Securities and Exchange Commission v. Lek Securities Corporation et al
Filing
375
OPINION AND ORDER.....The Lek Defendants April 22, 2019 motion for reconsideration is denied. (Signed by Judge Denise L. Cote on 5/8/2019) (gr)
Case 1:17-cv-01789-DLC Document 375 Filed 05/08/19 Page 1 of 9
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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:
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17cv1789 (DLC)
OPINION AND ORDER
APPEARANCES
For plaintiff Securities and Exchange Commission
David J. Gottesman
Olivia S. Choe
Sarah S. Nilson
U.S. Securities and Exchange Commission
100 F Street NE
Washington, DC 20549
For defendants Lek Securities Corporation and Samuel Lek:
Steve M. Dollar
David B. Schwartz
Norton Rose Fulbright US LLP
1301 Avenue of the Americas
New York, NY 10103
Kevin J. Harnisch
Norton Rose Fulbright US LLP
799 9th Street NW, Suite 1000
Washington, DC 20001
Ronald D. Smith
Norton Rose Fulbright US LLP
2200 Ross Avenue, Suite 3600
Dallas, TX 75201
Case 1:17-cv-01789-DLC Document 375 Filed 05/08/19 Page 2 of 9
DENISE COTE, District Judge:
An Opinion of April 8, 2019 granted the SEC’s motion to
exclude the expert testimony of Roger Begelman (“Begelman”).
SEC v. Lek Sec. Corp., 17cv1789(DLC), 2019 WL 1512713 (S.D.N.Y.
Apr. 8, 2019) (“Begelman Opinion”).
Begelman Opinion is assumed.
Familiarity with the
reconsideration of the ruling.
The Lek Defendants 1 have moved for
For the following reasons, that
motion is denied.
The standard for granting a motion for reconsideration is
“strict.”
Analytical Surveys, Inc. v. Tonga Partners, L.P., 684
F.3d 36, 52 (2d Cir. 2012) (citation omitted).
“[R]econsideration will generally be denied unless the moving
party can point to controlling decisions or data that the court
overlooked.”
Id. (citation omitted).
“A motion for
reconsideration should be granted only when the defendant
identifies an intervening change of controlling law, the
availability of new evidence, or the need to correct a clear
error or prevent manifest injustice.”
Kolel Beth Yechiel Mechil
of Tartikov, Inc. v. YLL Irrevocable Tr., 729 F.3d 99, 104 (2d
Cir. 2013) (citation omitted).
It is “not a vehicle for
relitigating old issues, presenting the case under new theories,
The Lek Defendants are Lek Securities Corporation (“Lek
Securities”) and Samuel Lek.
1
2
Case 1:17-cv-01789-DLC Document 375 Filed 05/08/19 Page 3 of 9
securing a rehearing on the merits, or otherwise taking a second
bite at the apple.”
Analytical Surveys, 684 F.3d at
52 (citation omitted).
The decision to grant or deny the motion
for reconsideration is within “the sound discretion of the
district court.”
Aczel v. Labonia, 584 F.3d 52, 61 (2d Cir.
2009) (citation omitted).
The Lek Defendants first seek reconsideration of the ruling
that Begelman was not qualified to give an opinion about the
adequacy of a broker-dealer’s systems and procedures to detect
and prevent manipulative layering, which is also referred to as
spoofing.
Begelman has extensive and impressive experience in
the securities industry.
That experience, however, did not
provide him with a basis to judge the adequacy of Lek
Securities’ compliance program, including as a system to detect
layering or spoofing.
And, indeed, his report does not actually do so, at least
directly.
For instance, he does not describe how a broker-
dealer goes about constructing a surveillance program for the
detection of layering, what the characteristics of a program
that meets industry standards are, or how the Lek Securities’
program stacked up against those standards.
Despite the
representation in this motion for reconsideration that through
his prior work Begelman “became familiar with” methodologies of
3
Case 1:17-cv-01789-DLC Document 375 Filed 05/08/19 Page 4 of 9
reviewing trading for manipulative spoofing, his report did not
describe those methodologies.
Begelman’s deposition is highly revealing.
It showed that
he does not possess experience with or knowledge relevant to the
processes that underpin the general observations he makes in his
report.
Despite repeated efforts to obtain a description from
him, Begelman was unable to describe the methodologies his team
used at Goldman Sachs to detect or surveil for layering or
spoofing.
He couldn’t even explain some of the passages in his
own report and was not familiar with documents on which his
expert report relied. 2
one will suffice.
Of the many examples that could be given,
When asked to identify the criteria that one
would use to determine whether the practices at a broker-dealer
such as Lek Securities are consistent with a compliance
framework to prevent potential manipulative trading, Begelman
responded that he wouldn’t be able to answer that “sitting here
right now.”
In making their argument that he is a qualified expert, the
Lek Defendants do not grapple with how poorly Begelman’s
experience aligns with the tasks that they asked him to perform.
Nor do they describe the Begelman Opinion accurately or
Begelman spent about thirty hours on this engagement before
submitting his nineteen-page report on March 16, 2018. The
report contains 58 footnotes.
2
4
Case 1:17-cv-01789-DLC Document 375 Filed 05/08/19 Page 5 of 9
acknowledge the deficiencies it identified.
For instance, the
Lek Defendants assert that the Begelman Opinion held that
Begelman was not qualified because he did not provide a “datadriven methodology.”
Not so.
If Begelman possessed relevant
experience for the opinions he expressed, that would have been
sufficient to qualify him as an expert to render those opinions.
Begelman Opinion, 2019 WL 1512713, at *4.
In their reply, the Lek Defendants principally rely on one
page of the Begelman deposition as evidence that he had the
necessary experience to opine on how the parameters for
surveillance of spoofing and layering were developed and changed
over time. 3
Begelman’s report does not describe those
parameters, much less explain how they were developed or how
they changed over time.
In the portion of his deposition to
which they cite, Begelman explained that between 1993 and 2008
Goldman Sachs used a daily post hoc report to detect problematic
activity, which he believed must have included exceptions for
some type of spoofing or manipulation.
But he could not
describe what parameters or “exceptions” Goldman Sachs used to
detect spoofing.
In sum, there is no basis, having reviewed his
report and his deposition once again, to find that Begelman is
qualified as an expert to give an opinion about the adequacy of
3
The Lek Defendants rely on page 128.
5
Case 1:17-cv-01789-DLC Document 375 Filed 05/08/19 Page 6 of 9
a broker-dealer’s systems and procedures to detect and prevent
manipulative layering.
The Lek Defendants argue that Begelman is in any event
qualified to offer at least two of the three opinions contained
in his expert report. 4
They describe the first of these two
opinions as the opinion that Lek Securities’ Q6 Layering Control
system “was consistent with a compliance framework to prevent
potential manipulative trading.”
They explain that this
overarching statement includes the opinions that no compliance
system is “fool proof” and compliance functions “undergo a
series of controls and reviews.” 5
Begelman has no expertise to equip him to assess the extent
to which Lek Securities’ Q6 Layering Control system was or was
The Lek Defendants assert that Begelman provided three opinions
in his report. They do not assert, however, that he can give
the third of these opinions unless found to have the relevant
expertise. They describe the third opinion as his statement
that Lek Securities’ controls were consistent with industry
standards for controls to manage the risk of manipulative
trading. As the Begelman Opinion noted, Begelman’s report did
not describe any industry standard for compliance systems aimed
at detecting and controlling for layering or spoofing, and
therefore, provided no basis for assessing the extent to which
the Lek’s own controls met that industry standard. Id. at *5.
4
In his report, Begelman opined that, in his experience, “no
front end control or back end surveillance or review is fool
proof” and “revisions and updates to compliance programs -particularly newly-created programs designed to address newlyidentified potentially manipulative behavior -- are common in
the securities industry as compliance professionals see the new
programs in action.”
5
6
Case 1:17-cv-01789-DLC Document 375 Filed 05/08/19 Page 7 of 9
not consistent with the industry standard for such controls.
As
already noted, his report does not describe that industry
standard and he was unable during his deposition to describe
even the one used by his own firm during the period prior to
2008, which is the only period in which he might have gleaned
experience relevant to his proffered testimony.
Moreover,
despite including citations in his report to Lek Securities
documents describing the parameters of its controls, his
deposition showed that he was unfamiliar with the documents and
could not use them to explain the Q6 Layering Control system.
And, as explained in the Begelman Opinion, his assertion that
“revisions and updates to compliance programs . . . are common”
is tangential to the issues in dispute and would not help the
jury -- at least in the absence of testimony setting forth an
industry standard of what these revisions and updates should be.
Id. at *5.
The same holds true for the commonplace observation
that no compliance system is fool proof.
Finally, the Lek Defendants describe Begelman’s second
opinion, which they contend he may offer even if not qualified
as an expert on compliance systems for the detection of layering
or spoofing, as the opinion that Lek Securities’ controls “were
not in conflict with communications from regulators and
exchanges.”
They assert that such testimony would help the jury
understand whether the Lek Defendants had acted in good faith;
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Case 1:17-cv-01789-DLC Document 375 Filed 05/08/19 Page 8 of 9
they do not assert that those communications provide the legal
standard against which Lek Securities’ actions must be judged.
The motion does not describe the context in which Begelman
rendered this particular opinion or recite the full opinion
rendered by Begelman in his report.
In his report, Begelman spent several pages summarizing
what he considered to be the pertinent communications between
Lek Securities and regulators and exchanges.
In setting out
this summary, Begelman was highly critical of the regulators.
For instance, Begelman asserted that FINRA never provided
specific guidance, never audited Lek Securities’ surveillance
system, never appeared to conclude that Lek Securities had
violated the law, and took too long to act on the Lek
Securities’ Wells’ notices.
Begelman concluded, “Under the
circumstances, with no additional input from FINRA or other
exchanges as to what its settings should be, my experience leads
me to conclude that the settings put in place in Lek’s Q6
Layering Controls were not in conflict with regulator and
exchange communications.”
As explained in the Begelman Opinion, this narrative of Lek
Securities’ communications with regulators is not admissible
expert testimony.
Id. at *4.
Nor, as explained above and in
the Begelman Opinion, does Begelman have the knowledge and
expertise regarding layering controls generally or Lek
8
Case 1:17-cv-01789-DLC Document 375 Filed 05/08/19 Page 9 of 9
Securities’ Q6 Layering Control system specifically to make an
assessment about the latter’s adequacy.
Therefore, even if it
were relevant and appropriate for an expert to assess and
criticize a regulator’s communications with a defendant,
Begelman isn’t equipped to give admissible testimony about the
extent to which Lek Securities’ controls were “not in conflict”
with the regulator or exchange.
Conclusion
The Lek Defendants’ April 22, 2019 motion for
reconsideration is denied.
Dated:
New York, New York
May 8, 2019
________________________________
DENISE COTE
United States District Judge
9
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