Opinion
C.A. No. 17989-NC
Date Submitted: July 30, 2001
Date Decided: November 15, 2001
R. Bruce McNew, Esquire of TAYLOR McNEW LLP, Greenville, Delaware; Attorney for Plaintiff
Arthur L. Dent and Brian C. Ralston, Esquires of POTTER ANDERSON CORROON LLP, Wilmington, Delaware; and David H. Kistenbroker and Leah J. Domitrovic, Esquires of KATTEN MUCHIN ZAVIS, Chicago, Illinois; Attorneys for Defendant
MEMORANDUM OPINION
At issue in this action brought under 8 Del. C. § 220 is whether the plaintiff, Dr. Bernard Magid (the "plaintiff' or "Dr. Magid"), is entitled to inspect certain books and records of the defendant, Acceptance Insurance Companies (the "defendant" or "Acceptance"), that concern Acceptance's loss reserves. This is the decision of the Court after trial. For the reasons set forth in this Opinion, I conclude that Dr. Magid is entitled to § 220 inspection relief.
I. FACTS
A. Background: The Nebraska Federal Action
In late 1999 and early 2000, three shareholder class actions were filed in the United States District Court for the District of Nebraska against Acceptance, certain Acceptance subsidiaries and underwriters, Acceptance's current and former officers and directors, and its outside auditor. Those actions were consolidated into the Nebraska Federal Action in April, 2000, and the firm of Milberg Weiss Bershad Hynes Lerach ("Milberg Weiss") was appointed as co-lead counsel for the plaintiffs.
In re Acceptance Ins. Cos. Inc. Sec. Litig., Master Case No. 8:99CV547 (D. Neb 2001).
The consolidated class action complaint in the Nebraska Federal Action alleged that the defendants had violated the Securities Act of 1933 and the Securities Exchange Act of 1934 (the "1934 Act") by failing to establish adequate loss reserves from at least 1997 through 1999. That failure, in turn, artificially inflated Acceptance's net income, retained earnings and shareholder equity; and rendered Acceptance's publicly filed disclosures materially false and misleading. In August 2000, the defendants in the Nebraska Federal Action moved to dismiss the complaint. The effect of that motion was to trigger the automatic-stay-of-discovery provision of the Private Securities Litigation Reform Act of 1995 (the "PSLRA") during the pendency of the dismissal motion. In an opinion issued in March 2001 (as clarified by later orders), the Nebraska Federal Court dismissed certain of the plaintiffs' claims, but sustained the plaintiffs' claim under Section 10(b) of the 1934 Act and SEC Rule 10b-5. Having so ruled, the Federal Court then permitted discovery to proceed as to the claims that survived dismissal.
Id.
B. The Plaintiffs § 220 Demand
On February 23, 2000, six months before the motion to dismiss the Nebraska Federal Action was filed, Dr. Magid, who is an Acceptance shareholder, submitted to Acceptance a formal demand under § 220. In that demand Dr. Magid sought to inspect certain books and records of Acceptance concerning loss reserves created on or after January 1, 1996. The demand recited that the plaintiff was a shareholder of record and that the purpose of the requested inspection was to "investigat[e] potential wrongdoing by the Company and its officers and directors, including potential wrongdoing relating to the Company's dissemination of public statements concerning the adequacy of its reserves." The inspection being sought encompassed six categories of records, all relating to loss reserves. Specifically, the demand sought to inspect documents relating to:
PX 1, Exh. A.
(i) the establishment of the reserves; (ii) adjustments to the reserves; (iii) evaluations opinions, analysis, or studies concerning the adequacy of the reserves or adjustments thereto; (iv) all documents prepared for or reviewed by the Board of Directors (or its audit committee) concerning reserves; (v) all documents prepared by or obtained by the Company's auditors (including its outside auditor) concerning reserves and (vi) all documents provided by or on behalf of the Company to third parties (including financial analysts or the Securities and Exchange Commission regarding reserves.
Id.
Although the demand was sent out on the letterhead of Dr. Magid's Delaware counsel, R. Bruce MeNew, Esquire, in fact the demand had been drafted by a Milberg Weiss attorney under the circumstances next discussed.
The draft demand prepared by Milberg Weiss (DX 7) has been the subject of one of several pretrial discovery-related "sideshows" that have protracted and delayed the resolution of this "summary" statutory proceeding. Plaintiff's counsel resisted producing DX 7 to the other side, necessitating an in camera inspection of that document by the Court, which ruled that the document should be produced. Thereafter, plaintiffs counsel opposed the admission of the Milberg Weiss draft demand into evidence — a position that required a separate in limine ruling on that issue. The Court determines that DX 7 is admissible, having found no basis to exclude DX 7 from evidence. That document is clearly relevant to the defendant's contention that the plaintiff's true purpose in making the demand was to discover evidence, at the instigation of Milberg Weiss, in circumvention of the automatic-stay-of-discovery provision of the PSLRA. The plaintiffs assiduous efforts to avoid disclosing DX 7 appear at odds with his position that this proceeding is not being prosecuted for that purpose and that this lawsuit is not being controlled by Milberg Weiss. As discussed elsewhere in this Opinion, if that were the case, one would have expected counsel freely to disclose the document to the other side and to stipulate to its admission into evidence rather than consume the time and resources of the Court and opposing counsel by engaging in this needless exercise.
The record establishes that at the suggestion of a friend, Dr. Magid first contacted lawyers at Milberg Weiss. The plaintiff had two short telephone conversations with Milberg Weiss lawyers in February 2000. During the second of those conversations, the plaintiff was referred to Mr. McNew, a Delaware attorney who has had a long-standing working relationship with Milberg Weiss on matters both in and outside of Delaware. Unbeknownst to plaintiff (and without his authorization), a Milberg Weiss lawyer who was actively involved in the prosecution of the Nebraska Federal Action prepared a draft inspection demand after Dr. Magid's first telephone conversation with Milberg. The draft demand was "faxed" to Mr. McNew on February 14, 2000, before Mr. McNew first met the plaintiff The demand letter in the form sent out by Mr. McNew was virtually identical to the draft prepared by Milberg Weiss.
Why Milberg Weiss chose not to represent the plaintiff is not disclosed of record. One reason may be that the plaintiff is not a member of the shareholder class that Milberg Weiss represents in the Nebraska Federal Action.
Compare DX 7 with PX 1, Exh. A.
In its February 29, 2000 response to the demand letter, Acceptance informed plaintiff of the existence of the Nebraska Federal Action and of its intent to file a motion to dismiss the Nebraska Federal complaint, which would trigger an automatic stay of discovery under the PSLRA. Acceptance also inquired whether Dr. Magid would be a member of the shareholder class in the Nebraska Federal Action, pointing out that if so, the requested inspection would be for an improper purpose.
On April 13, 2000, the plaintiff filed his complaint in this § 220 proceeding. Although Acceptance initially moved to dismiss the complaint, it withdrew that motion and filed an answer after learning that the plaintiff would not be a member of the proposed class in the Nebraska Federal Action.
C. The Disconnect Between Dr. Magid's Stated Concerns And The Records He Seeks To Inspect
At the trial the plaintiff testified that what precipitated his § 22Q demand was his concern about possible mismanagement. The specific mismanagement concerns that plaintiff identified, however, had no facially discernible connection to the reserve-related documents described in the demand. The circumstances that Dr. Magid identified as supporting his belief that Acceptance was being mismanaged were that: (i) during five of the previous six years Acceptance was the poorest performer in its industry peer group; (ii) a member of Acceptance's board of directors had received $650,000 from the sale of insurance to Acceptance; (iii) Acceptance had issued one million option shares to its president; and (iv) Acceptance had purchased a skybox at the University of Nebraska football stadium for $750,000.
These circumstances indicated mismanagement (the plaintiff testified) because at the same time the price of Acceptance stock had gone down, the company's fiduciaries were engaging in "not arm's-length transactions. . . . Here I'm losing money and stockholders are losing money and they are buying a sky box at the football game [for $750,000] . . . they were giving fantastic bonuses to officers of a losing corporation," and "one of the board members one year billed the company $650,000, which is a lot of money."
Trial Tr. at 16-17.
On cross examination, however, the plaintiff could not explain how the reserve-related documents he was seeking to inspect were germane to those concerns. Indeed, Dr. Magid admitted that he did not "know enough about reserves to talk to anybody about them." Thus, if the plaintiffs evidence had consisted only of his trial testimony, that evidence would likely have been insufficient to establish a claim for inspection relief under § 220. But other evidence was presented. The linkage between the requested documents and the plaintiffs stated purpose for inspecting them was established by the testimony of the plaintiffs trial expert, John Swanick, a forensic auditor and expert on the subject of the adequacy of loss reserves in the insurance industry.
Id. at 35, 38-39.
D. Closing The Evidentiary Gap
Because the documents Dr. Magid was seeking to inspect all related to Acceptance's loss reserves, and because the case law under § 220 required that the books and records for which inspection was being sought be "essential and sufficient" to his stated purpose, not surprisingly, the plaintiffs mismanagement hypothesis was based upon the loss reserves. Specifically, in verified interrogatory answers Dr. Magid stated that:
Inspection under § 220 is limited to those documents that are "necessary, essential and sufficient for the shareholders' purpose." BBC Acquisition Corp. v. DurrFillauer Med., Inc., Del. Ch., 623 A.2d 85, 88 (1994); see also Thomas Betts Corp. v. Leviton Mfg. Co., Del. Ch., 685 A.2d 702, 714 (1995), aff'd, Del. Supr., 681 A.2d 1026, 1035 (1996).
The factual basis for plaintiff [sic] belief that there may have been wrongdoing by defendant or its directors, officers or agents are [sic] set out in documents to be produced, including, but not limited to, press reports and the Class Action Complaint filed in the United States District Court for the District of Nebraska, which allegations include a reference to internal memoranda of defendant which indicate that defendant knowingly, or recklessly, failed to make adequate provisions for reserves.
PX 12, Response to Interrogatory 2 at 2.
Given that position, our law cast upon the plaintiff the burden of proving, by competent evidence, "some credible basis from which the court can infer that waste or mismanagement may have occurred." As noted above, the evidence relied upon to fill the evidentiary gap created by the plaintiffs testimony was Mr. Swanick's testimony. That expert opined that management's failure to adjust on a timely basis the Company's loss reserves in response to Montrose Chemical Corp. v. Admiral Insurance Co. constituted a reasonable basis for concluding that mismanagement may have occurred. Montrose was a 1995 California Supreme Court decision that significantly expanded the risk exposure of property damage insurers to certain risks in the California market. Mr. Swanick testified that Montrose affected the entire industry, including Acceptance. In its 1995 Annual Report, Acceptance recognized the impact of Montrose. That awareness, according to Mr. Swanick, meant that Acceptance's management had the ability to offset any additional Montrose-related risk by acquiring reinsurance or by adjusting Acceptance's loss reserves. Management, however, chose not to reinsure, and did not increase Acceptance's loss reserves until 1999. The significance of that four-year delay, Mr. Swanick opined, was that Acceptance's net income and equity for the years 1996 to 1998 were overstated, and that during those years the market price of Acceptance stock was inflated. When the reserve adjustment was finally made and announced, Acceptance's earnings declined and the market price of Acceptance stock cratered, which led ultimately to the Nebraska Federal Action.
Thomas Betts Corp., 681 A.2d at 1031 (citations omitted).
963 P.2d 878 (Cal. 1995).
Trial Tr. at 111-112.
Id. at 119. Mr. Swanick also related Dr. Magid's identified mismanagement concerns to the reserve issue, albeit indirectly. Mr. Swanick testified that the self-dealing transactions bore on the issue of management's integrity, id. at 123, which is relevant to an assessment of whether management might have decided not to increase the loss reserves in a timely manner for improper reasons.
The plaintiff testified that his Acceptance stock declined about $11,000 in stock market value, and that as of November 20, 2000, his stock was worth approximately $672. Trial Tr. at 16, 27-28.
Although Acceptance is highly critical of Mr. Swanick's testimony and urges that it be rejected, it is undisputed that Acceptance presented no evidence, expert or otherwise, that controverts Mr. Swanick's testimony
II. APPLICABLE LEGAL STANDARDS AND THE PARTIES' CONTENTIONS
Under § 220, a stockholder who seeks to inspect corporate books and records (other than a stocklist) must submit a written demand under oath, and must prove by a preponderance of evidence that he has a proper primary purpose for seeking the inspection. A proper purpose is "a purpose reasonably related to such person's interest as a stockholder." In addition, the books and records for which inspection is sought must be "essential and sufficient" to achieve the purpose for seeking the inspection.
8 Del. C. § 220 (c); Security First Corp. v. US. Die Casting Dev. Co., Del. Supr., 687 A.2d 563, 567 (1997); Thomas Betts, 685 A.2d at 709.
Helmsman Mgmt. Service, Inc. v. AS Consultants, Inc., Del. Ch., 525 A.2d 160 (1987); see also authorities cited at note 10, supra.
In this case the defendant does not challenge the sufficiency of the "form and manner of making [the] demand," nor does Acceptance dispute, as a legal matter, that the purpose stated in the demand — to investigate mismanagement — is proper. What Acceptance does challenge is the factual bona fides of that stated purpose. That is, Acceptance contends that in fact, Dr. Magid's real purpose is not to investigate mismanagement. Rather, it is to assist Milberg Weiss to circumvent the PSLRA's automatic stay of discovery in the Nebraska Federal Action, by obtaining in this lawsuit the discovery the Nebraska plaintiffs were stayed from obtaining in the Nebraska Federal Action. Alternatively, Acceptance argues that even if the plaintiffs true purpose is to investigate mismanagement, he is still not entitled to relief, because the reserve-related documents he seeks to inspect are not essential and sufficient — indeed, they bear no discernible relationship — to the specific mismanagement concerns Dr. Magid identified at the trial.
Del. C. § 220(c)(1).
It is established that investigating the possibility of mismanagement is a proper purpose for seeking inspection of books and records under § 220. Thomas Betts, 681 A.2d at 1031.
The plaintiff denies that the purpose of the demanded inspection is to aid Milberg Weiss in circumventing the automatic stay of discovery in Nebraska. Indeed, plaintiff's counsel offered to stipulate that any documents inspected in this action will not be made available to the plaintiffs or their counsel- in the Nebraska Federal Action. The plaintiff also urges that the testimony of his expert witness, Mr. Swanick, establishes the requisite relationship between the plaintiff's stated purpose of investigating mismanagement and the specific categories of books and records that he seeks to inspect.
These contentions raise essentially two basic issues: (1) whether, in fact, Dr. Magid's true purpose is to assist Milberg Weiss in circumventing the PSLRA stay of discovery in the Nebraska Federal Action, and (2) if not ( i.e., if plaintiffs true purpose is to investigate mismanagement), whether Dr. Magid has established the requisite ("essential and sufficient") relationship between his stated purpose and the (reserve-related) books and records that he seeks to inspect. These issues are addressed in the analysis that follows.
III. ANALYSIS
A. The Bona Fides of Dr. Magid's Stated Purpose
Whether Dr. Magid's true purpose is (as his demand recites) to investigate mismanagement or whether it is (as Acceptance contends) to help Milberg Weiss circumvent the PSLRA stay of discovery in the Nebraska Federal Action, is a quintessentially factual issue. Each side points to evidence that support its position on that question. What I must decide is whether the plaintiff has established his position by a proponderance of persuasive evidence. Although the question is close, I conclude the plaintiff has met his burden and should prevail.
Acceptance argues that the following circumstances establish that the plaintiffs stated purpose is wholly pretextual: (i) the documents that he seeks to inspect are concerned exclusively with reserves, yet at trial Dr. Magid testified that he knew nothing about reserves; (ii) Dr. Magid was unable to articulate any connection between reserves and the specific selfdealing transactions he identified as evidencing possible mismanagement; (iii) reserves are the focus of the Nebraska Federal Action, and Milberg Weiss is co-lead counsel in that action; (iv) Milberg Weiss and plaintiffs counsel, Mr. McNew, have a long-standing working relationship as cocounsel; and (v) Milberg Weiss referred the plaintiff to Mr. McNew for legal representation, and also drafted the § 220 demand for inspection, whose contents Mr. McNew adopted almost verbatim; and (vi) Mr. McNew is paying all of the plaintiffs litigation expenses.
These circumstances, Acceptance insists, compel the conclusion that the plaintiff and his counsel are stalking horses for Milberg Weiss, and that their purpose is to use the fruits of their § 220 inspection to help that firm do an "end run" around the stay of discovery in Nebraska.
These arguments, and the evidence upon which they are based, are not without persuasive force. Nor was the plaintiffs contrary position enhanced by Mr. McNew' s resistance to producing the draft demand that Milberg Weiss had prepared, and also to the admission of that document into evidence. If, as plaintiff argues, the fact that Milberg Weiss prepared a draft of the demand is an innocuous fact, then why did plaintiffs counsel strive so mightily to prevent the other side from viewing (and the Court from considering) that supposedly neutral document? Counsel's tactical approach seemed, to that extent at least, to be at war with his client's litigating position.
That being said, I conclude nonetheless that the credible evidence on this issue falls in the plaintiffs favor. Dr. Magid approached Milberg Weiss on his own initiative to discuss possible legal representation. Milberg Weiss did not take Dr. Magid's case, that firm does not represent him in the Nebraska Federal Action, and the plaintiff is not a member of the Nebraska Federal shareholder class. Milberg Weiss referred the plaintiff to Mr. McNew, and except for its having prepared a draft of the demand (without Dr. Magid's knowledge or authorization), Milberg Weiss has had (insofar as this record discloses) no involvement in this proceeding.
Moreover, Acceptance's scenario leaves several important questions unanswered. First, why would Dr. Magid agree to act as a stalking horse to help Milberg Weiss prosecute a securities class action from which he would never benefit? Second, the defendant's PSLRA-circumvention scenario ignores the fact that the plaintiff has a personal incentive to seek a recovery for his non-trivial economic loss (an $11,000 decline in the market price of his stock). Depending upon what the inspection reveals, the plaintiff would have a plausible incentive to pursue a possible claim for relief against Acceptance's directors in a separate proceeding. How assisting Milberg Weiss would help further the plaintiffs personal economic self-interest is not answered. Third, plaintiffs counsel has stated his willingness to stipulate that none of the documents produced in the § 220 inspection would be disclosed to Milberg Weiss or its clients in the Nebraska Federal Action. Counsel's representation strengthens the credibility of the plaintiffs position as to his true purpose for seeking inspection.
Presumably that action would be pursued on a contingent fee basis on behalf of a class of which the plaintiff would be a member. That possibility would also remove the unfavorable color with which Acceptance seeks to paint the fact that plaintiffs counsel is paying plaintiffs litigation expenses. It is commonplace for counsel to advance expenses in a contingent fee case, and insofar as the record shows, the expense arrangement between Dr. Magid and his counsel is of that character. The defendant has not shown otherwise.
Counsel did qualify that representation, in that as he wished to be free from to seek leave from the Court, at some future date, for relief from any order barring disclosure of the documents to the plaintiffs in the Nebraska Federal action. In this connection it merits observation that a books and records action under § 220 is not covered (that is, precluded) either by the PSLRA or the Securities Litigation Uniform Standards Act ("SLUSA"). See, e.g., Derdiger v. Tallman,., 75 F. Supp.2d 322 (D. Del 1999). Thus, if the plaintiff is to be barred from disclosing documents or other information resulting from an inspection in this case, the reason is not that supervening federal law requires it, but, rather, because it will assure the integrity of counsel's incourt representations and preserve the integrity of this proceeding.
For these reasons I find as fact that the plaintiffs true purpose is, as his demand indicates, to investigate possible mismanagement. The Court therefore rejects the defendant's assertion that the plaintiff "has been used as a shill by McNew and Milberg to pursue the interests of Milberg in connection with the Nebraska Federal Action rather than Plaintiffs own stated interests."
Def. Post Trial Ans. Br. at 22.
B. The Essentiality And Sufficiency of The Demanded Documents To The Stated Purpose For The Inspection
The second issue relates to an important policy underlying § 220, namely, that the relief being requested not be overbroad. Implementing that policy is the legal requirement that the inspection be limited to those documents that are "essential and sufficient" to the purpose for the inspection. Acceptance's argument, as earlier noted, is that because Dr. Magid's four articulated mismanagement concerns (involving alleged selfdealing and wasteful transactions) lack any facial connection to Acceptance's loss reserves, an inspection of the demanded reserve-related documents would shed no useful light on Dr. Magid's identified concerns and, hence, would not be essential or sufficient to achieve the purpose for the inspection.
The problem with that argument is that the testimony of Mr. Swanick, the plaintiffs trial expert, did connect the stated purpose (investigating possible mismanagement) with the reserve-related documents sought to be inspected. The connection, conceptually speaking, flows from Mr. Swanick's opinion that management's failure to adjust Acceptance's loss reserves in a timely manner ( i.e., after management learned of the Montrose decision in 1995), suggests that wrongdoing may have occurred.
Acceptance responds by advancing several reasons why Mr. Swanick's testimony either cannot or should not be considered. First, the defendant urges that because Dr. Magid personally could not articulate any connection between his identified mismanagement concerns and Acceptance's loss reserves, he cannot be permitted to supply that connection with expert testimony. Second, Acceptance contends that even if expert testimony may be used for that purpose, the evidence from this particular expert (Mr. Swanick) must be disregarded because it (i) lacked a sufficient evidentiary foundation, (ii) did not satisfy the Daubert test for determining the reliability of expert testimony, and (iii) is an insufficient basis from which to conclude that there was mismanagement.
Referring to Daubert v. Merrill Dow Pharmaceuticals, Inc, 509 U.S. 579 (1993), which developed the federal court standard for determining the reliability of expert testimony on scientific, technical or other specialized matters. The Daubert standard has been adopted as the law of Delaware. MG. Bancorp., Inc. it Le Beau, Del. Supr., 737 A.2d 513 (1999).
I conclude, for the reasons next discussed, that Mr. Swanick's testimony competently established the necessary connection between the adjudicated purpose for the inspection and the documents sought to be inspected, and that Acceptance's contrary arguments lack merit.
The defendant's first argument — that Mr. Swanick's testimony is legally irrelevant — is best expressed in Acceptance's own words:
Swanick's testimony should not be accepted because it does not relate to the mismanagement about which Plaintiff complains. Whether plaintiff's expert believes that [Acceptance] improperly set its loss reserves has nothing to do with what Plaintiff believed or was aware of in determining to seek an inspection. As Plaintiff candidly admitted, reserves simply were not on his radar screen. As a consequence, Swanick's conclusion — that the Company failed to timely adjust its reserves in light of Montrose — is irrelevant.
Def Post Trial Ans. Br. at 27 (emphasis in original).
This argument rests upon the unspoken premise that as a matter of law, a stockholder who seeks inspection of specific books and records must establish, by his or her own personal testimony, that those records are essential to and sufficient for the purpose of the inspection. The defendant cites no legal authority for that proposition, and the Court is aware of none. Indeed, it has become customary in § 220 books and records trials for the plaintiff to establish the "essentiality and sufficiency" element of the plaintiffs case through expert testimony. If Acceptance's argument were the law, the only plaintiffs who would qualify for § 220 inspection relief in a case such as this would be stockholders having expertise in evaluating the adequacy of insurance loss reserves. It is manifest that § 220 is intended to benefit all stockholders of Delaware corporations. The statute is not limited to those stockholders who possess a specific industry expertise.
This is not to suggest that where, as here, a plaintiff-shareholder's articulated concerns are facially unrelated to the documents that he or she seeks to inspect, the Court must ignore the "disconnect." On the contrary, the disconnect is relevant, but only to an assessment of the factual veracity of the plaintiffs stated purpose. As earlier discussed, the Court has made that assessment, and has found that despite the disconnect, Dr. Magid's stated inspection purpose is factually bona fide.
The defendant's remaining arguments focus upon the legal and factual adequacy of Mr. Swanick's testimony. Acceptance argues first that Mr. Swanick's testimony lacks a proper foundation because it rests exclusively on his communications with other industry experts concerning the implications of Montrose, a case that Swanick himself did not read. The short answer is that Rule 703 of the Delaware Rules of Evidence permits an expert to base his opinion on facts or data perceived by or made known to him before or at the hearing in question, even if the facts and data are not admissible in evidence, provided that they "are of a type reasonably relied on by experts in the particular field." In determining whether an expert's data is of the kind normally used by experts in the field, the Court will consider whether there are good grounds to rely on that data to draw the conclusion that the expert reached.
D.R.E. 703.
Id.
In re TMI Litig., 193 E.3d 613, 617 (3d Cir. 1999).
In this case, Mr. Swanick relied upon information supplied by his fellow consultants in his consulting firm to establish (for this purpose) one of the several components of his analysis. The remaining components Mr. Swanick established from his own personal research, which included an analysis of the defendant's public disclosures concerning its loss reserves and the effect of Montrose. Thus, Mr. Swanick did not rely "exclusively" upon the hearsay information supplied by others, and to the extent he did rely upon information from his colleagues, his reliance was validated by D.R.E. 703. The defendant cites no authority requiring the Court to conclude that Mr. Swanick lacked "good ground" to proceed in this manner. Nor has Acceptance persuaded me to so conclude, particularly since Acceptance does not dispute, and has introduced no evidence to controvert, the specific factual underpinnings of Mr. Swanick's testimony.
The defendant next argues that Mr. Swanick's testimony should be either excluded or disregarded for failure to satisfy the Daubert test of "whether the testimony has a reliable basis in the knowledge and experience of [the relevant] discipline." Mr. Swanick's testimony fails this test, Acceptance, argues because his opinion "lacks a reliable basis in accounting or actuarial principles." That argument — consisting of a single paragraph in the defendant's brief with no citation to legal authority or evidence of record — amounts to an ipse dixit. In essence, Acceptance is asserting that no expert can be permitted to opine about the adequacy of insurance loss reserves without a "review of the company's actuarial certification, assessment of the actuary's experience, analysis of the information relied upon by the actuary and analysis of the information disregarded by the actuary."
Cede v. Technicolor, Inc., Del. Supr., 758 A.2d 485, 498 (2000) (quoting Kumho Tire Co. v. Carmichael, 526 U.S. 137, 149 (1999)).
Def. Post Trial Ans. Br. at 29. Acceptance further argues that Mr. Swanick's testimony fails the Daubert test because of his "near total reliance upon the unverified conclusions of others." Id. That is an argument the Court has rejected.
Id.
Putting aside the absence of any cited law or evidence to support that quoted statement, Acceptance's argument overlooks the undisputed fact that in this case no reserve adjustment was made in response to the Montroserelated risk until four years after Montrose was decided. Why Mr. Swanick should have to resort to the entire panoply of reserve audit procedures to draw inferences from that undisputed fact is nowhere explained. Relying on information provided by his insurance consultant colleagues, Mr. Swanick was able to conclude that the impact of Montrose was industry-wide and required a timely adjustment of the reserves. If Acceptance was of the view that full-blown reserve audit procedures were needed to reach that conclusion, then it was defendant's burden to adduce evidence supportive of that position. It cannot substitute unsupported conclusory assertions for evidence.
Lastly, Acceptance argues that even if Mr. Swanick's testimony passes the Daubert requirements for admissibility, the Court should still disregard it because the testimony provides no factual basis to conclude that management's failure to adjust the reserves was the product of disloyalty. But the applicable standard does not require the shareholder "to prove by a preponderance of evidence that waste and mismanagement are actually occurring, " nor is the plaintiff required to establish that management's conduct was the product of "disloyalty." The law requires only that the stockholder "present some credible basis from which the court can infer that waste or mismanagement may have occurred." The testimony of Mr. Swanick, in my view, was sufficient to show that mismanagement may have (not actually has) occurred in this case.
Thomas Betts Corp., 681 A.2d at 1031 (emphasis added).
Id.
The plaintiff points to the fact that in 1996 Acceptance conducted a public offering of its securities, and from that fact argues that the Court may infer that management had an incentive not to adjust reserves that would require it to disclose a reduction of actual or projected earnings. Under that scenario, management would have engaged in deliberate misdisclosure. The alternative scenario is that management would have failed to act with the requisite degree of due care. Both scenarios are consistent with the ruling of the Court in the Nebraska Federal Action, that the plaintiffs had stated with sufficient particularity a claim under Section 10(b) and Rule 10b-5 under the 1934 Act and the PSLRA. That latter statute requires the plaintiffs "to state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2). "The required state of mind is scienter, [proof of which] is the `intent to deceive, manipulate, or defraud,' which is necessary to prevail in a 10b-5 action." In re Acceptance Ins. Cos. Sec. Litig., Master Case 8:99CV547 at 10 (D. Neb. 2001) (quoting In re NationsMart Corp. Sec. Litig., 130 F.3d 309, 320 (8th Cir. 1997), cert. denied, 118 S.Ct. 2321 (1998)).
III. CONCLUSION
Because of its intensively factual nature, this case was not an easy one to decide. Nor was the Court's task made easier by the sideshows that needlessly protracted this supposedly "summary" proceeding and diverted this Court's limited resources to issues unrelated to the merits.Despite these distractions, I am satisfied that the plaintiff has established his entitlement to relief under 8 Del. C. § 220. Because the defendant does not challenge the essentiality or sufficiency of the books and records described in the demand on grounds other than those I have considered and rejected, it follows that the inspection will encompass all categories of books and records described in the demand. Because counsel's representation was material to my decision, the inspection will be conditioned upon the plaintiff, his counsel, and any experts assisting him in the inspection, executing an undertaking that the documents to be inspected will be used solely for purposes of this litigation and will not be disclosed to any of the plaintiffs or their counsel in the Nebraska Federal Action.
Counsel for the parties shall confer and submit an appropriate form of implementing Order.