Opinion
03 Civ. 5194 (SAS).
February 16, 2005
Curtis V. Trinko, Esq., Neal A. DeYoung, Esq., Jeffrey B. Silverstein, Esq., LAW OFFICES OF CURTIS V. TRINKO, LLP, New York, for Plaintiffs.
Alexander Dimitrief, P.C., Peter D. Doyle, Esq., Katherine J. Alprin, Esq., KIRKLAND ELLIS LLP, New York, for Defendant Morgan Stanley Co., Inc.
Moses Silverman, Esq., H. Christopher Boehning, Esq., PAUL, WEISS, RIFKIND, WHARTON GARRISON LLP, New York, for Defendant Lehman Brothers, Inc.
David H. Braff, Esq., Stephanie G. Wheeler, Esq., SULLIVAN CROMWELL LLP, New York, for Defendant Goldman Sachs Co.
MEMORANDUM OPINION AND ORDER
On January 27, 2005, defendants wrote a letter to the Court requesting: (1) that the Court direct plaintiffs to produce their "class certification expert," Dr. Paul Irvine, for a deposition prior to the close of class discovery; and (2) a 60-day extension of time to oppose plaintiffs' class certification motion. Plaintiffs oppose defendants' request to produce Dr. Irvine, and consent to defendants' request for an extension of time.
1/27/05 Letter from H. Christopher Boehning to the Court ("1/27/05 Boehning Letter").
See 2/2/05 Letter from Curtis V. Trinko to the Court.
I. PLAINTIFFS' "CLASS CERTIFICATION EXPERT"
Defendants assert that Dr. Irvine should be produced for a deposition for two reasons: (1) because plaintiffs consented to expert discovery when they signed the parties' October 8, 2004 Scheduling Order; and (2) because "the failure to allow discovery would make it impossible for the party seeking discovery to make an adequate presentation in opposition to class certification." Defendants' request, though, is appropriate only to the extent that plaintiffs' expert opinion will be considered in the context of their pending class certification motion.
Ex. A to 1/27/05 Boehning Letter ("Defendants shall serve . . . deposition notices on putative lead plaintiffs, and plaintiffs' experts, if any, on or before Tuesday, November 16, 2004.").
1/27/05 Boehning Letter at 3 (quotation marks and alterations omitted) (citing Chateau de Ville Prods., Inc. v. Tams-Witmark Music Library, Inc., 586 F.2d 962, 966 (2d Cir. 1978)).
A. Expert Testimony in the Class Certification Context
"It is well-established that `the trial judge has broad discretion in the matter of the admission or exclusion of expert evidence.'" Nonetheless, "[i]n evaluating the admissibility of expert testimony, [the Second Circuit] requires the exclusion of testimony [that] states a legal conclusion." Indeed, "[t]his circuit is in accord with other circuits in requiring exclusion of expert testimony that expresses a legal conclusion." "The law of this circuit is that while an expert may provide an opinion to help a jury or judge understand a particular fact, `he may not give testimony stating ultimate legal conclusions based on those facts.'"
Boucher v. United States Suzuki Motor Corp., 73 F.3d 18, 21 (2d Cir. 1996) (quoting Salem v. United States Lines Co., 370 U.S. 31, 35 (1962)). See generally In re IPO, 174 F. Supp. 2d 61, 62-63 (S.D.N.Y. 2001).
United States v. Feliciano, 223 F.3d 102, 121 (2d Cir. 2000) (quotation marks and citation omitted) (second alteration in original). See also Marx Co. v. Diners' Club Inc., 550 F.2d 505, 510 (2d Cir. 1977).
Hygh v. Jacobs, 961 F.2d 359, 363 (2d Cir. 1992).
In re IPO, 174 F. Supp. 2d at 64 (quoting United States v. Bilzerian, 926 F.2d 1285, 1294 (2d Cir. 1991)).
One commentator has recently noted that:
[i]n recent years, the class action certification hearing has become the latest forum for disputes over the reliability of expert testimony. Since these hearings may involve complex technical matters, litigants frequently try to introduce expert testimony to either establish or challenge the basic requirements for class certification.
L. Elizabeth Chamblee, Between "Merit Inquiry" and "Rigorous Analysis": Using Daubert to Navigate the Gray Areas of Federal Class Action Certification, 31 Fl. St. U. L. Rev. 1041, 1041-42 (Summer 2004) (footnotes omitted).
Under the Federal Rules of Evidence, expert testimony is only admissible — whatever its context — if it will "assist the trier of fact to understand the evidence or to determine a fact in issue." Although such testimony may be admissible even if it embraces an ultimate issue for the trier of fact (or, in the class certification context, the certifying judge), courts should "exclude opinions phrased in terms of inadequately explored legal criteria." Indeed, "the rule prohibiting experts from providing their legal opinions or conclusions is `so well-established that it is often deemed a basic premise or assumption of the evidence law — a kind of axiomatic principle.'"
Fed R. Evid. 704(a) and Advisory Committee Note.
In re IPO, 174 F. Supp. 2d at 64 (quoting Thomas Baker, The Impropriety of Expert Witness Testimony on the Law, 40 U. Kan. L. Rev. 325, 352 (1992)).
Moreover, when considering class certification, a court does not resolve ultimate issues of material fact. Thus, an expert witness who seeks to offer opinions on ultimate issues of fact is of no help to the court. "Although a trial court must conduct a `rigorous analysis' to ensure that the prerequisites of Rule 23 have been satisfied before certifying a class, `a motion for class certification is not an occasion for examination of the merits of the case.'" Accordingly, the question of when an expert opinion is an appropriate tool in determining whether a class may be certified is a tricky one.
In re Initial Public Offering Sec. Litig. ("In re IPO"), No. 21 MC 92, 2004 WL 2297401, at *19 (Oct. 13, 2004) (quoting In re Visa Check/MasterMoney Antitrust Litig., 280 F.3d 124, 134-35 (2d Cir. 2001)).
More than a century ago, Judge Learned Hand remarked that "[n]o one will deny that the law should in some way effectively use expert knowledge wherever it will aid in settling disputes. The only question is as to how it can do so best." When considering the utility of expert testimony, though, a court must take care not to let academic theory overwhelm legal precedent. As Judge Keeton recently noted, in considering whether to certify a securities class action, "[w]hen legal precedent is available, I follow it, not economic or academic literature." Thus, parties should not offer expert testimony if such testimony is merely an attempt to substitute the legal conclusions of an "expert" for those of the court. There is a wealth of legal precedent in the field of securities class actions, for example, addressing the complex issues of loss causation and damages in the context of class certification. Any party addressing such issues should thus draw first on available legal precedent — and turn to expert testimony only if necessary to assist the court in determining whether a proposed class meets the requirements of Rule 23.
Learned Hand, Historical and Practical Considerations Regarding Expert Testimony, 15 Harv. L. Rev. 40, 40 (1901). Accord Chamblee, 31 Fl. St. U. L. Rev. at 1065.
In re PolyMedica Corp. Sec. Litig., 224 F.R.D. 27, 41 (D. Mass. 2004).
Because a "class certification" expert may opine neither on legal issues nor on the ultimate merits of the case, the issues such an expert may address are quite limited. Indeed, in this Circuit, courts ruling on class certification have generally restricted their analysis of proffered expert opinion to the issue of whether plaintiffs' purported class actions meet the requirements of Rule 23(b)(3) — i.e., whether plaintiffs' allegations are capable of being proved on a common basis for all class members. If a significant issue of liability — say, loss causation — must be proven individually by each class member, then "the difficulties likely to be encountered in the management of [such] a class action" counsel against certification of the class. Thus, expert testimony may be offered to describe and explain a methodology that the ultimate fact-finder can use to determine central factual issues on a common basis. Expert testimony should not be offered at the class certification stage, for example, to opine as to whether a legal presumption should apply, or to quantify the actual effects of the alleged fraud.
See, e.g., Visa Check, 280 F.3d at 135 (admitting expert report, noting that "the question for the district court at the class certification stage is whether plaintiffs' expert evidence is sufficient to demonstrate common questions of fact warranting certification of the proposed class, not whether the evidence will ultimately be persuasive") (emphasis added); In re IPO, 2004 WL 2297401, at *33 (considering expert report solely to determine whether it "present[ed] a methodology for determining loss causation that may be commonly applied to all members of the class") (emphasis added); In re Worldcom, Inc. Sec. Litig., 219 F.R.D. 267, 296-97 (S.D.N.Y. 2003) (considering defendants' expert report, which was offered to show that short sellers should not avail themselves of the fraud on the market presumption of reliance, only to the extent that "the expert evidence demonstrates the existence or absence of common questions of fact warranting class certification") (emphasis added).
See In re IPO, 2004 WL 2297401, at *33 ("In addition to transaction causation, plaintiffs must prove loss causation; that is, they must show a `causal link between the alleged misconduct and the economic harm ultimately suffered by the plaintiff.' Plaintiffs may submit an expert report suggesting a methodology for determining such a link.") (citing Emergent Capital Inv. Mgmt., LLC v. Stonepath Group, Inc., 343 F.3d 189, 197 (2d Cir. 2003)).
B. Dr. Irvine's Report
Dr. Irvine, an expert on "securities analysts and the markets," has submitted a 51-page report in which he purports to examine the following nine questions posed to him by plaintiffs' counsel:
11/12/04 Expert Report of Dr. Paul J. Irvine ("Irvine Report") at 4.
1. As a general principle, does empirical research indicate whether securities analyst reports published by the research divisions of major Wall Street brokerage houses and investment banks cause significant effects upon the prices at which open market transactions are made in the stock of the public companies that are the subjects of the reports?
2. Given the well established principle that efficient markets in the stock of a public company operate to integrate into transaction prices of that stock, in an ongoing and dynamic fashion, all material information pertaining to that company and its stock — does empirical research indicate that there is or is not a categorical difference between the manner of integration of market information in the form of issuers' statements as opposed to market information in the form of analysts [sic] reports, in setting transaction prices in the subject stock?
3. Does empirical research of the circumstances surrounding the market for RSL Communications stock indicate that the analysts' reports issued by Defendants caused significant impacts upon the transaction prices of RSL stock?
4. Is their [sic] any evidence that would indicate that the analysts' reports issued by Defendants did not cause significant effects upon the transaction prices of RSL stock?
5. Is there an empirical methodology that can demonstrate that Defendants' analysts [sic] reports caused the market prices of RSL to be artificially inflated?
6. Is there an empirical methodology that can demonstrate that the impact of Defendants' analysts [sic] reports upon the transaction prices of RSL stock continued to some degree throughout the class period?
7. Were Defendants' alleged misrepresentations issued in a public manner; i.e., were they disseminated into the marketplace?
8. Was the subject matter of the alleged misrepresentations material; i.e., would it induce a reasonable, relying investor to misjudge the value of the shares?
9. Were the RSL shares traded in an efficient market?
Irvine Report at 1-2.
A quick glance at these questions reveals that most of them — specifically, questions 1, 2, 3, 4, 7, 8, and 9 — are inappropriate at this stage of the proceedings. Questions 1 and 2 seek to convince the court that analysts' opinions are virtually identical to issuers' statements in their effect on securities prices, and that the same legal analysis generally applied to issuers' statements should thus be applied to analysts' reports. Whether such an argument is correct is a question of law, not one of scientific methodology. Similarly, questions 7, 8 and 9 seek to instruct the Court that, assuming the fraud on the market presumption is available to cases involving analysts' reports, the alleged statements satisfy three legal prerequisites for application of that presumption: (1) that the misrepresentations were material; (2) that the statements were public; and (3) that the securities were traded on an efficient market.
See Hevesi v. Citigroup Inc., 366 F.3d 70, 77 (2d Cir. 2004) (granting Rule 23(f) appeal to resolve this precise issue, noting that "[a]lthough the fraud-on-the-market doctrine clearly applies to statements made by issuers . . . we have never addressed whether it also applies to reports by analysts").
See Basic, Inc. v. Levinson, 485 U.S. 224, 247 (1988); In re PolyMedica, 224 F.R.D. at 41 (noting that the legal definition of market efficiency is derived from Basic, not "economists and social scientists," and "differs from the definition of an `efficient' market as an economic term of art").
Questions 3 and 4, while relevant to plaintiffs' ultimate success or failure on the merits, shed no light on the question of whether plaintiffs' purported class action satisfies the requirements of Rule 23. Those questions seek only to show that the alleged fraud actually affected share prices — a question for the finder of fact to determine when the merits of this case are heard. While such testimony may be relevant and even useful in the context of trial or a motion for summary judgment, class certification is emphatically not "an occasion for examination of the merits of the case." Accordingly, questions 1, 2, 3, 4, 7, 8 and 9, and Dr. Irvine's responses thereto, are of no utility to the court in deciding plaintiffs' pending motion.
In re Visa Check, 280 F.3d at 135 (citation omitted).
Questions 5 and 6 — which impliedly ask whether a methodology exists that can prove transaction causation, loss causation and damages on a common basis for all purported class members — at least attempt to address issues relevant to the class certification inquiry. Commonality and, in Rule 23(b)(3) cases such as this one, predominance, are important issues that must be addressed at the class certification stage. However, plaintiffs should look to case law — including the recent decisions of this court — for the answers before enlisting an expert to opine on legal issues. Nonetheless, I find that Dr. Irvine's responses to questions 5 and 6 are sufficiently relevant to the context of class certification that I will consider them in my decision.
See Fed.R.Civ.P. 23(a); 23(b)(3).
See, e.g., In re IPO, 2004 WL 2297401, at *29-37 (discussing the application of methodologies to prove transaction causation, loss causation and damages on a common basis in the context of securities class actions that alleged artificial inflation and dissipation of securities prices).
Defendants may depose Dr. Irvine solely with respect to his responses to questions 5 and 6. Any expert reports submitted by defendants shall be limited to inquiries bearing directly on the propriety of class certification, not on plaintiffs' ability to prevail on the merits, and certainly not on the controlling law of class certification. Legal citation belongs in parties' briefs, not in experts' opinions.
Defendants correctly note that plaintiffs' counsel signed a scheduling order providing that "[d]efendants shall serve discovery requests relating to class certification and deposition notices on putative lead plaintiffs, and plaintiffs' experts, if any," by a certain date. 7/8/04 Scheduling Order ¶ 4. Despite plaintiffs' protestations that Dr. Irvine should be shielded from the discovery process under Federal Rule of Civil Procedure 26(b)(4)(B), it is axiomatic that parties may agree as to "what changes should be made in the limitations on discovery imposed under these rules. . . ." Fed.R.Civ.P. 26(f)(3). Plaintiffs have agreed that their experts, if any, may be deposed.
Defendants are accordingly instructed not to offer expert opinion similar to that on pages 45 and 46 of the Irvine Report, in which Dr. Irvine cites cases and opines not only on the nature of the loss causation requirement itself, but on whether "such analyses [as the one offered] may assist the Court." Legal analysis in the guise of expert opinion will not be considered. The parties' briefs will undoubtedly be long enough.
II. DEFENDANTS' REQUEST FOR EXTENSION OF TIME
Defendants also request, and plaintiffs do not oppose, a sixty day extension of time in which to file their opposition papers. The briefing schedule for this motion is already extremely long. The parties have presented no compelling reason why an already unwieldy briefing schedule should be made even longer. Accordingly, defendants' request is denied. Defendants shall submit their opposition papers, if any, by March 14, 2005.
Plaintiffs moved to certify their class on November 10, 2004. Defendants have until March 14, 2005 — more than four months after plaintiffs filed their motion — to file an opposition.
Defendants cite the perceived necessity to depose Dr. Irvine and to prepare other depositions as justification for extending their deadline, see 1/27/05 Boehning Letter at 1-2. Defendants shall limit any discovery regarding Dr. Irvine to questions bearing solely on class certification, and the parties have already had three months to uncover and address discovery issues that might hamper their ability to comply with the briefing schedule. There is no justification for a further two-month extension.
SO ORDERED.