Ironshore Insurance Ltd. v. Western Asset Management Company

Filing 81

MEMORANDUM AND ORDER: For the reasons discussed, the plaintiff's motion is denied except to the extent that it may amend exhibits 2 and 3 to Dr. Mordechai's rebuttal report. Of course, Ironshore can depose Western's experts or cross-examine them at trial with respect to the basis for their opinions. (Signed by Magistrate Judge James C. Francis on 5/15/2013) Copies Mailed By Chambers. (rdz)

UNITED STATES DISTRICT COURT
(ECF)
SOUTHERN DISTRICT OF NEW YORK
- - - - - - - - - - - - - - - - - -:
IRONSHORE INSURANCE LIMITED,
: 11 Civ. 5954 (LTS) (JCF)
:
:
MEMORANDUM
Plaintiff,
:
AND ORDER
:
- against :
:
WESTERN ASSET MANAGEMENT COMPANY, :
:
Defendant.
:
- - - - - - - - - - - - - - - - - -:
JAMES C. FRANCIS IV
UNITED STATES MAGISTRATE JUDGE
Plaintiff Ironshore Insurance Ltd. (“Ironshore”) brings this
action

against

defendant

Western

Asset

Management

Company

(“Western”) for breach of contract and breach of fiduciary duty.
The parties have exchanged initial and rebuttal expert reports;
Ironshore now seeks leave to serve two reply reports to respond to
matters Western allegedly raised for the first time in its rebuttal
reports and to amend charts attached as exhibits to one of its
initial reports.

For the reasons that follow, the plaintiff’s

application is granted in part and denied in part.
Background
On February 21, 2007, Ironshore, a broker-sourced insurance
company, and Western, an investment adviser, entered into an
Investment Management Agreement (the “IMA”), under which Ironshore
granted Western “sole power” over Ironshore’s $520 million limited

1

duration fixed income portfolio (the “Portfolio”), subject to the
terms of the IMA.

(Amended Complaint (“Am. Compl.”), ¶¶ 11, 12,

26, 28-29). Western’s investment decisions were constrained by the
Recommended Limited Duration Fixed Income Investment Guidelines
(“Investment Guidelines”), which were incorporated into the IMA.
(Am. Compl., ¶

30).

Ironshore alleges that Western breached its

contractual and fiduciary duties under the IMA, “[m]ismanaging the
Portfolio by . . . concentrating the Portfolio in impermissibly
risky, illiquid, and volatile securities, failing to diversify risk
exposures, and ignoring relevant market information.” (Am. Compl.,
¶¶ 83, 89).

Ironshore terminated the IMA on May 20, 2008, after

sustaining an unrealized loss of approximately $55.5 million, and
by the end of 2008, Ironshore’s net realized and unrealized losses
exceeded $130 million.
The

parties

(Am. Compl., ¶¶ 71-74).1

exchanged

discovery

pursuant

to

a

Pretrial

Scheduling Order issued by the Honorable Laura Taylor Swain,
U.S.D.J. (Order dated Nov. 4, 2011 (“Order”)). The Order provided
for a simultaneous exchange of initial expert reports “on issues as
to which [ea]ch party has the burden of proof or otherwise in
support of the party’s case,” to be followed by “[r]ebuttal

1

The factual background of this action is more fully set
forth in Ironshore Insurance Ltd. v. Western Asset Management Co.,
No. 11 Civ. 5954, 2012 WL 1981477 (S.D.N.Y. May 30, 2012).
2

disclosures.”

(Order at 1-2).

exchange of reply reports.

The Order did not provide for the

For Ironshore, David K.A. Mordecai and

Daniel I. Castro submitted initial and rebuttal reports; Avram S.
Tucker and Erik R. Sirri submitted initial reports for Western,
and, along with Keith M. Schappert and Paul Jablansky, submitted
rebuttal reports.
Ironshore’s experts concluded that Western’s construction of
the Portfolio exposed Ironshore to undue risks, in violation of
Western’s contractual and fiduciary duties.

(Expert Report of

David K.A. Mordecai dated March 1, 2013 (“Mordecai Report”) at 9;
Expert Report of Daniel I. Castro, Jr. dated March 2, 2013 (“Castro
Report”) at 10).

In particular, the experts assert that (1)

Ironshore’s business as a property and casualty insurance company
dictated construction of a conservative portfolio; (2) despite
Ironshore’s
Western,

communication

the

Portfolio

of

the

exposed

desired
Ironshore

characteristics
to

undue

to

credit,

extension, and liquidity risks; and (3) the Portfolio, designed to
have risk characteristics approximating the Treasury Benchmark, was
inadequately

diversified

and

resulted

in

substantial

underperformance relative to the Treasury Benchmark.

(Mordecai

Report at 9; Castro Report at 10).
In

response,

Western’s

experts

concluded

that

Western’s

construction and management of the Portfolio conformed to industry
3

practice and to Ironshore’s objectives stated in the IMA and the
Investment Guidelines.
risk

profile

of

In particular, they assert that (1) the

the

Portfolio

was

consistent

with

that

of

investment holdings of other investors similar to Ironshore (Expert
Report of Keith M. Schappert dated April 29, 2013 (“Schappert
Rebuttal”) at 42); (2) the IMA and the Investment Guidelines,
rather than the standards used by Ironshore’s experts, provide the
proper standard to evaluate the Portfolio (Schappert Rebuttal at
12); and (3) Western could not have constructed a less risky
portfolio that could have achieved Ironshore’s stated objective of
outperforming

the

Treasury

Rebuttal at 45-46).

Benchmark

by

50

points

(Schappert

Ironshore contends that these arguments are

raised for the first time in Western’s rebuttal reports and seeks
leave to file reply reports to respond to them.
Discussion
“It is routine that the party with the burden of proof on a
particular

issue

addressing

the

be

the

issue.

first
The

to

other

submit

its

party

then

expert
is

reports

given

the

opportunity to submit a rebuttal report and, if requested and
allowed by the Court, a reply expert report may follow.”

Sandata

Technologies, Inc. v. Infocrossing, Inc., Nos. 05 Civ. 9546, 06
Civ. 1896, 2007 WL 4157163, at *1 (S.D.N.Y. Nov. 16, 2007) (citing
Fed. R. Civ. P. 26(a)(2)); accord Lidle v. Cirrus Design Corp., No.
4

08 Civ. 1253, 2009 WL 4907201, at *4 (S.D.N.Y. Dec. 18, 2009).
Reply expert reports may be appropriate if the rebuttal
reports raise new matters not discussed in the initial reports.
See Lidle, 2009 WL 4907201, at *4. Such reply reports, if allowed,
should be “‘confined to new matters adduced by the defense and not
to repetition of the plaintiff’s theory of the case.’”

Id.

(quoting Brune v. Time Warner Entertainment Co., No. 02 Civ. 5703,
2004 WL 2884611, at *2 (S.D.N.Y. Dec. 14, 2004)).

“It is not an

opportunity for the correction of any oversights in the plaintiff’s
case in chief.”

Crowley v. Chait, 322 F. Supp. 2d 530, 551 (D.N.J.

2004) (internal quotation marks and citations omitted).

Thus, I

turn to whether the defendant’s experts raised any new points not
discussed in the plaintiff’s initial expert reports.
A.

Investment Holdings of Other Insurance Companies

Ironshore claims that Western’s experts improperly address
investment holdings of insurance companies other than Ironshore.
(Letter of Thorn Rosenthal dated May 3, 2013 (“Rosenthal Letter”)
at 3).
other

In their rebuttal reports, Western’s experts contend that
similarly-situated

insurance

companies

held

the

same,

similar, or even more risky securities (Schappert Rebuttal at 5052), and conclude that Ironshore’s status as an insurer by itself
conveys no information about whether the securities that Western
purchased were too risky (Expert Rebuttal Report of Professor Erik
5

R. Sirri dated April 29, 2013 (“Sirri Rebuttal”) at 42; Schappert
Rebuttal at 42-45).
This is not a new issue.

Ironshore’s experts concluded in

their initial reports that Western purchased securities that were
too risky for a property and casualty insurance company such as
Ironshore.

Dr. Mordecai explained that the nature of the business

of property and casualty insurance companies “necessitates more
liquid,

lower

investments.”

volatility,

shorter

weighted

(Mordecai Report at 10-12).

average

life

And Mr. Castro opined

that certain bonds in the Portfolio “were totally unsuitable for a
property and casualty insurance company which required safe and
liquid investments.”

(Castro Report at 50).

Western’s rebuttal reports were limited to the same subject
matters encompassed in Ironshore’s initial reports, which included
the issue of whether the Portfolio was suitable for Ironshore,
given its status as a property and casualty company.

See United

States v. Casamento, 887 F.2d 1141, 1172 (2d Cir. 1989) (“The
function of rebuttal evidence is to explain or rebut evidence
offered by the other party.”).

The rebuttal reports sought to

“explain, repel, counteract or disprove the evidence of the adverse
party” by pointing to other similarly-situated investors, S.W. v.
City of New York, No. 2009 CV 1777, 2011 WL 3038776, at *2
(E.D.N.Y. July 25, 2011) (internal quotation marks omitted), not to
6

present new arguments, see Ebbert v. Nassau County, No. 05 CV 5445,
2008 WL 4443238, at *13 (E.D.N.Y. Sept. 26, 2008) (“A rebuttal
expert report is not the proper place for presenting new arguments,
unless presenting those arguments is substantially justified and
causes no prejudice.”) (internal quotation marks omitted).
B.

Investment
Guidelines

Ironshore

Management

contends

that

Agreements

one

of

and

Western’s

Investment

experts,

Mr.

Schappert,2 raises a new point regarding the importance of the IMA
and the Investment Guidelines.

(Rosenthal Letter at 3).

In his

rebuttal report, Mr. Schappert opines that Ironshore’s experts used
improper

standards

to

conclude

that

Western

breached

its

obligations and that they should have used the standards set forth
in the IMA and the Investment Guidelines.

(Schappert Rebuttal at

11-26).
The

IMA

and

the

Investment

Ironshore’s claims against Western.

Guidelines

are

central

to

(Am. Comp., ¶¶ 83, 89).

Ironshore’s relationship with Western is based on the IMA and the
Investment Guidelines, and Ironshore brought this action against
Western for breach of contract.

(Am. Compl., ¶¶ 26, 28-30, 83,

2

Ironshore identifies this expert only as “[o]ne of Westerns
experts . . . who did not submit an opening report.” (Rosenthal
Letter at 3).
I assume that Ironshore is referring to Mr.
Schappert, who did not submit an opening report and offered his
opinion on the importance of the IMA in the rebuttal report.
7

89).

Thus, Ironshore bears the burden of proof on the issues on

the nature and scope of Western’s obligations under the IMA and
Investment

Guidelines

and

whether

Western

breached

these

obligations.

Indeed, Ironshore’s experts concluded that Western

breached

obligations

its

securities.
response

to

to

Ironshore

by

investing

in

risky

(Mordecai Report at 9; Castro Report at 10).
this

assertion,

Mr.

Schappert

addressed

In
what

obligations were imposed on Western by the IMA and the Investment
Guidelines, which he contends were misconstrued by Ironshore’s
experts.
To

(Schappert Rebuttal at 11-26).
the

extent

that

Ironshore

believes

that

it

has

not

addressed the importance of the IMA, which set forth the “sole
standard of care” by which Western’s conduct is to be judged
(Investment Management Agreement dated Feb. 21, 2007, attached as
Exh. B to Am. Compl., § 3), it should not now be afforded an
opportunity to address an issue it had ample opportunity to explore
in

its

initial

reports,

see

Lidle,

2009

WL

4907201,

at

*5

(rejecting plaintiff’s reply report where “[t]here is no reason
[plaintiffs’ expert] could not have conducted those tests before
his initial report was drafted, and plaintiffs’ gamesmanship in
this regard is precisely what the Rules were intended to prevent”).
C.

Performance Objective

Ironshore contends that Western improperly argues in rebuttal
8

that

it

would

have

been

inconsistent

with

the

Investment

Guidelines, especially the target return of 50 basis points above
the Treasury Benchmark, for the Portfolio to contain less risky
securities.

(Rosenthal Letter at 3; Schappert Rebuttal at 46).

Ironshore now seeks to provide a hypothetical portfolio that would
have been consistent with the targeted return but would not have
contained a concentration of risky securities.

(Rosenthal Letter

at 3).
Again,

Western’s

expert

was

responding

to

Ironshore’s

contention that specific securities that Western purchased were too
risky.

It sought to explain that the types of securities that

Western purchased were consistent with achieving the “performance
objective[]”

stated

in

the

Investment

Guidelines

(Schappert

Rebuttal at 46), “for the purpose of rebutting or critiquing the
opinions of [the plaintiff’s] expert[s],” Park West Radiology v.
CareCore National LLC, 675 F. Supp. 2d 314, 326 (S.D.N.Y. 2009).
This is not a new argument, and no reply is warranted.
D.

Liquidity Profile

Ironshore contends that Mr. Schappert improperly asserts that
“‘Western made sure it understood the liquidity profile of its
investments, [and] whether that liquidity profile was appropriate
for its customers.’”

(Rosenthal Letter at 3, quoting Schappert

Rebuttal at 39).
9

However, Ironshore’s initial expert reports had addressed the
“liquidity profile” of the investments made by Western.

Dr.

Mordecai’s initial report includes a section titled “Liquidity
Risks,” in which he contends that certain “holdings of subordinate,
alternative, and limited issuance securities” rendered Western’s
portfolio “unduly exposed to liquidity risk.”
20).

(Mordecai Report at

Mr. Schappert only responded to Ironshore’s experts by

asserting that Western considered several factors in selecting
corporate bonds, including liquidity profile of its investments.
(Schappert Rebuttal at 39).

This served to explain or disprove

Ironshore’s experts’ opinions, not to present a new issue.
E.

Incomplete Information Produced by Western

Ironshore contends it learned through an exhibit to one of
Western’s

rebuttal

reports

that

Western’s

prior

document

productions did not include monthly reports for two accounts (nos.
1487 and 2354).

(Rosenthal Letter at 3; Letter of Carl Moor dated

May 7, 2013 (“Moor Letter”) at 6).

It seeks to revise charts

attached as exhibits 2 and 3 to Dr. Mordecai’s rebuttal report
which refer to accounts in Western’s US Limited Duration F&O
Composite (the “F&O Composite”) in the period between March 31,
2007, and April 30, 2008.
6).

(Rosenthal Letter at 3; Moor Letter at

Only account no. 1487 was in the F&O Composite in the time

period referenced in the exhibits, and Western had previously
10

produced monthly holdings for that account. 3

(Moor Letter at 6) .

Nevertheless, there is no showing of undue delay or bad faith on
the part of Ironshore,

and no prejudice to Western would result

from allowing

Ironshore

to amend these charts

complete

accurate

information.

and

to reflect more

Therefore,

Ironshore's

application to amend its exhibits is granted to the extent it may
incorporate account no. 1487. 1
Conclusion
For the reasons discussed,

the plaintiff's motion is denied

except to the extent that it may amend exhibits 2 and 3 to Dr.
Mordechai 's

rebuttal

report.

Of

course,

Ironshore

can depose

Western's experts or cross-examine them at trial with respect to
the basis for their opinions.

SO ORDERED.

~

~~utF'­
C. FRANCIS IV
-

JAMES
UNITED STATES MAGISTRATE JUDGE

Dated: New York, New York
May 15, 2013

Western's counsel represents that monthly holdings for
account no. 1487 were produced on October 18, 2012, under Bates
numbers WAMIS00749531 36.
(Moor Letter at 6) .
Western has now fully produced information regarding account
no. 2354, but this additional information does not affect Dr.
Mordecai's charts because it was not included in the F&O Composite
until May 2008, after the time period referenced in the charts.
4

11

Copies mailed this date to:

Thorn Rosenthal, Esq.

Ben A. Schatz, Esq.

David G. Januszewski, Esq.

Cahill Gordon & Reindel LLP

80 Pine Street

New York, NY 1005

Avi Braz, Esq.

Carl H. Moor, Esq.

Hailyn J. Chen, Esq.

Ronald K. Meyer, Esq.

Sean Eskovitz, Esq.

Munger, Tolles & Olson LLP

355 South Grand Ave., 35th Floor

Los Angeles, CA 90071

Brian Douglas Hail, Esq.

Nomi Berenson, Esq.

Goodwin Procter, LLP

The New York Times Building

620 Eighth Avenue

New York, NY 10018-1405

12