Irving H. Picard v. Saul B. Katz et al

Filing 136

REPLY MEMORANDUM OF LAW in Support re: 80 MOTION to Strike THE EXPERT REPORTS AND TESTIMONY OF STEVE POMERANTZ AND HARRISON J. GOLDIN.. Document filed by Charles 15 Associates, Charles 15 LLC, Charles Sterling LLC, Charles Sterling Sub LLC, College Place Enterprises LLC, Coney Island Baseball Holding Company LLC, Estate of Leonard Schreier, FFB Aviation LLC, FS Company LLC, Fred Wilpon Family Trust, Arthur Friedman, Ruth Friedman, Iris J. Katz and Saul B. Katz Family Foundation, Inc., Judy and Fred Wilpon Family Foundation, Inc., Amy Beth Katz, David Katz, Dayle Katz, Gregory Katz, Howard Katz, Iris Katz, 157 J.E.S. LLC, Air Sterling LLC, BAS Aircraft LLC, Jason Bacher, Bon Mick Family Partners LP, Bon-Mick, Inc., Brooklyn Baseball Company LLC, C.D.S. Corp., Michael Katz, Saul B. Katz, Todd Katz, Katz 2002 Descendants' Trust, Heather Katz Knopf, Natalie Katz O'Brien, Mets II LLC, Mets Limited Partnership, Mets One LLC, Mets Partners, Inc., Minor 1 (REDACTED), Minor 2 (REDACTED), L. Thomas Osterman, Phyllis Rebell Osterman, Realty Associates Madoff II, Red Valley Partners, Robbinsville Park LLC, Ruskin Garden Apartments LLC, Saul B. Katz Family Trust, Michael Schreier, Deyva Schreier Arthur, See Holdco LLC, See Holdings I, See Holdings II, Sterling 10 LLC, Sterling 15C LLC, Sterling 20 LLC, Sterling Acquisitions LLC, Sterling American Advisors II LP, Sterling American Property III LP, Sterling American Property IV LP, Sterling American Property V LP, Sterling Brunswick Corporation, Sterling Brunswick Seven LLC, Sterling Dist Properties LLC, Sterling Equities, Sterling Equities Associates, Sterling Equities Investors, Sterling Heritage LLC, Sterling Internal V LLC, Sterling Jet II Ltd., Sterling Jet Ltd., Sterling Mets Associates, Sterling Mets Associates II, Sterling Mets LP, Sterling Pathogenesis Company, Sterling Third Associates, Sterling Thirty Venture LLC, Sterling Tracing LLC, Sterling Twenty Five LLC, Sterling VC IV LLC, Sterling VC V LLC, Edward M. Tepper, Elise C. Tepper, Jacqueline G. Tepper, Marvin B. Tepper, Valley Harbor Associates, Kimberly Wachtler, Philip Wachtler, Bruce N. Wilpon, Daniel Wilpon, Debra Wilpon, Fred Wilpon, Jeffrey Wilpon, Jessica Wilpon, Judith Wilpon, Richard Wilpon, Scott Wilpon, Valerie Wilpon, Wilpon 2002 Descendants' Trust, Robin Wilpon Wachtler. (Wagner, Karen)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
----------------------------------- x
:
IRVING H. PICARD,
:
:
Plaintiff,
:
:
11-CV-03605 (JSR) (HBP)
- against :
:
SAUL B. KATZ, et al.,
:
:
Defendants.
:
:
----------------------------------- x

REPLY MEMORANDUM OF LAW IN FURTHER SUPPORT OF
DEFENDANTS’ MOTION TO STRIKE THE EXPERT REPORTS AND
TESTIMONY OF STEVE POMERANTZ AND HARRISON J. GOLDIN

DAVIS POLK & WARDWELL LLP
450 Lexington Avenue
New York, New York 10017
[phone]
Attorneys for Defendants

TABLE OF CONTENTS
PAGE
TABLE OF AUTHORITIES .............................................................................................. ii
PRELIMINARY STATEMENT .........................................................................................1
ARGUMENT.......................................................................................................................1
THE TRUSTEE’S EXPERTS SHOULD BE EXCLUDED
UNDER FEDERAL RULE OF EVIDENCE 702 ...............................................................1
A.

Dr. Pomerantz’s Testimony Should Be Excluded......................................................2

B.

Mr. Goldin’s Testimony Should Be Excluded ...........................................................7

CONCLUSION....................................................................................................................9

i

TABLE OF AUTHORITIES
CASES
PAGE
Coquina Invs. v. Rothstein, No. 10-60786,
2011 U.S. Dist. LEXIS 120267 (S.D. Fla. Oct. 18, 2011)............................................ 5
Country Rd. Music, Inc. v. MP3.com, Inc., 279 F. Supp. 2d 325 (S.D.N.Y. 2003)......... 1-2
FDIC v. Refco Grp., Ltd., 184 F.R.D. 623 (D. Colo. 1999) ............................................... 5
Gebhart v. SEC, 595 F.3d 1034 (9th Cir. 2010) ................................................................. 6
Global-Tech Appliances, Inc. v. SEB S.A., 131 S. Ct. 2060 (2011)................................ 4, 5
Highland Capital Mgmt. L.P. v. Schneider, 551 F. Supp. 2d 173 (S.D.N.Y. 2008)........... 5
In re Blech Sec. Litig., No. 94 Civ. 7696,
2003 U.S. Dist. LEXIS 4650 (S.D.N.Y. Mar. 26, 2003) .............................................. 5
In re Rezulin Prods. Liab. Litig., 309 F. Supp. 2d 531 (S.D.N.Y. 2004) ........................... 1
Kearney v. Auto-Owners Ins. Co., No. 8:06-cv-595,
2009 U.S. Dist. LEXIS 108918 (M.D. Fla. Nov. 5, 2009) ........................................... 5
Nimely v. City of New York, 414 F.3d 381 (2d Cir. 2005) .................................................. 4
Pension Comm. of the Univ. of Montreal Pension Plan v. Banc of Am. Sec., LLC,
691 F. Supp. 2d 448 (S.D.N.Y. 2010)........................................................................... 6
Picard v. Katz, No. 11 Civ. 3605,
2011 U.S. Dist. LEXIS 109595 (S.D.N.Y. Sept. 27, 2011).......................................... 7
SEC v. Badian, No. 06 Civ. 2621,
2010 U.S. Dist. LEXIS 123990 (S.D.N.Y. Nov. 19, 2010) .......................................... 5
SEC v. Cooper, 402 F. Supp. 516 (S.D.N.Y. 1975)............................................................ 6
SEC v. Lorin, 877 F. Supp. 192 (S.D.N.Y. 1995),
aff’d in part and vacated in part, 76 F.3d 458 (2d Cir. 1996) ...................................... 6
SEC v. U.S. Envtl., Inc., No. 94 Civ. 6608,
2002 U.S. Dist. LEXIS 19701 (S.D.N.Y. Oct. 16, 2002) ............................................. 5
Shad v. Dean Witter Reynolds, Inc., 799 F.2d 525 (9th Cir. 1986) .................................... 5
ii

Smith v. First Union Nat’l Bank, No. 00-4485-CIV,
2002 U.S. Dist. LEXIS 17758 (S.D. Fla. Aug. 23, 2002)............................................. 5
United States v. Fauls, 65 F.3d 592 (7th Cir. 1995) ........................................................... 6
Vernazza v. SEC, 327 F.3d 851 (9th Cir. 2003).................................................................. 5
STATUTES & RULES
Fed. R. Evid. 403 ................................................................................................................ 4
Fed. R. Evid. 702 ................................................................................................................ 1

iii

Defendants respectfully submit this reply memorandum of law in further support
of their motion under Federal Rule of Evidence 702 to strike the reports and testimony of
Steve Pomerantz and Harrison J. Goldin.
PRELIMINARY STATEMENT
The Trustee has failed to respond to the arguments in Defendants’ motion,
choosing instead to address points Defendants did not raise. Defendants did not argue
that Dr. Pomerantz’s calculations were methodologically flawed, or that Mr. Goldin lacks
sufficient practical experience to serve as an expert in an ERISA case alleging imprudent
management of retirement plan assets. Nor did Defendants assert that experts may not
testify in support of claims requiring proof of scienter, or that a litigant’s state of mind
may not be established by circumstantial evidence. Defendants move to exclude, instead,
because none of Dr. Pomerantz’s or Mr. Goldin’s testimony is relevant to this case. It
will not “help the trier of fact to understand the evidence or to determine a fact in issue.”
Fed. R. Evid. 702(a).
ARGUMENT
THE TRUSTEE’S EXPERTS SHOULD BE EXCLUDED
UNDER FEDERAL RULE OF EVIDENCE 702
The Rule 702(a) helpfulness requirement goes beyond the relevance requirement
of Rule 401 and mandates that expert testimony, to be admissible, must “have a valid
connection to the pertinent inquiry” for the trier of fact. In re Rezulin Prods. Liab. Litig.,
309 F. Supp. 2d 531, 540 (S.D.N.Y. 2004) (internal quotation marks omitted). Expert
opinions based on “assumptions that represent a complete break with the evidence in the

record . . . should be excluded.” Country Rd. Music, Inc. v. MP3.com, Inc., 279 F. Supp.
2d 325, 330 (S.D.N.Y. 2003) (internal quotation marks omitted).
A.

Dr. Pomerantz’s Testimony Should Be Excluded

Dr. Pomerantz’s testimony is inadmissible under Rule 702(a) because its
purported relevance depends on a “complete break” with both the record evidence and
the law. Notwithstanding the Trustee’s continuing effort to frame this case as based on
negligence or failure to do due diligence, the Court has clearly and definitively ruled that
the issue for trial is instead willful blindness. Dr. Pomerantz does not purport to offer any
opinion regarding that standard either in his report or in his deposition testimony.
Instead, Dr. Pomerantz in his report offers two opinions: (1) that there were “red flags”
and that “customs and practices” in what he terms the “investment management industry”
would be to conduct “further due diligence,” and (2) that such diligence might have
shown that Madoff was “running a fraudulent investment advisory business.” (Initial
Expert Report of Dr. Steve Pomerantz (“Pomerantz Report”) at 15-16 (Newman Decl.,
Ex. B).1) This is so even though Dr. Pomerantz “never concludes that the Defendants
would have discovered Madoff’s fraud. Rather, Pomerantz opines that a quantitative
analysis would have further confirmed the Defendants’ investment accounts with BLMIS
contained indicia of fraud.” (Tr. Pomerantz Mem. at 7 n.10 (emphasis added).2) Those
1

References to “Newman Decl.” and its attached exhibits are to the Declaration
of David C. Newman, dated January 26, 2012 and filed in support of Defendants’ Motion
to Strike the Expert Reports and Testimony of Steve Pomerantz and Harrison J. Goldin
(doc. no. 105).
2

References to “Tr. Pomerantz Mem.” are to the Trustee’s Memorandum of Law
in Opposition to the Defendants’ Motion to Strike the Expert Reports and Testimony of
Dr. Steve Pomerantz, dated February 9, 2012 (doc. no. 113).
2

are the only opinions Dr. Pomerantz offers, and the rest of his report purports only to be
support for them. The issue on this motion is whether either opinion is relevant or
helpful.
Defendants were individuals, real estate partnerships, a baseball team, and a
collection of relatives and friends. None was employed in the “investment management
industry.” The Trustee in his opposition fails to put forth any argument supporting their
inclusion in the “industry,” instead simply assuming the point. He repeatedly refers to
Defendants as “similarly-situated.” (Tr. Pomerantz Mem. at 5-6.) “Similarly-situated” to
whom, exactly? Dr. Pomerantz testified that he made no independent investigation into
the knowledge or experience of the Defendants and could not say what level of
sophistication, if any, they actually possessed. (Deposition Transcript of Dr. Steve
Pomerantz (“Pomerantz Tr.”), Jan. 8, 2012, 119:6-136:9 (Supplemental Declaration of
David C. Newman in Support of Motion to Strike (“Newman Supp. Decl.”), dated
February 16, 2012, Ex. G).) He was unable to testify as to even the most basic
information about Defendants.
Finally, although Dr. Pomerantz broadly asserts in his report that all wealthy
people are sophisticated investors and jumps from that rather questionable conclusion to
the startling assumption that they therefore “behave like institutional investors”
(Pomerantz Report ¶ 26 (Newman Decl., Ex. B)), he subsequently disavowed that leap
during his deposition. (Pomerantz Tr. 136:18-141:9 (Newman Supp. Decl., Ex. G).) It is
on that tenuous basis that the Trustee asserts that Dr. Pomerantz’s opinion about
investment management industry customs and practices is relevant here. To the contrary,

3

Defendants submit that there is no basis for admission of such testimony, and that it
would not only not be helpful, but it would be potentially confusing and prejudicial.
In addition, Dr. Pomerantz’s testimony is irrelevant because it addresses only a
negligence standard, which does not apply given this Court’s rulings. Failure to follow
industry practice is often cited in negligence and recklessness actions, based as they are
on departures from an objective standard. The issue in such cases is not what a defendant
actually thought or believed, but what a reasonable person in such circumstances should
or should not have done. The willful blindness test described by the Supreme Court in
Global-Tech Appliances, Inc. v. SEB S.A., 131 S. Ct. 2060 (2011), is subjective—whether
Defendants actually believed there was a high probability of fraud and then took some
deliberate action to avoid learning the truth. Whether they followed purported “customs
and practices,” even if such “customs and practices” were applicable to them, is not the
issue. Such evidence would therefore only serve to confuse the jurors and prejudice
Defendants by making it appear that the issue is not what Defendants actually knew and
believed, but what Dr. Pomerantz says they should have done if they followed “industry”
practice. The testimony should be excluded. See Fed. R. Evid. 403; Nimely v. City of
New York, 414 F.3d 381, 397 (2d Cir. 2005) (noting “the uniquely important role that
Rule 403 has to play in a district court’s scrutiny of expert testimony, given the unique
weight such evidence may have in a jury’s deliberations”).
The Trustee asserts that expert testimony about “industry standards” may be
helpful to a jury in a case alleging scienter because state of mind sometimes may be

4

inferred from a party’s “extreme departure” from industry standards.3 (E.g., Tr.
Pomerantz Mem. at 6.) But that is only true if the party sought to be charged was indeed
bound by these “industry standards.” The cases cited by the Trustee obviously do not
involve expert testimony about the standards of an irrelevant industry4—and many do not
address the relevance of testimony about industry standards at all.5
3

Courts typically make this observation in the context of recklessness, which is
not sufficient to demonstrate willful blindness. See Global-Tech, 131 S. Ct. at 2070.
4

See Vernazza v. SEC, 327 F.3d 851, 861-62 (9th Cir. 2003) (affirming the
exclusion of expert testimony); Coquina Invs. v. Rothstein, No. 10-60786, 2011 U.S. Dist.
LEXIS 120267, at *11-12 (S.D. Fla. Oct. 18, 2011) (expert testimony about banking
regulations and practice admissible in fraud case against bank); SEC v. Badian, No. 06
Civ. 2621, 2010 U.S. Dist. LEXIS 123990, at *8-9 (S.D.N.Y. Nov. 19, 2010) (dismissing
SEC’s allegation that “red flags” demonstrated inadequate supervision in violation of
NASD rule, due to lack of expert testimony); Kearney v. Auto-Owners Ins. Co., No. 8:06cv-595, 2009 U.S. Dist. LEXIS 108918, at *27-29 (M.D. Fla. Nov. 5, 2009) (expert
testimony about ordinary and reasonable insurance claims handling practices admissible
in case against insurance company for bad faith handling of insurance claim); Highland
Capital Mgmt. L.P. v. Schneider, 551 F. Supp. 2d 173, 180 (S.D.N.Y. 2008) (expert
testimony about “securities industry” “custom and practice” admissible in case alleging
breach of contract to sell promissory notes); In re Blech Sec. Litig., No. 94 Civ. 7696,
2003 U.S. Dist. LEXIS 4650, at *67 (S.D.N.Y. Mar. 26, 2003) (expert testimony about
“red flags” for brokers admissible in market manipulation case against brokers); SEC v.
U.S. Envtl., Inc., No. 94 Civ. 6608, 2002 U.S. Dist. LEXIS 19701, at *8-10 (S.D.N.Y.
Oct. 16, 2002) (expert opinion that trading activity was irregular and would have raised
flags for experienced traders admissible in securities manipulation case against
professional market-makers); Smith v. First Union Nat’l Bank, No. 00-4485-CIV, 2002
U.S. Dist. LEXIS 17758, at *3-4 (S.D. Fla. Aug. 23, 2002) (expert testimony on atypical
and suspicious banking activities admissible in aiding-and-abetting fiduciary breach case
against bank); FDIC v. Refco Grp., Ltd., 184 F.R.D. 623, 631 (D. Colo. 1999) (expert
opinion about “conduct inconsistent with [broker-dealer] industry practices or regulatory
requirements” admissible in fraud case against registered broker-dealer).
5

According to the Trustee, Shad v. Dean Witter Reynolds, Inc., 799 F.2d 525 (9th
Cir. 1986), held that it was “error to exclude [a] securities expert comparing defendants’
actions to industry standards as evidence that the defendants intended to defraud or
recklessly disregarded the securities laws.” (Tr. Pomerantz Mem. at 6.) That case—
which did not mention the “standards” of any “industry”—merely held that expert
testimony about churning was admissible in support of plaintiffs’ claims that defendant
brokers were engaged in churning. See 799 F.2d at 530. The Trustee’s remaining cases
5

The only case actually cited by the Trustee for its discussion of expert testimony
about due diligence, Pension Committee of the University of Montreal Pension Plan v.
Banc of America Securities, LLC, 691 F. Supp. 2d 448 (S.D.N.Y. 2010), is instructive.
(Tr. Pomerantz Mem. at 4.) There, plaintiffs were institutional investors suing the former
administrators of liquidated hedge funds in which they had invested. See 691 F. Supp. 2d
at 453. At issue was whether they should have performed due diligence that would have
“uncovered problems” with the hedge funds and enabled them to avoid suffering their
losses. Id. at 469. The court held that if defendants proffered expert testimony on what
reasonable due diligence by institutional investors would have revealed, plaintiffs could
then present their own expert in rebuttal. See id.
There are no institutional investor parties in this case, and the Trustee has no basis
for imposing on Defendants the standards of the professional investment management
industry. The linchpin of Dr. Pomerantz’s testimony—his stated view that the custom
and practice of wealthy individuals is to monitor their personal investments in the same
manner and with the same capability that professional money managers diligence their
clients’ investments (Pomerantz Report ¶ 26 (Newman Decl., Ex. B))—was renounced
by Dr. Pomerantz himself during his deposition, when he conceded that wealthy
individuals frequently lack experience in the securities markets and thus hire investment
professionals to manage their investments. (Pomerantz Tr. 147:24-149:16; 286:6-14
do not even involve challenges to the admissibility of expert testimony. See Gebhart v.
SEC, 595 F.3d 1034 (9th Cir. 2010) (expert testimony not mentioned); United States v.
Fauls, 65 F.3d 592 (7th Cir. 1995) (affirming broker’s conviction for securities fraud);
SEC v. Lorin, 877 F. Supp. 192 (S.D.N.Y. 1995) (defendants found liable for securities
manipulation after bench trial), aff’d in part and vacated in part, 76 F.3d 458 (2d Cir.
1996) (affirming exclusion of untimely designated expert); SEC v. Cooper, 402 F. Supp.
516 (S.D.N.Y. 1975) (expert testimony not mentioned).
6

(Newman Supp. Decl., Ex. G).)6 Indeed, that is precisely what Defendants did: they
hired Bernard L. Madoff. Dr. Pomerantz’s opinion about what a hedge fund manager’s
quantitative analysis might have disclosed is simply irrelevant.7
B.

Mr. Goldin’s Testimony Should Be Excluded

The Trustee asserts that Mr. Goldin’s testimony is “necessary to explain to the
jury certain specialized tenets of the retirement plan industry.” (Tr. Goldin Mem. at 4.)8
But no retirement plan is a party to this action. The Trustee does not assert any claim on
behalf of any participant in a retirement plan, or pursuant to the laws governing
retirement plans. The “retirement plan industry,” like the professional investment
management industry, has nothing to do with this case.
In the opening pages of his opposition, the Trustee adopts the convention of
referring to the “Sterling Fiduciaries,” as if that term applied to a large number of the
Defendants (id. at 2-3), although later in his argument he drops even that term and refers
simply to “Defendants” collectively (id. at 4-5), presumably suggesting his arguments
apply to all Defendants. There is no dispute, however, that out of the dozens of
6

Dr. Pomerantz’s alternative argument—that wealthy people who hire a
registered broker-dealer to manage their money “have an obligation to pursue competent
counsel to interpret and analyze what is happening in their accounts” (Pomerantz Tr.
174:20-175:5 (Newman Supp. Decl., Ex. G))—is simply wrong as a matter of law. See
Picard v. Katz, No. 11 Civ. 3605, 2011 U.S. Dist. LEXIS 109595, at *22-23 (S.D.N.Y.
Sept. 27, 2011).
7

The Trustee also argues that Dr. Pomerantz’s reports “source and rely upon
extensive facts and data from the record” and asserts that Dr. Pomerantz disclosed a
“detailed methodology.” (Tr. Pomerantz Mem. at 8.) Whether that is true or false, it
does not make his testimony relevant.
8

References to “Tr. Goldin Mem.” are to the Trustee’s Memorandum of Law in
Opposition to the Defendants’ Motion to Strike the Expert Reports and Testimony of
Harrison J. Goldin, dated February 9, 2012 (doc. no. 115).
7

Defendants, only two individuals, Arthur Friedman and Michael Katz, ever served as
named fiduciaries for any ERISA plan that had as one of its options a managed BLMIS
account. And that plan is not a party to this action. There is no basis whatsoever for
characterizing any other Defendant as a “fiduciary.” Even as to the two Defendants who
arguably were fiduciaries, they are not alleged to have been acting as fiduciaries with
respect to any account that is in issue in this action, either their own or anyone else’s.
There is no ERISA claim against them in this case.
As it is, this case will pose a sufficient challenge for jurors, who must absorb
evidence regarding multiple Defendants and Madoff’s complex Ponzi scheme
machinations over a substantial period of time, without burdening them with irrelevant
testimony about what is expected of ERISA fiduciaries when there are no ERISA issues.
Even were some Defendants fiduciaries for a non-party ERISA plan and, as Mr. Goldin
would testify, they did not meet the standard required of ERISA fiduciaries, that does not
make the fact in issue here—whether those Defendants were willfully blind with respect
to their personal investments in non-ERISA accounts—any more or less probable.
Willful blindness is a subjective standard, obviously far different from the objective
prudence standard that governs an ERISA fiduciary.
Mr. Goldin’s testimony would risk confounding the inapplicable objective
standard with the applicable subjective one. The very high standards demanded of an
ERISA fiduciary have nothing to do with the question whether Defendants actually had a
subjective belief that there was a high probability of fraud at BLMIS. Because Mr.
Goldin’s testimony would not be helpful to the jurors, is premised on an irrelevant
standard of conduct, and risks confusing the jury, it must be excluded.
8

CONCLUSION
For the reasons set forth above and in their initial memorandum of law,
Defendants respectfully request that the Court strike the reports and testimony of Dr.
Pomerantz and Mr. Goldin.
Dated: New York, New York
February 16, 2012
DAVIS POLK & WARDWELL LLP
By: /s/ Karen E. Wagner
Karen E. Wagner
Dana M. Seshens
450 Lexington Avenue
New York, New York 10017
Telephone:
[phone]
Facsimile:
[phone]

Of Counsel:
Robert B. Fiske, Jr.
Robert F. Wise, Jr.

Attorneys for Defendants

9