Sherman v. Bear Stearns Companies Inc. et al
OPINION re: (571 in 1:08-md-01963-RWS) MOTION to Strike the "Revised" Expert Report of John Finnerty. filed by Warren J. Spector, James E. Cayne, Bear Stearns Companies, Inc., (200 in 1:09-cv-08161-RWS) MOTION to Strike the "Revised" Expert Report of John Finnerty. filed by James Cayne, Bear Stearns Companies Inc., Warren Spector. Because it applies the same faulty analysis that this Court rejected in the July 5 Order, and because it is not a "supplement" to an expert report under Rule 26(e) of the Federal Rules of Evidence, the motion to is granted and the Revised Report of Finnerty is stricken. (Signed by Judge Robert W. Sweet on 6/30/2017) Filed In Associated Cases: 1:08-md-01963-RWS, 1:09-cv-08161-RWS(kgo)
UNITED STATES DISTRICT COURT
SOUTH ERN DISTRICT OF NEW YORK
IN RE BEAR STEARNS COMPANI ES , INC .
SECUR IT I ES , DERIVATIVE, AND ERISA
08 MDL 1963
This Document Relates To:
Securities Action, 08 Civ . 2793
BRUCE S. SHERMAN ,
09 Ci v . 8161
- against OPINION
BEAR STEARNS COMPANI ES INC ., JAMES CAYNE ,
WARREN SPECTOR AND DELOITTE & TOUCHE
------------------------------ -- ------------x
Counsel for Pla intiff
BOIES , SCH ILLE R & FLEXNER LLP
26 South Main Street
Hanover, NH 03755
Richard B . Drubel , Es q.
Counsel for Defendants
PAUL , WE I SS , RIFKIND, WHARTON & GARRISON LLP
1285 Avenue of the Americas
New York , NY 10 0 1 9
Jessica S . Carey , Esq.
Sweet, D . J.
Defendants The Bear Stearns Compan i es Inc.
Stearns " ) , James E . Cayne , and Warren J . Spector (together ,
" Defendants " ) have moved pursuant to Federal Rules of Civi l
Procedure 16 , 2 6 , and 37 , to strike t h e revised exper t report
(the "Revised Report " ) o f Dr . John D. Finnerty (" Fi nnerty")
served by Plainti f f Bruce S . Sherman ("Pla i ntiff " ) on December
21 , 20 1 6. Based upon the conclusions set forth above , the
Revised Report i s stricken .
The procedural history and f actua l background of the
under l ying multidis t rict litigation has been detailed i n various
opinions by this Court . See , e . g ., In re Bear Stearns Companies ,
Inc . Sec ., Derivative , & ERISA Litig ., No . 0 8 CI V. 2793 , 2014 WL
4 443458 , at *1 (S . D. N. Y. Sept . 9 , 2 014)
(hereinafter , " In re
Bear Stearns " ) ; In re Bear Stearns , 909 F . Supp. 2d 259 , 2 63
(S . D. N. Y. 2012) ; In re Bear Stearns , 763 F . Supp. 2d 423
(S . D. N. Y. 2011) , on reconsideration , No. 07 CIV. 10453 , 2 011 WL
(S.D . N.Y . Sept . 13 , 2011) , and on reconsiderat i on , No .
0 7 CIV . 10453 , 2 01 1 WL 4357 1 66 (S.D.N . Y. Sept . 1 3 , 2011) .
The Plaintiff filed his complaint on September 24,
2009 alleging securities violations by the Defendants. This and
similar actions were determined to be part of a multidistrict
litigation, 08 MDL 1963 (RWS).
Plaintiff's complaint alleges that he purchased a
large block of Bear Stearns common shares between June 25, 2007
and March 13, 2008 at prices ranging from $53.77 to $140.76 per
share. He sold 229,150 shares of Bear Stearns common stock on
March 19, 2008 at the price of $5.23 per share. Sherman alleges
Defendants misrepresented Bear Stearns's financial condition,
including the value of Bear Stearns's mortgage assets, the
nature of its risk management, and the adequacy of Bear
Stearns's capital and liquidity, leading Sherman to purchase and
retain Bear Stearns common stock, ultimately suffering massive
Sherman proffered Finnerty as an expert in loss
causation and the damages Sherman suffered as a result of the
conduct alleged. Finnerty concluded that, on March 14 and March
17, 2008, Bear Stearns's stock price fell due to corrective
disclosures that revealed alleged fraud at Bear Stearns, and
from December 20, 2007 through March 13, 2008
Period"), Bear Stearns's stock price fell because news of the
alleged fraud "leaked" into the market . According to Finnerty ,
as a result of the revelation of the alleged fraud via both
corrective disclosures and leakage , Plaintiff ' s damages were
over $13 million .
On April 16 , 2015 , Defendants served a rebuttal expert
report from Professor Allen Ferrell (" Ferrell") , which responded
to Finnerty ' s report , cataloguing a number of significant flaws
in Finnerty ' s loss causation methodology and calculation of
Plaintiff ' s damages . Defendants deposed Finnerty on May 14 ,
2015 , and expert discovery closed on June 22 , 2015 .
On August 17 , 2015 , Defendants moved to exclude
Finnerty's report and testimony as unre l iable under Federal Rule
of Evidence ("FRE " ) 702 .
By order of July 5 , 2016 (the "July 5 Order") , the
report and test i mony of Dr . John D. Finnerty was excluded . The
July 5 Order determined that Finnerty ' s report and testimony
were inadmissible under FRE 702 , because Finnerty ' s leakage
methodology for estimating loss causation and damages had not
been generally accepted by courts or the scientific community ,
or subjected to peer review , and because Finnerty ' s methodology
failed adequately to account for the impact of non-fraud related
information and effects on Bear Stearns's stock price.
The Plaintiff moved to clarify whether the ruling
applied to " only those portions of Finnerty's report addressing
leakage (as distinct from corrective disclosures)." By order of
December 6 , 2016 (the "December 6 Order"), this Court stated
that the July 5 Order "excluded the entirety of Finnerty 's
report as it was written, merging the two damages calculations."
On December 21 , 2016, Plaintiff sent an email to Defendants
attaching the Revised Report. No leave to submit a Revised
Report was sought by the Plaintiff.
This case was part of a multidistrict litigation that
was settled by opinion granting the Lead Plaintiff's motion for
a distribution order approving administrative determinations and
directing distribution of reserved settlement funds dated July
8 , 2014 . See Docket of Case No. 08 Md. 1963, ECF No. 448.
Plaintiff in the instant action opted out of the multidistrict
litigation in June 2013, discovery proceeded, and this case is
set for trial on October 2 , 2017.
The instant motion to exclude the Revised Report was
heard and marked fully submitted on April 18, 2017 .
The Revised Report
The Revised Report repeats much of Finnerty ' s original
loss causation analysis , omitting any exp l icit reference to his
leakage theory . Of the 136 pages in Finnerty ' s original report ,
127 appear nearly verbatim in the supposedly Revised Report. See
Deel . of Jessica S . Carey, Ex. C .
Report and Revised Report)
(Redline Comparing Original
[hereinafter , the "Redline "]. The
damages analysis has been modified to exclude damages due to
The Revised Report is Excluded under the July 5 and
December 6 Orders
The July 5 Order held that " The Finnerty Report fails
to qualify under Rule 702 for lack of general acceptance and for
not having been subject to peer-review " and that "The Finnerty
methodology does not qualify under Rule 702 for failure to
control for non - fraud factors " . See Sealed Opinion dated July 5,
20 16 at pp . 25, 29. It also denied Defendants ' motion f o r
summary judgment on the issue of loss causation or material
misstatements or omissions. See id. at p. 49. The December 6
Order sought to clarify the July 5 Order. As evidenced by the
instant motion , that effort was not overwhelmingly successful .
The present submissions and hindsight wi l l hopefully resol ve the
issues presented .
The December 6 Order , in ful l, stated :
Though the Ju l y 5 Opinion recognized that a
genuine d i spute of materia l fact exists with
respect to loss causation as a result of alleged
corrective d i sc l osures , i t did not do so in the
context of Finner t y ' s report . The Op i nion
excluded the entirety of Finnerty ' s report as it
was written , merging the two damage calculations .
The December 6 Order confirmed that entirety of
Finnerty ' s report was excluded because it relied upon the
leakage theory and because that theory and the theory of loss
causation as a result of corrective d i sc l osure were merged for
the purposes of damages calculation . The Revised Report does not
circumvent these two orders ; although the Revised Report has
excised reference to l eakage, the merger remains , as set forth
below, and the Finnerty Report remains exc l uded in its Revised
A. The Leakage Theory Remains the Foundation of the
While explicit reference to leakage has been excised
from the Rev i sed Report , and the damages ca l culation has been
revised downward , the Rev i sed Report continues to justify the
Plaintiff's damages claim resulting from the allegedly
fraudulent statements by the Defendants before the Plaintiff's
purchases of Bear Stearns '
stock in July 2007 and thereafter.
This was the basis of Finnerty's leakage analysis . The
corrective disclosures as put forth by the Plaintiff are the
March 14, 2008 and March 17, 2008 statements concerning the
emerging loan facility with JPMorgan Chase Co.
news of the acquisition of Bear Stearns by JPMC for $2 a share.
The Revised Report purports to establish damages based on these
alleged corrective disclosures; however, the methodology used
remains rooted in the faulty leakage theory.
The Revised Report establishes that Finnerty applies
the same faulty analysis this Court rejected in the July 5
Order. While in his initial report Finnerty attributed the loss
calculation damages to leakage and corrective disclosures, the
Revised Report repeats the backwards methodology without using
the terms "leakage" and "backwardation ," instead using the
phrase "liquidity problems." A shorter time period is used for
the Revised Report's loss calculation - from June 25, 2007 to
March 13, 2008 instead of from December 20, 2007 to March 13,
2008 - but the methodology applied is the same; the Revised
Report simply substitutes an assumption equivalent to the
For example , the Revised Report states that:
[B]etween June 25, 2007 and March 13 , 2008 , to be
conservative , I ca l culated inflation per share
utilizing the constant dollar method. It is my
opinion that this assumption is conservative in
favor of defendants because .
based on the
Bear Stearns' emp l oyee ema ils and other evidence
cited in this expert report,
. at least some
information regarding Bear Stearns' liquidity
problems adversely affected the price of its
common stock prior to March 14, 2008.
Accordingly, the disclosure of Bear Stearns'
serious liquidity problems ear lier in the
Relevant Period could have led to a substantially
greater loss of equity value .
237. This is, in effect, leakage. As another
example, Finnerty removes "the Leakage Period" and uses "March
14, 2008 , and extending at least as far back .
as June 25 ,
2007 when [Plaintiff first purchased the relevant shares]" in a
sentence explaining his calculation methodology: "I assume that
the amount of inflation per share is a constant dollar amount "
equal to the effect on Bear Stearns '
stock price of the
purported corrective disclosures that occurred on March 14 , 2008
and March 1 7 , 2008. Id.
236 . The methodology remains
As Ferrell explained in his rebuttal report,
assumes that the disclosure of the alleged fraud at any time
from June 25, 2007 through March 13, 2008 would have had the
same effect on Bear Stearns 's stock as the disclos ures that it
was entering into an emergency loan facility and being acquired
for $2 per share. See id. However, no facts in the Revised
Report support this assumption , and further,
that the "full disclosure concerning Bear Stearns' liquidity
problems, inadequate capital reserves, and the over - valuation of
its assets did not occur until [March 14, 2008 and March 17,
2008] ." See id.
207. No evidence is contained in the Revised
Report that disclosure of the alleged fraud would have had the
same effect had it occurred at the time of Plaintiff's purchase
of Bear Stearns stock as early as June 25 , 2007.
At his deposition, Finnerty testified:
[S]tarting December 20th , ' 07 when they reported
the first quarterly loss as a public
. the liquidit y situation from that
point on really started to get severe and grew
more and more severe until finally we had the run
on the bank the end of the week of March 10th and
Bear Stearns went out of business.
Finnerty Dep . Tr. at 51:3 -11. He also testified that he did not
analyze "the severity of the liquidity problems at Bear Stearns "
during the period from December 14, 2006 through December 20,
2007 , and was "not sure" that the "liquidity problems at Bear
Stearns were severe enough to sink the ship," as of December 14,
2006. Id . 206:4 - 17 . Plaintiff ' s expert cannot at the same time
opine that Bear Stearns's alleged liquidity problems were bad
enough to put it out of business as of December 20 , 2007 , but
not before, and that the drop in Bear Stearns ' s stock price
caused by the corrective disclosures made on March 14 and 17,
200 8 would have been exactly the same had the alleged fraud been
disclosed in June 2007 .
Though editorially altered , the reasoning and the
assumptions in the initial report that resulted in the July 5
Order remain present in the Revised Report. Under the reasoning
of the Jul y 5 Order , the Revised Report must be excluded.
B. The Revised Report is Procedurally Deficient
Under Rule 26(a) (2) of the Federal Rules of Civil
Procedure , an expert witness must prepare a written rep o rt that
contains, among other things, "a complete statement of all
opinions the witness will express and the basis and reasons for
them"; the expert witness must do so "at the times and in the
s e quence that the court orders." Fed. R . Civ. P . 26(a) (2). Rule
2 6 (e ) of the Federal Rules of Civil Procedure requires that a
party "supplement or correct its disclosure" in the limited
circumstanc e that the party discovers that a disclosure made
under Rule 26(a) is "in some material respect .
or in correct ." Fed. R . Ci v . P. 26(e) . When a party fails to make
a necessary disclosure under FRCP 26(a) or (e) , " the party is
not allowed to use that inf ormation or wi tness to supply
at a trial, un l ess the fa il ure was substantially
justified or is harmless." Fed. R. Civ. P. 37 (c) (1) .
The Plaintiff has contended that the Revised Report is
admissible as a " supplemental " report pursuant to Rule 26 (e) (2).
However, under Rule 26(e) , an expert may supplement his report
only where he " learns that i n some material respect the
. is incomplete or incorrect." Fed. R . Ci v . P.
26(e) . Thus, Rule 26(e) " does not grant a li cense to supplement
a previously filed expert report because a party wants to."
Sandata Techs., Inc . v . Infocrossing, Inc., 2007 WL 4157163 , at
*5 (S . D.N . Y. Nov . 16, 2007)
1, 3 (D.D . C . 2003)
(quoting Coles v . Perry, 2 1 7 F.R.D.
(internal quotation marks omitted)) .
"[ E]xperts are not free to continually bolster, strengthen, or
improve their reports by endlessly researching the issues they
already opined upon , or to continual l y supplement their
opin i ons ." Sandata, 2007 WL 4157163, at *6 . In other words ,
"Rule 26(e) is not .
a vehicle to permi t a party to serve a
deficient opening report and then remedy the deficiency through
the expedient of a 'supplemental '
report ." Lidle v . Cirrus
Design Corp ., 2009 WL 4907201, at *5 (S .D.N. Y. Dec. 18, 2009)
The rejection of the methodology underlying Finnerty's
initial report does not render it merely "incorrect" within the
meaning of Rule 26(e). If an expert ' s report "does not rely [on]
any inf ormation that was previously unknown or unavailable to
him," it is not an appropriate supplemental report under Rule
26 . Lidle, 2009 WL 4907201, at *5-6 ; see also Allen v. Dairy
Farmers of Am ., Inc., No. 5 : 09-cv-230 , 2014 WL 2040133 , at *5-6
(D . Vt . May 16, 2014)
(rejecting plaintiffs' argument "that Rule
26(e) permits them to ' correct' an expert opinion in response to
an adverse evidentiary ruling" because , in so ruling, the court
"did not ' correct ' an inaccuracy in [the expert's] opinion ; it
mere l y ruled a portion of that opinion inadmissible pursuant to
Fed. R. Evict. 702 " ) .
The Plaintiff has noted the possible significance to
his damages claim if the Revised Report is excluded. See Pl.'s
Opp'n at 10. The Court recognizes that "preclusion of an expert
report can be a harsh sanction. " Sandata , 2007 WL 4157163, at
*7 . In determin ing whether preclusion is appropriate, courts
(1) the reasons for the delay in providing the
(2) the importance of the evidence precluded ;
prejudice to the opposing party from having to address the new
evidence; and (4) the possibility of a continuance. See Softel,
Inc . v . Dragon Medical and Scientific Communications, Inc. , 118
F.3d 955, 961 (2d Cir. 1997); Outley v. City of New York , 837
F.2d 587, 590-91 (2d Cir. 1988); Lidle , 2009 WL 4907201 , at *6.
"None of these factors are dispositive and each factor is to be
balanced against the others in making the determination ." Lab
Crafters, Inc. v. Flow Safe, Inc., No . CV-03-4025
2007 WL 7034303 , at *6 (E.D . N. Y. Oct . 26 , 2007)
(SJF) (ETB) ,
118 F.3d at 962) .
After considering these principles, it is appropriate
in this Court ' s discretion to exclude the Revised Report. The
Report does not rely on previously unknown information, and thus
is not a "supplemental" report under Ru l e 26, nor was it
submitted at the direct i on of the Court or anyone else . See ,
e.g. , Fate v. Village of Spring Valley,
(S . D.N.Y. June 13, 2013)
2013 WL 2649548 , at *3
(finding that discrete portions of an
expert report were admissible as written and expressly directing
the party to file a new report with the stricken portions
excised) ; Cedar Petrochemicals , 769 F . Supp . 2d at 278 - 79
(plaintiff's filing of a " supplemental report" was explicitly
suggested by the defendant 's attorney). Though there is no new
information in the Revised Report , its admission would not be
harmless to Defendants, who relied upon this Court 's July 5 and
December 6 Orders str iking this report in it s ent ir ety. Although
a continuance would be possible, this case has been litigated
since 2009 , trial is now mere months away, and allowing
deadlines to continue to slip "result[s] in the backup of other
cases and eventual scheduling chaos as a series of bottlenecks
builds." Softel, 118 F.3d at 962 -63; Grabin v. Marymount
Manhattan Coll. , 659 F. App'x 7, 11 (2d Cir. 2016).
Furthermore, preclusion is appropriate because the
Revised Report relies upon the l eakage methodology for loss
calculation , and is in essence the same as Finnerty's initial
report with different wording. Plaintiff's " attempt to
resuscitate" Finnerty's report is improper . Advanced Analytics,
Inc. v. Citigroup Glob . Markets, Inc.,
301 F.R.D. 31, 37
(S.D.N .Y. ), objections overruled, 301 F.R.D. 47
(S .D .N.Y. 2014)
The Revised Report "was served in violation of the Scheduling
Order and constitutes a backdoor attempt to
without any explanation or justification, the previously
exc lude d [report], which was itself ordered stricken." Id. As
such , preclusion is the appropriate sanction. See United
Magazine Co ., Inc. v . Curtis Circulation Co ., 279 Fed. App'x 14,
18 (2d Cir. 2008)
(affirmin g district court 's decision to strike
a prev i ously stricken expert report, submitted with plaintiff 's
opposition papers); Softel , 118 F .3d at 961-63 (affirming
magistrate judge and district judge's order to preclude expert
reports submitted past discovery cutof f date); Mobileye,
Picitup Corp ., 928 F.Supp.2d 759 , 766 (S .D.N. Y.2013)
(striking an untimely expert declaration , submitted with
plaintiff's opposition papers, that incorporated portions of a
previously stricken report); see also Arnold v . Krause, Inc.,
232 F.R.D. 58 , 67
(W.D .N.Y.2 004)
("Prec lusi on of a proposed
expert 's testimony and report, disclosed in violation of a
scheduling order .
[has been held to be] a proper sanction
where the tardy expert report is offered in opposition to
summary judgment." (citation omitted)) .
Plaintiff dec i ded to pursue the leakage methodology
for proving loss causation and damages . Their decision resulted
in the July 5 Order . As the co urt in Lippe v. Bairnco Corp.
explained , when a party l oses a motion -
including a Daubert
motion - the losing party " does not get a chance to come up with
more evidence or to try to make a more persuasive presentation
or to try to write a more coherent br ief. Th at is not the way
our system of justice works ." 249 F. Supp. 2d 357 , 386 (S.D .N. Y.
2003) ; see also Rodgers v . Beechcraft Corp ., 2016 WL 7888048, at
*2 (N.D . Okla. Feb. 3 , 2017)
("The purpose of supplementation is
to correct inadvertent errors , not to allow a party to engage in
' gamesmanship ' -creating a 'new and improved ' expert report in
. to avert a dispositive motion. " ) .
Courts have excluded improper evidence despite its
importance , and this Court must do so here. See, e.g. , Design
Strategy, Inc . v . Davis , 469 F.3d 284 , 296 - 97
(2d Cir . 2006)
(exc lu d i ng testimony of expert witness who was not timely
disclosed , even though the expert ' s testimony was "essential to
. damages " ) ; Morritt v . Stryker Corp. , No . 07 - CV-
2319 (RRM) (RER) , 2011 WL 3876960 , at *7
(E.D.N . Y. Sept. 1 , 2011)
(excluding parts of an expert 's testimony that we r e "undoubtedly
important because plaintiff requ i res expert testimony to make
out a prima facie case ," and reasoning that " the great
importance of this testimony only serves to underscore the
inexcusable quality of it s delayed submission" (internal
quotat i on marks omitted)) ; see also Grabin,
659 Fed. App ' x at
10 -11 (affirming exclusion of testimony of witness who "may well
be critical" to plaintiff ' s case where wi tness was not timely
disc l osed) ; Spotnana, Inc . v . Am . Talent Agency , Inc., No. 09
Civ . 3698(LAP), 2010 WL 334 1 837 , at *2
(S .D. N. Y. Aug . 17, 2010)
(exclud in g evidence about damages , even though the party
offering the evidence "may be denied any recovery as a result " )
Because it applies the same fault y analysis that this
Court reje cted in the July 5 Order , and because it is not a
"supplement " to an expert report under Rule 26(e) of the Federal
Rules of Evidence , the motion to is granted and the Revised
Report of Finnerty is stricken.
It is so ordered .
New York, NY
June lb , 2017
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