded because he depends, to some extent, on Bodek’s finding.

An

expert may extrapolate from data supplied by other experts. Larson v. Kempker, 414

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F.3d 936, 941 (8th Cir. 2005). The defendant’s criticisms of the experts’ testimony are
properly the subject of cross-examination. Accordingly,
IT IS ORDERED that the defendants’ motion in limine to exclude the opinions
and testimony of plaintiff’s experts Haim Bodek and Shane Corwin (Filing No. 195) is
denied, without prejudice to reassertion as merits discovery progresses.
Dated this 7th day of March, 2018.

BY THE COURT:
s/ Joseph F. Bataillon
Senior United States District Judge

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