Board Of Trustees Of The AFTRA Retirement Fund et al v. JPMorgan Chase Bank, N.A.
Filing
130
OPINION AND ORDER:#101141 re: (105 in 1:09-cv-00686-SAS-DCF) MOTION in Limine to Exclude Certain Expert Testimony of Bernard Black, Fiachra O'Driscoll, and Daniel Nigro. filed by JPMorgan Chase Bank, N.A., (108 in 1:09-cv-00686-SAS-DCF) MOTION in Limine to Exclude Defendant's Proposed Expert Opinions of Patricia W. Chadwick and Dr. Michael F. Koehn. filed by Board of Trustees of The Imperial County Employees' Retirement System, Board Of Trustees Of The AFTRA Retirement Fund, The Investment Committe of the Manhattan and Bronx Service Transit Operating Authority Pension Plan. For the aforementioned reasons, JPMC's motion is granted in part and denied in part, and plaintiffs' motion is denied. The Clerk of the Court is directed to close these motions [Docket Nos. 105 and 108]. (Signed by Judge Shira A. Scheindlin on 12/14/2011) Filed In Associated Cases: 1:09-cv-00686-SAS-DCF, 1:09-cv-03020-SAS(pl) Modified on 12/15/2011 (pl). Modified on 12/16/2011 (jab).
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
------------------------------------------------------ )(
BOARD OF TRUSTEES OF THE AFTRA
RETIREMENT FUND, in its capacity as a
fiduciary of the AFTRA Retirement Fund,
individually and on behalf of all others
similarly situated,
Plaintiff,
OPINION AND ORDER
09 Civ. 686 (SAS)
- againstJPMORGAN CHASE BANK, N.A.,
Defendant.
------------------------------------------------------ )(
BOARD OF TRUSTEES OF THE
IMPERIAL COUNTY EMPLOYEES'
RETIREMENT SYSTEM, in its capacity
as a fiduciary of the Imperial County
Employees' Retirement System,
individually and on behalf of all others
similarly situated,
Plaintiff,
- againstJPMORGAN CHASE BANK, N.A.,
Defendant.
------------------------------------------------------ )(
09 Civ. 3020 (SAS)
THE INVESTMENT COMMITTEE OF
THE MANHATTAN AND BRONX
SURFACE TRANSIT OPERATING
AUTHORITY PENSION PLAN, in its
capacity as a fiduciary of the MaBSTOA
Pension Plan, individually and on behalf of
all others similarly situated,
09 Civ. 4408 (SAS)
Plaintiff,
- against JPMORGAN CHASE BANK, N.A.,
Defendant.
X
SHIRA A. SCHEINDLIN, U.S.D.J.:
I.
INTRODUCTION
This class action arises out of JPMorgan Chase Bank, N.A.’s
(“JPMC’s”) investment of certain “securities lending” clients’ cash collateral in the
June 2009 Medium-Term Notes (the “MTNs”) of Sigma Finance, Inc. (“Sigma”), a
structured investment vehicle (“SIV”) that collapsed on September 30, 2008.1
1
I granted plaintiffs’ motion for class certification on August 4, 2010.
See Board of Trustees of the AFTRA Retirement Fund v. JPMorgan Chase Bank,
N.A., 269 F.R.D. 340, 355 (S.D.N.Y. 2010). I granted JPMC’s motion for partial
summary judgment and denied plaintiffs’ motion for partial summary judgment on
August 5, 2011. See Board of Trustees of the AFTRA Retirement Fund v.
2
Class members governed by the Employee Retirement Income Security Act
(“ERISA”) assert claims for breach of the fiduciary duty to prudently manage plan
assets. Class members not governed by ERISA assert analogous prudence claims
under New York common law, in addition to breach of their securities lending
agreements with JPMC.
Both JPMC and plaintiffs now cross-move pursuant to Rules 702 and
403 of the Federal Rules of Evidence and Daubert v. Merrell Dow
Pharmaceuticals, Inc.,2 and its progeny to exclude expert testimony proffered by
their adversary. For the reasons discussed below, JPMC’s motion is granted in part
and denied in part, and plaintiffs’ motion is denied.
II.
BACKGROUND
A.
Plaintiffs’ Experts
1.
Professor Bernard Black
Professor Bernard Black is currently the Nicholas D. Chabraja
Professor at Northwestern University, with positions as Professor of Law in the
School of Law, Professor of Finance in the Kellogg School of Management, and
JPMorgan Chase Bank, N.A., — F. Supp. 2d —, Nos. 09 Civ. 686, 09 Civ. 3020,
09 Civ. 4408, 2011 WL 3477219 (S.D.N.Y. Aug. 5, 2011). This Opinion assumes
familiarity with the background and applicable law of this case, as stated in the
prior opinions.
2
509 U.S. 579 (1993).
3
Faculty Associate at the Institute for Policy Research.3 He holds undergraduate
and graduate degrees in physics from Princeton University and the University of
California at Berkeley, respectively, and a law degree from Stanford Law School.4
Professor Black has written expert reports and presented expert testimony in a wide
range of matters on topics concerning corporate finance and corporate governance.5
Professor Black offers an opinion that the Securities Lending unit of
JPMC (“JPM Securities Lending”), as a fiduciary to pension plan plaintiffs, failed
to meet the ERISA “prudent expert” standard of care because it
(1) failed to establish an appropriate position limit on investments
in Sigma; (2) failed to understand the risks associated with
Sigma’s business model; (3) failed to conduct sufficient due
diligence on its investments in Sigma; (4) failed to understand
how repo financing affected Sigma’s viability; (5) failed to assess
the likelihood that Sigma could survive long enough to repay its
June 2009 medium term notes (MTNs); (6) failed to follow up on
“red flags” that provided warnings of trouble ahead; (7) failed to
consider a full range of exit strategies; (8) failed to disclose
sufficient information about its Sigma investment to its
beneficiaries; and (9) allowed critical decisions to be taken by
people without sufficient knowledge or finance training to
3
See 8/10 Curriculum Vitae of Bernard S. Black (“Black CV”), App. A
to 8/13/10 Expert Report of Bernard S. Black (“Black Report”), Ex. A to 9/12/11
Declaration of Samuel E. Bonderoff, counsel for JPMC (“Bonderoff Decl.”), at 1.
4
See id. at 18.
5
See List of Expert Reports, Depositions and Trial or Arbitration
Testimony of Bernard Black, App. B to Black Report.
4
properly assess the risks of continuing to hold Sigma MTNs.6
Moreover, Professor Black offers an opinion that, as Sigma was winding down,
JPM Securities Lending was “gambling on which MTNs would pay off, and doing
so without knowing the odds” while “there was a high likelihood that Sigma would
fall off a ‘repo cliff’ well before the 2009 MTNs matured.”7
2.
Fiachra O’Driscoll
Fiachra O’Driscoll is a partner at KFSO Investments, an investment
business focused on equities trading.8 From 1992 to 2008, O’Driscoll worked in
increasingly senior positions at Credit Suisse, most recently as Managing Director,
Co-Head of CDO Structuring, Americas.9 In that capacity, O’Driscoll was
responsible for Credit Suisse’s restructuring efforts for SIVs beginning in the
spring of 2007.10 Before joining Credit Suisse, O’Driscoll received an M.B.A.
from Harvard Business School. In addition, he holds a bachelor’s degree in
6
Black Report at 3.
7
Id.
8
See Resume of Fiachra T. O’Driscoll (“O’Driscoll Resume”), Ex. 1 to
Report of Fiachra T. O’Driscoll Submitted on Behalf of Plaintiffs (“O’Driscoll
Report”), Ex. E to Bonderoff Decl.
9
See id.
10
See O’Driscoll Report at 2.
5
Computer Engineering from Trinity College in Dublin, Ireland.11
O’Driscoll offers an opinion that, during the relevant period, JPMC
“had ample opportunity to sell the $490 million of Sigma MTNs . . . at the thenexisting prices.”12 In addition, O’Driscoll echoes other plaintiffs’ experts in stating
that JPMC’s decision to invest in and hold Sigma MTNs was imprudent.13
3.
Daniel Nigro
Daniel Nigro is currently a consultant with Warfield Consultants,
which provides a “Full Range of Fixed Income Intelligence across Sectors.”14 He
has worked in fixed income markets as an institutional investor for over twentyfive years, with over twenty of those years spent as a portfolio manager.15 During
that time, Nigro acquired experience analyzing, purchasing, and managing assetbacked securities (“ABS”) and mortgage-backed securities (“MBS”).16 Nigro
received an M.B.A. in Finance and Marketing and an undergraduate degree in
11
See O’Driscoll Resume.
12
O’Driscoll Report at 3.
13
See id.
14
Resume of Daniel Nigro (“Nigro Resume”), App. A to 8/12/10
Declaration of Daniel J. Nigro (“Nigro Decl.”), Ex. C to Bonderoff Decl., at 1.
15
See Nigro Decl. ¶ 1.
16
See id.
6
Finance from the State University of New York at Buffalo.17
Nigro offers an opinion that “the prudence of JPM’s decision to buy
and hold the 2009 Sigma notes can be determined utilizing the same proof for all
Class Members.”18 JPMC “was required to invest in only the highest quality
instruments” and JPMC’s prudence can be evaluated by looking at “(a) the
characteristics and risk attributes of the notes themselves, and (b) the marked
conditions at the time of the investment decision.”19 Applying this methodology to
the facts at hand, Nigro concludes
the characteristics and attributes of the 2009 Sigma notes and the
prevailing market conditions at the time of the investment
decisions render the investment decisions to buy and subsequently
hold the 2009 Sigma notes for Class Members imprudent.20
B.
JPMC’s Experts
1.
Patricia W. Chadwick
Patricia W. Chadwick is the Founder and President of Ravengate
Partners LLC, a consulting firm that provides “businesses and not-for-profit
17
See Nigro Resume at 3.
18
Nigro Report ¶ 8.
19
Id. ¶¶ 9-10.
20
Id. ¶ 11.
7
institutions with education and advice about financial markets.”21 Before
Chadwick’s current position, she “served for 26 years in increasingly senior
positions as a securities analyst, portfolio manager, investment strategist, and
director of research/portfolio management/trading and sales at major assetmanagement firms.”22 For eighteen of those years, she served as a portfolio
manager, managing approximately five-billion dollars in assets.23 Chadwick has
previously given expert testimony on “investment processes, investment research,
and portfolio management.”24 Chadwick received an undergraduate degree in
economics from Boston University.25
Chadwick offers an opinion that JPMC “acted reasonably and
appropriately when it purchased the Sigma MTNs.”26 In reaching this conclusion,
21
Resume of Patricia W. Chadwick (“Chadwick Resume”), App. A to
8/13/10 Expert Report of Patricia W. Chadwick (“Chadwick Report”), Ex. A
9/12/11 Declaration of Peter H. LeVan Jr., plaintiffs’ counsel, in Support of
Plaintiffs’ Memorandum of Law in Support of Their Motion to Exclude
Defendant’s Proposed Expert Opinions of Patricia W. Chadwick and Dr. Michael
F. Koehn (“LeVan Decl.”).
22
Chadwick Report ¶ 2.
23
See id.
24
Id. ¶ 5.
25
See Chadwick Resume.
26
Chadwick Report ¶ 11.
8
Chadwick considered that (1) Sigma MTNs met or exceeded JPMC’s investment
guidelines; (2) Sigma MTNs had the highest possible ratings from all three rating
agencies; and (3) Sigma had a history of being a credit-worthy issuer with highquality assets.27 Moreover, JPMC had no reason to be concerned about problems
in the subprime sector in the first half of 2007 because Sigma MTNs did not have
direct exposure to the subprime market. At the time many believed that “problems
in the subprime market would have limited impact on the credit markets and
market as a whole.”28 Chadwick also states that JPMC’s decision to hold the notes
was reasonable based on the information available at the time, which indicated that
any sale would have resulted in a drastic loss. At the time, it was reasonable to
believe that JPMC could receive a greater recovery if Sigma defaulted and entered
receivership than if JPMC sold the MTNs into an illiquid and distressed market.29
Finally, Chadwick opines that JPMC’s credit analysis was “professional, thorough,
and consistent.”30
2.
Dr. Michael F. Koehn
27
See id.
28
Id.
29
See id.
30
Id.
9
Dr. Michael F. Koehn is an economist with a specialization in
microeconomics and finance. Dr. Koehn co-founded Analysis Group, Inc. and
continues to serve as a consulting affiliate.31 He has a Ph.D. in Financial
Economics from the Wharton School, University of Pennsylvania.32
Dr. Koehn critiques plaintiffs’ experts for portraying “an overly
simplistic picture of this case that demonstrates a misunderstanding of securities
lending, ignores the investment guidelines that were in place, and relies on
hindsight.”33 According to Dr. Koehn, securities lending requires a certain level of
risk, which “was explicitly contemplated and permitted by the investment
guidelines that [JPM Securities Lending] negotiated with its clients.”34 He also
attacks plaintiffs’ experts’ reliance on “red flags” because such supposed warning
signs were known to the market and reflected in the market price of Sigma MTNs,
which did not move materially until the spring of 2008.35
III.
ADMISSION OF EXPERT EVIDENCE
31
See 5/19/10 Declaration of Michael F. Koehn, Ph.D.
32
See 9/13/10 Rebuttal Report of Michael F. Koehn, Ph.D. (“Koehn
Report”), Ex. C to LeVan Decl., ¶ 1.
33
Id. ¶ 5.
34
Id. ¶ 6.
35
See id. ¶ 7.
10
The proponent of expert evidence bears the initial burden of
establishing admissibility by a “preponderance of proof.”36 Rule 702 of the
Federal Rules of Evidence states the following requirements for the admission of
expert testimony:
If scientific, technical, or other specialized knowledge will
assist the trier of fact to understand the evidence or to
determine a fact in issue, a witness qualified as an expert by
knowledge, skill, experience, training, or education, may
testify thereto in the form of an opinion or otherwise, if (1)
the testimony is based upon sufficient facts or data, (2) the
testimony is the product of reliable principles and methods,
and (3) the witness has applied the principles and methods
reliably to the facts of the case.
Under Rule 702 and Daubert, the district court must determine whether the
proposed expert testimony “both rests on a reliable foundation and is relevant to
the task at hand.”37 The district court must act as “‘a gatekeeper to exclude invalid
and unreliable expert testimony.’”38 However, “the Federal Rules of Evidence
36
Bourjaily v. United States, 483 U.S. 171, 175-76 (1987) (discussing
Rule 104(a) of the Federal Rules of Evidence). Accord Daubert, 509 U.S. at 592
& n.10 (1993) (citing Bourjaily, 483 U.S. at 175-76, and explaining that the
proponent of expert testimony must prove admissibility by a preponderance of
proof).
37
509 U.S. at 597. Accord Kumho Tire Co. v. Carmichael, 526 U.S.
137, 147-49 (1999).
38
Bickerstaff v. Vassar Coll., 196 F.3d 435, 449 (2d Cir. 1999) (quoting
Hollander v. American Cyanamid Co., 172 F.3d 192, 202 (2d Cir. 1999)). Accord
Louis Vuitton Malletier v. Dooney & Bourke, Inc. (“Vuitton IV”), 525 F. Supp. 2d
11
favor the admissibility of expert testimony, and [the court’s] role as gatekeeper is
not intended to serve as a replacement for the adversary system.”39 In serving its
gatekeeping function, the court’s focus must be on the principles and
methodologies underlying the expert’s conclusions, rather than on the conclusions
themselves.40 In assessing an expert’s methodology, courts may consider (1)
“whether [the method or theory] can be (and has been) tested,” (2) “whether [it]
has been subjected to peer review and publication,” (3) “the known or potential
rate of error [associated with the technique] and the existence and maintenance of
standards controlling the technique’s operation,” and (4) whether the method has
achieved “general acceptance” with the relevant community.41
558, 561-65 (S.D.N.Y. 2007) (discussing district court’s “special obligation” to
gatekeep with respect to expert evidence).
Additionally, expert testimony may not usurp the role of the court in
determining the applicable law. See United States v. Lumpkin, 192 F.3d 280, 289
(2d Cir. 1999). Although an expert “may opine on an issue of fact,” an expert
“may not give testimony stating ultimate legal conclusions based on those facts.”
United States v. Bilzerian, 926 F.2d 1285, 1294 (2d Cir. 1991). Expert testimony
is also inadmissible when it addresses “lay matters which [the trier of fact] is
capable of understanding and deciding without the expert’s help.” Andrews v.
Metro N. Commuter R.R. Co., 882 F.2d 705, 708 (2d Cir. 1989).
39
Vuitton IV, 525 F. Supp. 2d at 562 (citation and quotation marks
omitted).
40
See Daubert, 509 U.S. at 595.
41
Id. at 592-95.
12
The courts’ gatekeeping function under Daubert applies not only to
“scientific” evidence, but also to proffers of “technical, or other specialized
knowledge” under Rule 702.42 The objective of this function 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.”43 However,
recognizing that “there are many different kinds of experts, and many different
kinds of expertise,” the Supreme Court has emphasized that the reliability inquiry
“is a flexible one.”44 Accordingly, the factors “identified in Daubert may or may
not be pertinent in assessing reliability, depending on the nature of the issue, the
expert’s particular expertise, and the subject of his testimony.”45 Ultimately, the
inquiry “depends upon the particular circumstances of the particular case at
issue.”46 In sum, the trial court has “the same kind of latitude in deciding how to
test an expert’s reliability . . . as it enjoys when it decides whether or not that
42
See Kumho Tire, 526 U.S. at 141.
43
Id. at 152.
44
Id. at 150.
45
Id. (quotations omitted).
46
Id.
13
expert’s relevant testimony is reliable.”47
In addition, Rule 403 of the Federal Rules of Evidence states that
relevant evidence “may be excluded if its probative value is substantially
outweighed by the danger of unfair prejudice, confusion of the issues, or
misleading the jury.” “Expert evidence can be both powerful and quite misleading
because of the difficulty in evaluating it. Because of this risk, the judge in
weighing possible prejudice against probative force under Rule 403 . . . exercises
more control over experts than over lay witnesses.”48
IV.
DISCUSSION
Plaintiffs and JPMC offer expert testimony concerning the prudence
of JPMC’s decision to invest in and hold Sigma MTNs. They challenge their
adversary’s experts partially on the basis of the four criteria listed in Daubert.
However, the question of whether an investment manager, acting as a fiduciary,
acted “with the care, skill, prudence, and diligence under the circumstances then
prevailing that a prudent man acting in a like capacity and familiar with such
matters would use in the conduct of an enterprise of a like character and with like
47
Id. at 152 (emphasis in original).
48
Id. (quotation marks omitted).
14
aims”49 is not susceptible to determination by a scientific formula or mathematical
calculation. Rather, it includes questions such as whether the fiduciary
“exercise[d] independent judgment when making investment decisions” and
whether the fiduciary “act[ed] in a manner as would others who have a capacity
and familiarity with such matters.”50 Accordingly, a determination of the
reliability of the proffered experts’ testimony, while using the illustrative Daubert
criteria where appropriate, ultimately concerns whether the proffered experts
“employ[] in the courtroom the same level of intellectual rigor that characterizes
the practice of an expert in the relevant field.”51 Because the proffered experts
have ample experience in the relevant fields and employ the same techniques in
their proffered testimony as they do in practice I conclude, with limited exceptions,
that their testimony is sufficiently reliable to be admissible under Rule 702 and
Daubert.
A.
JPMC’s Challenges to Plaintiffs’ Experts
1.
49
Failure of Plaintiffs’ Experts to Value the Sigma MTNs
29 U.S.C. § 1104(a)(1)(B).
50
Board of Trs. of Local 295/Local 851-IBT Emp’r Pension Fund v.
Callan Assocs., Inc., No. 97 Civ. 1741, 1998 WL 289697, at *3 (S.D.N.Y. June 4,
1998).
51
Kumho Tire, 526 U.S. at 152.
15
JPMC contends that the purported expert opinion – offered by
O’Driscoll, Nigro, and Professor Black – that it was imprudent of JPMC to hold
the Sigma MTNs is methodologically flawed and irrelevant. According to JPMC,
an expert must assess the prudence of JPMC’s decision to hold the MTNs by
“determining the value of the notes—comparing the available sale price to the
amount the notes were expected to yield if held to maturity” during the relevant
period.52 Specifically, JPMC contends the proper inquiry would be to determine
(1) the value of the MTNs, based on information available at the time and
accounting for the risk of default and the likely recovery upon default; (2) the price
the MTNs could be sold for, considering market conditions at the time; and (3)
whether the MTNs could have been sold at a price exceeding their value.53
Although plaintiffs’ experts conceded that it was important to compare the value of
the MTNs to the prices at which they could be sold, plaintiffs’ experts failed to
value the MTNs for any date during the relevant period. JPMC contends that their
opinion – simply that it was too risky to hold the MTNs – is fatally flawed because
it fails to examine the alternatives to holding the MTNs.
52
Defendant’s Memorandum of Law in Support of Its Motion In Limine
to Exclude Certain Expert Testimony of Bernard Black, Fiachra O’Driscoll, and
Daniel Nigro (“JPMC Mem.”) at 1.
53
See id. at 2.
16
Plaintiffs initially respond by arguing that JPMC’s proposed analysis
is impossible because information about the specific securities held in Sigma’s
portfolio was unavailable.54 This argument lacks merit. JPMC, in fact, argues that
plaintiffs’ experts failed to use a proper methodology because they did not
“determine the value of the MTNs . . . based on the information available to
Securities Lending at the time.”55 Thus, JPMC’s attack is not based on plaintiffs’
failure to consider unascertainable facts to value the MTNs, but rather a failure to
value the MTNs based on the information available to JPM Securities Lending at
the time.
Plaintiffs also argue that their experts’ methodology is proper because
it focuses on evaluating “what limited analysis [JPMC] actually conducted during
the relevant time.”56 Plaintiffs contend that because JPM Securities Lending never
obtained specific bids on the Sigma MTNs it would be improper to exclude
plaintiffs’ experts for not performing a financial analysis that JPMC never
conducted at the time. Accordingly, plaintiffs argue that their experts’ opinions
54
Plaintiffs’ Memorandum of Law in Opposition to Defendant’s Motion
in Limine to Exclude Certain Expert Testimony of Bernard Black, Fiachra
O’Driscoll, and Daniel Nigro (“Pl. Opp. Mem.”) at 3-4.
55
JPMC Mem. at 1.
56
Pl. Opp. Mem. at 1.
17
should not be excluded because the lack of data to properly value the MTNs
reflects the information available to JPM Securities Lending at the relevant time.
Both JPMC and plaintiffs agree that the proper inquiry focuses on the
information available to JPM Securities Lending at the relevant time, without the
benefit of hindsight.57 Accordingly, an inquiry into the prudence of JPMC’s
conduct may properly include a critique of JPM Securities Lending’s analysis of
the Sigma MTNs.58 Plaintiffs’ experts have the necessary experience and
qualifications to make such a critique59 – Professor Black has testified extensively
on finance,60 O’Driscoll led Credit Suisse’s SIV restructuring efforts during the
57
See McCabe v. Capital Mercury Apparel, 752 F. Supp. 2d 396, 41112 (S.D.N.Y. 2010) (“ Because defendants’ decisions were objectively appropriate
in light of then-prevailing circumstances, subjective disagreement or speculation
regarding their motivations does not render their actions imprudent or
unreasonable.”).
58
See Katsaros v. Cody, 744 F.2d 270, 279 (2d Cir. 1984) (holding that
the proper inquiry looks into whether the fiduciary “‘at the time [it] engaged in the
challenged transactions, employed the appropriate methods to investigate the
merits of the investment and to structure the investment.’”) (quoting Donovan v.
Maxilla, 716 F.2d 1226, 1232 (9th Cir. 1983)).
59
See Kumho Tire, 526 U.S. at 156 (holding that proffered experts may
“draw a conclusion from a set of observations based on extensive and specialized
experience”).
60
See 8/10 List of Expert Reports, Depositions and Trial or Arbitration
Testimony of Bernard Black, Ex. B to Black Report.
18
relevant time,61 and Nigro has spent over twenty years as a portfolio manager
analyzing ABS and MBS.62 Nor does JPMC actually contest the admissibility of
such an opinion.
Whether plaintiffs’ experts may offer an opinion that JPM Securities
Lending’s analysis was deficient, however, begs the question as to whether they
may offer the opinion that JPMC contests – that JPM Securities Lending’s decision
to hold the MTNs was imprudent. Although plaintiffs have not offered as
thorough an analysis as JPMC believes is necessary, this goes to the weight, rather
than the admissibility, of the experts’ testimony and is properly attacked on crossexamination.63
In light of the experience of plaintiffs’ experts and their knowledge of
the SIV markets during the relevant time period,64 their opinion that JPMC’s
decision to hold the Sigma MTNs was imprudent is certainly not so flawed as to
61
See O’Driscoll Resume.
62
See Nigro Decl. ¶ 1.
63
Cf. In re Methyl Tertiary Butyl Ether (MTBE) Prods. Liab. Litig., 643
F. Supp. 2d 482, 499 (S.D.N.Y. 2009) (“As the Second Circuit has repeatedly
counseled, concerns about the adequacy of data underpinning an expert opinion are
best addressed via cross-examination.”).
64
See Kumho Tire, 526 U.S. at 156 (holding that proffered experts may
“draw a conclusion from a set of observations based on extensive and specialized
experience”).
19
require exclusion under Daubert. O’Driscoll, in his capacity restructuring SIVs at
Credit Suisse, was intimately acquainted with the SIV market during the relevant
period. He has first-hand knowledge of sales of Sigma MTNs. Because JPM
Securities Lending did not actually attempt to sell the MTNs, there is no direct
evidence of what prices JPM Securities Lending could have received for the notes.
O’Driscoll’s opinion, based on his familiarity with the active market in Sigma
MTNs through mid-September 2008, is helpful to the finder of fact because of the
absence of such direct evidence.
Moreover, Professor Black does explore alternatives that JPM
Securities Lending could have pursued in lieu of holding the MTNs. Professor
Black offers an opinion that JPM Securities Lending acted imprudently by not
engaging in privately-negotiated ratio trades with Sigma, which would be
preferable to holding the Sigma MTNs.65
These experts do not merely make conclusory statements based on
their experience,66 but rather offer detailed analyses to substantiate their
65
See Black Report at 40 (“JP Morgan was in an excellent position to
negotiate a large ratio trade that would have protected Securities Lending against
the cliff risk, on terms that would lead to little or no loss of principal.”).
66
See Primavera Familienstifung v. Askin, 130 F. Supp. 2d 450, 530
(S.D.N.Y. 2001) (holding that an expert “must do more than aver conclusorily that
his experience led to his opinion”) abrogated on other grounds by Casey v. Merck
& Co. Inc., 653 F.3d 95, 100 (2d Cir. 2011).
20
conclusions. Accordingly, plaintiffs’ experts may offer an opinion that JPM
Securities Lending’s decision to hold the MTNs was imprudent. The experts’
failure to value the Sigma MTNs and compare the value to market prices is
appropriately dealt with on cross-examination.
2.
Professor Black’s “Repo Cliff”
Professor Black uses the metaphor of a “repo cliff” to illustrate the
danger Sigma faced as it increased its levels of repo financing. Professor Black
describes repo financing and the “repo cliff” as follows:
The repo alternative worked like this. To pay the first $10 in
maturing debt, Sigma would pledge assets to a repo financier. This
was permitted, as long as Sigma obtained financing equal to at
least 90% of the market value of assets. The repo financier would
charge a fee, and might value the assets at less than Sigma did, say
at 85% of face (call this “repo collateral value”). The actual fees
were complex and not easy to disentangle from interest payments,
but a reasonable approximation is an annual fee of around 1%,
largely paid up front. The repo lender would therefore take
possession of assets with $11.11 in repo collateral value, and lend
$10.10 to Sigma, of which Sigma would pay $0.10 to the repo
lender as its 1% fee. The market value of the pledged assets would
be $11.75; their face value would be $13.06: So, if Sigma initially
had assets with face value of $105 and market value of $94.50,
then after the repo transaction, it would have unpledged assets
with face value of $91.84 and market value of $82.66. After the
first repo transaction, it[s] ratio of unpledged assets/debt had
dropped from 105% to 102% based on face value, and from
94.5% to 91.8% based on estimated market value.
Now repeat 6 more times. By the end, Sigma has left only $13.58
in unpledged assets, to cover its remaining $30 in debt. The repo
21
lenders then say, enough already, declare a default, seize the
collateral, and sell it. In theory, if they sell the collateral for more
than the $70 that Sigma owes them, they should pay the excess to
Sigma. In practice, they have no incentive to collect any more than
the $70 they need to cover their loan, and likely will return little
or nothing to Sigma. To make matters worse, the repo lenders will
have cherry picked Sigma’s better, more liquid assets. The limited
remaining assets will be worth less than their face value of $8.58,
perhaps substantially less.
By relying so heavily on repo, Sigma was heading toward a cliff.
If market values and liquidity recovered before it ran out of assets
to pledge to repo lenders, it might recover. If not, the value of its
remaining senior notes would crash when the repo lenders pulled
the plug. As Sigma continued through 2007 and 2008, building up
more and more repo, while the market values of its assets fell, it
should have been increasingly clear that the likely ending was
bad.67
At his deposition, Professor Black testified about the “repo cliff” as follows:
Q.
What’s a repo cliff?
A.
This is a term that I use in my expert report in this case to
describe, in colloquial fashion, if you will, a risk that Sigma’s . .
. use of repurchase agreement – which I will call “repo,” if I may
– in order to finance its operations. I use this term to describe a
risk that that manner of financing posed to the eventual recovery
for the longer dated Sigma senior Notes . . . .
Q.
Who has previously used the concept of repo cliff, to your
knowledge?
A.
I made it up.
Q.
You made it up. Just for this case?
A.
I made it up just for this case.68
67
Black Report at 17-18.
68
12/3/10 Deposition of Bernard S. Black (“Black Dep.”), Ex. B to
Bonderoff Decl., at 14:8-15:3.
22
JPMC contends that Professor Black’s “repo cliff” theory should be
excluded for several reasons. First, courts generally require that the methodologies
used by experts have been subject to peer review and are generally accepted in the
relevant field. Black fails to meet either of these requirements. Second, courts are
especially skeptical of methodologies created solely for purposes of litigation.
Third, courts generally exclude untestable opinions. Here, Black has only
identified broad factors suggesting that a security issuer faces a “repo cliff” without
specifying when and how these factors create an unacceptable risk to the stability
of an investment, thus rendering the theory untestable.
Plaintiffs contend that what Professor Black “made up” for purposes
of this litigation is only the term “repo cliff.” Although Professor Black was being
asked about the “concept of repo cliff,”69 rather than the term “repo cliff,” it is
apparent that what is novel is Professor Black’s metaphor.
Although new methodologies created for purposes of litigation are
disfavored,70 Professor Black’s repo cliff theory is admissible. The essence of
69
Id. (emphasis added).
70
See In re Methyl Tertiary Butyl Ether (MTBE) Prods. Liab. Litig., 593
F. Supp. 2d 549, 561 (S.D.N.Y. 2008) (excluding expert testimony where the
proffered expert could “not name another scientist who ha[d] ever employed, much
less approved of” his method and “had never used it in his day-to-day work, or
applied it”).
23
Black’s theory is that the amount of collateral pledged to repo financiers detracts
from the value of senior debt because it limits the amount of assets available to
senior lenders in a liquidation and that excessive amounts of repo financing should
be of concern to an investment manager. JPMC cannot demonstrate that this
theory is flawed or lacks support among economists and financial analysts.71 To
the extent the “repo cliff” theory is imprecise, JPMC may cross-examine Professor
Black about his theory and argue that Professor Black has not and cannot identify
the precise point at which repo financing becomes so excessive that one falls off
the “repo cliff.” These points go to weight rather than admissibility. Because the
“Federal Rules of Evidence favor the admissibility of expert testimony, and [the
71
See, e.g., Sam Jones, FT Alphaville, SIVs repo what they sow (Sept.
12, 2007) (“Repos – repurchasing agreements – are essentially a super-senior form
of debt. Rather than use assets as collateral for loans, repos literally sell the assets
themselves. The assets are bought from the borrower and sold back for more at an
agreed later date. Naturally, of course, that has existing SIV note holders worried,
because it subordinates them in the capital structure. If a SIV with repo financing
went into defeasance – those repo assets wouldn’t be coming back. Investors were
noticeably concerned at the end of Moody’s teleconference.”), available at
http://ftalphaville.ft.com/blog/2007/09/12/7241/sivs-repo-what-they-sow/; cf. Viral
Acharya, Professor of Finance, Stern School of Business, New York University,
Arvind Krishnamurthy, Harold Stuart Professor of Finance, Kellogg School of
Management, Northwestern University, & Enrico Perotti, Professor of
International Finance, University of Amsterdam, A Consensus View on Liquidity
Risk (Sept. 14, 2011) (“Financial claims such as repos and derivatives enjoyed
broader privileges to repossess collateral and resell it immediately upon default
since the reform of US and EU bankruptcy rules in 2005. Since then, massive
growth in these funding and hedging strategies has increased contingent liquidity
risk.”), available at http://www.voxeu.org/index.php?q=node/6973.
24
court’s] role is not intended to serve as a replacement for the adversary system”72
Professor Black’s “repo cliff” theory is admissible.
3.
Professor Black’s Opinions Concerning State of Mind
JPMC also seeks to preclude Professor Black from making certain
statements that purportedly “offer speculation about the state of mind and
motivations of JPMC . . . or individual witnesses.”73 JPMC contends that such
opinions are improper subjects for expert testimony. Plaintiffs respond that the
challenged statements are not speculations about state of mind; rather, they are
statements that rest on the factual record.
There is no dispute that opinions concerning state of mind are an
inappropriate topic for expert opinion.74 Accordingly, any such statements will not
be permitted at trial. JPMC gives the following statements from Professor Black’s
report as examples of improper state-of-mind opinions:
72
Vuitton IV, 525 F. Supp. 2d at 562 (citation and quotation marks
omitted).
73
JPMC Mem. at 21.
74
See Highland Capital Mgmt., L.P. v. Schneider, 379 F. Supp. 2d 461,
469 (S.D.N.Y. 2005) (excluding expert testimony where proffered expert
interjected “his opinion as to the state of mind and knowledge possessed by
defendants and non-parties to this action”); In re Rezulin Prods. Liab. Litig., 309 F.
Supp. 2d 531, 546 (S.D.N.Y. 2004) (holding inadmissible expert testimony
concerning “intent, motives or state of mind”).
25
1.
2.
3.
4.
5.
6.
7.
JPM Securities Lending largely relied blindly on [Lisa
Shin’s] advice75
[James Wilson] understood even less about Sigma’s model
and its risks than Ms. Shin did76
Shin knew of Fitch’s ratings withdrawal but was
untroubled77
[Shin and Wilson] understood neither the odds nor the
game78
[Shin and Wilson] appeared to assume that the only options
were to sell Sigma notes at market prices or accept the ratio
trades that Sigma was offering79
[Wilson] didn’t know how to assess when to sell (or ratio
trade) and when to hold. He didn’t know how to approach
Sigma, to propose a ratio trade. So he held, and hoped for
the best.80
Before the 2007 financial crisis, securities lending was a
sleepy, apparently safe backwater. Not someplace one
would put stars.81
The first contested statement – that JPM Securities Lending “relied
blindly” on Shin – is excluded from Black’s report because the word “blindly”
impermissibly draws an inference as to JPM Securities Lending’s state of mind.
75
Black Report at 24.
76
Id.
77
Id. at 25.
78
Id. at 36.
79
Id. at 40.
80
Id. at 42.
81
Id.
26
While Professor Black may permissibly opine that JPM Securities Lending’s due
diligence did not comply with industry standards, whether JPM Securities Lending
relied “blindly” on Shin is an inference for the finder of fact to draw.
The second contested statement – that Wilson understood Sigma less
than Shin – is permissible because it is clearly based on the record. Wilson
testified that he was not directly involved in the decision to purchase Sigma, and he
referred questions about the financial reporting of SIVs, such as Sigma, to Shin.82
However, Professor Black may not testify to this as his expert opinion. Rather, he
can reference this fact in the record as the basis for his ultimate opinion.
The third contested statement – that Shin was untroubled by Fitch’s
ratings withdrawal – is an impermissible expert opinion going to state of mind.
Again, it is proper for an expert to observe that Shin did not investigate Fitch’s
withdrawal and offer an opinion that this behavior was in contravention of industry
standards. However, because plaintiffs point to no explicit statement by Shin that
she was “untroubled” by Fitch’s withdrawal, this is an inference that the finder of
fact may choose to accept or reject.
82
See 6/29/10 Deposition of James Wilson, Ex. M to 10/11/11
Declaration of Peter H. LeVan, Jr., plaintiffs’ counsel, in Support of Plaintiffs’
Memorandum of Law in Opposition to Defendant’s Motion In Limine to Exclude
Certain Expert Testimony of Bernard Black, Fiachra O’Driscoll, and Daniel Nigro
(“LeVan Opp. Decl.”), at 65, 72-73.
27
The fourth contested statement – that Shin and Wilson “understood
neither the odds nor the game” – is also not a proper expert opinion. Although it is
proper for Professor Black to critique Shin’s recovery analysis by pointing to
flawed assumptions and inaccurate estimates, the conclusion that Shin and Wilson
“understood neither the odds nor the game” is properly reserved for the finder of
fact.
The fifth contested statement – that Shin and Wilson “appeared to
assume” that their only options were to sell the Sigma MTNs at market prices or
accept Sigma’s ratio trades – is improper. Professor Black may testify as to Shin’s
and Wilson’s failure to adequately research alternative measures, such as a
privately negotiated ratio trade. However, testimony concerning what Shin and
Wilson “appeared to assume,” without any supporting testimony from Shin or
Wilson stating that they only considered selling the Sigma MTNs at market prices
or accepting Sigma’s proposed ratio trades, once again draws inferences that
should be left to the finder of fact.
The sixth contested statement – that Wilson held the Sigma MTNs and
“hoped for the best” because he did not know when to sell or ratio trade – is
improper. Plaintiffs fail to point to anything in the record that clearly shows
Wilson did not know how to propose a ratio trade or when to sell or ratio trade.
28
Professor Black may testify that Wilson never sold an asset during his career, but
he lacks any basis to testify that Wilson did not “know” how to approach Sigma
about a ratio trade, or how to assess a decision to buy or hold. These are inferences
that may be drawn by the finder of fact.
The seventh, and final, contested statement – that securities lending
was a “sleepy, apparently safe backwater” and not a place for “stars” – is also
excluded. Professor Black is a lawyer and law professor, without any experience
as a financial analyst or portfolio manager.83 Having never worked at a bank,
Professor Black’s statement about whether “stars” would be placed in securities
lending falls outside his area of professional expertise.
4.
O’Driscoll’s Bloomberg Screen Shot
O’Driscoll offers an opinion that “[b]y July 2008, certain purchasers
continued demanding the Sigma MTNs at prices of $76/79” and cited to a
Bloomberg screen shot from July 14, 2008 to support this proposition.84 JPMC
seeks to preclude O’Driscoll from offering any testimony based on an incomplete
Bloomberg screen shot. JPMC contends that this is not the type of facts or data
that is “reasonably rel[ied]” upon by “experts in the particular field” in forming
83
See Black Dep. at 5:17-19, 47:14-22, 53:9-19.
84
O’Driscoll Report at 15; see also 7/14/08 Bloomberg screen shot, Ex.
3 to O’Driscoll Report.
29
opinions or inferences on the subject.85 O’Driscoll was unable or unwilling to
identify the source of the screenshot and acknowledged that it did not reflect an
actual purchase or sale of Sigma MTNs. He could not “guarantee . . . that any of
the information on this is reliable.”86
Plaintiffs argue that JPMC received the bid contained in the
Bloomberg screen shot and produced an unsolicited marketing e-mail, containing
the same information.87 This is immaterial. Simply because JPMC received an
unsolicited e-mail, does not make the contents of the e-mail or screenshot a reliable
basis for an expert opinion. This is especially true where the expert does not know
the source of the documents and cannot guarantee its reliability.
The Bloomberg screenshot, by O’Driscoll’s own admission, is not the
type of evidence upon which a reasonable expert would rely. Accordingly,
O’Driscoll is precluded from testifying about the screenshot or offering an opinion
that “[b]y July 2008, certain purchasers continued demanding the Sigma MTNs at
prices of $76/79” to the extent that opinion is based solely on the Bloomberg
85
Fed. R. Evid. 703.
86
12/9/10 Deposition of Fiachra O’Driscoll (“O’Driscoll Dep.”), Ex. F
to Bonderoff Decl., at 229:5-7.
87
See Opp. Mem. at 22; see also Defendant’s Reply Memorandum of
Law in Support of Its Motion In Limine to Exclude Certain Expert Testimony of
Bernard Black, Fiachra O’Driscoll, and Daniel Nigro at 9.
30
screen shot. However, O’Driscoll may offer opinions based on his knowledge of
the SIV market during the relevant time period independent of the Bloomberg
screen shot.
B.
Plaintiffs’ Challenges to JPMC’s Experts
1.
Patricia Chadwick
Plaintiffs seek to exclude Chadwick’s testimony on the grounds that
her proffered opinion (1) is not her independent opinion, but is actually based on
analysis, which she does not understand, performed by a third-party; (2) is based
on information contained in interview notes Chadwick has destroyed; and (3)
consists of inadmissible ipse dixit.
a.
Third-Party Research
Plaintiffs contend that much of Chadwick’s opinion is based on work
done by the Analysis Group, a “third-party economic research and consulting firm
hired by counsel for” JPMC.88 The work done by the Analysis Group went beyond
the typical work permitted for expert’s assistants, such as administrative support
and research. According to plaintiffs, the Analysis Group provided substantive
expertise in areas where Chadwick lacked such expertise. Chadwick bases her
88
Plaintiffs’ Memorandum of Law in Support of Their Motion to
Exclude Defendant’s Proposed Expert Opinions of Patricia F. Chadwick and Dr.
Michael F. Koehn (“Pl. Mem.”) at 6.
31
“Recovery Analysis,” which compares the expected receipts from a sale of the
Sigma MTNs to the expected recovery if Sigma entered liquidation, on many
assumptions. For example, Chadwick estimates the amount of collateral Sigma
pledged to repo counterparties and the amount of MTN holders’ claims on assets in
liquidation. According to plaintiffs, the Analysis Group “did the research,
provided the underlying data, and constructed those critical assumptions,”89 and
Chadwick’s report merely regurgitates the recovery analysis constructed by the
Analysis Group. As another example, plaintiffs argue that Chadwick relied on the
Analysis Group to select a figure crucial to the recovery analysis – the ten-percent
discount rate Chadwick applies to Sigma’s assets in a fire-sale scenario. In
addition, Chadwick relied upon the Analysis Group’s substantive judgment and
expertise in selecting a benchmark index to estimate the market value of Sigma’s
holdings – the Merrill Lynch index. Chadwick also used the S&P/LSTA
Leveraged Index Loan Index, identified by the Analysis Group, where the Merrill
Lynch index did not provide for a specific asset class. At her deposition,
Chadwick could not explain the composition of the S&P/LSTA Leveraged Index
Loan Index.
Despite plaintiffs’ characterizations, the work done by the Analysis
89
Id. at 7.
32
Group, a firm with which Chadwick is affiliated, falls within the permissible scope
of research and data collection done by third-party assistants to experts.90 The
Analysis Group gathered data and provided research under Chadwick’s
supervision. Chadwick testified that she used the Analysis Group to gather data
because of the subscriptions they have – “so under my supervision and describing
to them what I wanted and needed, they certainly provided me with that data.”91
Chadwick testified further that “I don’t think there was any analysis that I could
not do on my own. What I found valuable from them was the resources of data
that they had, that they had access to.”92 There is nothing improper about an expert
relying on third-parties for data collection.93
The Analysis Group’s selection of certain benchmark indices is also
within the permissible scope of work done by expert’s assistants.94 The Analysis
90
See Gussack Realty Co. v. Xerox Corp., 224 F.3d 85, 94-95 (2d Cir.
2000) (affirming denial of motion to exclude an expert who relied on data provided
by others); Cedar Petrochems., Inc. v. Dongbu Hannong Chem. Co., Ltd., 769 F.
Supp. 2d 269, 284 (S.D.N.Y. 2011).
91
12/10/10 Deposition of Patricia Chadwick (“Chadwick Dep.”), Ex. A
to 10/11/11 Declaration of Samuel E. Bonderoff (“Bonderoff Opp. Decl.”) at 68.
92
Id.
93
See Cedar Petrochems, 769 F. Supp. 2d at 284.
94
See Taylor, Bean & Whitaker Mortg. Corp. v. GMAC Mortg., No. 05
Civ. 260, 2008 WL 3819752, at *2 (M.D. Fla. Aug. 12, 2008) (permitting expert to
select pricing index in consultation with third-party “even though he does not
33
Group merely provided research for data underlying Chadwick’s analysis.
Plaintiffs do not challenge the use of the indices or propose any alternatives.
With respect to the ten-percent discount rate Chadwick applied to
Sigma’s assets in a fire-sale scenario, Chadwick merely asked Analysis Group to
provide research on an appropriate percentage discount for a fire sale. The
Analysis Group provided a peer-reviewed article with such information. The
article suggested a discount between ten and twenty percent. Chadwick
independently chose the ten-percent figure. Plaintiffs’ counsel may cross-examine
Chadwick as to why she chose a ten-percent discount instead of a twenty-percent
discount. They may also question why Chadwick did not seek out any research
beyond this one article. It is apparent that Chadwick has taken full responsibility
for this figure.
Finally, plaintiffs argue that Chadwick does not understand her own
opinion because she failed to recall the securities that a particular leveraged loan
index was based upon. This argument lacks merit. Memory lapses are
traditionally challenged on cross-examination.95 An expert is not required to have
understand every detail of how it was calculated” where it was “the type of data
reasonably relied upon by experts in the mortgage servicing industry”).
95
See Pension Comm. of Univ. of Montreal Pension Plan v. Banc of Am.
Sec., LLC, 716 F. Supp. 2d 220, 227 n.45 (S.D.N.Y. 2010) (“[L]apses in memory
are traditionally challenged through cross-examination and do not render [expert]
34
memorized the complete contents of her expert report. In sum, the work done by
the Analysis Group consists of research and data collection – types of work
permissibly done by third-parties for experts.
b.
Chadwick’s Interview Notes
Plaintiffs also argue that Chadwick’s testimony should be precluded
or limited because Chadwick relied upon interviews with Shin and Matthew
Sarson, but Chadwick subsequently destroyed her notes from those interviews.
According to plaintiffs, this is a violation of Rule 26(a)(2)(B) of the Federal Rules
of Civil Procedure, which requires that experts disclose facts or data “considered”
by a testifying expert in reaching a conclusion.96 Plaintiffs also argue that
precluding Chadwick from testifying is an appropriate sanction for violating Rule
26(a)(2)(B) because Chadwick relies on these interviews in support of key
propositions97 and the interviews also provided background information throughout
the report that is not specifically cited.
opinion testimony unreliable.”).
96
In this case, there was a stipulation that parties would only disclose
notes “relied” upon by experts in reaching their conclusion. See Undated
Stipulation Regarding Discovery of Certain Types of Expert Witness Information,
Ex. G to Bonderoff Opp. Decl. Accordingly, the production obligation under Rule
26(a)(2)(B) only applies to those portions of the Shin and Sarson interviews upon
which Chadwick relied.
97
See Chadwick Report nn. 118, 119, 197.
35
JPMC’s counsel had an obligation to remind Chadwick to “preserve
and produce documents subject to the expert protocol.”98 This obligation concerns
all information relied upon by Chadwick in forming her opinion. Chadwick relied
upon the interviews99 and, while her testimony is not conclusive, it appears likely
that she destroyed her notes.100 Regardless of what exactly happened with any
supposed interview notes, JPMC’s counsels’ failure to ensure that Chadwick
exercised more caution with her discovery obligations “merits this Court’s
disapproval.”101
In this situation, however, preclusion is not an appropriate remedy.
The contents of the interviews upon which Chadwick relies are incorporated into
the body of Chadwick’s report – Chadwick cites the interviews four times, and in
each instance Chadwick specifically describes the information from the interview
on which she is relying.102 Where the substance of the interviews is incorporated
into the body of the report, exclusion is not an appropriate remedy for failure to
98
In re MTBE Prods. Liab. Litig., 643 F. Supp. 2d at 500.
99
See Chadwick Report nn. 118, 119, 197.
100
See Chadwick Dep. at 124-128 (testifying that she “may have” taken
notes of Shin’s and Sarson’s interviews and that such notes are “probably
nonexistent now since my report’s done and I tend to get rid of my notes”).
101
In re MTBE Prods. Liab. Litig., 643 F. Supp. 2d at 499.
102
See Chadwick Report ¶¶ 90, 92, 160.
36
produce interview notes.103 Moreover, Shin and Sarson have been extensively
deposed by plaintiffs, and will be available for further questioning at trial.
Plaintiffs’ caselaw is easily distinguishable. In Fidelity National Title Insurance
Co. v. Intercounty National Title Insurance Co. an expert relied on interviews
where the interviewed witnesses refused to testify at trial on Fifth Amendment
grounds.104 Here, Shin and Sarson have already provided deposition testimony
under oath. Plaintiffs have made no showing that they have been prejudiced by
Chadwick’s destruction of the notes such that preclusion of Chadwick’s testimony
is appropriate.
c.
Chadwick’s Opinions Are Not Ipse Dixit
Finally, plaintiffs argue that Chadwick’s opinions should be excluded
because they constitute inadmissible ipse dixit. With regards to her opinion on
JPMC’s decision to purchase the Sigma MTNs, plaintiffs attack Chadwick’s credit
analysis. Plaintiffs claim that Chadwick’s analysis of Sigma’s (1) viability and
stability; (2) quality of underlying assets; (3) protection to investors, and (4)
103
See THOIP v. Walt Disney Co., 690 F. Supp. 2d 218, 242 (S.D.N.Y.
2010); In re MTBE Prods. Liab. Litig., 643 F. Supp. 2d at 499-500.
104
See Fidelity Nat’l Title Ins. Co. v. Intercounty Nat’l Title Ins. Co., 412
F.3d 745, 750 (7th Cir. 2005). Even though the interviewed witnesses would not
testify at trial, the court held that exclusion was not warranted because any
prejudice from destruction of the notes was outweighed by prejudice from
exclusion of the expert. See id. at 752-53.
37
reputation of management amounts to unsupported broad conclusions. According
to plaintiffs, Chadwick fails to cite any authority supporting her credit analysis and
jumps to the conclusion that the MTNs would be reasonable to include in a
securities lending portfolio after noting their ratings.
Likewise, plaintiffs contend that Chadwick offers no support for her
opinion that JPMC’s decision to purchase the MTNs was based upon robust due
diligence within industry standards. With regards to JPMC’s decision to hold the
MTNs, plaintiffs assert that Chadwick similarly jumps to broad conclusions.
Plaintiffs also attack Chadwick’s opinion casting repo financing as a sign of
Sigma’s financial health because Chadwick simply puts a positive spin on negative
events without any support. These characterizations are inaccurate.
Although courts may exclude “opinion evidence which is connected
to existing data only by the ipse dixit of the expert,”105 plaintiffs fail to identify any
gap between Chadwick’s data and Chadwick’s opinion sufficient to justify
exclusion. Plaintiffs’ mere disagreement with Chadwick’s conclusions is
insufficient to render her opinions inadmissible ipse dixit.
Chadwick’s opinion concerning JPMC’s decision to purchase the
105
General Elec. Co. v. Joiner, 522 U.S. 136, 146 (1997) (holding that
expert opinion may be excluded if “there is simply too great an analytical gap
between the data and the opinion proffered”).
38
Sigma MTNs is supported by her extensive credit analysis. Although plaintiffs
attack Chadwick for not citing authority for the four common-sense factors
Chadwick believes an investment advisor should consider when deciding whether
to purchase an a security, plaintiffs do not dispute Chadwick’s methodology,
propose an alternative, or contend that Chadwick fails to consider material
information available at the time. Accordingly, plaintiffs have made no showing
that Chadwick has failed to exercise the “intellectual rigor” of an expert in
investment management.106
Moreover, Chadwick offers sufficient support to show that her
opinion is consistent with the practice of experts in the field and is not ipse dixit.
First, Chadwick does cite to authority to support the fourth prong of her credit
analysis – an inquiry into the reputation of management.107 Second, Chadwick has
ample experience to support her opinion. Chadwick states that her analysis of
the reasonableness of investment decisions is based on my
training and experience in the industry and my understanding of
what a competent and informed professional might do in similar
situations. This evaluation, in turn, depends on the governing
investment guidelines, the stated risk/return preferences of the
clients, and the overall purposes of the investment–here, as part of
106
Kumho Tire, 526 U.S. at 152.
107
See Chadwick Report ¶ 74.
39
a securities lending program.108
The experience on which Chadwick bases her opinion consists of eighteen years as
a portfolio manager, managing approximately five billion dollars in assets.109
Moreover, Chadwick does not offer a conclusory opinion that JPMC acted
reasonably based solely on her experience;110 rather, as discussed below, Chadwick
reviews and analyzes the relevant information available to JPMC at the time, while
drawing on her relevant experience to inform her analysis.111 Third, her opinion is
also based on AFTRA’s investment guidelines. After considering the permissible
investments, quality guidelines, concentration guidelines, and maturity guidelines
under the applicable investment guidelines, Chadwick concludes that “compliance
with the guidelines at the time of purchase is compelling evidence that JPMorgan’s
purchase decision was consistent with its clients’ risk/reward preferences.”112
Fourth, Chadwick supports her opinion that JPMC acted reasonably in purchasing
the Sigma MTNs by surveying the decisions made by other institutional investors
108
Chadwick Report at 3.
109
See Kumho Tire, 526 U.S. at 156; Chadwick Report ¶ 2.
110
Cf. Primavera Familienstifung, 130 F. Supp. 2d at 530.
111
See Kumho Tire, 526 U.S. at 156 (holding that proffered experts may
“draw a conclusion from a set of observations based on extensive and specialized
experience”).
112
Chadwick Report ¶ 40.
40
at the same time.113
Plaintiffs’ assertion that Chadwick’s opinions concerning the quality
and diversification of Sigma’s assets are ipse dixit also fails. Chadwick based her
opinions concerning the quality of Sigma’s assets on all information available to
JPMC at the time – such as classes of assets in Sigma’s portfolio.114 Chadwick’s
reliance on Sigma’s credit rating was just one part of the inquiry; Chadwick does
not render an opinion on the quality of Sigma’s assets solely based on the rating
agencies’ ratings. Chadwick’s opinion concerning the diversification of Sigma’s
portfolio again is based on information available to JPMC at the relevant time –
from Sigma’s monthly and annual business reports and from the rating agencies.
Chadwick cites to the diverse sectors of assets held by Sigma and the percentages
of Sigma’s assets made up of certain sectors.115 Chadwick also considered that
“Sigma’s portfolio was . . . diversified across maturities” and limited in exposure to
individual issuers.116 Moreover, Chadwick considered that the underlying assets
“were also diversified across U.S., British, French, German and Australian
113
See id. ¶¶ 76-80.
114
See id. ¶ 58.
115
See id. ¶ 67.
116
Id. ¶ 68.
41
markets, among others.”117 Again, the fact that Chadwick is not able to identify the
specific assets held by Sigma does not preclude her from offering an opinion that
Sigma’s underlying assets were diversified based on information available to the
public at the time.
With regards to JPMC’s due diligence efforts, Chadwick concludes
that JPMC’s due diligence was “consistent with best practices in the industry.”118
Chadwick bases this conclusion on JPMC’s (1) review of materials provided by
Sigma and other SIVs, such as financial statements and business reports; (2)
review of credit rating reports; (3) independent analyses monitoring liquidity
trends and capital adequacy; and (4) communications with the issuer and periodic
on-site diligence.119 Chadwick concludes, based on her ample experience, that
these are the types of information a diligent credit analyst should review and the
types of analysis a diligent credit analyst should perform.120
Finally, Chadwick’s opinions concerning JPMC’s decision to hold the
Sigma notes are not ipse dixit. They are supported by a detailed analysis. In
117
Id. ¶ 68.
118
Id. ¶ 91.
119
See id. ¶ 90; see also id. ¶¶ 160-162 (discussing ongoing due diligence
efforts while JPMC held the Sigma MTNs).
120
See id. ¶ 91; see also id. ¶ 162 (concluding, based on Chadwick’s
experience, that the ongoing analysis was “thorough and rigorous”).
42
assessing JPMC’s decision to hold, Chadwick considers (1) the likelihood of a
Sigma default; (2) the likely recovery in event of default; (3) the likely proceeds
from the sale of the Sigma MTNs; and (4) macroeconomic factors, such as the
worldwide credit crisis.121 Over the span of twenty-three pages, Chadwick assesses
these factors at various points in time from June 2007 to September 2008.122 In
addition, Chadwick considers the responses of other market participants at the
same time.123 Plaintiffs merely disagree with Chadwick’s conclusion, and they
may probe her analysis on cross-examination and offer experts with contrary
opinions; however, this is not grounds for excluding an opinion as ipse dixit.124
Likewise, plaintiffs disagree with Chadwick’s opinion that Sigma’s
ability to obtain repo financing was a positive sign. Chadwick may present an
opinion that an ability to obtain financing during a liquidity crisis is a positive sign.
On the other hand, plaintiffs may present the negative inference that might arise
from repo financing – that Sigma was on the edge of a “repo cliff.” The finder of
fact is entitled to determine which inference to draw.
121
See id. ¶¶ 97-98.
122
See id. ¶¶ 99-152.
123
See id. ¶¶ 153-159.
124
See Emig v. Electrolux Home Prods. Inc., No. 06 Civ. 4791, 2008 WL
4200988, at *9 (S.D.N.Y. Sept. 11, 2008) (holding that deficiencies in “support
and detail for the conclusions” are an issue of weight rather than admissibility).
43
2.
Dr. Michael F. Koehn
Finally, plaintiffs seek to exclude Dr. Koehn's testimony to the extent
it relies on Chadwick's analysis. Because I have held that Chadwick's opinion is
admissible, Dr. Koehn's reliance on Chadwick's opinion is not grounds for
exclusion.
v.
CONCLUSION
For the aforementioned reasons, JPMC's motion is granted in part and
denied in part, and plaintiffs' motion is denied. The Clerk of the Court is directed
to close these motions [Docket Nos. 105 and 108].
SO ORDERED:
!
!
/
Shira A. Scheindlin
V.S.DJ.
Dated:
December 14,2011
New York, New York
44
- Appearances For Plaintiffs:
Joseph H. Meltzer, Esq.
Peter H. LeVan, Jr., Esq.
Barroway Topaz Kessler Meltzer &
Check, LLP
280 King of Prussia Road
Radnor, Pennsylvania 19087
(610) 667-7706
Bradley E. Beckworth, Esq.
Brad Seidel, Esq.
Nix Patterson & Roach, LLP
205 Linda Drive
Daingerfield, Texas 75638
(903) 645-7333
Milo Silberstein, Esq.
Dealy & Silberstein, LLP
225 Broadway, Suite 1405
New York, New York 10007
(212) 385-0066
David L. Wales, Esq.
Bernstein, Litowitz, Berger &
Grossman, LLP
1285 Avenue of the Americas
New York, New York 10019
(212) 554-1400
Gregory M. Nespole, Esq.
Wolf Haldenstein Adler Freeman
Herz LLP
270 Madison Avenue
New York, New York 10016
(212) 545-4761
For JPMC:
Lewis Richard Clayton, Esq.
Jonathan H. Hurwitz, Esq.
Samuel E. Bonderoff, Esq.
Paul, Weiss, Rifkind, Wharton & Garrison LLP
1285 Avenue of the Americas
New York, New York 10019
(212) 373-3215
45
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