Securities and Exchange Commission v. Lek Securities Corporation et al

Filing 389

OPINION AND ORDER....The Lek Defendants November 19, 2018 motion in limine is denied. The parties are instructed to exchange any summary exhibits or charts on a schedule to which they agree, but on a date not less than two weeks before the deadline for filing the Joint Pretrial Order. (Signed by Judge Denise L. Cote on 7/11/2019) (gr)

Case 1:17-cv-01789-DLC Document 389 Filed 07/11/19 Page 1 of 11

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)
OPINION AND ORDER

APPEARANCES
For plaintiff U.S. 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 389 Filed 07/11/19 Page 2 of 11

DENISE COTE, District Judge:
On November 19, 2018, the Lek Defendants 1 moved in limine to
preclude certain testimony from Erin Smith (“Smith”) and Patrick
McCluskey (“McCluskey”), who the plaintiff U.S. Securities and
Exchange Commission (“SEC”) expects to call at trial to provide
summaries of voluminous evidence and to introduce charts
reflecting those summaries.

The Lek Defendants contend that

some of their testimony, proffered in the witnesses’
declarations submitted in opposition to the Lek Defendants’
motion for summary judgment, constitutes expert testimony and
must be barred due to the SEC’s failure to timely identify Smith
and McCluskey as experts.

As reflected in their declarations,

the witnesses are not functioning as experts but as summary
witnesses.

The motion to preclude is therefore denied.

The factual and procedural history of this case has been
described in several recent Opinions, including a March 26, 2019
Opinion denying the Lek Defendants’ motion for summary judgment,
see SEC v. Lek Sec. Corp., No. 17cv1789(DCL), 2019 WL 1375656
(S.D.N.Y. Mar. 26, 2019), and a March 14, 2019 Opinion denying
the Lek Defendants’ motion to exclude two of the SEC’s expert
witnesses, Terrence Hendershott (“Hendershott”) and Neil

The Lek Defendants are Lek Securities Corporation (“Lek
Securities”) and its principal Samuel Lek.
1

2

Case 1:17-cv-01789-DLC Document 389 Filed 07/11/19 Page 3 of 11

Pearson.
2019).

See SEC v. Lek Sec. Corp., 370 F. Supp. 384 (S.D.N.Y.
Familiarity with those Opinions is assumed; they are

incorporated by reference.
In brief, the SEC sued the Lek Defendants, Avalon FA Ltd.
(“Avalon”), and other Avalon Defendants 2 on March 10, 2017.
Securities is a broker-dealer based in New York.

Lek

Avalon is a

foreign day-trading firm whose traders are largely based in
Eastern Europe and Asia.

Because Avalon is not a registered

broker-dealer, it relies on registered firms like Lek Securities
to conduct trading in U.S. securities markets.

The SEC

principally alleges that traders at Avalon engaged in two
schemes to manipulate the securities markets and that they did
so through trading at Lek Securities.
Background
Smith’s testimony offered in opposition to a summary
judgment motion is set forth in an October 4, 2018 declaration.
McCluskey’s testimony in opposition to the summary judgment
motion is set forth in an October 3, 2018 declaration. 3

The

summary judgment motion to which these declarations relate was

The Avalon defendants are Avalon, Nathan Fayyer, and Sergey
Pustelnik.
2

McCluskey also filed declarations dated March 7, 2017, and July
5, 2017. The Lek Defendants do not appear to take issue with
the content of those declarations.
3

3

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denied on March 26, 2019.

See Lek Sec. Corp., 2019 WL 1375656.

On November 19, 2018, the Lek Defendants moved to limit
testimony from Smith and McCluskey as untimely disclosed expert
testimony.

The motion became fully submitted on May 10, 2019.

For purposes of this motion, a summary of the information
provided in the declarations is set out below.

Then, after a

description of the legal standard for receipt of summary
evidence, the Lek Defendants’ objections to portions of the
declarations as constituting expert testimony are addressed.
Smith
Smith reviewed over a million daily RTR messages (“RTRs”)
which, according to Lek Securities’ president, reflect the
company’s layering and depth controls for co-defendant Avalon’s
trading and the trading by Avalon’s sub-accounts.

Based on that

review, Smith identified the periods of time when there were
either no layering or depth controls implemented for Avalon subaccounts or when the controls that were implemented were less
restrictive than what Lek Securities represented them to be. 4

In brief, layering and depth controls are applications designed
to block certain orders (or sequences of orders) that may
reflect manipulative trading. A layering control with a “delta”
of 10, for example, would block a trader from entering more than
10 orders on one side of the market while at the same time
entering an order on the opposite side of the market. A depth
control with a setting of 10 would restrict a trader from
entering more than 10 orders on one side of the market
4

4

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Smith also compared these time periods to data compiled by SEC
expert Hendershott in order to calculate the number of Layering
Loops that occurred at times when the depth controls were set at
different levels. 5
Smith also reviewed and summarized monthly reports produced
by the Lek Defendants reflecting the commissions it received
from Avalon’s trading.

Smith calculated the portion of Lek

Securities’ commissions that are attributable to Avalon’s
Layering Loops and Cross-Market Loops. 6

She concluded that it

received almost $600,000 in commissions from Avalon’s trading in
the Layering and Cross-Market Loops.

To make these

calculations, Smith relied on a procedure described by the Lek
Defendants.

Using Lek Securities’ annual Profit and Loss

statements, Smith calculated that from March 10, 2012 through
October 13, 2016, the Avalon commissions represented 12.3% of
its total commission income.
McCluskey
McCluskey reviewed voluminous e-mails and other documents
to determine which Avalon trade groups were associated with

regardless of whether the trader had placed any orders on the
opposite side of the market.
For a description of Layering Loops, see Lek Sec. Corp., 370 F.
Supp. 3d at 390-93.
5

6

For a description of Cross-Market Loops, see id. at 397-400.
5

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certain trade group leaders who exchanged e-mail communications
with Nathan Fayyer, the sole disclosed owner of Avalon.
McCluskey filtered Hendershott’s Layering Loops to determine how
many Layering Loops were associated with those trade groups.

He

calculated that sub-accounts associated with five different
Avalon trade group leaders, whom he identified by name, engaged
in 242,143 Layering Loops, which is over 35% of Avalon’s
Layering Loops.
Finally, McCluskey calculated how many orders Avalon placed
in the Layering Loops, including Loud-side and Quiet-side
orders, and the revenues associated with those orders.

He also

calculated the revenues associated with the twenty Avalon trade
groups with the highest percentage of Layering Loops, as well as
those figures for smaller sets of the trade groups.
Discussion
The admission of summary evidence -- whether by chart or
through a summary witness -- is governed by Rule 1006, Fed. R.
Evid.

Rule 1006 provides that

[t]he proponent may use a summary, chart, or
calculation to prove the content of voluminous
writings, recordings, or photographs that cannot be
conveniently examined in court. The proponent must
make the originals or duplicates available for
examination or copying, or both, by other parties at a
reasonable time and place. And the court may order the
proponent to produce them in court.

6

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To be admissible under Rule 1006, “[a] summary must . . . be
based on foundation testimony connecting it with the underlying
evidence summarized.”

Fagiola v. Nat’l Gypsum Co. AC & S.,

Inc., 906 F.2d 53, 57 (2d Cir. 1990).

Before admitting such

testimony, “the court must ascertain with certainty that [the
summaries] are based upon and fairly represent competent
evidence already before the jury.”

United States v. Conlin, 551

F.2d 534, 538 (2d Cir. 1977) (citation omitted).
The Second Circuit has “repeatedly approved” the use of
summary testimony to facilitate jury deliberations, see, e.g.,
id., including “to avoid forcing the jury to examine boxes of
documents in order to make simple calculations.”
F.2d at 57.

Fagiola, 906

A summary witness may not, however, “usurp[] the

function of the jury to decide what to infer from the
[evidence].”

United States v. Grinage, 390 F.3d 746, 750 (2d

Cir. 2004) (excluding summary testimony interpreting the meaning
and significance of telephone conversations).
The testimony proffered by Smith and McCluskey in their
declarations, including the tables and charts that they prepared
to present that testimony, is classic summary evidence.

They

reviewed voluminous materials to calculate trading patterns and
trading revenues and similar data points.

Their work will make

portions of critical evidence more accessible to the jury.

7

They

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are not testifying as experts and the SEC had no duty to
disclose them as expert witnesses.
The Lek Defendants make principally four arguments in
support of their motion to exclude certain testimony from these
two witnesses as untimely expert testimony.

The Lek Defendants

first argue that Smith relied on assumptions and inferences
outside the evidentiary record to prepare portions of her
summary concerning the RTRs.

They admit that a summary of the

contents of RTR files is properly presented through a summary
witness such as Smith, but complain that on a few occasions she
explained the assumptions she had used in making her
calculations.

For instance, when the last change to a control

setting was made in October 2013, Smith assumed for purpose of
her analysis that that setting remained constant through
September 29, 2016.
Neither this nor the other assumptions of which the Lek
Defendants complain constitute expert testimony.

They are

instead Smith’s explanations of the process she used in
summarizing massive data.

Whether her assumptions were

conservative or not can be tested through cross-examination.
Summary witnesses who pull together massive quantities of data
customarily make assumptions.

So long as they are disclosed and

reasonably drawn from the data being summarized, the use of

8

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assumptions is appropriate and does not convert the summary
evidence into expert testimony.
For instance, Smith’s declaration does not suggest that she
is acting either as a fact witness or an expert witness in
making an assumption that a control setting remained constant
for three years when the records she reviewed did not reflect
that it was altered during that time.

She is not purporting to

know anything either as an expert or a fact witness about the
actual operations of Lek Securities, but is merely describing
what the records she reviewed reflected and the assumptions she
made in setting forth that evidence in a chart.
The Lek Defendants next argue that Smith became an expert
when she manipulated data.

They have not shown either that she

manipulated data or that her testimony regarding the data was
expert testimony.

The Lek Defendants point, for instance, to

Smith’s disclosed decision to omit from her summary charts
information about one Avalon sub-account because the RTRs
indicated that it had a negative control value.

Because the

interpretation of a negative setting was unclear from the
underlying documents, she left data regarding that sub-account
out of a chart reporting Layering Loops.

This was an entirely

appropriate response by a summary witness to confusing or
incomplete data.

9

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The Lek Defendants next complain that Smith was functioning
as an expert when she calculated and then compared the
commissions Lek Securities earned from Avalon to an amount
reported on a line on Lek Securities’ Profit and Loss statements
labeled “Commissions - Billings.”

The Lek Defendants assert

that the evidence at trial will demonstrate that the Avalon
commissions are not a part of that P&L line, and that that line
does not reflect the total commissions it earned.

This

comparison, which does not appear to be an unreasonable one at
first blush, may prove to be unreliable.

But, the comparison

does not convert testimony about the comparison into expert
testimony.

The comparison involved little more than making an

adjustment to account for different time periods and dividing
two numbers.
Finally, with respect to McCluskey’s testimony, the Lek
Defendants assert that McCluskey assumed the role of an expert
when he identified certain individuals associated with Avalon
trade groups as “leaders” and referred to them by name, as in
“Avalon Trade Group Leader Andy” and “Avalon Trade Group Leader
Reggy.” 7

The identification of these individuals as trade group

As the Lek Defendants admit in their reply brief, the names
that McCluskey ascribes to Avalon traders -- “Andy,” “Reggy,”
“Edison,” “Tim,” and “Michael Chen” – come from the names in email addresses or exchanges.
7

10

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“leaders,” and the use of these individuals’ names as a
shorthand reference to trade groups with which they were
affiliated, comes directly from the evidence being summarized. 8
It does not reflect use of expertise to opine upon the evidence.
To the extent that the Lek Defendants are concerned that such
references imply extra-record knowledge or the application of
any particular expertise, this concern can be addressed through
cross-examination.
Conclusion
The Lek Defendants’ November 19, 2018 motion in limine is
denied.

The parties are instructed to exchange any summary

exhibits or charts on a schedule to which they agree, but on a
date not less than two weeks before the deadline for filing the
Joint Pretrial Order.

Dated:

New York, New York
July 11, 2019
____________________________
DENISE COTE
United States District Judge

The individuals identified were engaged in e-mail negotiations
with Fayyer on behalf of a group of Avalon traders. Fayyer
testified that Avalon generally entered into agreements with
trade group leaders who oversaw a number of traders.
8

11