Aubrey et al v. Barlin et al
ORDER GRANTING IN PART 589 Motion to exclude Testimony of Edmond Martin; GRANTING IN PART 591 Motion to exclude Untimely Disclosed Expert Testimony; GRANTING 599 Motion to exclude Testimony of John R. Fahy; GRANTING 607 Motion to exclude Testimony of Joyce Weedman. Signed by Judge David A. Ezra. (os)
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF TEXAS
STEVEN B. AUBREY, et al.,
PETER E. BARLIN, et al.,
ORDER (1) GRANTING IN PART DEFENDANT’S MOTION TO EXCLUDE
UNTIMELY DISCLOSED EXPERT TESTIMONY; (2) GRANTING IN PART
DEFENDANT’S MOTION TO EXCLUDE TESTIMONY OF EDMOND
MARTIN; (3) GRANTING DEFENDANT’S MOTION TO EXCLUDE
TESTIMONY OF JOHN R. FAHY; AND (4) GRANTING
PLAINTIFFS’MOTION TO EXCLUDE TESTIMONY OF JOYCE WEEDMAN
On October 13, 2015, the Court heard Defendant Peter E. Barlin’s
(“Barlin”) and Plaintiffs Steven B. Aubrey (“Aubrey”) and Brian E. Vodicka’s
(“Vodicka”) (collectively, “Plaintiffs”) Motions to Exclude Expert Testimony and
conducted evidentiary hearings pursuant to Daubert v. Merrell Dow Pharm., Inc.,
509 U.S. 579 (1993) (the “Daubert hearings”).
After reviewing the motions and the supporting and opposing
memoranda, and considering the testimony proffered at the Daubert hearing, the
Court (1) GRANTS IN PART Barlin’s Motion to Exclude Untimely Disclosed
Expert Testimony (Dkt. # 591), (2) GRANTS IN PART Barlin’s Motion to
Exclude Testimony of Edmond Martin (Dkt. # 589), (3) GRANTS Barlin’s Motion
to Exclude Testimony of John R. Fahy (Dkt. # 599), and (4) GRANTS Plaintiffs’
Motion to Exclude Testimony of Joyce Weedman (Dkt. # 607).
Plaintiffs’ Second Amended Consolidated Complaint (“Complaint,”
Dkt. # 467) alleges that Defendants Barlin, Gregory H. Lahr (“Lahr”), and
Sandra F. Gunn (“Gunn”) (collectively, “Defendants”) fraudulently induced
Plaintiffs to loan money to what Defendants touted as a “commercial land
development project” called Sky Station in Travis County, Texas. (Id. ¶ 13.) Sky
Station was represented to include four developments collectively known as
Wildhorse Ranch, which was to feature 9,200 lots with commercial stores, hotels,
and restaurants. (Id.) Plaintiffs allege that no development ever occurred, and
Defendants pocketed the money. (Id.)
Plaintiffs allege that Defendants committed the fraud using an illegal
land-flipping scheme and an illegal loan-flipping scheme. Defendants utilized
numerous entities, all owned and operated by Defendants, to sell the same land to
themselves via different entities, thereby artificially inflating property values in
order to fraudulently obtain loans. (Id. at 14.) Plaintiffs further allege that
Defendants used North American Title Company (“NAT”), by and through its
agent, Karen Williams (“Williams”), to create false real estate and closing
documents that enabled Defendants to continue to divert funds. (Id.)
Plaintiffs state that in reliance upon Defendants’ false representations
and failure to disclose material facts, Plaintiffs loaned an excess of $1.5 million
purportedly to be used to develop the land. (Id. at ¶ 15.) Plaintiffs also contend
that Defendants never developed the property, never generated any earnings, and
paid disbursements to lenders solely from other loan proceeds in a “Ponzi” scheme.
Plaintiffs’ claims stem from three loans: the “Manor Loan,” the
“Temple Loan,” and the “Long Beach Loan.” Plaintiffs state that the Manor Loan
was part of Defendants’ illegal land- and loan-flipping schemes, while the Temple
and Long Beach Loans were not. However, Plaintiffs state that the latter two loans
involved some of the same participants and similar means and methods of fraud.
(Id. ¶ 22.) The Manor Loan was a commercial syndicated bridge loan
administrated by CFS, a mortgage brokerage allegedly owned, operated, and
controlled by Lahr and Gunn. (Id. ¶ 20.) Plaintiffs participated in the Manor Loan
by loaning $915,000.00 to J&T Development Group, L.P. (“J&T”), an entity
Plaintiffs claim was created in furtherance of Defendants’ fraudulent scheme. (Id.
¶¶ 17, 20–21.) Plaintiffs allege that J&T was a shell entity that received no benefit
from the loan and did not own the majority of the properties which the loans
supposedly benefitted. (Id. ¶ 20.) Plaintiffs further allege that NAT diverted the
loan proceeds to Defendants. (Id. ¶ 21.)
Regarding the Temple Loan, Plaintiffs allege that they invested a total
of $120,000.00 in a loan created, packaged, and offered by Creative Financial at
the direction of Lahr and Gunn and promoted and sold by Lahr and Barlin. (Id.
¶ 23.) The investment was purportedly secured by a second lien against real
property and improvements in Temple, Texas. (Id.) Plaintiffs state that they
suffered at least $75,896.00 in damages as a result of the Temple Loan investment.
Similarly, regarding the Long Beach Loan, Plaintiffs allege that they
invested $140,000.00 in a loan created, packaged, and offered by Capital
Advantage at Lahr’s direction and promoted and sold by Lahr. (Id. ¶ 24.)
Plaintiffs state that this investment was secured by a junior lien against real
property and improvements in Long Beach, California, and that they suffered
damages in excess of $70,000.00 as a result of this investment. (Id.)
After many years of tortured progress, including the consolidation of
several related actions and the addition of multiple new claims and parties, on
May 7, 2014, Judge Sam Sparks entered an Order Granting Defendants’ Partial
Motions to Dismiss. (Dkt. # 536.) Plaintiffs’ remaining claims are as follows:
1) Violations of the Texas Securities Act, Tex. Rev. Civ. Stat. Art. 581-1,
2) Violations of the Texas Securities Act, Tex. Rev. Civ. Stat. Art. 581-1,
et seq. – aiding and abetting;
3) Breach of fiduciary duty against Lahr and Gunn;
4) Aiding and abetting breach of fiduciary duty against Barlin;
5) Common law fraud; and
6) Negligent misrepresentation.
On August 3, 2015, Barlin filed a Motion to Exclude the Testimony of
Edmond Martin. (Dkt. # 589.) On August 10, 2015, Plaintiffs filed a Response
(Dkt. # 594); on August 31, 2014 Barlin filed a Reply (Dkt. # 596); and on
August 31, 2015, Plaintiffs filed a Sur-Reply (Dkt. # 603). On August 4, 2015,
Barlin filed a Motion to Exclude Untimely Disclosed Expert Testimony. (Dkt.
# 591). On August 11, 2015, Plaintiffs filed a Response (Dkt. # 595), and on
August 18, 2015, Barlin filed a Reply (Dkt. # 597). On August 26, 2015, Barlin
filed a Motion to Exclude the Testimony of John R. Fahy. (Dkt. # 599.) On
September 2, 2015, Plaintiffs filed a Response (Dkt. # 606), and on September 9,
2015, Barlin filed a Reply (Dkt. # 609). On September 8, 2015, Plaintiffs filed a
Motion to Exclude the Testimony of Joyce Weedman. (Dkt. # 607.) On
September 21, 2015, Barlin filed a Response (Dkt. # 612), and on September 25,
2015, Plaintiffs filed a Reply (Dkt. # 615). The Court has carefully considered
each of the parties’ submissions along with the arguments presented at the hearing,
and analyzes each Motion below.
Federal Rule of Evidence 702 provides:
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
d. the expert has reliably applied the principles and methods to
the facts of the case.
Fed. R. Evid. 702. This rule lays responsibility on the court to “ensure that any
and all scientific testimony or evidence admitted is not only relevant, but reliable.”
Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579, 589 (1993).
“Before a district court may allow a witness to testify as an expert, it
must be assured that the proffered witness is qualified to testify by virtue of his
‘knowledge, skill, experience, training, or education.’” United States v. Cooks,
589 F.3d 173, 179 (5th Cir. 2009) (quoting Fed. R. Evid. 702). “A district court
should refuse to allow an expert witness to testify if it finds that the witness is not
qualified to testify in a particular field or on a given subject.” Id.
To determine whether testimony is reliable, the court must assess
whether the reasoning or methodology underlying the testimony is scientifically
valid. Moore v. Ashland Chem. Inc., 151 F.3d 269, 276 (5th Cir. 1998) (en banc).
Courts consider five non-exclusive factors in making this determination:
(1) whether the expert’s theory or technique can be or has been tested; (2) whether
the theory or technique has been subjected to peer review and publication; (3) the
known or potential rate of error of the challenged method; (4) the existence and
maintenance of standards controlling the technique’s operation; and (5) whether
the theory or technique is generally accepted in the relevant scientific community.
Daubert, 509 U.S. at 593–94. In evaluating these factors, the court must focus on
the expert’s “principles and methodology, not on the conclusions” generated. Id. at
The party seeking admission of expert testimony must show the
testimony is reliable by a preponderance of the evidence. Moore, 151 F.3d at 276.
“This requires some objective, independent validation of the expert’s
methodology.” Id. “Vigorous 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.” Pipitone v.
Biomatrix, Inc., 288 F.3d 239, 250 (5th Cir. 2002) (quoting Daubert, 509 U.S. at
“In addition to being reliable, expert testimony must ‘help the trier of
fact to understand the evidence or to determine a fact in issue.’” Roman v.
Western Mfg., Inc., 691 F.3d 686, 694 (5th Cir. 2012) (citing Fed. R. Evid.
702(a)). Under Rule 702, this means that the proffered expert testimony must be
relevant. Id. “Expert testimony which does not relate to any issue in the case is
not relevant, and ergo, non-helpful.” Id. (quoting Daubert, 509 U.S. at 591
(internal quotation marks and citations omitted)).
Barlin’s Motion to Exclude Untimely Disclosed Expert Testimony
Barlin first moves to exclude any expert testimony not timely
disclosed under the scheduling order entered on July 8, 2011. (Dkt. # 591.) The
July 8, 2011 scheduling order required Plaintiffs to designate their expert witnesses
and provide expert reports by April 17, 2012. (Dkt. # 167.) On that date, Plaintiffs
designated John R. Fahy (“Fahy”) and J. Kenneth Huff, Jr. (“Huff”) as testifying
experts, among others. (Dkt. # 591, Ex. B.) At some point thereafter, Barlin states
that Plaintiffs served amended disclosures in which they designated additional
attorneys’ fees experts 1 as well as an expanded report from Huff. (Id, Ex. E.) On
Barlin attached a copy of Huff’s expanded report to his Motion (Dkt. # 591,
Ex. E), but does not provide the Court with a copy of Plaintiffs’ amended
disclosures designating additional attorneys’ fees experts. Instead, Barlin lists the
following additional attorneys’ fees experts in the body of his Motion: Cox Smith,
Mark Perlmutter, Henry Novak, Clifford Gorman, Donald Grissom, Adam Pugh,
September 11, 2014, Plaintiffs submitted their First Supplement to their First
Amended Rule 26(a)(2)(B) Disclosures, in which they designated Robert Philo and
Paul Hornsby as additional experts. (Id., Ex. F.) Additionally, Plaintiffs also
produced two additional reports from Huff. (Id., Exs. I, J.) Finally, on January 20,
2015, Plaintiffs produced another report from Fahy. (Id., Ex. K.)
History of Discovery Orders
Barlin argues that by the time the expert designation deadline passed
on April 17, 2012, the parties had already been engaged in litigation in state and
federal court for nearly four years. (Dkt. # 591 at 4.) Barlin further states that all
of the operative facts and transactions at issue occurred before the end of 2007, and
that Plaintiffs had more than an adequate opportunity to investigate their claims
and designate their expert witnesses before the 2012 deadline. (Id.) Specifically,
therefore, Barlin moves to exclude all testimony of Robert Philo, Paul Hornsby,
and the additional attorneys’ fees experts. (Id.) Barlin also moves to exclude the
additional reports from Huff and Fahy which were disclosed after the April 17,
2012 deadline. (Id. at 5.)
Plaintiffs respond that the July 8, 2011 scheduling order is no longer
in effect and a new scheduling order was never issued. (Dkt. # 597 at 1.) They
and Susman Godfrey. (Id. at 4.) However, Plaintiffs state that their lead counsel,
Brian Weil Zimmerman (“Zimmerman”), has been designated as their attorneys’
fee expert. (Dkt. # 595 at 10.)
further claim that neither party was under any illusion that the July 8, 2011
scheduling order remained in effect after November 2012, during which time
Judge Sparks consolidated several cases into this action. (Id. at 2.)
On November 16, 2012, Judge Sparks held a status conference at
which the parties represented that they were ready to proceed to trial and discussed
scheduling deadlines going forward. (Dkt. # 597, Ex. A.) In response to a
question regarding additional discovery, Judge Sparks stated, “I don’t expect you
to go back over the roads that you’ve already driven on; but, on the other hand,
I’ve never seen the logic of freezing a case for two years and not allowing the
lawyers to work. So if there is a need for supplemental deposition and there is a
good reason for it, don’t come whining to me. Produce the witness. If there’s not
a reason for it—this case has a black mark already on it, meaning it’s not one of
my favorite cases.” (Id. at 12:24–13:6.)
On November 21, 2013, after being inundated with additional motions
and miscellaneous filings, Magistrate Judge Austin held a status conference to
discuss the various motions pending before the court. (Dkt. # 597, Ex. D.) Judge
Austin noted that at the previous hearing before Judge Sparks, the majority of
parties indicated that they were ready to proceed to trial, and that the final party
(Plaintiff Charles Tutor, who has since been dismissed from this action), indicated
that he would likewise be ready if discovery was consolidated and he could be
permitted to obtain a few additional documents and requests for production. (Id. at
In sum, Judge Austin concluded, “it appeared that there was minimal
additional discovery that was ever contemplated between November the 16th of
2012 and whatever trial date was anticipated then.” (Id. at 22:3–6.) Because Judge
Sparks appeared to contemplate only that one additional deposition would be taken
after the November 16, 2012 hearing, Judge Austin opined that any additional
discovery should be done by motion. (Id. at 22:12–13.) Regarding designation of
experts specifically, Judge Austin stated: “So if there are any experts that need
designating . . . . I think you need to file motions on that.” (Id. at 28:1–4.)
Following the hearing, on December 6, 2013, Judge Austin issued a written order
denying Plaintiffs’ motions to compel additional discovery, stating that the
“substantial” additional discovery sought by Plaintiffs was “inconsistent with the
representations made to [Judge Sparks] in November 2012.” Judge Austin further
noted that “Plaintiffs have made no attempt to seek leave to pursue the discovery,
nor have they shown good cause for being permitted to conduct the discovery at
this late date.” (Dkt. # 465.)
The Court finds that Judge Austin’s comments at the November 21,
2013 hearing constitute an oral order that the parties should file a motion before
attempting to designate additional experts. Plaintiffs’ designation of additional
experts and additional reports from their existing experts after November 21, 2013
constitutes a clear violation of Judge Austin’s order. Therefore, the Court must
evaluate whether exclusion of those experts and additional testimony is warranted.
When a party violates a discovery order, district courts consider four
factors in determining whether excluding expert designations is warranted: “(1) the
explanation, if any, for the party’s failure to comply with the discovery order;
(2) the prejudice to the opposing party of allowing the witnesses to testify; (3) the
possibility of curing such prejudice by granting a continuance; and (4) the
importance of the witnesses’ testimony.” Barrett v. Atl. Richfield Co., 95 F.3d
375, 380 (5th Cir. 1996); Sierra Club, Lone Star Chapter v. Cedar Point Oil Co.
Inc., 73 F.3d 546, 569 (5th Cir. 1996). The burden is on the party that violated the
order to show that the failure to comply with the discovery rule was harmless.
Plaintiffs’ Explanation for Failing to Comply with Discovery Order
Plaintiffs’ only explanation for their failure to comply with the
discovery order is that discovery was ongoing with the permission of Judge Sparks,
and that they designated their additional experts as soon as they knew they would
be needed based on the new information obtained in later discovery. (Dkt. # 595 at
12.) As explained above, Judge Sparks clearly did not contemplate or permit
extensive discovery beyond the November 2012 hearing, when Plaintiffs
represented that they were ready to proceed to trial, and Plaintiffs offer no
explanation as to why the discovery leading to their additional expert designations
was not completed in a timely fashion.
The Fifth Circuit has stated that it takes a party’s lack of explanation
for failing to comply with a discovery order seriously, and has held that exclusion
of expert witnesses is “particularly appropriate” where the party has “failed to
provide an adequate explanation for their failure to identify their expert within the
designated timetable.” Betzel v. State Farm Lloyds, 480 F.3d 704, 707 (5th Cir.
2007) (quoting 1488, Inc. v. Philsec Inv. Corp., 939 F.2d 1281, 1289 (5th Cir.
1991)). Thus, this factor weighs in favor of exclusion.
Prejudice to Defendants of Allowing Witnesses to Testify
Plaintiffs assert that allowing their additional attorneys’ fee witness to
testify will not prejudice Barlin because Barlin was aware that an attorney would
provide fee testimony, and Plaintiffs designated Zimmerman as their fee expert
over a year ago. (Dkt. # 595 at 10.) Regarding the supplemental reports from Huff
and Fahy, Plaintiffs argue that the supplemental reports merely expand on their
existing opinions based on the additional information gained through additional
discovery. (Id.) Finally, Plaintiffs state that Hornsby and Philo were retained to
provide additional expert opinions based on new information generated in the
additional discovery. Plaintiffs further argue that Barlin has been aware of these
designations for approximately one year, and Barlin has not taken any action to
depose these experts. (Id. at 10–11.) In sum, Plaintiffs’ position is that because
Barlin has been on notice of these experts and their opinions for a significant
amount of time, no prejudice will result from admitting the proposed testimony.
Barlin responds that allowing Plaintiffs’ untimely expert testimony
will significantly add to Defendants’ financial burden because they would incur
additional expenses in analyzing the new reports, re-depose Huff and Fahy, and
depose Philo and Hornsby. (Dkt. # 597 at 4.) Barlin also states that he may be
forced to designate additional experts of his own in response to the late-disclosed
testimony from Plaintiffs’ experts. (Id.) The Fifth Circuit and other district courts
have often considered additional expense as a factor weighing in favor of finding
prejudice in this context. See, e.g., Betzel, 480 F.3d at 708; Geiserman, 893 F.2d
at 791; Barrett, 95 F.3d at 381; Qualls v. State Farm Lloyds, 226 F.R.D. 551, 554
(N.D. Tex. Mar. 30, 2005).
This case is admittedly different from the typical case in which a party
discloses new experts shortly before trial, leaving their opponent scrambling to
take new depositions and possibly change their trial strategy. However, as the
above overview of this case’s history shows, Plaintiffs should have known that
such extensive additional discovery was not permitted in the first instance. While
Barlin perhaps should have filed the instant motion sooner, this does not change
the fact that Judge Sparks and Judge Austin both made it clear to the parties that
discovery should have been very near completed three years ago. Plaintiffs were
required to file a motion before designating additional experts, and they failed to
do so. The Court finds that requiring Defendants to incur additional expenses in
responding to new experts and testimony that Plaintiffs disclosed in violation of
Judge Austin’s order would result in prejudice to the defendants because they
reasonably believed that they would not be required to participate in further
discovery at that point. 2 Thus, this factor also weighs in favor of exclusion.
However, the above discussion does not apply equally to Plaintiffs’
designation of Zimmerman as an attorneys’ fee expert. “[P]roving attorney fees
via the expert testimony of counsel is expected.” Mungia v. Judson Indep. Sch.
Dist., No. SA-09-CV-395-XR, 2010 WL 707377, at *1 (W.D. Tex. Feb. 24, 2010).
Because attorneys’ fees are determined at the close of a case, late designation does
not result in prejudice to the opposing party. Id.; Straus v. DVC Worldwide, Inc.,
484 F. Supp. 2d 620, 633 (S.D. Tex. 2007). Although Plaintiffs offer no
explanation as to why they chose to disclose Zimmerman after the deadline and
It is important to note that Barlin and the other Defendants did not produce the
discovery material that resulted in Plaintiffs’ additional designations. Plaintiffs
state in their Response that the additional reports from Huff and Fahy and the
designations of Hornsby and Philo were the result of documents obtained from
third party discovery. (Dkt. # 595 at 7.)
without filing a motion as ordered by Judge Austin, the Court finds that
Zimmerman’s late designation does not prejudice Barlin.
Possibility of Curing by Granting a Continuance
Plaintiffs state that no continuance is necessary as trial is not
scheduled for another five months, and Barlin has had more than ample time to
depose the late-disclosed experts. (Dkt. # 595 at 12.) The Court agrees that if it
were inclined to deny Barlin’s motion, no continuance would be necessary.
Importance of Witnesses’ Testimony
Plaintiffs state that Zimmerman’s testimony on attorneys’ fees is
necessary because their prior attorney has little to no interest in testifying and
cannot testify about fees incurred after his withdrawal from the case. (Dkt. # 595
at 7.) Where, as here, a plaintiff has asserted a claim for attorneys’ fees in the
complaint, expert testimony is obviously crucial to establishing that claim. See
Mungia, 2010 WL 707377, at *1. The Court finds that this factor weighs against
excluding Zimmerman’s testimony.
Regarding the other late-disclosed witnesses, Plaintiffs contend that
their testimony is necessary to help explain to the jury the details of the Ponzi
scheme(s) allegedly carried out by Barlin and the other defendants. (Dkt. # 595 at
7.) Specifically, Plaintiffs state that Philo will explain the title fraud allegedly
perpetuated by Defendants and describe the illegal disbursements made to
Defendants, and that Hornsby will explain that the real estate at the center of the
scheme to defraud Plaintiffs was not valued as Defendants claimed. (Id. at 7–8.)
Plaintiffs make no argument regarding the expanded reports from Huff and Fahy.
The Fifth Circuit has held that “[t]he importance of such proposed
testimony cannot singularly override the enforcement of local rules and scheduling
orders.” Barrett, 95 F.3d at 381 (quoting Geiserman, 893 F.2d at 792)). As
explained above, Plaintiffs’ lack of explanation for the untimely designation and
the prejudice to Barlin and the other defendants weighs in favor of excluding the
untimely-disclosed experts. The Court finds that although Philo and Hornsby’s
testimony may bolster Plaintiffs’ case at trial, Plaintiffs have engaged other
securities and fraud experts who will testify, and Plaintiffs should not be permitted
to take advantage of the extensive additional third party discovery which they did
not have permission from the Court to conduct.
For the reasons stated above, the Court GRANTS IN PART Barlin’s
Motion to Exclude Untimely Disclosed Expert Testimony (Dkt. # 591). The Court
will not exclude Zimmerman’s testimony on attorneys’ fees, but grants Barlin’s
Motion in all other respects.
Barlin’s Motion to Exclude Testimony of Edmond Martin
Barlin next moves to exclude the testimony of Edmond Martin
(“Martin”). (Dkt. # 589.) Martin’s proposed testimony concerns the Temple Loan
and the Manor Loan. Martin opines that the loans were part of a Ponzi scheme and
states that he observed other “indicia of fraud” in the transactions at issue.
(“Martin Report,” Dkt. # 589 at 10–21.) Barlin moves to exclude Martin’s
testimony on the grounds that (1) Martin is not qualified to give the opinions
expressed in his report, (2) his testimony will not aid the jury, and (3) his opinions
are not reliable. (Dkt. # 589 at 1.) The Court discusses each argument in turn.
A witness may be qualified as an expert if he possesses specialized
knowledge, skill, experience, training, or education. Fed. R. Evid. 702. The
inquiry is whether the witness’s qualifications allow him to form a reliable opinion
on a relevant issue. See Huss v. Gayden, 571 F.3d 442, 455 (5th Cir. 2009). “A
district court should refuse to allow an expert witness to testify if it finds that the
witness is not qualified to testify in a particular field or on a given subject.”
Wilson v. Woods, 163 F.3d 935, 937 (5th Cir. 1999). However, “Rule 702 does
not mandate that an expert be highly qualified in order to testify about a given
issue. Differences in expertise bear chiefly on the weight to be assigned to the
testimony by the trier of fact, not its admissibility.” Huss, 571 F.3d at 452.
Martin is a certified fraud examiner and a Texas certified investigator
with over forty years of training and experience in forensic accounting,
investigations into money laundering and fraudulent financial activities, and the
application of commonly accepted fraud examiner principles to the analysis of
financial records and related documents. (Martin Report at 1; Dkt. # 589, Ex. A.)
He was a Special Agent with the Internal Revenue Service in the Intelligence and
Criminal Investigations Divisions for 25 years. He also acted as a supervising
examiner for the State of Texas Securities Board and worked as an accountant and
private investigator. (Martin Report at 1; Dkt. # 589, Ex. A.) Currently, Martin is
the owner and principal of Sage Investigations, LLC which performs private
investigative and forensic accounting services. (Martin Report at 1; Dkt. # 589,
Barlin first argues that Martin’s background and experience do not
qualify him to opine that the loans in question were part of a Ponzi scheme as
distinguished from imprudent investments where the bargained-for risk
materialized. (Dkt. # 589 at 3.) The Court finds Barlin’s argument without merit.
The entirety of Martin’s work experience deals with financial fraud. In an
unpublished opinion, the Fifth Circuit expressly found that an expert with
accounting experience is qualified to testify as to the existence of a Ponzi scheme. 3
In re Rodriguez, 95 F.3d 54, 1996 WL 460144, at *1–2 (5th Cir. Aug. 2, 1996). In
fact, Martin has served as a court-appointed expert in this district in a criminal
matter involving securities fraud, fraudulent loans, and an alleged Ponzi-like
While the Court does not rely on unpublished opinions as the law of this Circuit,
the Court does in this case find the reasoning in this opinion persuasive.
scheme. See Barton v. United States, Nos. A-13-CA-910-SS, A-11-CR-083-SS,
2014 WL 131194, at *1 n.4 (W.D. Tex. Jan. 10, 2014). The Court finds that
Martin is qualified to offer his opinion that the loans in question were part of a
Barlin also argues that Martin lacks qualifications to opine that
Defendants’ alleged acts and omissions were material and would have affected the
decisions of reasonable investors. (Dkt. # 589 at 3.) Martin does not have
substantial experience in advising investors or recommending particular
investments to the average person. For this reason, the Court finds that he is not
qualified to offer an opinion as to what facts would influence a reasonable
investor’s decision whether or not to make a certain investment. See MTV Capital
Ltd. P’ship v. Quvis, Inc., No. CIV-07-0981-HE, 2008 WL 5516517, at *2 (W.D.
Okla. Nov. 12, 2008) (finding that a securities regulation lawyer without
experience advising investors lacked qualifications to testify as to what a
reasonable prospective investor would consider important in its decisionmaking);
Koch v. Koch Indus., Inc., 2 F. Supp. 2d 1385, 1398 (D. Kan. 1998) (finding that
an accountant was not qualified to testify as to what might be material to a prudent
An expert’s opinion is relevant if it would “be helpful to the jury in
understanding the evidence or determining a fact in issue.” Daubert, 509 U.S. at
591. Thus, an expert may “suggest an appropriate inference to be drawn from the
facts in evidence if the expert’s specialized knowledge is helpful in understanding
the facts.” United States v. Willey, 57 F.3d 1374, 1389 (5th Cir. 1995). Barlin
argues that Martin’s opinions regarding the existence of a Ponzi scheme are
irrelevant because the jury will never be asked to decide whether a Ponzi scheme
existed. (Dkt. # 589 at 5.)
Count 9 of the Second Amended Complaint alleges a cause of action
for violations of the Texas Securities Act (“TSA”) against all three Defendants.
(Dkt. # 467 ¶¶ 155–58.) Under the TSA, “[a] person who offers or sells a
security . . . by means of an untrue statement of a material fact or an omission to
state a material fact necessary in order to make the statements made, in the light of
the circumstances under which they are made, not misleading, is liable to the
person buying the security from him.” Tex. Rev. Civ. Stat. art. 581-33, subd. A(2).
Evidence that Defendants were operating an illegal Ponzi scheme could support a
finding of liability under the TSA. See, e.g., Sterling Tr. Co. v. Adderley, 168
S.W.3d 835, 845 (Tex. 2005).
However, Barlin argues that Martin’s opinions regarding the alleged
Ponzi scheme are irrelevant and unhelpful to the jury because Martin relied on an
incomplete definition of a Ponzi scheme. Specifically, the characterization of a
Ponzi scheme in Martin’s report fails to include an essential aspect of an illegal
Ponzi scheme—namely, that money contributed by later investors is used to pay
dividends or returns for the earlier investors. See Janvey v. Alguire, 647 F.3d 585,
597 (5th Cir. 2011) (“A Ponzi scheme is a ‘fraudulent investment scheme in which
money contributed by later investors generates artificially high dividends or returns
for the original investors, whose example attracts even larger investments.’”)
(quoting Black’s Law Dictionary 1198 (8th ed. 2004)).
Instead, Martin states that the following elements are traditionally
found in and associated with Ponzi schemes:
1) Successful credible promoter with a promise that the investment will
achieve an above normal rate of return, with an explanation of how the
investment can achieve the above normal rate.
2) An investment account, limited partnership agreement, investment
contract, or some type of security instrument is used as a means or
artifice to satisfy the victims [sic] need to know their money is safe.
3) The investor’s funds are not put to use in a meaningful business that
generates returns that can support the promised returns on the investment.
4) For the first few interest payments, the investor needs to receive at least
the promised rate of return, if not better, to build confidence in the
promoter and the investment.
5) Other investors hear about the investments and are encouraged to invest
so that more money continues to come in to [sic] the scheme.
(Martin Report at 4.)
The Court agrees with Barlin that the above characteristics could
describe a legitimate investment, albeit a very poor one. Plaintiffs respond that
although Martin does not mention the essential aspect of a Ponzi scheme described
above, his conclusions clearly indicate that he took that aspect into account in
forming his opinions. (Dkt. # 594 at 5.) The Court agrees. Martin’s detailed
analysis of the transactions at issue includes findings that funds received from later
investors, including Plaintiffs, were pooled and disbursed to earlier investors.
(Martin Report at 5, 7–9, 12.) Furthermore, Martin’s testimony at the Daubert
hearing leaves no doubt that he took this aspect into account in reaching his
conclusions regarding the existence of a Ponzi scheme. At the hearing, Martin
testified that the section of his report detailing the definition of a Ponzi scheme
inadvertently omitted this aspect of the definition. He further clarified that he
defines a Ponzi scheme as one in which new investors are fraudulently induced
into making investments, the funds from which are then paid out to older investors
contrary to the representations made to the new investors at the time they chose to
invest. The Court finds that this testimony is relevant and helpful to the jury in
determining whether Defendants are liable under the TSA.
Furthermore, scienter is an element of Plaintiffs’ state law claim for
common law fraud. See Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of
Am., 314 S.W.3d 323, 337 (Tex. 2011) (noting that scienter as to the falsity of a
representation at the time it was made is an element of fraud under Texas law).
Operation of a Ponzi scheme may serve as evidence of fraudulent intent. See, e.g.,
Warfield v. Byron, 436 F.3d 551, 558 (5th Cir. 2006); Donell v. Kowell, 533 F.3d
762, 770 (9th Cir. 2008); Scholes v. Lehmann, 56 F.3d 750, 757 (7th Cir. 1995);
Quilling ex rel. Sardaukar Holdings, IBC v. Schonsky, No. 3:05-CV-2122-BH(H),
2006 WL 3772302, at *3 (N.D. Tex. Dec. 19, 2006). Thus, evidence of a Ponzi
scheme is also relevant and helpful to the jury as to Plaintiffs’ common law fraud
Barlin also argues that Martin’s testimony regarding what information
would be important to the average investor must be excluded on relevance grounds
because the jurors will be able to make such determinations themselves. (Dkt.
# 589 at 5; Dkt. # 596 at 6.) Because the Court has already determined that Martin
is not qualified to offer such testimony, the Court need not reach this argument.
As explained above, to determine whether testimony is reliable, a
court must assess whether the reasoning or methodology underlying the testimony
is scientifically valid. Moore, 151 F.3d at 276. Courts consider the five
non-exclusive Daubert factors listed above in making this determination. Daubert,
509 U.S. at 593–94. However, because the Daubert factors are not always easily
applied to non-scientific testimony, courts have “considerable leeway in
deciding . . . whether particular [non-scientific] expert testimony is reliable.”
Kumho Tire Co. v. Carmichael, 526 U.S. 137, 150–52 (1999).
Barlin argues that Martin’s testimony is unreliable because Martin
bases his opinions on his own definition of a Ponzi scheme, which Barlin asserts
differs from the definition accepted by the Fifth Circuit. (Dkt. # 589 at 4.) For the
reasons explained above, the Court finds that Martin’s expert report does account
for the fact that a classic Ponzi scheme involves using payments from new
investors to make payments to older investors. The Court therefore declines to
find Martin’s testimony unreliable on this basis.
Barlin also argues that Martin’s testimony regarding an alleged Ponzi
scheme is unreliable because it lacks a sufficient factual foundation. (Dkt. # 589 at
4–5.) The Court finds this objection without merit. Each factual assertion in
Martin’s report is supported by a citation to a document obtained in discovery.
Martin does admit that he has made certain assumptions in the preparation of his
report, but asserts that all assumptions are based on the allegations set forth in
Plaintiffs’ Complaint unless otherwise noted. (Martin Report at 3.)
Finally, Barlin argues that Martin’s testimony about Defendants’
material 4 omissions must be excluded because it is not the product of reliable
methodology. Because Martin’s testimony is non-scientific, the Court has
considerable leeway in determining whether Martin’s methodology is reliable.
Kumho Tire Co., 526 U.S. at 150–52. The Court finds that Martin’s process of
piecing together the relevant documents and identifying missing information and
omissions is reliable. Martin is certainly familiar with the process of investigating
fraudulent transactions, having served for decades as a certified fraud examiner
and Special Agent with the Internal Revenue Service in the intelligence and
criminal investigations divisions. (Martin Report at 2.) For these reasons, the
Court concludes that the proper course for challenging Martin’s testimony
regarding Defendants’ alleged omissions is through “[v]igorous cross-examination,
presentation of contrary evidence, and careful instruction on the burden of proof.”
See Daubert, 509 U.S. at 596.
For the reasons stated above, the Court GRANTS IN PART Barlin’s
Motion to Exclude the Testimony of Edmond Martin (Dkt. # 598). The Court
excludes Martin’s testimony regarding the “reasonable investor,” but denies
Barlin’s Motion in all other respects.
Again, the Court has already determined that Martin is not qualified to testify as
to what a reasonable investor would consider material.
Barlin’s Motion to Exclude Testimony of John R. Fahy
Finally, Barlin moves to exclude the testimony of John R. Fahy. (Dkt.
# 599.) Fahy’s testimony concerns the Temple Loan, the Manor Loan, and the
Long Beach Loan, and his expert report contains three major conclusions: (1) the
transactions in this matter constituted the “sale of securities” under the Securities
Exchange Act of 1934 and the TSA, (2) Defendants acted as brokers and dealers as
defined by the Securities Exchange Act of 1934 and the TSA, and (3) the sale of
securities at issue were required to be registered with the Texas State Securities
Board under Section 7 of the TSA. (“Fahy Report,” Dkt. # 599, Ex. A at 2–3.)
Barlin moves to exclude Fahy’s testimony on the grounds that it consists of legal
conclusions and consequently is an improper subject of expert testimony. (Dkt.
# 599 at 1.) Barlin also argues that Fahy’s opinion that Defendants are sellers of
securities is unreliable because it is based on an inaccurate legal definition.
(Id. at 2.)
The Fifth Circuit has “consistently held that legal opinions are not a
proper subject of expert testimony because they do not assist the trier of fact in
understanding the evidence, instead merely telling the trier of fact what result to
reach.” BNY Mellon, N.A. v. Affordable Holdings, Inc., No. 1:09CV226-SAJAD, 2011 WL 2746301, at *1 (N.D. Miss. July 12, 2011) (collecting cases); see
also Owen v. Kerr-McGee Corp., 698 F.2d 236, 240 (5th Cir. 1983) (“[A]llowing
an expert to give his opinion on the legal conclusions to be drawn from the
evidence both invades the court’s province and is irrelevant.”). As the Fifth Circuit
has succinctly stated, “an expert may never render conclusions of law.” Goodman
v. Harris Cnty., 571 F.3d 388, 399 (5th Cir. 2009).
Plaintiffs respond that Fahy’s testimony does not consist of
conclusions of law, but rather addresses legal matters involving questions of law
and fact. (Dkt. # 606 at 2–3.) To the extent Plaintiffs argue that Fahy’s testimony
should be admissible under Texas evidentiary law because it addresses mixed
questions of law and fact, Plaintiffs’ argument clearly fails because the Texas laws
of evidence do not apply to this case. See Stallion Heavy Haulers, LP v. Lincoln
Gen. Ins. Co., No. SA-09-CA-0317-FB, 2011 WL 130154, at *2 (W.D. Tex. Jan.
13, 2011) (excluding expert testimony about mixed questions of law and fact
because Texas evidence law does not apply to federal cases).
In support of the proposition that experts may testify as to mixed
questions of law and fact in federal court, Plaintiffs cite to Huddleston v. Herman
& MacLean, 640 F.2d 534, 552 (5th Cir. Unit A 1981), rev’d in part on other
grounds by 459 U.S. 375 (1983) and S.E.C. v. U.S. Envt’l, Inc., No.
94Civ.6608(PLK)(AJP), 2002 WL 31323932, at *2 (S.D.N.Y Oct. 16, 2002).
However, both of these cases are distinguishable from the instant case because they
discuss the propriety of allowing securities experts to testify as to ordinary
practices within the securities industry. Huddleston, 640 F.2d at 552 (holding that
expert witness could testify as to whether statements in prospectus were standard
language within the industry); U.S. Envt’l, 2002 WL 31323932, at *2 (permitting
testimony of expert witness that “certain trading patterns would raise ‘red flags’”
and that “these trading patterns would have raised questions for an experienced
Here, in contrast, Fahy’s conclusions amount to his application of the
facts to the relevant securities laws, including the federal Securities Exchange Act
of 1934 and the TSA. Barlin aptly points out that his report reads much like a law
review article on the merits of this case, and the Court finds that this testimony
must be excluded as an improper rendering of legal conclusions. See Owen, 698
F.2d at 240; Highland Capital Mgmt., L.P. v. Schneider, 379 F. Supp. 2d 461, 470–
71 (S.D.N.Y. 2005) (excluding expert witness who opined that securities law had
been violated based on the evidence provided).
Although the Court finds that Fahy’s testimony should be excluded
for the reasons explained above, the Court briefly addresses Barlin’s second
argument in favor of exclusion in order to clarify a point of law. Barlin argues that
Fahy’s opinion regarding whether Defendants were “sellers” under the TSA must
be excluded because he formed his opinion in reliance on outdated case law. (Dkt.
# 599 at 5.)
Nearly sixty years ago in Brown v. Cole, the Texas Supreme Court
held that under the TSA, “the seller may be any link in the chain of the selling
process or in the words of the Act he is one who performs ‘any act by which a sale
is made.’” 291 S.W.2d 704, 708 (Tex. 1956). The TSA has since been amended
twice, in 1963 and 1977, and since then both state and federal courts in Texas have
found that Brown v. Cole’s broad definition of “seller” is no longer appropriate.
See In re Enron Corp. Sec., Derivative & ERISA Litig., 258 F. Supp. 2d 576, 603
(S.D. Tex. 2003); Frank v. Bear, Stearns & Co., 11 S.W.3d 380, 383 (Tex. App.
2000). The post-1977 version of the TSA requires that a plaintiff must be in
privity with a defendant in order to impose seller liability. In re Enron, 258 F.
Supp. 2d at 603; Frank, 11 S.W.3d at 383.
Under the current version of the statute, therefore, a “seller” is “the
person who sold the security directly to the purchaser or who acted as the vendor’s
agent and solicited the sale.” In re Enron Corp. Sec., Derivative & ERISA Litig.,
762 F. Supp. 2d 942, 974 (S.D. Tex. 2010); see generally In re Enron, 258 F. Supp.
2d at 603–08 (undertaking a comprehensive review of the history of the TSA,
relevant Texas case law, and analogies to the federal provisions of the Uniform
Securities Act of 1933 upon which the TSA was based).
For the reasons stated above, the Court GRANTS Barlin’s Motion to
Exclude the Testimony of John R. Fahy (Dkt. # 599).
Plaintiffs’ Motion to Exclude Testimony of Joyce Weedman
Plaintiffs move to exclude the testimony of Joyce Weedman
(“Weedman”). (Dkt. # 607.) Weedman’s report contains her conclusions on two
discrete issues: (1) that Lahr and former Defendant Vitaly Zaretsky (“Zaretsky”)
had an objectively reasonable basis for concluding that the hard money loans being
brokered by Lahr to Zaretsky’s entity were sufficiently collateralized and would be
repaid, and (2) that but for the economic downturn of 2008, the lien foreclosures
likely could have been avoided and the hard money junior loans ultimately repaid.
(“Weedman Report,” Dkt. # 607, Ex. A at 1.) Plaintiffs move to exclude
Weedman’s testimony on the grounds that (1) the subject matter of her expertise is
not clear; (2) her opinions are based on personal experiences rather than on
acquired knowledge or expertise, and (3) she employed no methodology,
principles, or any criteria in arriving at her opinions. (Dkt. # 607 at 1.)
As explained above, a witness may be qualified as an expert if she
possesses specialized knowledge, skill, experience, training, or education. Fed. R.
Evid. 702. The inquiry is whether the witness’s qualifications allow her to form a
reliable opinion on a relevant issue. See Huss, 571 F.3d at 455. “A district court
should refuse to allow an expert witness to testify if it finds that the witness is not
qualified to testify in a particular field or on a given subject.” Wilson, 163 F.3d at
937. However, “Rule 702 does not mandate that an expert be highly qualified in
order to testify about a given issue. Differences in expertise bear chiefly on the
weight to be assigned to the testimony by the trier of fact, not its admissibility.”
Huss, 571 F.3d at 452.
Plaintiffs’ first two arguments in support of exclusion challenge
Weedman’s qualifications. Weedman is a real estate broker who has been selling
commercial land in the Austin, Texas area for 28 years. (Weedman Report at 1;
“Weedman Dep.,” Dkt. # 607, Ex. B at 12:15–23.) She participated in the sale of
the Wildhorse Ranch. (Weedman Report at 1.) In her deposition, Weedman
testified that her area of expertise is “limited to my assumption that the values of
this—any part of this property were what contributed to those values at any given
time and my history in this area talking to numerous developers and investors in
this area from a period—time person that covered everything that happened here.”
(Weedman Dep. at 59:13–18.) She further stated, “I’m an expert in what
contributes to the value of land. And what—what was the psychology and the
activity in a ten-year period or more in this area specifically and why.” (Id. at
59:24–60:2.) Weedman later clarified that she considers herself an expert mostly
in the psychology of lenders, (id. at 60:16), although she also stated, “I’m not a
lender . . . I don’t usually participate in that side of the conversations between a
buyer and their lender other than having the lender call me and ask me questions.
So I’m not an expert on that side.” (Id. at 61:16–20.)
The Court agrees with Barlin that Weedman’s testimony is based not
on actual knowledge of the financial health or wellbeing of the borrowing entity,
but rather on the perceived market at the time the Manor Loan was made. (Dkt.
# 612 at 3; Weedman Dep. at 59:24–61:16, 77:11–79:9, 80:5–8.) Weedman
specifically stated in her deposition that her conclusions had nothing to do with the
financial condition of the entity borrowing the loan, (Weedman Dep. at 80:5–8),
and when asked how she could have reached her conclusions without any financial
information about the entities involved, she responded, “[a]ll I’m looking at is the
value of the dirt and the marketplace.” (Id. at 78:11–17.) Weedman has no
personal experience with hard money loans. (Id. at 75:22–76:25.) The Court
therefore finds that while Weedman may be qualified to testify as to the general
market conditions during the time period at issue, she is not qualified to testify as
to her speculations about specific loans or transactions in which she did not
Weedman’s opinion is based on her general knowledge of the real
estate market conditions during the time period at issue as well as her personal
experience as a real estate broker in the Austin, Texas area. However, her report
fails to provide the Court with any indication of the process by which she arrived at
her conclusions. Instead, it simply describes the market conditions and then
abruptly arrives at its conclusions. In the total absence of any indicia of
methodology, the Court finds that Weedman’s testimony must be excluded as
unreliable. See Fed. R. Evid. 702(c); Daubert, 509 U.S. at 592; Hebbler v. Turner,
2004 WL 414821, at *3 (E.D. La. Mar. 3, 2004) (excluding expert testimony of
commercial real estate agent where expert’s report did not reveal how she applied
her expertise to the commercial lease in dispute).
For the reasons stated above, the Court GRANTS Plaintiffs’ Motion
to Exclude the Testimony of Joyce Weedman (Dkt. # 607.)
For the reasons stated above, the Court hereby (1) GRANTS IN
PART Barlin’s Motion to Exclude Untimely Disclosed Expert Testimony (Dkt.
# 591), (2) GRANTS IN PART Barlin’s Motion to Exclude Testimony of
Edmond Martin (Dkt. # 589), (3) GRANTS Barlin’s Motion to Exclude Testimony
of John R. Fahy (Dkt. # 599), and (4) GRANTS Plaintiffs’ Motion to Exclude
Testimony of Joyce Weedman (Dkt. # 607).
IT IS SO ORDERED.
DATED: Austin, Texas, October 14, 2015.
David Alan Ezra
Senior United States Distict Judge
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?