Securities and Exchange Commission v. Lek Securities Corporation et al

Filing 350

MEMORANDUM OPINION AND ORDER......The SECs October 5, 2018 motion to exclude Fillers testimony is granted. (Signed by Judge Denise L. Cote on 3/21/2019) (gr)

Case 1:17-cv-01789-DLC Document 350 Filed 03/21/19 Page 1 of 12

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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:
SECURITIES AND EXCHANGE COMMISSION,
:
:
Plaintiff,
:
:
-v:
:
LEK SECURITIES CORPORATION, SAMUEL
:
LEK, VALI MANAGEMENT PARTNERS d/b/a
:
AVALON FA, LTD., NATHAN FAYYER, and
:
SERGEY PUSTELNIK a/k/a SERGE PUSTELNIK :
:
Defendants.
:
:
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17cv1789 (DLC)
MEMORANDUM OPINION
AND ORDER

APPEARANCES
For plaintiff Securities and Exchange Commission
David J. Gottesman
Olivia S. Choe
Sarah S. Nilson
U.S. Securities & Exchange Commission
100 F Street NE
Washington, DC 20549
For defendants Vali Management Partners d/b/a Avalon Fa Ltd.,
Nathan Fayyer, and Sergey Pustelnik
James M. Wines
Law Office of James M. Wines
1802 Stirrup Lane
Alexandria, VA 22308
Steven Barentzen
Law Office of Steven Barentzen
17 State Street, Suite 400
New York, NY 10004
DENISE COTE, District Judge:
This Opinion addresses the motion of plaintiff U.S.
Securities and Exchange Commission (“SEC”) to exclude expert

Case 1:17-cv-01789-DLC Document 350 Filed 03/21/19 Page 2 of 12

testimony based on the report of Ronald Filler (“Filler”),
offered by defendants Avalon FA Ltd., Nathan Fayyer, and Sergey
Pustelnik (the “Avalon Defendants”).

The Filler report is

purportedly submitted in rebuttal to the reports of SEC experts
Terrence Hendershott (“Hendershott”) and Neil Pearson
(“Pearson”).

For the following reasons, the SEC’s motion is

granted.
Background
On March 10, 2017, the SEC sued defendants Lek Securities
Corporation (“Lek Securities”), Samuel Lek (“Lek; and together
with Lek Securities, the “Lek Defendants”) and the Avalon
Defendants, principally alleging that traders at Avalon engaged
in two schemes to manipulate the securities markets and that
they did so through trading at Lek Securities, a broker-dealer
based in New York.

Avalon is a foreign day-trading firm whose

traders are largely based in Eastern Europe and Asia.

Avalon is

not a registered broker-dealer and relies on registered firms
like Lek Securities to conduct trading in U.S. securities
markets.
The SEC brought claims for violations of several provisions
of the Securities Exchange Act of 1934 (the “Exchange Act”) and
the Securities Act of 1933 (the “Securities Act”).

The SEC’s

claims against the Avalon Defendants are principally for
violations of Sections 10(b) and 9(a) of the Exchange Act and
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Section 17(a) of the Securities Act.
Following the close of discovery, on October 5, 2017, the
SEC moved to exclude Filler and three other experts that the
defendants intend to call as rebuttal expert witnesses to
Hendershott and Pearson.
on November 16.

Those motions became fully submitted

The Lek Defendants’ motions to exclude

testimony by Hendershott and Pearson, and the SEC’s motions to
exclude testimony from three of the four rebuttal expert
witnesses offered by the defendants were addressed in a recently
filed Opinion.

SEC v. Lek Sec. Corp., No. 17cv1789(DLC), 2019

WL 1198599 (S.D.N.Y. Mar. 14, 2019) (the “March 2019 Opinion”).
A detailed recitation of the factual and procedural
background to this motion, including descriptions of the two
schemes alleged by the SEC -- a layering scheme and a CrossMarket Strategy -- is provided in the March 2019 Opinion.

The

March 2019 Opinion also describes the legal framework for
addressing a Daubert motion and summarizes the Hendershott and
Pearson reports.

Familiarity with the March 2019 Opinion is

assumed; it is incorporated by reference.
I. Summary of Filler Report
Filler’s expert report, dated May 11, 2018, is divided into
three sections.

The first section provides background

information about several topics, including the financial
markets, high-frequency trading, the securities laws, and market
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competition.

He explains, among other things, the difference

between “market orders” and “limit orders,” and he describes
various strategies market makers and high-frequency trading
firms might use to compete in the equities and options markets.
He also describes his understanding of the legal standards that
govern market manipulation.

For example, while he acknowledges

that market manipulation is illegal, Filler opines that
“layering” is not prohibited by any “law, rule or regulation
governing trading in the U.S. equities markets.”

He explains

that regulators must provide proper notice prior to enforcing
the securities laws and argues that the SEC’s use of the term
“layering” remains vague and undefined.
Portions of the first section of Filler’s report also apply
his understanding of the legal standards to the facts as alleged
in the SEC’s complaint.

He concludes that “[i]t would be

extremely difficult, if not impossible” for Avalon to know of
any layering activity, that “it was reasonable” for Avalon to
rely on Lek Securities’ compliance procedures, and that “[i]t is
unreasonable” to expect Avalon to comply with regulators’
concerns about layering, “especially when there is no such
prohibition under the federal securities laws.”

He adds that

the trading activity in this case “is indistinguishable from the
legitimate market making strategy that the SEC and Professor
Hendershott find to be perfectly legal and beneficial to the
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market.”
The second and third sections of Filler’s report purport to
dispute the analyses conducted by Hendershott and Pearson,
largely by applying Filler’s understanding of the legal
principles that should govern the jury’s assessment of the
trading at issue.

Filler did no econometric assessment of

either expert’s report; he admits that he is not qualified to do
so.

Nor did Filler do any independent analysis of Avalon’s

trading activity.

Instead, he offers broad criticisms about

legal insufficiencies in the SEC’s case.

He concludes that the

SEC’s allegations are “vague in concept and application” and
that the Hendershott and Pearson reports do not prove any
violations of the federal securities laws.
In the section directed to Hendershott’s layering analysis,
for example, Filler states his understanding of various legal
elements that constitute a violation of the securities laws and
explains why, in his view, Hendershott’s analysis does not prove
the required elements. 1

Among other things, he opines that the

securities laws are violated through allegedly manipulative
trading only when that trading artificially affects a security’s

Separate from this discussion, Filler also opines that
Hendershott’s analysis cannot be used as a basis for
disgorgement because Hendershott failed to “isolate [Avalon’s]
wrongful gains from those resulting from unrelated market
forces.”
1

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price in a deceptive manner.

He claims that Hendershott’s

analysis does not show proof of price impact.

He also faults

Hendershott for failing to account for external market factors
that could have caused a price impact.

Filler concludes that

the Layering Loops identified by Hendershott cannot be
manipulative.
As a second example, Filler argues that open-market orders
at risk of execution “cannot satisfy” the SEC’s burden, and that
Avalon’s cancellations of those orders “cannot form the basis
for any reasonable inference of fraudulent intent.”

According

to Filler, this is because order cancellation is a common
practice among high-frequency traders.

Filler criticizes

Hendershott’s conclusions on the grounds that Hendershott “has
no knowledge regarding actual intent of any of the Individual
Traders” at Avalon.
As a third example, Filler opines that the securities laws
are not violated unless the SEC can show that Avalon took some
action to prevent its Loud-side orders from executing. 2

Filler

contrasts the SEC’s allegations in this case with a lawsuit
brought by the U.S. Commodity Futures Trading Commission

As explained in the March 2019 Opinion, Loud-side orders are
placed in a layering scheme to manipulate the market and
facilitate profitable trading of Quiet-side orders. See Lek
Sec. Corp., 2019 WL 1198599, at *3.
2

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(“CFTC”) against a trader who placed orders away from the
“inside price” and automatically modified the orders to keep
them away from the inside price as the market shifted. 3
The third section of Filler’s report briefly addresses the
alleged Cross-Market Strategy.

He opines that Avalon’s equity

trades did not artificially change the price of the
corresponding options.

According to Filler, this is because the

equities trades were “actual trades executed with willing
unaffiliated market participants” and the SEC failed to allege
any “collusion, insider information or any other factors that
would render these [transactions] . . . fraudulent.”

Instead,

he claims that Avalon simply tested the liquidity in the
equities markets and, having determined that the options were
inaccurately priced, took advantage of a “legitimate arbitrage
opportunity.”
IV.

The Motion to Exclude
The SEC moves to exclude Filler’s expert testimony, which

the Avalon Defendant’s seek to introduce to rebut the testimony
from Hendershott and Pearson.

The SEC contends that Filler is

unqualified to serve as a rebuttal expert and that his opinions,
which are essentially arguments by counsel, are inadmissible.

The “inside price” is a price within the National Best Bid and
Offer (“NBBO”). See Lek Sec. Corp., 2019 WL 1198599, at *4 n.9,
19-20.
3

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The SEC is correct.
The law governing the admissibility of expert testimony was
set forth in the March 2019 Opinion.
1198599, at *13-14.

Lek Sec. Corp., 2019 WL

Of particular importance to this motion, an

expert may not provide testimony that “will usurp either the
role of the trial judge in instructing the jury as to the
applicable law or the role of the jury in applying that law to
the facts before it.”
289 (2d Cir. 1999).

United States v. Lumpkin, 192 F.3d 280,
“It is not for witnesses to instruct the

jury as to the applicable legal principles of law, but for the
judge.”

Marx & Co. v. Diners’ Club Inc., 550 F.2d 505, 509 (2d

Cir. 1977).
A. Filler’s Expertise
Filler has extensive experience as an attorney and law
professor.

He is well qualified to serve as counsel for the

defendants; he is not qualified to serve as a rebuttal expert to
Hendershott and Pearson.

Filler has no experience as a

professional trader, almost no formal education in statistics,
and limited experience in the equities and options markets.
These gaps make it impossible for Filler to offer a reliable
critique of the sophisticated and intricate analyses performed
by Hendershott and Pearson.

Lek Sec. Corp., 2019 WL 1198599, at

*5-13, 21-31.
Filler barely engages with the Hendershott or the Pearson
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reports.

The few comments he makes about the reports

misrepresent their analyses and misinterpret their conclusions.
He frankly admitted his lack of relevant expertise in his
deposition.

Accordingly, Filler is unqualified to serve as a

rebuttal witness in response to these two SEC experts.
B.

Filler’s Opinions Are Inadmissible

Filler’s expert report must be excluded in its entirety
because his opinions are inadmissible.

Filler’s report

functions as a legal brief, and in some portions as an argument
in summation.

It is not admissible testimony from an expert.

To the extent Filler’s report touches upon the Hendershott or
Pearson methodologies, Filler’s opinions are speculative and
conclusory; they would mislead and confuse the jury if admitted.
In his proffered testimony, Filler attempts to instruct the
jury on the governing law in this case and its application to
the facts as Filler describes them.

The cornerstone of Filler’s

rebuttal to Hendershott is that “layering” is not prohibited by
“any applicable law, rule or regulation.”

Filler then proceeds

to define the legal standard that governs the liability of the
Avalon Defendants.

Citing to federal caselaw, Filler opines

that open-market orders cannot qualify as “inaccurate
information . . . injected into the marketplace,” that the jury
may not “infer unlawful intent from [open-market orders],” and
that order cancellations are not evidence of a “manipulative
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act.”

Filler’s testimony would usurp the role of the court and

invade the jury’s prerogative to apply the law to the facts as
the jury determines them.

See Lumpkin, 192 F.3d at 289. 4

Filler’s legal analysis permeates his report, including his
criticisms of Pearson’s report and his “background” section on
the financial markets.

In rebuttal to Pearson, Filler contends

that Avalon’s equities trades could not “artificially” move the
market because they were “actual trades executed with willing
unaffiliated market participants.”

Without an allegation such

as “collusion” or “insider information,” Filler concludes that
Pearson and the SEC cannot prove that Avalon’s trades were
fraudulent.

Likewise, Filler opines in his background section

that Avalon’s trading activity is “indistinguishable” from
legitimate market making, that Avalon’s Loud-side orders “cannot
be deemed to be illegal orders,” and that “[i]t is unreasonable”
for Avalon to understand and comply with the nuances of
regulators’ layering concerns.

As the SEC notes, at least one other court has excluded
Filler’s proffered testimony for providing legal conclusions.
See Paulina Guirola De David v. Alaron Latin Am., No. 10cv3502
(N.D. Ill. Mar. 21, 2016) (order granting in part defendant’s
motion in limine). The Honorable Daniel Martin held that “the
Court’s own review of [Filler’s] expert report shows that it
contains numerous conclusions about whether Defendants committed
fraud, and whether one Defendant is liable for the acts of
another. Clearly, Filler may not make such statements at trial.
They constitute prohibited legal conclusions that could
determine the outcome of the case.” Id. at 12.
4

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Filler’s opinions in the background section also contain
veiled arguments about due process and supervisory liability.
For example, Filler suggests that the SEC’s enforcement action
against Avalon is improper because the government has not
provided “[p]roper notice and explanation.”

Many of Filler’s

legal conclusions contradict previous rulings in this case
holding that both manipulative schemes alleged by the SEC would
violate the federal securities laws if proven at trial.

See SEC

v. Lek Sec. Corp., 276 F. Supp. 3d 49, 60 (S.D.N.Y. Aug. 25,
2017).

Filler also implies that the Avalon Defendants should

not be held liable because it was “Individual Traders, acting as
independent contractors,” who “placed each of the orders at
issue in this case.”

This is not admissible expert testimony.

It contains opinions regarding what the law requires and is
devoid of any appropriate response to the analyses performed by
Hendershott and Pearson.

If there is any appropriate comment on

the evidence, that is for defense counsel to add to his
summation argument.
To the extent Filler mentions the Hendershott and Pearson
reports, his opinions are conclusory and fail to meaningfully
engage with those experts’ analyses.

For example, while Filler

claims that Hendershott failed to consider “price impact,”
Filler does not address -- and appears not to have considered -Hendershott’s NBBO Movement Analysis, which demonstrated a
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favorable shift in the NBBO midpoint more often than would be
expected by chance.

In rebuttal to Pearson’s report, Filler

concludes that Avalon’s traders “tested the available liquidity
in the equities markets” and “made the determination” to pursue
an arbitrage opportunity. 5

Filler has identified no admissible

evidence and has conducted no analysis of Avalon’s trading data
to support this conclusion.

Pearson admitted in his deposition

testimony that he “did not examine any of [Pearson’s] analysis”
because he did not understand it.
Conclusion
The SEC’s October 5, 2018 motion to exclude Filler’s
testimony is granted.
Dated:

New York, New York
March 21, 2019
____________________________
DENISE COTE
United States District Judge

Filler may not conduct factfinding for the jury by opining on
what the Avalon traders “tested” or “determined” with respect to
their cross-market trades. That is for the jury, not Filler.
See Lumpkin, 192 F.3d at 289.
5

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