Sherman v. Bear Stearns Companies Inc. et al

Filing 186

(REDACTED) SEALED OPINION re: (513 in 1:08-md-01963-RWS, 101 in 1:09-cv-08161-RWS) MOTION to Exclude the Report and Testimony of John D. Finnerty . filed by James Cayne, Warren J. Spector, Bear Stearns Companies Inc., James E. Cay ne, Warren Spector, Bear Stearns Companies, Inc., Warren J. Spector, The Bear Stearns Companies Inc., (509 in 1:08-md-01963-RWS) MOTION for Summary Judgment . filed by Warren J. Spector, James E. Cayne, Bear Stearns Companies, Inc. , (104 in 1:09-cv-08161-RWS, 516 in 1:08-md-01963-RWS) MOTION to Exclude Evidence Concerning the SEC's Office of Inspector General, Office of Audits' Report, "SEC Oversight of Bear Stearns and Related Entities" . fi led by James Cayne, Warren J. Spector, Bear Stearns Companies Inc., James E. Cayne, Warren Spector, Bear Stearns Companies, Inc., Warren J. Spector, The Bear Stearns Companies Inc., (97 in 1:09-cv-08161-RWS) MOTION for Summary Judgment < i>. filed by James Cayne, Bear Stearns Companies Inc., Warren Spector. Based on the conclusions set forth above, Defendants' motion to exclude the SEC Report is denied and the motion to exclude Finnerty is granted. Defendants' moti on for summary judgment is granted in part and denied in part as set forth above. In light of the confidentiality stipulation and order entered in this case, the parties are directed to jointly submit a redacted version of this opinion to be filed publicly or otherwise notify the Court that no redactions are necessary within two weeks of the date of distribution of this opinion. (Signed by Judge Robert W. Sweet on 7/5/2016) Filed In Associated Cases: 1:08-md-01963-RWS, 1:09-cv-08161-RWS(cf)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

----------------------------------------x
IN RE THE BEAR STEARNS COMPANIES, INC.
SECURITIES, DERIVATIVE, AND ERISA
LITIGATION

Master Fi l e No.:
08 MDL 1963 (RWS)

This Document Relates To:
Securities Action, No. 08 Civ. 2793

ECF CASE

------------------------------ ----------x
BRUCE S. SHERMAN,
09 Civ. 8161 (RWS)
SEALED OPINION

Plaintiff,
- aga inst BEAR STEARNS COMPANIES, INC., JAMES
CAYNE, WARREN SPECTOR, AND DELOITTE
& TOUCHE LLP,
Defendants.

----------------------------------------x

USDC SDi"'l'..
DOCU!v1EN'T
ELECTRONICALLY FILED
DOC#:
DATE FI.LED:

~~~~~~~~~

A P P E A R A N C E S:

Attorneys for Plaintiff
BO IES, SCHILLER & FLEXNER LLP
575 Lexington Avenue, 7th Floor
New York, NY 10022
By:
Philip C. Korologos, Esq.
BOIES, SCHILLER & FLEXNER LLP
26 So uth Main Street
Hanover, NH 0375 5
By:
Richard B. Drubel, Esq.
Matthew J. Henk en , Esq.
KOREIN TILLERY LLC
205 North Michigan Plaza, Suite 1950
Chicago, IL 60601
1

By:

George A. Zelcs, Esq .

KOREIN TILLARY LLC
505 North 7th Street , Suite 3600
St . Louis , MO 6310 1
By: Stephen M. Tillary, Esq.
Doug l as R. Sprong , Esq.
Attorneys for Defendants
PAUL WEISS , RI FKIND, WHARTON & GARRISON LLP
1285 Avenue of the Americas
New Yo r k, NY 1 001 9
By : Brad S . Kar p, Esq .
John F. Baughman, Esq .
Jessica S. Carey, Esq .
Jonathan H. Hurwitz , Esq.
KRAMER LEVIN NAFTALIS & FRANKEL LLP
1177 Avenue of the Americas
New York , NY 10036
BY : David S . Fra n kel , Esq .
WACHTE LL, LI PTON , ROSEN & KATZ
5 1 West 5 2nct Street
New York , NY 100 19
By : Dav i d B. Anders , Esq .

2

- - - - - - - - - --

--- - - - - -

Sweet , D.J.

Defendants the Bear Stearns Companies

(" Bear Stearns" or

"Bear"), James Cayne , and Warren Spector (collectively ,
"Defendants") h ave moved to exclude the report and tes timony of
Plaintiff ' s expert John D. Finnerty pursuant to Federal Rules of
Evidence 702 and 403, to exclude the September 25,

2008 rep o rt

by the Securities and Exchange Commission , Office of Inspecto r
General , Office of Audits p u rsuant to Federal Rules of Evidence
803 (8) (b) and 403 , and for s ununary judgment pursua n t

to Federal

Rule of Civil Procedure 56 . Based on the c o nclusions set forth
below , the mot i on to exclude the SEC Report is denied , the
motion to exclude Finnerty and the Finnerty Report is granted ,
and the motion for summary judgment is granted in part and
denied in part.

I.

Prior Proceedings

The procedural history and factual background of the
underlying mult i district litigation has been detailed
ex tensively i n va r ious opin i o n s by this Court . See
Be ar Stearns Companies , Inc. Sec. , Derivative,

~

In r e

& ERISA Litig.,

No . 0 8 CI V. 2 7 9 3 , 2 014 WL 4 4 4 3 4 5 8 , at * 1 ( S . D. N . Y . Sept . 9 ,
2014)

(here i nafter , " In re Bear Stearns " ); In re Bear Stearns,
3

- - - ----· - -

-

- - --·

~-·~-~~~~~~~~~~~~~~~~-------------------------------------------------

909 F . Supp . 2d 2 5 9 , 263 (S.D . N.Y . 2012) ; In r e Bear Stearns ,
763 F. Supp . 2d 423 (S .D. N. Y. 2011 ), o n reconsider at ion,

No . 07

CIV . 10453 , 2011 WL 407 202 7 (S.D.N.Y. Sept . 13 , 201 1), and on
reconsiderat i on , No. 07 CIV . 1045 3 , 2011 WL 4357166

(S . D.N . Y_

Sept . 13 , 2011). Fam ili a rity with these facts is assumed and the
f o l lowing det a ils provide only a brief rete lli ng f o r the purpose
of approaching the i n stant mo tions.

1

Plaintiff Bruce Sh erman ("Plaintiffu or "Sherman")

filed

his complaint in this court on September 24 , 2009 . 2 Sherman, the
Ch ief Executive Officer and Chief I nvestment Officer of Private
Capita l Managemen t

("PCMu) , purc h ased a l a rge block of Bear

common shares between June 25, 2007 and March 13, 2008 at prices
ranging from $53.77 to $140 . 76 per share. He s o ld 229,150 shares
of Bear common stock on March 19 , 2008 at the price of $5.23 per
share . Plaintiff's claims concern the decline of Bear Stearns in
March 2008 . Sherman alleges De fendants misrepresented Bear's
financial condition, including the value of Bear's mortgage
a sse t s , th e nature o f i ts risk man agement , a nd the adequacy of

1 The f a ct s that follow a re drawn from f il ings in this case and
are no t in mater ia l dispute except as n oted .
2 Sherman e l ected t o opt - ou t of the se ttlement of the re l ated
securities class action in I n r e Bear Stearns , 08 MDL 1963
(S.D.N . Y. ) (RWS). ECF No. 338. This Cour t susta ine d the c laims in
t he securi t ies class a ction in an opinion on Defendant 's moti on
to dism i ss da ted January 29 , 2011. See 7 63 F. Supp. 2d 423 .

4

Bear's capital a n d liquidity, leading Sherman to purchase and
retain Bear common stock, ultimately suffering massive losses .
Sherman seeks to prove his claims via a report titled "SEC ' s
Oversight of Bear Stearns and Related Entities: The Consolid a ted
Supervised Entity Prog r amn ("SEC Report ,u o r the "Report")
Sherman has also proffe r ed Professor John D. Finnerty
("Finnertyu) as a n expert in loss causation and the damages
Sherman suffered as a result of the conduct alleged .

Defendants seek to exclude both the Report and Finnerty ,
a nd ultimately , summary judgme n t in their favor . Defendants
filed the instant mot i ons on August 17 , 2015 . The motions were
argued o n March 24, 2016 at which time they were deemed fully
submitted .

II .

Applicable Standards

De f endants seek to exclude the Repor t on t he basis of
Federal Rules of Evidence 803(8) (B) and 403 , a n d to exclude
Finnerty on the basis of Federal Rule of Evidence 702 and
Daubert v. Merrell Dow Pharmaceuticals , Inc. , 509 U.S.

579

( 1993) .

Rule 803(8) provide s an exception to the rule against
5

hearsay, establishing presumptive admissibility for public
records 3 where "the opponent does not show that the source of
information or other circumstances indicate a lack of
trustworthiness ." Fed. R. Evid. 803 (8) (B). The rule "assumes
admissibility in the first instance but with ample provision for
escape if sufficient negative factors are present . " Fed R. Evid.
803 , Advisory Comm. Notes to Paragraph (8) . "As with any
exception to the r ule against hearsay, Rule 803(8) [BJ

is to be

applied in a commonsense manner , subject to t he district court ' s
sound exercise of discretion in determining whether the hearsay
document offered in evidence has sufficient indepe ndent in dicia
of reliability to justify its admission ." City of New York v.
Pullman Inc., 662 F . 2d 910,

914

(2 d Cir. 1981) (ci ting LeRoy v .

Sabena Belgian World Airlines, 344 F.2d 266, 272

(2d Cir.

1965);

Swietlowich v. Bucks Cty. , 610 F.2d 1 157, 1 165 (3d Cir. 1979);
Weinstein and Berger, 4 Weinstein's Evidence P. 803(8) (03)
(1979)).

Federa l Rule of Evidence 403 permits the Court to exclude
otherwise relevant evidence "if its probative value is

3

Defendants agree that the Report is a public record prepared by
a public agency under the ambit of Rule 803(8) . See Defs.' Mem .
of Law in Supp. Mot. to Exclude Evid. Concerning the SEC's
Office of Inspector General , Office of Audits' Report a t 1 0
("Defs. ' SEC Report MOL").
6

substantially outweighed by a danger of one or more of the
following: unfair prejudice, confusing the issues, misleading
the jury, undue delay, wasting time, or needlessly presenting
cumulative evidence." Fed. R. Evid. 403. In deciding whether to
exclude otherwise relevant evidence under Rule 403,

the court

"balance[es] the probative value of and need for the evidence
against the harm likely to result from its admission." Id.,
Advisory Comm. Notes.

The standard for the admissibility of expert testimony at
trial is set forth in Federal Rule of Evidence 702:
A witness who is qualified as an expert by knowledge,
skill, experience, training, or education may testify in
the form of an opinion or otherwise if: (a) the expert's
scientific, technical, or other specialized knowledge will
help the trier of fact to understand the evidence or to
determine a fact in issue; (b) the testimony is based on
sufficient facts or data; (c) the testimony is the product
of reliable principles and methods; and (d) the expert ha s
reliably applied the principles and methods to the facts of
the case.
Fed. R. Evid. 702.

Rule 702 was the subject of extensive analysis by the
Supreme Court in Daubert and Kumho Tire Co. v. Carmichael, 526
U.S. 137 (1999). The Court emphasized in Daubert that
(t]he inquiry envisioned by Rule 702 is .
. a flexible
one.
Its overarching subject is the scientific validity
and thus the evidentiary relevance and reliability of the
principles that underlie a proposed submission.
The focu s ,
of course, must be solely on principles and methodology,
7

not on the conclusions that they generate.
509 U.S. at 594-95.
The Federal Rules of Evidence assign to th e
district court the responsibility to act as a gatekeeper and to
ensure that "an expert's testimony both rest s on a reliable
foundation and is relevant to the tas k at hand."

Id. at 597.

"[I)n analyzing the admissibility of expert evidence,

the

district court has broad discretion in determin i ng what method
is appropriate for evaluating reliability under the
circumstances of each case."
Corp., 303 F.3d 2 56 , 265

Amorgianos v. Nat'l R.R.

(2d Cir. 2002) .

However ,

Passenger

"[t]he Ru l es'

basic standard of relevance ... is a liberal one," Daubert, 509
U.S. at 587.

"A review of the caselaw after Daubert shows that

the rejection of expert testimony is the exception rather t han
the rule."

Fed.R.Evid. 702, Advisory Comm. Notes.

Finally, summary judgment is appropriate only wher e "there
is no genuine issue as to any material fact and .

the moving

party is enti tl ed to a judgment as a matter of law ."

Fed. R.

Civ. P. 56(c).

A dispute is ''genuine" if "the e vidence is such

that a reasonable j ury could return a v e rdict for the nonrnoving
party."

Anderson v. Liberty Lobby, Inc.,

477 U. S . 242 ,

(1986) .

The relevant inquiry on application for summary

judgment is "whe ther the evidence presents a sufficient

8

248

disagreement to require submission to a jury or whether it i s so
one - sided that one party must prevail as a matter of law."
at 251 - 52.

Id.

A court is not charged wi th weighing the eviden ce

and determining its truth, but with determining whether t here is
a genuine issue for trial.

Westinghouse Elec . Co rp . v . N.Y.

City Transit Auth . , 735 F . Supp . 1205 , 1212 (S.D.N.Y. 1990)
(quoting Anderson, 477 U.S . at 249).

"[T]he mere existence of some alleged factual d i spute
between the parties will not defeat an otherwise properly
supported motion for summary judgment; the requ ir ement is tha t
there be no genu ine issue of materi al fact." Ande r son , 477 U. S .
at 247-48

(emphasis in original) . "In assessing the record to

determine whether there is a genuine issue to be tried ,

[the

c ou rt is) required to res o lve al l ambiguities and draw all
permissible factual inferences in favor o f the party against
whom summary judgment is sought." Gorzynski v. JetB lue Airways
Corp. , 596 f . 3d 93 , 101 (2d Cir . 20 10)
U. S . at 255).

9

(citing Anderson,

477

III . The Motion to Exclude the SEC Report is Denied

Following Bear ' s co l lapse in March 2008 , on April 2,

2008 ,

Senator Charles E. Grassley , then Ranking Member of the Senate
Committee on Finance , wrote to the Hon . David Kotz ,

Inspector

General of the Secur i ties and Exchange Commi ssion ("SEC " ) with a
Congressional Audit Request. Borner Deel. Ex . 2 ("Grassley
Letter"). Noting press coverage of the SEC ' s failure to bring a
case against Bear for i mproper l y valuing mortgage - related
investments , Grass l ey requested an investigation of the SEC
Enforcement Div i sion ' s decis i on not to p u rsue enforcement action
aga i nst Bear , a final report as to whether any misconduct
occurred , and an a udit of the Division of Trading and Markets .
Id .

Defendants argue t he Report is untrustworthy for four
reasons :

(1) it was prepared for a p u rpose other than the one

for which it is being proffered by Plaintiff in this action ;
the Report is a n onymous ;

(2)

(3) the Report was not adj u dicated and

no hearing was held allowing Bear an opportunity to respond; and
(4) elements of t he SEC itself deemed the report untrustworthy.
See Defs .' SEC Report MOL.

10

The Rule 803(8) analysis begins at a foundati o nal point of
presumed admissibility.

Fed. R. Evid. 803, Advisory Comm. Notes

to Paragraph (8). The Rule "is based upon th e assumption that
public officers will perform their duties, that they lack motive
to falsify,

and that public inspection to which many s uch

records are subject will disclose inaccuracies." Bridgeway Corp.
v. Citibank, 201 F.3d 134, 143 (2d Cir. 2 000)

(quoting 31

Michael H. Graham, Federal Practice and Procedure § 6759, at
663 -64

(Interim ed. 1992)). Thus, public records containing

factual findings and "made pursuant to legal authority" are
deemed pres umptively admissible not because such documents are
presumptively unassailable, but because their source is one of
presumptive integrity subject to public review.

The Advisory Corrunittee has suggested three factors to guide
analysis of the trustworthiness of evaluative reports:
timeliness of the investigation;
experience of the official;

[and]

(1 ) t he

(2) the special skill or
(3) whether a hearing wa s held

and the level at which conducted." Fed . R. Evid. 803, Advisory
Corrun . No t es t o Paragraph 8 .

The shortcomings Defendants identify do not outweig h the
presumptive admissibility and trustworthiness of a government
report that generally meets these criteria. First,
11

the Report is

indisputably timely , submitted less than six months from th e
date of Senator Grass l ey 's letter . See Borner Deel . Ex.
("Audi t Report")

l

(dated September 25 , 2008) . Second , the SEC

Office of Inspector General is tasked b y Congress as the agency
designed and equipped to evaluate t he conduct of the SEC and
relevant factual circumstances. See Grassley Letter ; Inspector
General Act of 1978, 5 U.S.C . §APP . 3 § 4{a); 1 7 C .F. R .
200 .1 6a(a). Th ough no hearing was held on the report , that fact
does not defeat the othe r elements of credibility present . See
Br i dgeway Cor_E_:_ , 201 F .3 d at 143 .

Defendants submit that the Audit Report was intended to
address SEC oversight of Bear Stearns , not the cause and
circumstances of Bear ' s collapse , and therefore cannot be deemed
trustworthy with respect t o th ese facts.

De f s. '

SEC Report MOL

at 11-1 2. The distinction is a formalistic one . Analysis and
findings regarding the detai ls of Bear's collapse were the
factual underpinning to a review of the propriety of the SEC ' s
oversigh t of Bear d uring t ha t period. In the words of Senator
Grassley , "Gi ven the (2008) collapse and f ederally backed bailou t of Bea r Stearns , Congress needs to understand more about
t hi s case and wh y the SEC ultima tel y sought no enforcement
action . 11 Grassley Letter at 54 . The f acts of Bear ' s collapse
cannot be d i saggregated from review of t h e SEC ' s conduct with
12

specific respect to those events. Plaintiff seeks to admit the
Report for purpose of establishing those facts,

and thus the

purpose of the Report and the purpose for which Plaintiff relies
o n it are congruent. To the extent the Office of Audits was
somehow biased, deficient, or non-comprehensive, those iss ues go
to weight, not admissibility.

Second, Rule 803(8) does not demand that a public record be
admitted for the same purpose for which it was drafted.

4

While a

public record admitted in litigation for the same purpose for
which it was drafted would be particularly trustworthy,

it does

not follow that the record is less trustworthy if admitted for
a nother purpose. The public officers that generated the rec ord
had no more incentive to falsify, no less duty to their office
in the event that a record is admitted for a purpose they did
not have in mind at the time the record was cr eated. The re cord

Defendants submit City of New York v. Pullma n Inc. establishes
such a requ irement. See 662 F.2d 910 (2d Cir . 1981). Pullman
concerned the denied admission of an interim report prepared by
the Urban Mass Transit Administration. Id. The Interim Report
was based on appellant's own data, not on the UTMA's independent
investigation, and constituted o nl y a review of proposals for
correction of problems regarding train car undercarriages. Id.
at 914-15. The Audit Report is not comparable to the UTMA
Interim Report. The Audit Report was not only prepared b y an
agency, but by the Office of Inspector General, the entity
tasked with f act gathering and investigation of the SEC. Its
concl usi on s were final and based on its own audit and the
retained expert opinion of Professor Albert S. (Pete) Kyle. The
retention of Professor Kyle will be addressed infra .
4

13

is no less public or subject to criticism .

Next , that the report was authored by an institution
specifically tasked with performing such audits does not make it
anonymous or its authors inexpert.5 The Report was drafted by
Office of Inspector General Office of Audits , the only entity
capable and expert i n aud i ting SEC conduct. Defendants submit
that the Office of Audits was not qual i fied to review the
c i rcumstances catalyzing that conduct , which as reasoned above ,
is an unpersuasively narrow perspective of the office ' s
capabilit i es .

Nevertheless , the Report exhaustively describes reliance o n
its retained expert, Professor Kyle , the only contributor not
included in the institutional a ttribution to the Office of
Audits . See Audit Report at vii. Defendants argue that Kyle ' s
inclusion demonstrates the Office of Audits '

5

lack of expertise.

Defendants cite a non-binding, out-of - distric t case to support
their argument , Coughlin v . Tai l hook Association . 1994 WL 780904
(D . Nev . Sept. 2, 1994) . In Coughlin , the court rejected the
admission of a report authored by the Depa rtment of Defense
Inspector Ge n eral given there was "no basisn upo n which that
court could "meaningfully assess [the] skills and experience" of
the invest i gators." Id. Unlike the Audit Report, that report was
based on facts derived from law enforcement investigative
practice , such as polygraphs , undercover operations , consensual
monitoring , and computer analys i s "wit h no clear ind i cation of
the qualifications of the persons performing these ta sks . " Id .
14

However, that the Report identifies Professor Kyle

(who it

relied on due to "the complexity of the subject matter")
bolsters rather than hinders its trustworthiness. Where the
Office of Audits was expert in reviewing the SEC's conduct an d
the factual predicates to such SEC conduct, Professor Kyle
supplemented th ose qualifications by offering specific
experience in capital markets (established by the Report's own
summary and Professor Kyle's attached C.V.). Kyle 's inclusion
cures any concern that the Report was drafted without an expert
understanding of the specific factual circumstances of Bear's
collapse. That the Report discloses not only Professor Kyle's
involvement, but the specific purpose for which he contributed
and factual issues he addressed, makes the Report all the more
transparent and fa c ilitates an assessment of the skill and
expertise of the author of the report. The Office of Audits and
Professor Kyle t ogether possess the sufficient experience and
skill that the Report cannot be deemed untrustworthy on this
basis.

Finally, Defendants argue that the SEC's own internal
criticism of the Report demonstrates its lack of
trustworthiness. Defs.' SEC Report MOL at 14-15. Defendants
submitted a two part argument on this point: first,

that "the

Chief Administrative Law Judge [Murray] of the Cormnission
15

concluded that the entire [OIG Investigative Report] was
flawed." Id _ at 14. Second, the Division of Trading and Markets
:..
opposed the Report's findings and issued a long response i n the
form of a commentary. Id.

Chief Administrative Law Judge Murray's conclusions as to
the OIG Investigative Report, a separate and distinct Report
from the Audit Report, have no bearing on the trustworthiness of
the Audit Report. Defendants argue that the two reports were
written by the same people, at the same time, and submitted in
response to the same inquiry. Carey Deel. in Supp. Defs.' Mem.
of Law in Supp. Mot. for Summ. J.

("Defs.' MSJ"), Ex. 29 at

6:24-7:8 ("Finnerty Tr." ) . Nevertheless, the Audit Report must
be judged on its own merits.

The SEC's Division of Trading and Markets took issue with
elements of the Report, particularly findings regarding the
cause of Bear's collapse. Borner Deel., Ex.

lb ("T&M

Con@entary,,). For example, "The Division of Trading and Markets
concurs with [the Report's first Recommendation], even t hough we
believe it is based on a fundamentally flawed understanding of
the Bear Stearns crisis," id. at 86, "the OIG Report's
assumptions regarding leverage .

are inaccurate," id. at 87 ,

"the OIG Report's conclusion regarding the interaction of

16

capital and secured finding is misguided," id. at 88. There is
little doubt that Trading and Markets disagreed with the
Report's factual understanding of Bear's collapse. It should be
noted, however, that the Report addressed the propriety of the
conduct of t he Div isio n of Trading and Markets. Its
recommendations, the majority of which Trading and Markets
adop ted, were largely directed at the Division. The fact that
Trading and Markets disagreed with criticism of its conduct does
not itself d emand that their perspective be adopted as to
whether the Repo rt's findings were trustworthy.

6

The conflict

amounts to a dispute of fact as to the circumstances of Bear's
collapse. The dispute is not alone grounds to reject the
presumptive trustworthiness of the Report.

Finally, Defendants submit th a t the Report's probative
value is substantially outweighed by the danger of unfair
prejudice . Defs.' SEC Report MOL at 17-19. Defendants first
argue that "risk of unfair prejudice arises when government
reports are offered."

Id. at 17. As a general rule , this may be

true. However, the Report is somewhat unlike other public
records that may carry an aura of officiality that may bias a

6 As Miles' Law cautions, "where you stand depends on where you
sit.n Rufus E. Miles, Jr ., The Origin and Meani~g of Miles' Law,
38 Public Administration Review 399, 399 (1978).

17

jury. Most significantly, it was an investigation about whether
impropriety had occurred within th e very agency that produced
the report. An internally critical government r ecor d does not
carry the same risk of unfair prejudice as other government
records, as its very genesis is a result of the plausibility
that an element of the Government may have in some way erred. In
short, the Report itself negates the assumption that a piece of
evidence obtained from the government is any less assailable
than a document obtained from another party . Defendants
e xplicitly state that t hey intend to present the same evidence
and arguments to the jury presented in the instant motion,
presumably including seeking in troduction of the contradict ory
commentary produced by Trading and Markets. In this i nstance,
l ittle risk of unfair prejudice exists, and any remain i ng risk
can be cured with a limiting instruction if necessary .

Second, Defendants submit admission of the Report would
result in a further protrac t ed trial and confuse the jury . As
reasoned above , the factual findings of the Report are central
to the foundation of Plaintif f ' s claims . That Defendants intend
to refute them by attacking the Report's tr u stworthiness is more
l ike ly to expound necessary fac tual disputes for th e fact finder
than confuse or lead to undue delay. Defendants s imilarly point
to Plaintiff's use of the Report to attribute knowle dge to the

18

SEC demonstrates a l ikelihood of confusion. This i s proof only
of the l a b yrinthine nature of the SEC ' s h i erarchy . 7 Confusion
that may arise from the Office ' s placement in the government ,
rather than the nature or findings of the Report ,

is not grounds

to exclude it .

Based on the conc lu s i ons set forth above , the Report is
a dmissible under Federal Rule of Evidence 803(8)

and its

probative v alue outweighs any danger of unfair prejudice under
Rule 403 .

IV.

The Finnerty Report is Inadmissible

The Report submitted by Plaintiff's expert has proposed a
damage calculation based on leakage to satisfy Sherman ' s
requirement to show l oss causation. The theory , based on
assumption,

fails to do so under Federal Rule of Civ il Procedure

702 and is therefore inadmissib l e .

7 The Off ic e of Audits sits within the Office of the Ins pector
General , a sub-office of the Securities and Exchange Commission.
U. S . Secur i ties and Exchange Commis sio n, Office of the Inspector
General , (May 17 , 2016) https : //www . sec .gov/o i g .

19

A.

Finne rty and the Leakage M thodology
e

Plaintiff has proffered John D. Finnerty as an expert as to
loss causation and damages. Finnerty is Managing Direct ion at
AlixPartners , LLP, a financial and operational co nsulting f irm.
Carey Deel . in Supp. Carey Deel. in Su pp . Defs . '
J ., Ex.

2'

Mot. for Summ .

1 ("Finnerty Report") . He h o lds a Ph.D . in

Operations Research from the Naval Postgraduate School , a B .A.
and M. A. in Eco nomics from Cambridge University, where he was a
Marshall Scholar , and an A.B . in Mathematics from Williams
College . Finnerty Deel. App ' x A at 2 . He specializes in
securities class actions , business valuation , securities
valuation , derivatives valuat io n , solvency ana lysis , calc ul ation
of damages , and has published extensively in these and related
areas of fi n ance . Finnerty Report '

1 . Finnerty has served as

Partner of the Financial Advisory Services Group o f
Pricewaterho u seCoopers , and is a tenured Professor of Finan ce at
the Fordham University Gabelli School of Business , where he also
se r ved as Fo unding Director of the Schoo l's Master of Scien ce in
Quantitative Finance Program . Id . ' 3 ; Finnerty Deel. App'x A .
Finnerty has taught and published extensively on analysis and
valuat i on of securities , has served as an editor or board member
of several finance journals, and serv e d in a management capac it y
of several finance asso c ia t i ons . Finnerty Deel . App ' x A a t

20

3,

11-20 . Finnerty has pro vided expert advice in over 40 cases in
the last four years. Id. at 5-10. He is demonstrably qualified .

This case involves a complex web of relevant facts rel ated
to Bear's 2008 crisis . In particular , Plaintiff must demonstrate
that the alleged misrepresentation s or omissions "proximately
caused the plaintiff's economic loss ." Id. Finnerty's report and
testimony set forth analysis of the efficiency o f the market for
Bear common stock between December 14, 2006 through March 14,
2008 , a loss causation analysis determining the substantial
cause of the declines in the price of Bear common stock on the
alleged disclosure dates , and a calcula t ion of damages sustained
by Sherman traceable to the alleged fraud and leakage .

Finnerty's loss causation method uses a finance theoryapproach to analyze the market impact of "leakage"

( that is, the

dissemination of information over time before and not limited to
corrective disclosures) . Finnerty Report at

~~

186 - 89.

Defe ndants submit that the l e akage model is not "endorsed by the
courts ," "general ly accepted ," or "peer reviewed." Defs.' Mem .
of Law in Supp. Mot. to Exclude Finnerty ("Defs. '

Finnerty MOL")

at 8-9.

Defendants contend "no court has ever endorsed Finnerty's
21

leakage mode l for loss causation and damages , and the only two
Circuit Courts to have addressed leakage models have found that
they ' did not adequately account for the possibility that firmspecific , nonfraud related information may have affected the
dec l ine i n (the) relevant period. '" Defs .'

Finnerty MOL at 9

(citing Glickenhaus & Co . v . Household Int ' l , Inc. ,

787 F . 3d

408 , 423 (7th Cir. 2015) , reh ' g denied (July 1, 2015)) .

Not withstanding that courts have rejected particular
leakage a n a l yses as lacking , they have commented upon the
concept ' s validity .

See~

Dur~ ,

Dura Pharm .,

Inc . v . Broudo,

544 U.S . 336 , 342 , 125 S . Ct . 1627 , 161 L . Ed . 2d 577

(2005)

("if ,

say , the purchaser sells the shares quickly before the relevant
truth begins to leak out , the misrepresentation will not have
led to any loss . u ; In r e Flag Telecom Holdings, Ltd . Sec .
Litig ., 5 7 4 F . 3d 29 , 41 (2d Cir . 2009)
with the plausibility of Plaintiffs '

( " We do not take issue

' leakage '

v. AtriCure , I n c ., 508 F . Supp . 2d 268 , 273n.5

theory . ") ;

-~evin~

(S.D . N.Y . 2007)

(" the possibility that decli n es in s t ock price prior to b r oad
publ ic d i sclosure may be reflective of leaki n g of relevant
i n formation into the marketplace. " ) . If the efficient market
hypo t hesis is accepted as valid , then the broad notion that
shifts in stock price may b e attrib u table to gradual information
leakage has rhetorical force . However , in matters of fact ,
22

·--

- ··- -·- - - - - - - -

evidence is determinative.

The Seventh Circuit in Glickenhaus, which both Plai ntiff
a nd Defendants cite , is instructive . It engaged in a thorough
analysis of the two loss causation models c o nducted by the
plaintiff ' s expert, a l eakage model and a specific-disclosure
model. 787 F.3d at 415-23. The specific-disclosure model yielded
the measured effect of each particular disclosure on the
particula r day on which it occurred, while the leakage model
(which the jury ultimately adopted) calculated the diffe ren ce
between predicted returns and actual returns during the entire
disclosure period, assuming an efficient market reaction to more
gradual information diffusion . The court accepted the leakage
model's approach , but remanded the case for a new trial as to
loss-causation because the expert ' s particular model did not
inspire sufficient faith that firm-specific, nonfraud related
info rmation were isolated from the results. Id. at 419 -4 23

( " As

things stand , the record r eflects only the expert 's general
statement that any such info rmat ion was insignificant . That's
not e n ough .u). The Seventh Circuit was explicit :
If the plaintiffs ' expert testifies that no firm-specific ,
nonfraud related information contributed to the decline in
stock price during the relevant time period and explains in
nonconclusory terms the basis for this opinion, then it's
reasonable to expect the defendants to shoulder the burden
of ide nt ifying some significant , fi rm-s pecific , n onfraud
r el ated information that could have affected the stock
23

price.
Id. at 422.

The Tenth Circuit's decision in In re Williams accords. In
re Williams Sec. litigation-WCG Subclass, 558 F.3d 1130 (10th
Cir. 2009). In affirming the lower court's rejection of an
expert leakage analys is, the court prefaced its holding with an
analysis of Dura:
Loss causation is easiest to show when a corrective
disclosure reveals the fraud to the public and the price
subsequently drops-assuming, of course, that the plaintiff
could isolate the effects from any other intervening causes
that could have contributed to the decline. Dura did not
suggest that this was the only or even the preferred method
of showing loss causation , though; it acknowledged that the
relevant truth can "leak out,n . . . which would argue
against a strict rule requiring revelation by a single
disclosure. By premising (the analysis in question] on a
leakage theory rather than a corrective disclos ur e theory,
therefore, (the leakage expert's) methodology does not
automatically run afoul of Dura.

Id. at 1137-38.

lP~Wil liam s

rejected the l eakage analysis in

question for "failure to describe how the market was alerted to
the fraud" during the class period but before the first
potential corrective disclosure ." Id. at 1138. In simple terms ,
while a bare claim that "the market must have known" will not
suffice, a leakage theory supported by a plausible mechanism or
set of facts showing how the market was gradually alerted to the
fraud is a sufficient theory of loss causation . See id.

24

B.
The Finnerty Report Fails to Qualify Under Rule 702
For Lack of General Acceptance and For Not Having Been
Subject to Peer-Review

Rule 702 , as amended, codifies the holdings of Daubert v .
Merrell Dow Pharrns . , Inc. , 509 U. S . 579 (1993) , and its progeny .
Under Rule 702 and Daubert, " the district court functions as th e
gatekeeper for expert testimony." Major League Baseball Props.,
Inc. v. Salvino ,

Inc. , 542 F.3d 290, 311 (2d Cir. 2008)

(interna l quotation marks and citation omitted). The tria l

judg e

must ensure that expert testimony (1) "rests on a reliable
foundation, " and (2) "is relevant to the task at hand ." Daubert,
509 U.S . at 597. The proponent of expert testimony has "the
burden o f estab l ishing that the pertinent admissibility
requirements are met by a preponderance of t h e evidence ." Fed.
R. Evid. 702 advisory committee ' s note

(20 0 0 Amend.)

(citing

Bourjaily v. United States , 483 U.S. 171 (1987)) .

To assess the reliabi l ity and va l idit y of an expert ' s
method, a court may cons i der :
been) tested; " (2)
and publication ; "

( 1) " whethe r it can be

(and has

" whether it has been s u bjected to peer review
(3) "the known or potential rate of error .

. and the existence and maintenance of standards controlling the
techniqu e ' s ope r ation ; " and (4) whether the method has achieved
"general acceptance " within the relevant community , though this

25

factor is n ot a requirement. Daubert, 509 U.S. at 593 -94
(internal citations omi tted).

Courts consider addi ti onal factors when assessing the
reliability of expert t estimony , including "wh ether experts are
'propos in g to t es t ify about matters growing naturally and
di rectly out of research they have conducted independent of the
litigation , or whether they have developed their opinions
expressly for pu r poses of testifying.'" Fed . R. Evid . 702
advisory committee's not e

(2000 Amend.)

Merre!l_Q~~harms.,_J;nc .,

see also _Kumho
" employ []

Tir~ ,

(quoting Daubert v .

43 F.3d 1311 , 1317

526 U.S. at 152

(9th Cir.

1995)) ;

(holding an expert must

. the same level of intellectual rigor that

characterizes the practice of an expert in the relevant field'').
Daube rt's reliability standards apply not o nl y where an expert
relies on a specific scientific methodology, but also where an
expert "relies ' on skill- or experience -bas ed observation. '"
Kumho Tire, 526 U.S . at 151

(citatio n omitted) .

Our circuit has not endorsed the leakage t heory,

and in all

due deference in spite of the clarity of its analysis for the
reasons set forth above , t his court ca nno t accept the
assumptions u n derlying the 7th Circuit's opinion in Glickenhaus.
From this vantage point the leakage theory, sans evidence ,
26

eliminates the loss causation requirement.

In addition, Finnerty's leakage model has not achieved
"general acceptance" within the relevant scientific conununity or
"been subjected to peer review and publication." See Daubert,
509 U.S. at 593-94 .

Finnerty has cited in his ana lysis , an article by Bradford
Cornell and R. Gregory Morgan entitled Using Finance Theory to
Measure Damages in Fraud on the Market Cases,

37 UCLA L. Rev .

883 (1990). See Carey Deel. Ex. 82. That article,

however, does

not refer to the particular methodology contained in the
Finnerty Report to estimate stock price inflation and to
calculate damages due to leakage. Finnerty has stated that he
has "extended" the approach outlined by Cornell and Morgan in
order to eliminate "potential bias" in the inflation
calculation. Finnerty Report 1 191 n.310. Although Finnerty has
written numerous expert reports concerning loss causation and
damages, and has testified as an expert between 100 and 150
times, he has not before testified about leakage , and has
written about leakag e in only one prior expert report.

Finnerty

Tr. at 29:4-30 : 4, 309:8-310:11 . In that report, per the
plaintiff's request, he calculated the abnormal return on the
stock price during the leakage period , but was instructed by the
27

plaintiff not to use the leakage damages in his damages
calcu lat ion. Id. at 309:8-310:11.

Courts , including the Second Circuit , have precluded expert
opinions that fail peer review and scientific community
acceptance . See,

~'

355 , 358 (2d Cir . 2004)

Zaremba v . Gen. Motors Corp ., 360 F.3d
(affirming exclusion of expert testimony

where expert's proposed methodo log y was not subject to peer
review and had not attained general acceptance in the field ) ; In
re Methyl Tertiary Butyl Ether Prods. Liab. Litig.,
2d 549, 561

(S.D .N. Y. 2008)

593 F. Supp.

(excl u ding expert testimony in part

because expert could "not name another scientist who ha[d] ever
employed , mu ch less approved of," his method); Gary Price
Studios, Inc. v.
1319543 , at *8

Ran~olph

Rose Co ll ection, Inc., 2006 WL

(S . D.N . Y. 2006)

(noting economic expert ' s theory

that had not been subject to peer review where there '' appear(ed)
to be no prior application of his theories or methodology").

The Pl aintiff contends that "leakage ana l ysisu has been
endorsed by the courts and accepted by the relevant scientific
community, citing a handfu l of cases and academic articles that
genera lly recognize the possibility of losses where the truth
begins to "leak outu to the market. Pl .' s Opp. to Mot . to
Exclude Fi nnerty ( " Pl .' s Finnerty Opp.u) at 7-8. However,
28

leakage as a potent i al t heory of loss causation has never been
written a b out or acknowle d ged by courts employing Fi nnerty's
methodo l ogy for est i mat i ng l oss ca u sati on and damages based on
leakage . None of t h e cases or academic l iterature cited by
plaint if f are to the contrary . See Ferrell Deel . i

17 . Wh i le

Fi nnerty c l a ims to have control l ed for confounding factors , not
having been genera l ly accepted or subject to pee r r ev i ew ,
Fi nnerty ' s le akage me t hodolo g y must be ex cl uded .

The Finnerty Methodology Does Not Qualify Under Rule
C.
702 For Failure to Control For Non-Fraud Factors

One Ru le 702 r e q uireme n t establ i shed spec i fic to t he
l eakage t h eory is th at it i s n ecess a ry t o compensate for other
facto r s af f ec t ing p rice. It was the fa i lure to appropr i ately do
Circu it in

G~ickenhaus .

so th at ca u sed th e rev er sa l by t he

7th

Fi nnerty h as acknowledged that " i t

i s very important to exclude

company- specif i c i nforma t ion t hat it i s not r elated to the
a l leged f r a u d fro m the damage calculat i on .u Fi n ne r ty Repo r t . i
190 . Professor Allen Ferre l l , the Defendants '

exper t, has

expla i ned t he f l aws in Fi nne rt y ' s met h odology on th i s point.
" The po r t i on of th e stock r eturn exp l a in ed by Bear - specific non fraud re l ated information cannot , by def i n i tion , be caused by
the al l eged fraud. u Ferrel l Deel . i

29

9.

As Ferrell expla in s , according to Fin nerty , he has exc l uded
t he effec t s of Bear - spec i fic non-fra ud related information by
adjusting his estimate of Bear stock's true value (the value
Bear ' s stock wo u ld have had but for t he alleged fraud)

o n days

he designa t es as "non - fra ud related news days . u Finnerty Report
!! 190 - 91 , n . 310. Finner t y claims "even if I were to reclassify
certa i n days d uring the Leakage Period as non-fraud-related news
days to address Defendants' criticisms , the damages amou n ts
would not be subs t an t ially different from my original damage
calcula t ion.u Finnerty Deel . t 36 . The adjustment Finnerty makes
on days invo l ving no fraud-related news has admittedly no
subs t a n t i al impact on Finnerty's damages calculation . Fe r re l l
rep l ica t ed Finnerty's model and assumed no day during t he
Leakage Period qualified as a non-fraud related news day . The
es t imate of t he inflation that leaked from the Bear stock price
changed by only 2 %. Ferrell Deel. !

1 1. Fe rrell ran the opposite

scenario , classifying every day during the period as a non-fraud
rela t ed news day , finding t he model ' s estimated inflation that
leaked out of the Bear stock price changed by 1 4 %, or $27.53.
Id . "[E)ven if Bear ' s actual return we re completely explained by
non-fraud factors on every day of the Purported Leakage Peri od ,
Finnert y ' s model would mechanically find that
caused Bear ' s stock price to fall by $27.53. " Id.

30

' leakage '

Finnerty ' s model therefore fails to adequately account for
the impact of non-fraud related information and effects,
including market and industry effects. This is a result of a
fundamental flaw in the "backwardation method " used to estimate
the impact of leakage on t he fraud.

Finnerty's "backwardati on

method" estimates Bear ' s "true value" on each day of the
purported Leakage Period by taking his estimate of the true
value of Bear 's stock at the close of the last day of the period
and then back-casting this price to previous days based on
either Bear's actual return (for non-fraud related news days)
the return due to market and industry factors

or

(on all other

days). Because Finnerty purports to find t hat the true value of
Bear's stock was such a small fraction of Bear's stock price at
the end of the Leakage Period ($10.41 when the stock price was
$57) , the change in the model's estimated "true value" is
minimal on each day of the Leakage Period . In turn , this has the
mechanical result in his model of attributing almost all of the
actual declines in Bear ' s stock price to th e alleged fraud,
despite the actual effects on Bea r's stock price of mark e t and
industry factors and company - specific non - fraud related news . As
a result of this fundamental flaw,

Finnert y 's backwardation

posits that the alleged fraud caused Bear ' s stock price t o
decline d uri ng t he Leakage Period regardless of whether t h ere
was any identifiable leakage . This is most starkly illustrated
31

by the three days shown in Ex hibit B to the Finnerty Report
where Finnerty attributes substantial price declines to leakag e
even though hi s own event study found the portion of Bear's
return not caused by market and industry factors

(i.e .,

the

abnormal return) was positive.

Ferrell notes that Bear's cumu l ative abnormal return over
the purported Leakage Period (prior to March 10, 2008)

was not

sta ti stica lly significant as measured by Professor Finnerty's
s tudy. Because Fi nnerty 's event study did not find that the
cumulative abnormal return was statistically significant,

it did

not rule out the possibility that the cumulative abnormal return
was caused by chance and , consequently,

it did not estab l ish

that the alleged fraud caused Bear's stock price to decline over
the purported Leakage Period (prior to the week of March 10,
2008) . In his declaration,

Professor Finnerty responds that

"[i)f the substant ia ll y positive abnormal return for

[January

22 , 2008 through January 25 , 2008) was excluded from the Leakag e
Period , Bear Stearns's cumulative abnormal return during the
Leakage Period excluding the week of March 10, 2008 would be 14.56% and statistically sig nifican t at the 5% level ." Finnerty
Deel .

~

41 .

However,

Ferrel l 's calculation of the cumulative abnormal
32

return already exc luded January 22 , 2008 through January 25,
2008, along with all of the days designated by Professor
Finnerty as non-fraud related news days.

Ferrell excluded these

dates to be consisten t with Professor Finnerty's me thodology f o r
estimating the cumulative abnormal return in Finnerty's initial
report. Specifically, in his initial report Professor Finnerty
defined the cumulative abnormal return for the purported Leakage
Period as " the portion of the decline in Bear Stearns' share
price over the entire Leakage Period that is attributable to the
lea kage of information conc e rning the alleged f r aud after
contro lling for market - wide and industry-wide factors and
Company - specific information that is unrelated t o the alleg e d
fraud . " Finnerty

Report~

236 . Professor Finnerty estimated "the

cumulative abnormal return (CAR) for the entire Leakage Per i od"
in Attachment 34 to his report. To replicate this estimate,
Ferrell excluded days Finnerty designated as non-fraud related
news days, including January 22, 2008 through January 25 , 2008 ,
from the calculation . Pr ofessor Finnerty reca l culated the
cumulative abnormal return during the purported IJeakage Period
in Attachment C to his Declaration. Ferrell replicated the
result and found that Finnerty again excluded all days
designated as non-fraud related news days . Excluding non-fraud
news days is consistent with Finnerty's admoniti o n that " i t

is

very important to exc l ude company - specific info r mation that is
33

not related to the alleged fraud from the damage calculation."
Finnerty Report

~

190.

Ferrell replicated Finnerty's calculation that "Bear
Stearns ' s cumulative abnormal return during th e Leakage Period
excluding the week of March 10, 2008 would be -14.56 % and is
statistically significant at the 5% level," Finnerty Deel.

~41,

and concluded that he needed to include every n on -fraud related
news day (except January 22 , 2008 through January 25 , 2008) and
make no adjustments for non-fraud related news . This finding is
consistent with Professor Finnerty's admission at note 43 of his
declaration that he did not "control for Bear Stearns specific
non-fraud related information" in this analysis.

Thus , Professor Finnerty was only able to find that "th e
cumulative abnormal return during the Leakage Period excluding
the week of March 1 0, 2008 [and January 22, 2008 through Ja n uary
25, 2008)" was statistically significant by applying a
methodology that i s inconsistent with his re po rt and the rest o f
his declaration and which he admits does not control for nonfraud related information. See Finnerty Deel.

~

41. Because

Finnerty fails to establish that the cumulative abnormal r eturn
in Bear's stock price from December 20, 2007 through March 7,
2008 , even excluding Ja nuary 22, 2008 th rough January 25, 2008,
34

- - - - - - - - - -- -- - -- -

·- ·- ·-

was not caused by non - fraud factors , Finnerty likewise fails to
establish that it was caused by leakage of the alleged fraud.

While Plaintiff argues that the days in the Lea kage Period
prior to March 10 , 2008 were reasonably included in Finnerty ' s
analysis , a comparison of the fluctuations in Bear Stearns ' s
stock price versus the stock prices of its peer firms prior to
March 10 shows that they followed similar trajectories until
Bear Stearns experienced a run on the bank the week of March 10 .
Finnerty Report

~

59 , Ex . 7 . There simply is no evidence that

any of the stock price declines between

Decemb~r

20 , 2007 and

March 7 , 2008 were due to leakage rather than other factors , and
Plaintiff will not be permitted to use the results during the
week of March 10 , 2008 to create the impression of an abnormal
return where there was none .

V.

The Motion for Summary Judgment is Granted in Part and

Denied in Part

On a motion f or summary judgment , "the substantive law will
identify which facts are material ." Anderson , 477 U. S . at 248 .
Plaintiff has alleged claims under Sections lO(b) and 18 of the
Securities Exchange Act of 1934 , SEC Rule lOb-5 and common law
fraud against all Defendants , and claims under Section 20(a) of
35

the Exchange Act against the individual defendants . The elements
of each claim, recited below, are similar .

With respect to the lO(b) cause of action , " plaintiff must
prove (1) a material misrepresentation or omission by the
defendant ;

( 2) scienter ;

( 3) a connection between the

misrepresentation or omission and the purchase or sale of a
security;

(4)

reliance upon the misrepresentation or omission;

(5) economic loss; and (6)

loss causation . " Stoneridge Inv.

Partners, LLC v . Sci. - Atlanta,
761 , 768, 169 L. Ed. 2d 627

552 U. S . 148, 157 , 128 S. Ct.

(2008) . Rule lOb-5 encompasses only

conduct already prohibited by§ lO(b). Id . "Courts in the Second
Circuit have found that the elements of common law fraud are
essentia l ly the same as those which must be pleaded to establish
a claim under§ lO(b) and Rule lOb-5 . u Fezzani v. Bear , Stearns

& Co. Inc ., 592 F . Supp . 2d 410, 423 (S . D.N . Y. 2008), 9ff'd
part , vacated in part , 716 F . 3d 18

(2d Cir . 2013),

i~

and aff ' d in

part , vacated in part , 527 F. App'x 89 (2d Cir. 2013)

(interna l

quotation marks omitted) .s

s Specifically , a New York state common law fraud claim requires
a pla i ntiff to show "(l) an omission or mis r epresentation of a
mate r ial fact , (2) which defendants knew to be fals e when made,
(3) which defendants made with the intent to induce
plaintiff [ ' s) reliance , ( 4) upon which plaintiff reasonab l y
relied , and (5) which caused injury to plaintiff. " Carroll v.
LeBoeuf , Lamb , Greene & MacRae, LLP , 623 F . Supp . 2d 504, 510
(S . D. N.Y . 2009)

36

·----- - · - - - - - - - - - -- - -- - - -- -- -- ----.

"The Sect io n 18 cause of action requires plaintiff[] to
plead that

(1) a false or misleading statement was contained in

a document filed pursuan t to the Exchange Act
regulation thereunder);

(or any ru le or

(2) defendant made or caused to be made

the false or misleading statement;

(3) plaintiff relied on the

false statement ; and (4) the reliance caused loss to the
plaintiff. Int'l Fund Mgmt . S.A. v . Citigroup Inc ., 822 F . Supp.
2d 368 , 385 (S.D . N.Y . 2011)

(c i ting In re Alst om SA , 406

F.Supp . 2d 433 , 478 (S . D. N.Y. 2005)

(internal quotation marks

omitted) .

Finally , "under§ 20(a) , a plaintiff must show:

(1) a

primary [Sec t ion lO(b)] violation by a controlled person;

(2)

co n t r ol of the primary v i olator by the defendant ; and (3)

that

the controll i ng person was in some meaningful sense a culpable
participant in the p rimary violation . "

Ro~~:

Lloyds Banking

Grp . , PLC, No. 11 crv . 8530 PKC , 2012 WL 4891759, at *11
(S.D . N. Y. Oct . 16 , 2012) ,

aff~

546 F . App ' x 5 (2d Cir . 2013).

Defendants argue Plaintiff has failed to show actionable
misstatements or omissions and loss causation sufficient t o
sus t a i n any claims . Defs. ' MSJ at 11 - 29 . Defendants
alternatively seek to carve out parts of Plaintiff's claims on
the following individualized basis :
37

(1) failure t o show loss

-·-·--- - ----------------------------.

causation for claims arising from the per i od between March 14
and 17, 2008;

(2) the Section 18 claims are time-barred;

(3) New

York State common law fraud does not recognize "holder" claims
(that is , claims that an investor was defrauded into retaining
an investment) ;

( 4) purchases of Bear Stearns shares on August

15 , 2007 by t he Bruce & Cyn t hia Sherman Charitab l e Foundation
(the "Fou ndati on") , not a party to this action; and (5)
She rman 's purchase of Bear Stearns shares on March 1 1 , 2008, and
March 1 3 , 2008 in his capacity as a trustee.

A.

Plaintiff Fails to Establish Loss Causation Via

Leakage Theory

1.

The Loss Causation Requirement

One of t he critical elemen t s to be established in every
action alleg ing a violation of the securi tie s law is loss
causation . See Halliburton Co. v. Erica P. John Fund , Inc.,
S . Ct . 2398 , 240 7, 1 89 L. Ed . 2d 339 (2014)

134

(internal citations

and quot a tion marks omi tt ed).

To s how loss causation, "the plaintiffs had the burden to
establish th at the price of the securities they purchased was
' inflated '

- that is , it was higher than it would have been

without the false statements - and t hat i t declined o nc e t he
38

.

- - ---------------------------------

truth was revealed." Glickenhaus,
544 U.S. at 342 -44 );
E' . 3d 991 ,

995

~-

787 F.3d at tJ15

(citing Dura,

Citigroup Global Mkts.,

Inc., 482

(7th Cir . 200 7 )). " A plaintiff's ca usal losses ar e

measured by the amount the share price was inflat ed when he
bought the stock minus the amount it was infla te d when he s ol d

it." Id.

(citing Dura, 544 U.S. at 342-44,

The causal nexus is inescapable.
"the defendant's misrepresentation .

125 S . Ct . 1627) .

Plaintiff must show that
. proximately caused th e

plaintiff's economic loss." Dura , 544 U.S. at 346; see
Lentell v. Merrill Lynch & Co .,
2005)

Inc ., 396 F .3d 161,

al~~

175

(2d Cir.

(holding plaintiff must show "the misstatement or om issi on

con cealed something from the market that , when disclosed,
negatively affected the value of the security"

(citation

omitted)) . In order to prove that his losses were caused by the
alleged fraud,

the plaint i ff mus t establish that the decline in

stock price that resulted in his losses was a result of the
market learning of the alleged fraud,
§ec . Litig. , 2005 WL 2319118 , at *23

see In re Worldcom,
(S . D. N.Y . 2005),

Inc.

an d th at

it was the alleged fraud , and not "other intervening causes,
such as

' changed econom i c circumstances , changed investor

expectations , new industry - specific or firm-specific facts ,
conditions , or other events'" that caused the stock price to
decline. Hall i burton Co ., 563 U. S. at 812 -1 3.
39

"Loss causation is typically shown by the reaction of the
market to a

'corrective disclosure' which reveals a prior

misleading statement, but may also be shown by the
'materialization of risk' method, whereby a concealed risk- s u ch
as a liquidity crisis-comes to light in a series of revealing
events that negatively affect stock price over time." Solow v.
Citigroup, Inc., 827 F. Supp. 2d 280, 292 {S.D.N.Y. 2011)
(internal quotation marks and brackets omitted)
Vivendi Universal, S.A., Sec. Litig.,

(citing In re

765 F.Supp.2d 512,

555

(S.D.N.Y. 2011); Heller v. Goldin Restructuring Fund, L.P.,
F.Supp.2d 603, 623-24

590

(S.D.N.Y. 2008)). Loss causation, in

short, is based on an identifiable fact or facts.

2.
The Finnerty Report Fails to Meet the Loss
Causation Requirement

Finnerty used the Corrective Disclosures of March 14 and
March 17, 2008 to initially calculate his damage calculation but
then attributes his calculation to the loss of the inflated
val u e due to fraud during the period of December 20, 2007 to
March 13, 2008

(the "Leakage Period"), to leakage.

The Finnerty Report c o ntains no evidence that the Bear
Stearns stock price actually moved in reaction to the leakage of
a ny factual information. Rather, Finnerty's calculation is bas ed
40

-- --·-·

· --------------------------------~

on an estimated inflation amount of Bear stock resulting from
fraud between December 14 , 2006 (the date of Bear's 2006 10-K
f iling containing alleged misstatements) and March 14 ,

2008

(the

date it was announced JPMorgan Chase & Co . would acquire Bear at
$2 per share) .

Finnerty calculates the inflation in the stock price on the
last day of the Relevant Period (March 17, 2008)

and proceeds

backwards , calculating the inflation on the immediately
preceding trading day (i.e. , March 14 , 2008) and adding the
inflation from March 17 to his calculation of inflation on March
14 , to get the t o tal stock price inflation on March 14 , as
follows:

For March 17, 2008 ,

Finnerty mu l tiplies the closing

price of Bear Stearns stock on March 14, 2008

($30 . 00)

abnormal return on th e stock on March 17 , 2008

by the

(-77.24%)

results in inflation of $23 . 17 per share . For March 14,

which
2008 ,

Finnerty complet es the same steps, multiplying the closing price
of Bear Stearns stock on March 13, 2008
return on the stock on March 14 ,

2008

($57 . 00)

by the abnormal

(41 . 08%) , which equals

$23 .4 2 . He then adds $23.42 to the inflation from March 17 ,

20 08

($23 . 17) to get total inflation of $46 . 59 per share on March 14 ,
2 008 . Finnerty Report at t 267 , Finnerty Tr . at 160:14 - 161 : 5.

Finnerty con ti nues to work backwards as he calculates stock
41

- -·- ···-

· · --- · ·- -·------ - - - -- -- - -- - - - -- - - ----..

price inflat i on due to the alleged fraud during his Leakage
Period . Finnerty Report At tachs. 31, 34. Finnerty concludes that
the abnormal return on the stock price o n each Corrective
Disclosure Date , and the stock price's cumulative abnormal
return during his Leakage Period , are statistically significant.
Id . 1 236 , Attach . 34.

However , as Defendants arg ue , Finnerty is unable to
establish tha t the decline in Bear Stearns ' s stock price during
the Leakage Period was due to the market learning of the alleged
fra u d . This flaw is fatal to loss causation . See ,

~'

In re

Will i ams , 558 F . 3d at 1138 (citing In re World com, 2005 WL
2319118)

(" [Plaintiff must} establish that his losses were

attr i butab l e to some form of reve l ation to the market of th e
wrongfully concealed information ." ) . Finnerty has stated that he
cannot factua l ly pinpoint the ca use of changes to Bear Stearns'
stock price on any given day :
I ' m comparing [how I would expect the price to behave in
the absence of fraud) to the actual behavior and that
difference in any given day is the amount of inflation.
What act u ally causes that day to day I don't know because
there a r en't press releases that identify what's being
di s closed. But what I can see is that , I can see the
decline i n the price of the stock , the persistent price in
the dec l i n e of the stock over t h e leakage period .

Finnerty Tr . At 228 : 10 - 22. His report contains no evidence o f
trad i ng on the allegedly leaked news . Finnerty has simply
42

assumed that the market was reacting to leakage of the fraud
throughout the entire Leakage Period . Id. at 227 : 14-228:22;
258:15 - 2 60:13 ; 261:19-266 : 20.9

Finnerty's opinions on loss causation rely entirely on his
model based on the assumption of leakage . Using his model,
Finnerty attempts to control for market - and industry-wide
effects on Bear Stearns ' s stock price, as well as Be ar Stearnsspecific news that he does not attribute to the alleged fraud .
Id . at 2 28:6-12 ; see also Finnerty Report 'JI 235. He then
concludes that any inflation in Bear Stearns ' s stock price after a pplication of these controls - is attributable to le a kag e
of the alleged fraud.

As discussed a t length supra § IV, the assumption inherent
in Leakage as set forth by Finnerty would vitiate the loss
causation requirement contrary to controlling precedent .
Consequently , Plaintiffs have failed to establish loss caus a tion
via the leakage theory. However , a genuine dispute of material
fact exists with respect to loss causation as a result of the

9 Early in my exposure to the federal requirements to prove a
cause as an Assistant United States Attorney, I was tutored
unforgettably by the Honorable J. Edward Lumbard, then United
States Attorney, later Chief Judge of our Circuit, 'Never assume
a g~ d~ thing.' This dictate may found this decisio n .

43

- - -- - -- - - - - - - - - - - -·-

--

- -

alleged correct i ve d i sclosures .

B.

A Genuine Dispute of Material Fact Exists as to

Material Statements and Omissions

Defendants argue disclosure defeats Plaintiff ' s claims of
misstatements or omissions . Defs .' MSJ at 11-15. Tha t

is , t o

whateve r extent Bear St earns was poor l y managed as evidenced by
i t s excessive l everag e , re li anc e on repo financing , and exposure
to mortgage asse t s , these r i sks were none t he l ess pub l ica ll y
known as a resul t of Bear Stearns ' d isc l osures.

Defendants ' opposition and cited d i sc l osures demonstrate
tex t book dispu t es of ma t erial fact sufficient to defeat a motion
for surrunary judgme n t . For example , both Pl aintiff and Defendants
point to a disc l osure stating " inabi l ity to raise money in the
l ong - term or short - term debt mar kets , or to engage in repurchase
agreements or securities lend i ng, could have a substantia l
negative effec t on [Bea r St earns ' ] l iqu i di t y ." Defs .' MSJ at 12 ;
Pl.' s Mem . in Opp . Defs .' Mot. Surrun J .

(" Pl.' s MSJ Opp . " ) at 6 .

Defenda nt s fram e th is as sufficie n t disclosure to ale rt
Pl a i ntiff to ris k s , defeating the possibility of a misstatement
or omission . Pl a i ntif f emphas i zes that Defe nd ants disc l osed only
the poss i bi l ity but not the cer t ai n ty that Bear Stearns was
44

already experiencing negative pressure as a result of its
reliance on repo financing. Id .. at 6-7. Plaintiff points to SEC
corrunent criticizing lack of disclosure with respect to Bear
Stearns ' exposure to subprime loans. Id . at 7-8. Defendants
again point to disclosures that Bear Stearns was net s hort
subprime mortgage assets to argue that such risk was known .
Defs.' MSJ at 11-15. With respect to mortgage valuations,
Defendants argue the factual accuracy of Bear Stearns' reported
asset values. Defs.' MSJ at 15-20. With respect to risk
management, th e parties explicitly disagree and marshal their
own evidence to demonstrate the accuracy and timely updating of
value at risk models. Defs.' MSJ at 23 ; Pl. 's MSJ Opp. at 1 5 -6.
Plaintiff submits that Bear's actual stress testing practices
were not consistent with disclosures regarding stress testing.
Id . at 17. With respect to liquidity, Plaintiff points to
discrepancies between representations that Bear Stearns had
sufficient liquidity 10 and evidence from inside Bear

10 Defendants contend that the statements Plaintiff identifies
amount to non- actionable opinion. Defs.' MSJ at 24.
"[E]xpression[s] of optimism" are generally "too indefinite to
be actio nable under the securities laws." In re Int'l Bus.
Machines Corp. Sec . Litig ., 163 F.3d 102, 108 (2d Cir. 1998).
However, the Court notes there is a distinction between the
cases Defendants cite rejecting statements that liquidity was
"impressive" or strong" and some of the statements Plaintiff has
identified, such as that Bear had "ample liquidity" and "didn't
need to raise capital" Pl.'s MSJ at 21 . These statements imply
numerical reference points, which is less vague than "strength."
Regardless, Plaintiff argues that Bear's liability on the

45

·--··---------------------------------

demonstrating an active attempt to hide facts contradicting
those statements when they were made. Pl .' s Opp. to MSJ a t

21-

22 .

"Nothing short of a complete failure of proof concerning an
essential element of the nonmoving par t y's case will be
s ufficient to award surrunary judgment." Celotex Corp . v . Catrett,
477 U.S.

317 ,

323, 106 S. Ct . 2548 , 2552,

91 1. Ed.

2d 265

(1 986). The disclosures Bear has identified are not so
forthright and comprehensive that it can be said no dispute of
material fact exists. The run-on-the-bank notwithstanding,
s taggering damage wrought as a result of Bear Stearns'

the

collapse

be lie s the argument that it is indisputably clear on the record
t ha t th e marke t was alerted to the danger and degree of what was
occ urring at Bear Stearns during the relevant period. The
ev idence Plaintiff has produced bridges the distance between the
possibility that Bear's d isclosures were insuffici e nt and
adequate proof of his claim such that, drawing all inference s in
h is favor,

th e claims cannot be defeated on summary judgme nt.

liquidity issue sterns fr om the fact that Bear knew damag ing
facts regarding its liquidity situation that wer e not disclosed
to th e public. Pl.'s MSJ Opp. at 21-22 . An op in ion regarding
"strength" may be actionable were it is not sin ce rely held.
Ross , 2012 WL 4891759, at *6 (citing Ci t y of Omaha , Neb.
Civilian Employees' Ret. Sys . v. CBS C~£.:_, 679 F . 3 d 64 , 67 (2 d
Cir . 2012)). Omissions are actionable irrespective of public
st atements of opinion.
46

Regulatory compl i ance and accurate disclosure , while possibly
demonstrative of good faith efforts, do not themselves establish
complete disclosure meeting the dictates of securities law . See
United States v. Rigas , 490 F.3d 208 , 220

(2d Cir . 2007) .

The non-comprehensive list of aforementioned disputes
demonstrates that central questions remain with regard to each
of Plaintiff's alleged material misstatements and omissions. Not
least of which : when the known disclosures Defendants have
identified are compared to the information Plaintiff argues was
material , do they match? Or was there information that remained
undisclosed that would have been significant to investors
sufficient to establish liability? It is precisely these
discrepancies of scope , between what was disclosed and what
constituted the whole material truth of the relevant
circumstance , that the parties dispute .
26 , 28, 30-34, 38 - 9, 45, 49-52 , 59-60,

See~'

63,

64-7,

Pl . 's 56.1 1
71-3,

72 . Some

disclosu r e does not necessarily indicate complete disclosur e ,
and Plaintiff has marshaled evidence to suggest that such a
discrepancy may have existed. Id. A jury may ultimately decide
that the appropriate risks were disclosed and ignored,

and thus

Plaintiff will be unable to recover for his losses.
Nevertheless, a genuine dispute of material fact exists such
that it is the jury's decision to make.
47

Defendants argue that the March 14, 2008 a nd March 16, 2008
statements are not corrective disclosures, and thus,

Plaintiff

cannot establish that his lo sses between March 14 and 17
resul ted from disclosure of previously unknown risk.

Defs. '

MSJ

at 29 - 33 . Defendants allege incongruity; that the March 14
disclosure that liquidity had de t eriorated and the March 16
announcement of Bear ' s merger with JPMorgan lack a sufficient
nexus to th e misrepresentations Plaintiff has alleged.

Id.

Defe ndants posit the run-on-the-bank "was a materialization of

disclosed ri sks coupled with a sharp deterioration in market
cond iti o n s .n Defs .' MSJ at 32.

The requirement of nexus between a corrective disclosure
and the alleged misstatement or omiss io n is not such a narr ow
dictate as to require an explicit confession to establish loss
causat i on . I n re Bear Stearns , 7 63 F. Supp . 2d at 520-21
(col le cting citations ) .

As reas oned above , Plain ti ff has sufficiently argued
actionable misstatements and omissio ns existed. Consequentl y ,
Pla i ntiff ' s corrective disclosure-based loss causation theory
cannot be defeated by the argument that o n ly disclosed risks
came to light on March 14 and 16 unless the March 14 and 16
information did not implicate the alleged misstatements and
48

-

- -- - · - -- - · - - - ··-

-

··········· ····································-···- -- --

-

--------------------------------

·-

-

-

-

--

- -- - - - - - ---··- ·-··---·····----

omissions. Plaintiff has submitted Bear Stearns failed to full y
disclose its liquidity position, and has provided evidence to
show that facts that should have been disclosed were withheld
f r om the public. The c orrective disclosures alleged clearly
relate to the alleged misstatements and omissions. Pl.'s 5 6 .l at
176. There is sufficient nexus between the disclosures and
alleged fraud relating to liquidity such that a jury could
reasonably conclude the March 14 and 16 events disclosed
information previously unknown to the public that c a used th e
losses between March 14 and 17, 2008.

Based on the conclusions set forth above,

Defendants'

motion for summary judgment on the grounds that Plaintiff h a s
failed to show loss causation or material misst a tements or
omissions is denied. Defendants argu e that Plaintiff's Secti on
2 0 cl a ims fall for failure to establish a primary violation of
s e curities law. Pl.'s MSJ at 36. Accordingly, the motion f o r
summary judgment with regard to Plaintiff's Sect i on 2 0 clai m i s
denied.

C.

Plaintiff's Section 18 Claims are Time-Barred

By statute, Section 18 claims must be "brought with i n o ne
year after the disc o very o f the facts constituting the cause o f
49

action and within three years afte r such cause of action
accrued ." 15 U.S . C. § 78r(c) . Defendants submit that Plaintiff
was on notice of his claim "by at least March 16 , 2008 ," more
than a year before the fi li ng of his September 24 , 2009
complaint. Defs .' MSJ at 33; see general l y In re Bear Stearns
Companies, Inc. Sec., Derivative , & ERISA Li t ig .,
2d 291 , 307

(S.D.N.Y . 2014)

995 F. Supp.

(SRM Global Masters Fund Ltd . P ' sh.i£

v . The Bear Stearns Companies, hereinafter "S RM Global")
(dismissing simi l ar §18 c l aims as time-barred). Plaintiff "does
no t contest Defendants ' argument that his Section 18 claims are
time-barred." Pl . ' s MSJ Opp . at 6n.4. Accordingly ,

Plaintiff ' s

Section 18 c l aims are dismissed .

D.

Defendants are Entitled to Summary Judgment on

Plaintiff's Holder Claims

Plaintiff's comrnon law fraud claims allege in part that
Sherman was defrauded into retaining his Bear Stearns
investment. Pl. ' s MSJ Opp. at 36-37; Comp l.

~264 .

This Court has

previous ly addressed the viability of such "ho l der " claims. See
SRM Global ,

995 F. Supp. 2d at 3 1 4 - 15. Recognizing "the

uncertainty of the New York law " on the issue, this Court held
that the most persuasive read i ng of relevant law barred holder
claims . Id.
50

Plaintiff makes the same arguments the Court found
unpersuasive in SRM Global. Compare id. with Pl.' s MSJ Opp. at
36-8. Plaintiff submits that SRM Global is currently on appeal
before the Second Circuit, and thus caution is warranted.
However, each new source Plaintiff cites bolsters the r e asoning
in SRM Global.

Issued a month after SRM Global, Beach cited that holding
in acknowledging that "[s]ince Starr Foundation was decided,
state and federal courts applying New York law have split on the
question of whether the decision forecloses all holder claims,
or only holder claims alleging hypothetical lost profits.u Beach
v. Citigroup Alternative Investments LLC, No. 12 CIV. 7717 PKC,
2014 WL 904650, at *17 (S.D.N.Y. Mar. 7, 2014)

(citations

omitted). Bank Hapoalim, issued six months after SRM Global,

is

at best dicta for Plaintiff, and at worst accords:
[t)his case is essentially a 'holder' fraud case-that is,
the alleged fraud is that the structured investment
vehicles held their assets instead of liquidating them. As
a result, plaintiffs suffered no out-of-pocket loss.
Moreover, since plaintiffs' case depends on an attenuated
chain of events and series of hypothetical transactions,
they have not pleaded the causation element with sufficient
particularity.
Bank Hapoalim B.M. v. WestLB AG, 121 A.D.3d 531, 535, 995
N.Y.S.2d 7, 11 (2014), leave to appeal denied, 24 N.Y.3d 914,
N.E.3d 783 (2015)

26

(internal citations omitted). Similar ly, Varga

cited Starr Foundation and Bank Hapoalim to f ind "[a]llegations
51

that Defendants' inaction somehow caused the [Plaintiff] to
hold,

rather than sell, the securities are too undeterminable

and speculative to constitute a cognizable basis for damages and
such 'holder' claims are not actionable." Varga v. McGraw Hill
Fin. Inc., 2015 WL 4627748, at *12 (N.Y. Sup. Ct. 2015).

The Court declines to revisit its holding at this time
without further direction from the New York Court of Appeals or
the Second Circuit. In the event the Second Circuit overturns
the Court's holding with respect to holder claims, the issue can
be renewed at that time. Plaintiff's holder claims are
accordingly dismissed.

E.

Sherman Does Not Have Standing to Pursue the

Foundation's Damages

Sherman included 7,000 shares purchased August 15, 20 0 7 on
behalf of the Bruce & Cynthia Sherman Charitable Foundation,
Inc.

(the "Foundation") in his opt-out letter,

intending to

exclude them from settlement in the Securities Class Action.
Pl.'s MSJ Opp. at 38; 56.1 1 6, 9. Defendants submit Plaintiff
lacks standing to seek damages on those shares. Defs.' MSJ at
37. Sherman does not dispute that the shares were purchased on
behalf of the Foundation, but argues that Sherman has third52

- - - - - - -- ·- - -- - ---- - - -

-

- - - - -- ---·-·····-······--····------ - - - - - - · · -

party standing to pursue the claims on the Foundation 's b e half.
Pl.'s MSJ Opp. at 38 .

"[T]he irreducible constitutional minimum of standing
consists of three elements. The plaintiff must have
an injury in fact,

(1) suffered

(2) that is fairly traceable to the

challenged conduct of the defendant , and (3)

that is likely to

be redressed by a favorable judicial decision." Spokeo, Inc. v.
Robins, No. 13-1339, 2016 WL 2842447

(U.S. May 16, 2016)

(internal quotation marks and citations omitted) . The injury in
fact must be both "particul a rized" and "concrete." Id . To be
particularized , an injury "must affect the plaintiff in a
personal and individual way." Id.

(internal quotation marks and

citat ions omitted). "As a general rule," this means "plaintiff
must have personally suffered." W.R. Huff Asset Mgmt. Co., LLC
v . Deloitte & Touche LLP, 549 F .3d 100, 107 (2d Cir. 2008)
(citing Lujan v. Oefs. of Wildlife, 504 U.S. 555, 561 n.l,
S. Ct.

112

2130 , 2136 n.1, 119 L. Ed. 2d 351 (1992).

Any injury traceable to l o sses for the Foundation's shares
undoubtedly do not accrue to Plaintiff personally . Nevertheless,
Plaintiff submits he should be permitted to stand in for th e
Foundation . It is worth quoting at length from the case
Plaintiff relies on to establish third-party standing . In W.R.
53

________ ___ _ ____ _________________________________.
_

-------------·- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- -

Huff Asset Mgmt. Co., LLC v.

Deloitte & Touche LLP,

the Second

Circuit held:
There are, indeed, a few well-recognized, prudential
exceptions to the "injury-in-factn requirement. These
exceptions permit third-party standing where th e plaintiff
can demonstrate (1) a close relationship to the injured
party and (2) a barrier to the injured party's ability to
assert its own interests.
. We reject Huff ' s assertion
of a prudential exception based on 'investment manager
standing. ' First, the investment advisor-client
relationship is not the type of close rel a tionship courts
have recognized as creating a 'prudential exception' to th e
third-party standing rules. Second, Huff has failed to
demonstrate that, absent a recognition of its standing
claim, there is a 'hindrance' to the Beneficial Owners'
a bility to protect their own interests. Rather, the
Beneficial Owners are relativel y sophisticated parties with
a demonstrated capacity to protect their own interests in
the absence of Huff's intervention.
549 F.3d at llO .
Sherman argues

-Pl.'s MSJ Opp . at 39. This argument is not materially
different from the investment advisor-client relationship in
W.R. Huff, where the Second Circuit rejected the plaintiff's
argument that it "qualifie[d] for

th~

prudential exception to

the injury-in-fact requirement because of its authority to make
investment decisions on behalf of its clients." W.R.
F.3d at 109 .

54

Huff ,

549

-···--·· ·----······----··-··------- --

··---·--··- --

- - - - - -- - -- - -- - - -- - - - -- - - - - - - - - - - - -- - --

Plaintiff also submits that "the Found a tion is hindered
because, like a trust, it lacks the practical ability to sue
outside of a decision by those who control it." Pl.'s MSJ Opp.
at 39. Non-natural entities are capable of initiating
litigation, and the sole fact of their being controlled by
individuals does not alone hinder them from asserting their own
independent interests. Plaintiff cites Powers v. Ohio to support
his hindrance argument based on "practical barriers." Id. As
part of a multifaceted analysis awarding third-party standing to
permit a white juror to challenge discriminatory exclusion o f
seven black venirepersons on the basis of their race, this part
of Powers reasoned that individual jurors impermissibly
subjected to racial exclusion are unlikely to be willing or abl e
to sufficiently vindicate their rights. 499 U.S. 4 00 , 4 1 4, 111
S. Ct. 1364, 1373, 113 L. Ed. 2d 411 (1991). One sentence of
that reasoning compared the economic burdens of litigation to
the low financial stake of the impermissibly excluded juror. Id.
at 415 ("And, there exist considerable practical barriers to
suit by the exc luded juror because of the small financial stake
involved and the economic burdens of litigation."). The
"practical barriers" that the Foundation must act through its
Off icers and Directors, whatever they may be, are not
comparable.

55

·--········----·-·-----------------~

Third-party standing being inappropriate in this instance
and contrary to the Second Circuit's direction in W.R. Huff,
Plaintiff has failed to establish standing to pursue losses
traceable to the Foundation's shares. Accordingly, summary
judgment is granted with respect to the Foundation's shares.

F.

Defendants Are Not Entitled to Summary Judgment on

Claims Related to the Shares Held in Escrow

On March 11, 2008 and March 13, 2008 Plaintiff purchased an
approximate total of 700,000 Bear Stearns shares with funds in
an escrow account (the "Account") . The Account was created in
2001 pursuant to a contract between Sherman and Legg Mason for
the sale of Sherman's investment management business to Legg
Mason. Pl.'s MSJ Opp. at 39; Defs.' MSJ at 38-39; 56.1 'ft 11-12.
Legg Mason placed funds into the escrow account which were to be
released over time as PCM met its targets. Defs.' MSJ at 39;
56.1 'J['J[l3-4.
Pl.'s MSJ Opp. at 39-40;
Defs.' MSJ at 39; 56.1 '1[17-8.

Defs.' MSJ at 39.
Therefore, Legg Mason, not Plaintiff, suffered the losses from

56

the Bear Stearns trades. Id. Indeed, in the fall of 2008 , $68.4
million of the escrowed funds were returned to Legg Mason.

Id .

Nevertheless, the sum value and loss in the accounts did
n ot belong to Legg Mason at the time of the losses only because
return was likely. Defendants' position turns on wh ether the
terms and circumstances of the Account amount to an intervening
or superseding cause breaking the proximate causal chain between
the Bear Stearns l osses and Plaintiff . Ultimate value to both
Legg Mason and Plaintiff depended on

•
See id. Thus Sherman's obligation to Legg Mason
certainly depended on the unrelated element of PCM ' s
performance . However , Defendant's argumen t would equa lly apply
to Legg Mason , resulting in the impossible construction that no
party could rec over for the losses to the shares in escrow
because they were bundled in a l arger complex deal . Regardless
of what Plaintiff ultima t ely owed Legg Mason as a result of
PCM ' s performance, the losses were borne by him and were not
altered by PCM's performance. Proximate cause therefore exists
between Plaintiff and any escrow share losses .

57

VI.

Conclusion

Based on th e conclusions se t f o rth above , Defe nd ants '
motion to excl ude th e SEC Report is denied a n d th e mo t ion to
excl ude Finnerty is grant ed.

De f enda nts' motion for summary

judgme nt is granted in part and denied in par t as se t

for th

above.

In light of the co nfid e nt iali t y s ti pula ti on a nd order
en ter ed in this case , th e parties a r e directed to jo intly submit
a re dac t ed version of this op in ion to be filed publicly or
o therwis e noti fy th e Court t ha t no redactions are n ecessary
wi th i n tw o weeks of the date of distr ibuti o n of t his opi ni on .

58

It is so ordered .

(~--\

' ~Wt±

New York, NY
July

5' ,

C7ROBERT W. SWEET
U.S.D.J.

2016

59