Securities and Exchange Commission v. Johnson et al

Filing 247

OPINION AND ORDER re: 213 MOTION in Limine to exclude opinions of Defendants' Expert. filed by Securities and Exchange Commission. For the reasons stated above, the SEC's motion to exclude Chase's expert testimony is GRANTED in part and DENIED in part. The Clerk is directed to terminate the motion at docket number 213. SO ORDERED. (Signed by Judge Kimba M. Wood on 4/23/2019) (kv)

Case 1:16-cv-00828-KMW Document 247 Filed 04/23/19 Page 1 of 4

USDSSDNY
DOCUMENT
ELECTRONICALLY FILED
DOC#: _ _ __ _ __
DATE FILED:
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UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

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SECURITIES & EXCHANGE
COMMISSION,
Plaintiff,

I

V.

16-CV-828 (KMW)

AMERICAN GROWTH FUNDING II, LLC,
PORTFOLIO ADVISORS ALLIANCE, INC.,
RALPH C. JOHNSON,
HOWARD J. ALLEN III, and
KERRI L. WASSERMAN

OPINION AND ORDER

Defendants.

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KIMBA M. WOOD, United States District Judge:
The Securities and Exchange Commission ("SEC" or "the Commission") brings claims
against Portfolio Advisors Alliance, Howard J. Allen III, and Kerri L. Wasserman ("the PAA
Defendants") for securities fraud under Sectionl0(b) of the Exchange Act and Rulel0b-5
thereunder, and Sections l 7(a)(l ), (2), and (3) of the Securities Act. The PAA Defendants deny
these allegations. The SEC now moves to exclude the testimony of the PAA Defendants' expert
Richard Chase ("Chase"). (ECF No. 213.)
For the reasons stated below, the Court GRANTS in part and DENIES in part the SEC's
motion to exclude Chase's testimony.

DISCUSSION
As an initial matter, because Chase is a rebuttal expert witness, his testimony will depend
on the testimony of Robert Lowry ("Lowry"), the SEC's securities expert. At this time, it is not

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Case 1:16-cv-00828-KMW Document 247 Filed 04/23/19 Page 2 of 4

clear exactly what Lowry's testimony at trial will entail. Therefore, the SEC's motion is largely
premature. 1
However, regardless of Lowry's testimony, Chase is precluded from offering testimony
concerning: ( 1) the PAA Defendants' intent or state of mind; and (2) interpretation of the plain
language of the PP Ms.
I.

The PAA Defendants' State of Mind

"Opinions concerning state of mind are an inappropriate topic for expert opinion." Bd. of
Trs. ofAFTRA Ret. Fund v. JPMorgan Chase Bank, NA ., No. 09 CIV 3020 SAS, 2011 WL

6288415, at *8 (S.D.N.Y. Dec. 15,201 I); see also In re Rezulin Prod. Liab. Litig., 309 F. Supp.
2d 531, 547 (S.D.N.Y. 2004) ("Inferences about the intent or motive of parties or others lie
outside the bounds of expert testimony."). Throughout his expert report, Chase repeatedly
opines on the PAA Defendants' state of mind, including whether the PAA Defendants acted with
the requisite intent to defraud. (Chase Expert Report, ECF No. 217-1.) For example, Chase
states: "At no time is there any evidence in the records that PAA, Allen, or Wasserman did not
have a good faith view that audited financials would not be produced." (Id. at 1; see also id. at 3
("Based on the ongoing series of communications during that period between Allen, Johnson,
and various independent accountants, it appears that the PAA defendants manned a good faith
belief, ultimately borne out, that AGF II's annual financial statements would in fact be audited,
consistent with the representations in the PPM.").) Chase's opinions as to the state of mind of
the PAA Defendants' are not an appropriate subject for expert testimony. Therefore, Chase is
precluded from offering testimony concerning the PAA Defendants' state of mind.
II.

1The

Interpretations of the Plain Language Contained in the PPMs

SEC may renew its objectiong to Chase's expert testimony at triill.
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"[T]he district court should not admit [expert] testimony that is 'directed solely to lay
matters which a jury is capable of understanding and deciding without the expert's help."'

United States v. Mulder, 273 F.3d 91, 101 (2d Cir. 2001) (quoting United States v. Castillo , 924
F.2d 1227, 1232 (2d Cir. 1991). In his expert report, Chase improperly interprets the plain
language of the PPMs. For example, with respect to the phrase "as has been the policy in the
past, the Company's annual financial statements will continue to be audited," which is contained
in the 2011 PPM, Chase states the following:
The reference in the disclosure to the Company's "policy in the past"
of having its financials audited is admittedly confusing. If Johnson
intended to convey that it had been his policy, as Chairman of AGF
II and a principal of its Manager, to audit AGF-related entities, the
statement is imprecise, as it should have referenced the policy of the
Company's management and affiliates, not the Company itself. If it
was in fact intended to reference AGF II itself, as it is literally
written, it is clearly incorrect, as the Company has no past. But I am
unable to conclude that this representation is materially misleading.
In reading the PPM as a whole, that statement could only lead to
the conclusion that the Company intended to have its financials
audited in the future. As a result, a reasonable investor could not
have been misled by this statement.
(Chase Expert Report at 25 (emphasis added).) Here, Chase attempts to tell the jury how to
interpret the plain language of the PPMs and instructs the jury that his favored interpretation is
not materially misleading to a reasonable investor. These topics are not appropriate for expert
testimony. First, the jury is capable of interpreting the plain language of the PPMs without the
aid of an expert. Second, whether a reasonable investor would be materially misled by language
contained in the PPMs is an "ultimate legal conclusion," and this determination rests with the
jury. United States v. Bilzerian, 926 F.2d 1285, 1294 (2d Cir. 2019.) (""[A]lthough an expert
may opine on an issue of fact within the jury's province, he may not give testimony stating
ultimate legal conclusions based on those facts."). Therefore, Chase is precluded from offering

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testimony interpreting the plain language of the PPMs and from instructing the jury as to whether
a reasonable investor would be materially misled by language contained in the PPMs.

CONCLUSION
For the reasons stated above, the SEC's motion to exclude Chase's expert testimony is
GRANTED in part and DENIED in part.
The Clerk is directed to terminate the motion at docket number 213.
SO ORDERED.
Dated: New York, New York
April 23 , 2019
KIMBA M. WOOD
United States District Judge

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