Securities and Exchange Commission v. Revelation Capital Management Ltd. et al

Filing 51

MEMORANDUM OPINION re: 42 MOTION to Preclude Testimony of Plaintiff's Expert Witness Guy Erb filed by Christopher P.C. Kuchanny, Revelation Capital Management Ltd., 39 MOTION to Preclude Testimony of Defendants' ; Expert filed by Securities and Exchange Commission. For the foregoing reasons, the Defendants' Motion to Exclude the Testimony of Plaintiff's Expert Witness Guy Erb (Dkt. 42) is DENIED and Plaintiff's Motion to Strike Defendan ts' Expert Report and Preclude the Expert from Testifying (Dkt. 39) is GRANTED. The Clerk of Court is respectfully directed to close Docket Entries 42 and 39. Counsel for the parties must appear before the undersigned for a status conference to discuss the parties' anticipated summary judgment motions on July 22, 2016 at 10:00 a.m. in Courtroom 443 of the Thurgood Marshall Courthouse, 40 Foley Square, New York, New York, 10007. (As further set forth in this Order.) (Status Conference set for 7/22/2016 at 10:00 AM in Courtroom 443, 40 Centre Street, New York, NY 10007 before Judge Valerie E. Caproni.) (Signed by Judge Valerie E. Caproni on 7/8/2016) (kko)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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SECURITIES AND EXCHANGE COMMISSION, :
:
:
Plaintiff,
:
:
-against:
REVELATION CAPITAL MANAGEMENT, LTD., :
:
and CHRISTOPHER P.C. KUCHANNY,
:
:
Defendants.
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VALERIE CAPRONI, United States District Judge:

USDC SDNY
DOCUMENT
ELECTRONICALLY FILED
DOC #:
DATE FILED: 7/8/2016

14-CV-645 (VEC)
MEMORANDUM
OPINION

The Securities and Exchange Commission (“SEC”) filed suit against Revelation Capital
Management, Ltd. (“Revelation”) and Christopher P.C. Kuchanny, Revelation’s founder,
Chairman, Chief Executive Officer, Chief Investment Officer, and sole shareholder (collectively,
Defendants), alleging that Defendants violated Rule 105 of Regulation M, see 17 C.F.R.
§ 242.105. Currently before the Court are Defendants’ Motion to Exclude the Testimony of
Plaintiff’s Expert Witness Guy Erb (Dkt. 42) and SEC’s Motion to Strike Defendants’ Expert
Report and Preclude the Expert from Testifying (Dkt. 39). For the following reasons,
Defendants’ Motion is DENIED, and Plaintiff’s Motion is GRANTED.
BACKGROUND1
Rule 105 of Regulation M prohibits any person who makes a short sale of securities
during a restricted period prior to the pricing of the securities in a firm commitment offering
from then purchasing securities in that same offering. 17 C.F.R. § 242.105(a). Rule 105 only

1

The Court cites to the parties’ briefing on Defendants’ motion to exclude the testimony of Plaintiff’s expert
Guy Erb as “Defs. Erb Mem.,” “Pl. Erb Opp.,” and “Def. Erb Reply.” The Court cites to the parties’ briefing on
Plaintiff’s motion to strike the expert report and preclude from testifying Defendants’ expert Dennis Dumas as “Pl.
Dumas Mem.,” “Defs. Dumas Opp.,” and “Pl. Dumas Reply.”

applies to offerings that are conducted on a firm commitment basis. 17 C.F.R. § 242.105(c); see
also Defs. Erb Mem. at 1 n.1, 11; Pl. Erb Opp. at 4.2
The SEC claims that Defendants violated Rule 105 of Regulation M when they shorted
securities of Central Fund of Canada Limited (“Central Fund”) during the restricted period
preceding Central Fund’s November 2009 offering (the “Offering”) and then purchased
securities from the Offering. Compl. ¶¶ 2, 16-17 (Dkt. 2). According to the SEC, Defendants
made approximately $1.37 million in profits from the short sale. Id. ¶¶ 2, 18.
Many of the facts in this case are not in dispute. Defendant Revelation is a Bermudian
corporation, and Defendant Kuchanny is a citizen of the United Kingdom and a resident of
Bermuda. Id. ¶¶ 10-11; Answer ¶¶ 10-11 (Dkt. 17). Central Fund is a closed-end fund
incorporated and based in Canada that is listed on both the New York Stock Exchange and the
Toronto Stock Exchange. Compl. ¶ 12; Answer ¶ 12. Defendants admit: that Revelation

2

The text of Rule 105 provides, in relevant part:
(a) Unlawful activity. In connection with an offering of equity securities for cash pursuant to a
registration statement . . . filed under the Securities Act of 1933 (“offered securities”), it shall be
unlawful for any person to sell short (as defined in § 242.200(a)) the security that is the subject of
the offering and purchase the offered securities from an underwriter or broker or dealer
participating in the offering if such short sale was effected during the period (“Rule 105 restricted
period”) that is the shorter of the period:
(1) Beginning five business days before the pricing of the offered securities and ending
with such pricing; or
(2) Beginning with the initial filing of such registration statement or notification on Form
1–A or Form 1–E and ending with the pricing.
...
(c) Excepted offerings. This section shall not apply to offerings that are not conducted on a firm
commitment basis.

17 C.F.R. § 242.105(a), (c). The regulations define “short sale” as “any sale of a security which the seller does not
own or any sale which is consummated by the delivery of a security borrowed by, or for the account of, the seller.”
17 C.F.R. § 242.200.

2

directed the short sales of Central Fund securities between November 3 and 9, 2009, compare
Compl. ¶ 17 with Answer ¶ 17; that Central Fund filed an underwriting agreement with the SEC
following the Offering, Answer ¶ 16; and that Revelation directed the purchase of securities from
Central Fund’s Offering, compare Compl. ¶ 16 with Answer ¶ 16.
Defendants deny, however, that they engaged in any illegal trading or wrong-doing and
deny that Rule 105 applies to the Offering. Answer ¶ 2. Specifically, they “deny that the
Offering constituted a firm commitment follow-on offering” under Rule 105 and assert, instead,
that “[t]he Offering was made on a ‘best-efforts’ basis.” Id. ¶ 16.3
There are two motions before the Court: the Defendants’ motion to exclude the testimony
of Plaintiff’s expert, Guy Erb, and Plaintiff’s motion to strike the expert report of and preclude
testimony from Defendants’ expert Dennis Dumas. Plaintiff retained Erb to “opine on the
assertion by [Defendants] that the underwriting of Central Fund shares in the Offering was on a
‘best efforts’ basis, not as a ‘firm commitment’ underwriting.” Yoskowitz Decl., Ex. 1, ¶ 5 (Dkt.
44-1) (hereinafter, “Erb Report”). According to Plaintiff, Erb’s testimony is offered to assist the
fact finder in resolving the meaning of the term “firm commitment” as it is used by participants
in the securities industry. Pl. Erb Opp., at 4. Erb’s principal opinion is that “the underwriting of
the Offering was in all respects a firm commitment underwriting.” Erb Report ¶ 18. Defendants
move to exclude Erb’s testimony arguing that he is unqualified to opine on this issue, that his
testimony is unreliable and, under Rule 403, unfairly prejudicial.

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As discussed in more detail below, Defendants switched gears in their reply brief, now contending that they
“are not arguing that this Offering was conducted on a best efforts basis. Instead, Defendants’ experts, Edward
Fleischman and Gilbert Matthews, testified that the November 2009 Offering of Central Fund securities was an
overnight marketed offering, which is not conducted on a firm commitment basis, and therefore not subject to Rule
105.” Defs. Erb Reply, at 2 n.2 (emphasis in original).

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Defendants retained Dumas “to analyze and critique certain factors relating to the
exercise of extraterritorial jurisdiction over the Defendants in the Litigation.” Pl. Dumas Mem.,
Ex. 1, ¶ 3 (hereinafter, “Dumas Report”). According to Defendants, Dumas will “aid the fact
finder in understanding what factors entities like Revelation may have considered at the time of
purchasing securities in the Canadian Offering and what expectations it would have had
regarding the implications of the purchase and the application of U.S. law.” Defs. Dumas Opp.
at 2. Dumas’s principal opinion is that “the exercise of jurisdiction over Defendants’
participation in the Central Fund offering is not consistent with the factors considered by market
participants in evaluating jurisdictional reach and choice of law.” Dumas Report ¶ 31. Plaintiff
moves to strike Dumas’s expert report and to preclude him from testifying because his report is
irrelevant to any issue before the fact finder or the Court, offers an impermissible legal opinion,
is unreliable and, under Rule 403, is unfairly prejudicial.
DISCUSSION
Rule 702 of the Federal Rules of Evidence governs the admissibility of expert testimony
and provides that:
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 has reliably applied the principles and methods to the facts of the
case.
Fed. R. Evid. 702. The district court acts as a gatekeeper under Rule 702 and is charged with
“ensuring that an expert’s testimony both rests on a reliable foundation and is relevant to the task

4

at hand.” Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579, 597 (1993); see also Louis
Vuitton Malletier S.A. v. Sunny Merch. Corp., 97 F. Supp. 3d 485, 503 (S.D.N.Y. 2015) (“A trial
court should therefore admit expert testimony only where it is offered by a qualified expert and is
relevant and reliable.”); Forte v. Liquidnet Holdings, Inc., No. 14 CIV. 2185 (AT), 2015 WL
5820976, at *5 (S.D.N.Y. Sept. 30, 2015) (“In order for an expert opinion to be admissible, the
witness ‘must be qualified as an expert, the testimony must be reliable, and the testimony must
assist the trier of fact.’” (quoting In re Fosamax Prods. Liab. Litig., 645 F. Supp. 2d 164, 172
(S.D.N.Y. 2009))). This gatekeeping obligation “applies not only to testimony based on
‘scientific’ knowledge, but also to testimony based on ‘technical’ and ‘other specialized’
knowledge.” Kumho Tire Co. v. Carmichael, 526 U.S. 137, 141 (1999). A district court has
broad discretion to carry out its gatekeeping function. In re Pfizer Inc. Sec. Litig., 819 F.3d 642,
658 (2d Cir. 2016). The proponent of the expert testimony bears the burden of establishing by a
preponderance of the evidence that the proffered testimony meets the admissibility requirements
of Rule 702. R.F.M.A.S., Inc. v. So, 748 F. Supp. 2d 244, 253 (S.D.N.Y. 2010); Dreyer v. Ryder
Auto. Carrier Grp., 367 F. Supp. 2d 413, 424-25 (W.D.N.Y. 2005).
I.

Defendants’ Motion to Exclude Erb’s Testimony is Denied; Erb is Adequately
Qualified, His Testimony is Reliable and His Testimony Is Not Unfairly Prejudicial.
Defendants move to exclude Erb’s testimony arguing that Erb is unqualified to opine on

whether the Offering at issue was conducted on a firm commitment basis. They further argue
that Erb’s testimony is unreliable and, under Rule 403, unfairly prejudicial.
A. Erb is Qualified To Opine that the Offering was on a Firm Commitment
Basis.
Defendants argue that Erb is unqualified to opine on whether the Offering was conducted
on a firm commitment basis because his experience is limited to a small handful of securities
underwritings, none of which was Canadian and all of which were conducted on a firm
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commitment basis. Moreover, Erb’s experience did not focus on the mechanics of underwriting,
but instead focused on other aspects, such as due diligence. Defs. Erb Opp. at 1-2, 12-14; Defs.
Erb Reply, at 2-4.
Whether a proposed expert is qualified in the area in which he or she intends to testify is
a threshold inquiry under Rule 104(a) of the Federal Rules of Evidence. See Daubert, 509 U.S.
at 592 n.10; S.E.C. v. Tourre, 950 F. Supp. 2d 666, 674 (S.D.N.Y. 2013). “The Federal Rules of
Evidence permit opinion testimony by experts when the witness is ‘qualified as an expert by
knowledge, skill, experience, training, or education.’” McCullock v. H.B. Fuller Co., 61 F.3d
1038, 1042 (2d Cir. 1995) (quoting Fed. R. Evid. 702). To determine whether a proffered
witness is qualified, a court must “ascertain whether the proffered expert has the educational
background or training in a relevant field by looking at the totality of the witness’s background,”
and then “‘compare the area in which the witness has superior knowledge, education, experience,
or skill with the subject matter of the proffered testimony.’” Arista Records LLC v. Lime Grp.
LLC, No. 06-CV-5936 (KMW), 2011 WL 1674796, at *2 (S.D.N.Y. May 2, 2011) (quoting
United States v. Tin Yat Chin, 371 F.3d 31, 40 (2d Cir. 2004)) (other internal quotation marks
and citations omitted).
“Courts within the Second Circuit ‘have liberally construed expert qualification
requirements’ when determining if a witness can be considered an expert.” Carey Oil Co. v. MG
Ref. & Mktg., Inc., No. 99 Civ. 1725 (VM), 2003 WL 1878246, at *1 (S.D.N.Y. Apr. 11, 2003)
(quoting TC Sys. Inc. v. Town of Colonie, N.Y., 213 F. Supp. 2d 171, 174 (N.D.N.Y. 2002)); see
also Tourre, 950 F. Supp. 2d at 674 (“Courts have construed the inquiry into an expert’s
qualifications with an eye towards the ‘liberal thrust of the Federal Rules and their general
approach of relaxing the traditional barriers to opinion testimony.’” (quoting Daubert, 509 U.S.
at 588-89) (internal quotation marks omitted)). In light of this liberal construction, “courts in
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this circuit have noted that an expert ‘should not be required to satisfy an overly narrow test of
his own qualifications.’” Arista Records, 2011 WL 1674796, at *3 (quoting Johnson & Johnson
Vision Care, Inc. v. CIBA Vision Corp., No. 04 Civ. 7369 (LTS)(HBP), 2006 WL 2128785, at *6
(S.D.N.Y. July 28, 2006)). An expert who is qualified in one field cannot offer an opinion about
aspects of the case in another field for which the expert is not qualified—the expert must stay
within the reasonable confines of his subject area and not render expert opinion on an entirely
different field or discipline. Id. at *2; Dreyer, 367 F. Supp. 2d at 425. But “[i]f the expert has
educational and experiential qualifications in a general field closely related to the subject matter
in question, the court will not exclude the testimony solely on the ground that the witness lacks
expertise in the specialized areas that are directly pertinent.” In re Zyprexa Prods. Liab. Litig.,
489 F. Supp. 2d 230, 282 (E.D.N.Y. 2007) (citing Stagl v. Delta Air Lines, Inc., 117 F.3d 76, 80
(2d Cir. 1997)); see also Cary Oil, 2003 WL 1878246, at *2 (“‘[L]ack of extensive practical
experience directly on point does not necessarily preclude [an] expert from testifying.’ A formal
education in a particular field is sufficient to qualify a witness as an expert.” (quoting Valentin v.
N.Y. City, No. 94 CV 3911 (CLP), 1997 WL 33323099, at *15 (E.D.N.Y. Sept. 9, 1997))
(internal citation omitted)). “[Q]uibble[s]” such as these are “properly explored on crossexamination and [go] to [an expert’s] testimony’s weight and credibility—not its admissibility.”
McCullock, 61 F.3d at 1043.
Plaintiff has established that Erb is adequately qualified as an expert to testify about the
characteristics of the Offering as understood by the securities industry. Erb has approximately
twenty-five years of experience in international finance and at least a dozen years of experience
working in the securities industry, including almost ten years at Goldman Sachs in both New
York and Mexico. Erb Report ¶ 6, App. 1. While at Goldman Sachs, he participated in the
underwriting of approximately ten equity offerings for Mexican companies listed on the New
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York Stock Exchange, five of which were realized. Yoskowitz Decl., Ex. 6, 12:17-17:3 (Dkt.
44-2) (hereinafter, “Erb Dep.”). Erb also has experience comparing United States securities
industry practices to those of another country, specifically Mexico. Erb Report ¶ 13. Moreover,
he has acted as an expert on securities underwriting on a number of occasions. Erb Dep. 21:1824:9.
Defendants argue that, despite his lengthy work history in finance-related positions, Erb
lacks sufficiently particularized knowledge and experience to qualify him to opine on the nature
of the Offering at issue here. Defs. Erb Mem. at 12. Specifically, Defendants argue that Erb’s
experience in underwritings is limited to his time at Goldman Sachs and to the due diligence and
document creation aspects of underwritings. Id. at 13 (citing Erb Dep. 15:4-17:3). They argue
that he has no experience in the mechanics of underwriting, which are at issue here, and he has
no specialized underwriting training or education. Id. Moreover, they argue that all the
underwritings in which he participated were firm commitment—none was on a different basis;
and he has no experience with Canadian offerings. Id. (citing Erb Dep. 36:8-13).
The Court disagrees that these concerns make Erb unqualified. From his experience in
the securities industry in an international capacity and his previous work on underwritings, Erb
has provided more than adequate credentials to qualify him as an expert who can assist the fact
finder in understanding the underwriting at issue. He need not have experience or education
directly on point. In re Zyprexa Products, 489 F. Supp. 2d at 282 (“If the expert has educational
and experiential qualifications in a general field closely related to the subject matter in question,
the court will not exclude the testimony solely on the ground that the witness lacks expertise in
the specialized areas that are directly pertinent.” (quoting Stagl, 117 F.3d at 80)). Thus, even if
Defendants’ arguments are all accurate, they go to the weight, not the admissibility, of Erb’s

8

testimony. Put differently, Defendants’ quibbles with Erb’s credentials are properly explored on
cross-examination. McCullock, 61 F.3d at 1043.
B. Erb’s Opinion Meets the Indicia of Reliability Required By Rule 702.
Defendants also argue that Erb’s Report and testimony are unreliable under Rule 702 and
should be excluded because Erb: (1) impermissibly equates, without explanation, the term
“underwritten” with a “firm commitment offering,” Defs. Erb Mem. at 14-15; (2) relies on the
language of the Offering documents but fails to take into account witness statements that the
language in the Offering documents did not accurately describe the events that actually occurred
in the Offering, id. at 15-16; (3) fails to consider that the underwriter of this Offering, CIBC
World Markets, Inc. (“CIBC”), had firm bids prior to pricing, id. at 17-18; (4) fails to account for
differences between offerings filed under the Multijurisdictional Disclosure System (“MJDS”),
such as this one, and those that are purely United States offerings, id. at 18-19; and (5) cites to
secondary materials, the Offering documents, and testimony of fact witnesses that do not support
the opinions and conclusions he reached, id. at 19-23.
The Court looks to the indicia of reliability identified by Rule 702, “namely, (1) that the
testimony is grounded on sufficient facts or data; (2) that the testimony ‘is the product of reliable
principles and methods’; and (3) that ‘the witness has applied the principles and methods reliably
to the facts of the case.’” Amorgianos v. Nat’l R.R. Passenger Corp., 303 F.3d 256, 265 (2d Cir.
2002) (quoting Fed. R. Evid. 702). The Supreme Court in Daubert identified a number of factors
that may bear on reliability, including:
(1) whether a theory or technique “can be (and has been) tested”; (2) “whether the
theory or technique has been subjected to peer review and publication”; (3) a
technique’s “known or potential rate of error,” and “the existence and
maintenance of standards controlling the technique’s operation”; and (4) whether
a particular technique or theory has gained “general acceptance” in the relevant
scientific community.

9

Id. at 266 (quoting Daubert, 509 U.S. at 593-94) (internal citations omitted); see also Kumho
Tire, 526 U.S. at 151 (“[S]ome of Daubert’s questions can help to evaluate the reliability even of
experience-based testimony.”). The reliability inquiry is “fluid” and necessarily varies from case
to case. See Daubert, 509 U.S. at 594 (“The inquiry envisioned by Rule 702 is . . . a flexible
one”); Kumho Tire, 526 U.S. at 150 (“[T]he gatekeeping inquiry must be tied to the facts of a
particular case.” (internal quotation marks and citation omitted)).
The Second Circuit has cautioned that not every flaw in an expert opinion warrants
exclusion of the testimony. Amorgianos, 303 F.3d at 266-68. The Court must exclude an expert
opinion when it “is based on data, a methodology, or studies that are simply inadequate to
support the conclusions reached.” Id. at 266. Yet, “[w]here an expert otherwise reliably utilizes
scientific methods to reach a conclusion, lack of textual support may ‘go to the weight, not the
admissibility’ of the expert’s testimony.” Id. (quoting McCullock, 61 F.3d at 1044).
A minor flaw in an expert’s reasoning or a slight modification of an otherwise
reliable method will not render an expert’s opinion per se inadmissible. “The
judge should only exclude the evidence if the flaw is large enough that the expert
lacks ‘good grounds’ for his or her conclusions.” This limitation on when
evidence should be excluded accords with the liberal admissibility standards of
the federal rules and recognizes that our adversary system provides the necessary
tools for challenging reliable, albeit debatable, expert testimony. As the Supreme
Court has explained, “[v]igorous cross-examination, presentation of contrary
evidence, and careful instruction on the burden of proof are the traditional and
appropriate means of attacking shaky but admissible evidence.”
Id. (quoting In re Paoli R.R. Yard PCB Litig., 35 F.3d 717, 746 (3d Cir. 1994); Daubert, 509
U.S. at 596).
Indeed, “the Second Circuit [has] espouse[d] a particularly broad standard for the
admissibility of expert testimony.” Colon ex rel. Molina v. BIC USA Inc., 199 F. Supp. 2d 53, 75
(S.D.N.Y. 2001). “[A] trial judge should exclude expert testimony if it is speculative or
conjectural or based on assumptions that are ‘so unrealistic and contradictory as to suggest bad

10

faith’ or to be in essence ‘an apples and oranges comparison.’” Zerega Ave. Realty Corp. v.
Hornbeck Offshore Transp., LLC, 571 F.3d 206, 213-14 (2d Cir. 2009) (quoting Boucher v. U.S.
Suzuki Motor Corp., 73 F.3d 18, 21 (2d Cir. 1996)). But “‘[o]ther contentions that the
assumptions are unfounded go to the weight, not the admissibility, of the testimony.’” Id. at 214
(quoting Boucher, 73 F.3d at 21). “If an expert’s testimony lies within ‘the range where experts
might reasonably differ,’ the jury, and not the trial court, should ‘decide among the conflicting
views of different experts,’” even if the evidence is “shaky.” Forte, 2015 WL 5820976, at *6
(quoting Kumho Tire, 526 U.S. at 153). The objective of the court’s gatekeeping role under Rule
702 is ultimately to “make certain that an expert, whether basing testimony upon professional
studies or personal experience, employs in the courtroom the same level of intellectual rigor that
characterizes the practice of an expert in the relevant field.” Kumho Tire, 526 U.S. at 152.
The Court finds that Erb’s testimony has the indicia of reliability required by Rule 702.
First, Erb’s Report is factually grounded. The Report cited a number of sources to support Erb’s
view of the characteristics of “best efforts” and “firm commitment” offerings. Erb explained the
difference between the two types of offerings. In a “best efforts” offering, an issuer and a
broker-dealer, which acts as a selling agent, enter into a placement agreement. Erb Report ¶ 30.
The selling agent is obligated to make its best effort to sell the shares but does not guarantee the
full proceeds of the offer to the issuer. Id. (quoting Guiliano Iannotta, Investment Banking: A
Guide to Underwriting and Advisory Services, Springer-Verlag, 2010, p. 52). In such an
offering, the selling agent bears no responsibility for unsold shares. Id. In contrast, in a firm
commitment offering, the underwriter guarantees the full proceeds to the issuer, regardless of the
actual demand. Id. (quoting Guiliano Iannotta, Investment Banking: A Guide to Underwriting
and Advisory Services, Springer-Verlag, 2010, p. 52). In such an offering, the underwriter bears
the risk that it is unable to sell all of the shares at the offering price; at the end of such an
11

offering, the underwriter owns (and must pay for) any unsold shares. Id. ¶ 32 (citing Barron’s
Dictionary of Finance and Investment Terms, Seventh Edition, dated June 2006, p. 255).4
Regarding the concept of underwriter risk, Erb discussed a 1987 underwriting for British
Petroleum, in which the stock markets crashed before the offering, resulting in substantial losses
to the underwriters, which were stuck with unsold shares priced before the market crashed. Erb
Report ¶¶ 41-42. Erb explained that this experience was the impetus for the current practice of
underwriters to “build[] a book of orders for offered shares by soliciting investor indications of
their interest in purchasing the shares within an indicative price range.” Id. ¶ 43. He opined that
book building is now a standard feature of firm commitment underwritings. Id. From those
facts, Erb summarized his understanding that
there are two types of firm commitment underwriting: one in which the price is
set before the underwriters go to market with the transaction and the other where
the deal is “pre-marketed” before the underwriters purchase the shares. Both have
been described as “bought deals,” since the distinguishing feature of the two types
of firm commitment underwriting is the moment at which the shares are
purchased, not whether the underwriters will purchase the shares.
Id. ¶ 44. As discussed, Erb relied on more than just his experience and credentials and cited to
secondary sources for his definition of firm commitment and best effort offerings and his
explanation of how and why book building developed. Id. ¶¶ 30-32, 41-42.

4

In contrast to Erb’s opinion, which compares a “firm commitment” to a “best efforts” offering, and in
contrast to Defendants’ Answer, which states that the Offering was a “best effort” offering, Answer ¶ 16,
Defendants now assert that the Offering was an “overnight marketed offering.” Defs. Erb Reply, at 2 n.2.
According to Defendants, their experts testified that the “November 2009 Offering of Central Fund securities was an
overnight marketed offering, which is not conducted on a firm commitment basis, and therefore not subject to Rule
105.” Id. (emphasis in original). Defendants define an “overnight marketed offering” as a “‘deal [that] is being
launched at the close of business on one day, with the anticipation, but no guarantee . . . of pricing that transaction
and having final terms before the market opens the next day.’” Defs. Erb Mem. at 6 (quoting Yoskowitz Decl., Ex.
10, 49:14-25 (hereinafter, “Smith Dep.”)). According to Defendants, this means that the underwriter, CIBC,
gathered a book of firm bids overnight (that the bids were firm meant, in Defendants’ view, the bids were “very
difficult” to retract, id. at 9, n.11), and whether the offering or the signing of the underwriting agreement actually
occurred was dependent on the firm bids that CIBC was able to gather, id. at 6.

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Moreover, Erb’s Expert Report and testimony are the product of reliable principles and
methods. His Report is broken into sections, including a background section on the specific
markets that are relevant; a section comparing industry practice relative to “best efforts” and
“firm commitment” deals; a section describing his understanding of the Offering at issue in this
case; and finally an analytical section in which he applies his understanding of industry practice
to the Offering at issue to opine that it was on a “firm commitment” basis. Erb’s preparation and
presentation are certainly “of a kind that others in the field would recognize as acceptable.”
Kumho Tire, 526 U.S. at 151.
Finally, Erb applied his understanding of industry definitions for firm commitment versus
best effort offerings reliably to the facts of the case. Erb analyzed the Offering at issue in light of
his understanding of industry practice and relied on the plain language of the Offering documents
and his review and interpretation of produced documents and deposition testimony. As set forth
in his Report, based on his “investment banking experience with securities underwriting, [his]
training in and knowledge of the standards and practices of the industry, [his] understanding of
the regulatory framework for the Offering, the plain language of the Offering documents, and
[his] review of the material produced in this matter,” he reached the conclusion that the Offering
was on a firm commitment basis. Erb Report ¶ 82.
The basis of Erb’s opinion is clear and reasonable to the Court. In Erb’s opinion, the risk
of the Offering passed to the underwriter lock, stock and barrel; the fact that CIBC mitigated that
risk in its overnight work does not alter the fact that, if some of the prospective buyers who
expressed interest ultimately did fall through, the underwriter, not the issuer, would own those
shares. “If an expert’s testimony lies within ‘the range where experts might reasonably differ,’

13

the jury, and not the trial court, should ‘decide among the conflicting views of different
experts.’” Forte, 2015 WL 5820976, at *6 (quoting Kumho Tire, 526 U.S. at 153).
Defendants’ concerns about Erb’s Report and testimony all go to the weight, not the
admissibility, of his opinion and can be addressed on cross-examination. Defendants’ first
concern is that “Erb equates a firm commitment offering with the term ‘underwritten,’ or the
point at which shares are purchased, but fails to explain how his experience leads him to that
understanding.” Defs. Erb Mem. at 14 (citing Erb Dep. 44:19-22). According to Defendants,
“[i]nstead of providing objective evidence to support his opinion, Erb provides only his
subjective opinion, which he claims is based on his purported experience, training, knowledge,
and interpretation of documents.” Id. at 15.
Erb’s opinion equating the terms “underwriting” and “firm commitment” is not so
speculative, conjectural, or based on assumptions so unrealistic and contradictory as to suggest
bad faith or to render his opinion inadmissible. Although Defendants are correct that Erb must
provide an explanation for his conclusions that is more than ipse dixit or a simple reference to his
credentials and experience, Erb does not rely simply on ipse dixit or his credentials. He cites a
number of secondary sources to support his understanding of industry practice. See, e.g., Erb
Report ¶¶ 30 (quoting Guiliano Iannotta, Investment Banking: A Guide to Underwriting and
Advisory Services, Springer-Verlag, 2010, p. 52), 32 (citing Barron’s, Dictionary of Finance and
Investment Terms, Seventh Edition, dated June 2006, p. 255). Regardless, Defendants will be
able to test the strength and accuracy of his opinion on cross-examination or by offering rebuttal
testimony.
Second, Defendants argue that Erb, in relying on the Offering documents, failed to
acknowledge that the documents did not accurately reflect the events that actually occurred in the
Offering. Specifically, Defendants contend that the prospectus for the Offering contained a
14

clause regarding the underwriter’s ability to reduce the price at which shares were offered, and
that CIBC witness Scott Smith testified that such a clause would be more appropriate in a
“bought deal,” which was not the case here. Defs. Erb Mem. at 16. Those concerns go to the
weight of his testimony but do not render Erb’s testimony and report inadmissible.
Third, Defendants argue that Erb’s testimony is unreliable because he “fails to adequately
explain how he extrapolated that there were no firm bids prior to pricing from the facts at issue.”
Id. at 17. This argument simply reflects a disagreement over the interpretation of the documents
and testimony and is not grounds for exclusion. Although not entirely clear, Defendants appear
to take the position that, prior to the underwriting in this Offering, “all of the shares had already
been sold.” Id. (citing Yoskowitz Decl., Ex. 7, 100:3-23 (Dkt. 44-2) (hereinafter, “Kuchanny
Dep.”); Yoskowitz Decl., Ex. 10, 60:14-23, 128:8-16, 133:7-11, 146:5-16 (Dkt. 44-2)
(hereinafter, “Smith Dep.”); Yoskowitz Decl., Ex. 13, 75:18-76:9 (Dkt. 44-3) (hereinafter, “Scott
Dep.”)). They argue that “Erb failed to take into account that Kuchanny, as well as [other
witnesses], had all testified that there were firm bids for the securities before the pricing call.”
Id. From that argument, the Court understands Defendants to be equating “firm bids” with
“sale” of the shares. Accordingly, Defendants appear to argue that Erb’s opinion—that in a firm
commitment offering, “the underwriters, not the issuer, bear the principal risk of selling the
shares at the offering price”—is inapplicable because the shares had already been sold. Id.
(citing Erb Report ¶ 32).
Erb, on the other hand, appears to disagree that a “firm bid” removes the principal risk of
the transaction from the underwriter or constitutes a sale. In his Report, Erb writes:
Sales of Central Fund shares only occurred after CIBC had received expressions
of “firm interest” from potential investors, and after the deal was priced and CIBC
had allocated the shares to the investors. No sales or purchases of Central Fund

15

shares were made before the pricing and allocation of shares. CIBC sent the final
term sheet to investors after the execution of the trades.
Erb Report ¶ 65 (internal citations to Smith Dep. and Scott Dep. omitted). In other words, in
Erb’s opinion, the record reflected that “[t]he Underwriters relied on their longstanding customer
relationships and industry traditions to mitigate the risk that a customer might have opted ‘not to
proceed’ with its purchase of Central Fund shares,” but ultimately, CIBC, as the underwriter,
maintained that risk. Id. ¶ 67 (internal citations to Smith Dep. and Scott Dep. omitted).
The deposition testimony that Defendants cite to support their argument that “all of the
shares had already been sold” may well persuade a jury that Erb is wrong, but it is not a basis to
exclude his testimony in the first instance.5
Fourth, Defendants argue that Erb failed to account for differences between offerings that
are filed under the MJDS, such as this Offering, and those that are purely United States offerings.
Defs. Erb Mem. at 18-19. They argue that his reliance on only United States regulations was
inappropriate because the underwriters of this Offering were Canadian and the offering
documents provided that Canadian disclosure rules should apply. Id. Defendants specifically
take issue with Erb’s reference to “rules promulgated under Regulation C,” which they argue do
“not apply to documents filed under Form F-10, the form under which the November 2009
offering prospectus was filed.” Id. at 18. Plaintiff responds that such arguments are a “red
herring” because the MJDS disclosure requirements “have little if any bearing on the merits of
the SEC’s claims in this case” and are “irrelevant to Mr. Erb’s principal conclusion that the
Offering was a firm commitment offering.” Pl. Erb Opp. at 12 n.6.

5

Defendants also take issue with Erb’s ordering of the steps within the Offering in paragraph forty-five of
his Report. Defs. Erb Mem. at 17-18. Erb admitted he misordered the steps, Erb Dep. 93:16-94:4; such a concern is
not of the type to render Erb’s opinion inadmissible. Amorgianos, 303 F.3d at 267 (“A minor flaw in an expert’s
reasoning . . . will not render an expert’s opinion per se inadmissible.”).

16

Erb’s citation to Regulation C and lack of analysis of the MJDS disclosure rules are not
reasons to exclude his testimony. Even assuming that Defendants are correct that Regulation C
is inapplicable to this Offering, Erb testified that he relied on that regulation only to convey the
idea that “shelf takedowns were often on an expedited or rapid basis and so the exercise of the
underwriting often occurs very quickly.” Erb Dep. 56:20-57:3. Defendants fail to explain, and
the Court does not see, how Erb’s citation to Regulation C or his failure to cite the MJDS
disclosure rules are such significant flaws that the Court should exclude his report and testimony.
Amorgianos, 303 F.3d at 267 (“The judge should only exclude the evidence if the flaw is large
enough that the expert lacks good grounds for his or her conclusions.” (internal quotation marks
and citations omitted)).
Finally, Defendants argue that Erb cites materials that do not support his opinions. Defs.
Erb Mem. at 19-23. Defendants argue that none of the definitions Erb cited from secondary
sources contains a discussion of pre-marketed offerings and that the Offering documents did not
expressly use the term “firm commitment.” Id. at 19-21. These concerns also do not warrant
exclusion of Erb’s testimony and can be dealt with on cross-examination. During his deposition,
Erb was himself quick to admit that there was no discussion of pre-marketed offerings in the
secondary sources he cited and to explain how and why he used the definitions he did to arrive at
his conclusions.6 The same is true for Erb’s reliance on the Offering Documents. He does not
represent that the Offering Documents themselves use the phrase “firm commitment” (if they
had, it seems unlikely an expert report would have been necessary). He explained in his
deposition, however, that he focused on the fact that the documents “use[] the term purchase,

6

See Erb Dep. 82:16-83:19 (“Q. . . . There’s no reference in either of those definitions to pre-marketed deals,
is there? A. I don’t think so. Let me look to check here. That is correct. Q. So I guess I’m wondering what the
basis is because it’s not in the cite for your statement that a premarketed deal has been described as a bought deal?
A. Well, just my own experience any deal that involves a purchase of the shares would be sometimes referred to as
a bought deal. I just recall that terminology from my time in the industry.”).

17

which is a characteristic of firm commitment underwritings.” Erb Dep. 43:11-44:3. Neither of
these instances reflects “assumptions that are ‘so unrealistic and contradictory as to suggest bad
faith,’” Zerega, 571 F.3d at 214, and they can be addressed on cross-examination.
Defendants further argue that Erb “misuse[d]” the fact testimony from CIBC
underwriters, Scott and Smith, and “twist[ed] the facts to fit his own hypothesis.” Defs. Erb
Mem. at 21-23. Defendants are correct that neither Scott nor Smith definitively stated that a
premarketed offering is a type of firm commitment underwriting; to the contrary, both Smith and
Scott suggest that the opposite is true – they equate a firm commitment offering with a “bought”
deal and indicate definitively that the Offering was not a “bought” deal but an “overnight
marketing arrangement.” See Smith Dep. 108:16-109:18, 139:4-140:5; see also Scott Dep. 24:629:8, 30:2-31:9. In his deposition, Erb explained that the citations in his Report to Smith’s and
Scott’s depositions arise from his interpretation that “firm commitment” equates to
“underwritten.” Erb Dep. 52:21-55:4. As Erb testified, he cited to portions of Scott’s and
Smith’s depositions in the context of the deal being underwritten and for the statements that the
underwriters were purchasing the shares. Erb Dep. 52:21-55:4, 87:6-89:20 (testifying that Scott
never used the term “firm commitment” but used the word “underwritten” and that Erb equates
“firm commitment” with “underwritten” and with “purchase.”).7

7

Upon review of Scott’s and Smith’s depositions, the Court is not convinced that Erb’s views are as far apart
and as contrary to Scott’s and Smith’s testimony as Defendants assert. For instance, in Scott’s deposition, he
described an overnight marketing arrangement as follows:
assuming the company decides that they want to move forward, we make an announcement in most
cases right after the market closes . . . and a press release is issued. That allows us to go out and
market to investors on an overnight basis. That’s why it’s called an overnight marketed transaction.
And then the size of the offering, the price of the offering, and, you know, ultimately the deal itself
is determined the next day, the next morning. And at that stage it’s underwritten and becomes a
liability of the bank.
Scott Dep. 25:12-26:8. Scott testified that, in an “underwritten transaction,” “[o]nce [CIBC] sign[s] the
underwriting agreement . . . [CIBC] own[s the shares] . . . , and then it’s [their] responsibility to collect the money
from investors who have agreed to be part of the transaction. So we’re essentially fronting the money on behalf of

18

In short, there is no indication that Erb’s citations were intentionally manipulative or
misleading, a bad faith twisting of the facts, or so speculative or conjectural as to render his
testimony inadmissible.
In sum, Erb’s testimony meets the indicia of reliability required by 702. Defendants’
arguments all go to the weight, not the admissibility, of his testimony and can be addressed on
cross examination.8
C. Defendants’ Motion to Exclude Erb’s Testimony Under Rule 403 Is Denied.
Defendants also urge exclusion of Erb’s testimony under Rule 403 of the Federal Rules
of Evidence. According to Defendants, Erb’s “selectively researched and unsubstantiated
opinions distill down to little more than his own ‘beliefs,’” which “will serve only to confuse the
issue with regards to the type of offering in which Revelation was participating and thus, the
applicability of Rule 105 of Regulation M.” Defs. Erb Mem. at 24. They further argue that Erb
strayed from his scope of expertise and intruded into subject matters beyond which he was
qualified resulting in “an undue degree of confusion.” Id.
Erb’s testimony is highly relevant and probative to a central issue in the case. Erb is
qualified and his Expert Report and testimony meet the indicia of reliability required to be
admissible under Rule 702 of the Federal Rules of Evidence. In short, the probative value of his
testimony is not outweighed by any danger of unfair prejudice, confusion of the issues, or
misleading the jury.

shareholders or investors in this case.” Id. 28:12-19. If an investor who indicated interest in participating in the deal
decided not to go forward, CIBC would still own the shares and “would obviously either try to find another investor
to buy those shares or we would end up having to hold them.” Id. 28:12-29:8.
8

As a last ditch effort, Defendants argue that “even where individual, separate flaws may properly be
considered questions of weight,” they may be “‘sufficiently accumulated’” that they become so serious as to require
exclusion. Defs. Erb Reply at 9 (quoting Malletier, 525 F. Supp. 2d at 679). While in concept the Defendants may
be correct, that principle does not apply here.

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II.

Plaintiff’s Motion to Strike Dumas’s Expert Report and to Preclude Him from
Testifying is Granted; His Report and Testimony Are Irrelevant.
Plaintiff moves to strike Dennis Dumas’ expert report and to preclude him from

testifying. According to Plaintiff, Dumas’s report and testimony are irrelevant and constitute an
impermissible legal opinion: “Dumas offers no opinions relevant to the substance of
Defendants’ trading activity, the nature of the offering, or any other pertinent factual issue” but
instead devotes the entire report “to the legal question of whether the Court has jurisdiction over
the Defendants or their alleged misconduct.” Pl. Dumas Mem. at 3, 6-7. Plaintiff further argues
Dumas’s Report is unreliable, identifies no conflict of law, and, under Rule 403, is unfairly
prejudicial, confusing, and a waste of time. Id. at 7-10
Dumas purports “to analyze and critique certain factors relating to the exercise of
extraterritorial jurisdiction over the Defendants in the Litigation.” Dumas Report ¶ 3. Dumas
opines that “the exercise of jurisdiction over Defendants’ participation in the Central Fund
offering is not consistent with the factors considered by market participants in evaluating
jurisdictional reach and choice of law.” Id. ¶ 31. In his testimony, Dumas focused on how
market participants look at the question of jurisdiction and choice of law. See, e.g., Pl. Dumas
Mem., Ex. 2, 55:15-24 (Dkt. 40-2) (hereinafter “Dumas Dep.”) (“Q. . . . I’m trying to understand
the analytic framework against which you are applying the factors that you’ve just identified in
determining—in reaching the conclusion that you offer in this report. A. I think I’m – I’m really
looking at how – how the – you know, the industry and the – the relevant states, you know,
historically have looked at the question of – of structuring and – and jurisdiction and choice of
law.”).
In their opposition to Plaintiff’s Motion, Defendants assert that “Dumas has opined
regarding the factors considered by market participants – not Courts – in evaluating, from a

20

business perspective, which country’s regulations might apply to . . . multinational securities
transactions.” Defs. Dumas Opp. at 1 (emphasis in original). Put differently, Dumas opines that
a market participant would not have understood that this transaction was subject to Rule 105 of
Regulation M.
The Court fails to see how Dumas’s opinion regarding what a market participant would
have thought about the applicability of Rule 105 of Regulation M is at all relevant to any issue
the jury will have to decide. Rule 105 of Regulation M imposes strict liability and prohibits
conduct regardless of a short seller’s intent. See Short Selling in Connection with a Pub.
Offering; Final Rule, Exchange Act Release No. 34-56206, 91 S.E.C. Docket 781, 2007 WL
2254466 (Aug. 10, 2007); see also Exchange Act Release No. 34-54888, 89 S.E.C. Docket 1346,
2006 WL 3523646 (Dec. 6, 2006).9 Therefore, what a hypothetical market participant would
have understood with respect to the applicability of United States law to the facts, the factors
Revelation might have considered at the time of purchasing securities in the Offering, or the
expectations Revelation would have had regarding the implication of that purchase, are all
irrelevant to any issue the jury will have to find. For these reasons, Plaintiff’s motion is
granted.10
CONCLUSION
For the foregoing reasons, the Defendants’ Motion to Exclude the Testimony of
Plaintiff’s Expert Witness Guy Erb (Dkt. 42) is DENIED and Plaintiff’s Motion to Strike

9

Defendants do not explicitly admit or dispute that Rule 105 of Regulation M imposes strict liability. But
even if they dispute whether Rule 105 of Regulation M imposes strict liability and even if they believe that this
multijurisdictional offering is not subject to Regulation M even if it is a firm commitment offering, those are all
legal questions that must be resolved by the Court.

10

Because Dumas’s Expert Report and testimony are wholly irrelevant, the Court need not, and will not,
discuss whether his expert report and testimony offer impermissible legal opinions or are unreliable or prejudicial.

21

Defendants’ Expert Report and Preclude the Expert from Testifying (Dkt. 39) is GRANTED.
The Clerk of Court is respectfully directed to close Docket Entries 42 and 39.
Counsel for the parties must appear before the undersigned for a status conference to
discuss the parties’ anticipated summary judgment motions on July 22, 2016 at 10:00 a.m. in
Courtroom 443 of the Thurgood Marshall Courthouse, 40 Foley Square, New York, New York,
10007.
SO ORDERED.
_________________________________
____________________________
_
VALERIE CAPRONI
United States District Judge

Date: July 8, 2016
New York, New York

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