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explaining that "simply stating that materiality and scienter are determined based on the facts at the time of the alleged misstatement does not mean that later occurring evidence is irrelevant," and denying motion to exclude evidence relating to events occurring after the period of the alleged Rule 10b-5 violation
Summary of this case from Media General, Inc. v. TomlinOpinion
94 Civ. 5587 (PKL) (RLE)
December 11, 2002
Attorneys for Plaintiff: LEHMAN GIKOW, P.C., David H. Gikow, Esq., Arthur R. Lehman, Esq., New York, New York
Attorneys for Defendants: JAFFE ASHER LLP, Gregory E. Galterio, Esq., Joan M. Perryman, Esq., Mark P. Monack, Esq., New York, New York
OPINION AND ORDER
Plaintiff RMED international, Inc. ("RMED") brings this class action alleging violations of Section 10(b) of the Securities Exchange Act of 1934, Rule 10(b) promulgated thereunder, and common law fraud by defendant Sloan's Supermarkets, Inc. ("Sloan's") and John Catsimatidis. Plaintiff now moves in limine (1) to exclude evidence of events occurring after the filing of the FTC complaint in June 1994; (2) to exclude expert rebuttal evidence with respect to the testimony of plaintiff's expert; and (3) to exclude evidence of any alleged lack of reliance by class members other than plaintiff. For the reasons set forth below, plaintiffs motions are denied.
RMED also brought causes of action under Article 23-A of the General Business Law of New York and for breach of fiduciary duty. Following defendants' summary judgment motion, the Court dismissed those causes of action in an Opinion and Order dated February 21, 2002. See RMED Int'l. Inc. v. Sloan's Supermarkets, Inc., 185 F. Supp.2d 389 (S.D.N.Y. 2002) (Leisure, J.).
Plaintiff also filed an in limine motion requesting the Court to compel production of the documents on defendants' privilege log. On December 3, 2002, the Court denied this motion on procedural grounds.
BACKGROUND
The factual and procedural background of this case is explained in detail in RMED Int'l. Inc. v. Sloan's Supermarkets, Inc., 185 F. Supp.2d 389 (S.D.N.Y. 2002), familiarity with which is assumed. Any additional relevant facts are included in the discussion.
DISCUSSION
I. Motions in Limine
The purpose of a motion in limine is to allow the trial court to rule in advance of trial on the admissibility and relevance of certain forecasted evidence. See Luce v. United States, 469 U.S. 38, 41 n. 4 (1984) (noting that although the Federal Rules of Evidence do not explicitly authorize in limine rulings, the practice has developed pursuant to the district court's inherent authority to manage the course of trials); Palmieri v. Defaria, 88 F.3d 136, 141 (2d Cir. 1996); Nat'l Union Fire Ins. Co. v. L.E. Myers Co. Group, 937 F. Supp. 276, 283 (S.D.N.Y. 1996). Evidence should not be excluded on a motion in limine unless such evidence is clearly inadmissible on all potential grounds.See Noble v. Sheehan, 116 F. Supp.2d 966, 969 (N.D. Ill. 2000); see also Baxter Diagnostics. Inc. v. Novatek Med., Inc., No. 94 Civ. 5520, 1998 WL 665138, at *3 (S.D.N.Y. Sept. 25, 1998) (denying a motion in limine to preclude presentation of evidence regarding a potential punitive damages claim because the motion was too sweeping in scope to be considered prior to trial). Indeed, courts considering a motion in limine may reserve judgment until trial, so that the motion is placed in the appropriate factual context. See Nat'l Union Fire Ins. Co., 937 F. Supp. at 287 (citing Hawthorne Partners v. ATT Technologies. Inc., 831 F. Supp. 1298, 1400 (N.D. Ill. 1993)). Furthermore, a court's ruling regarding a motionin limine is "subject to change when the case unfolds, particularly if the actual testimony differs from what was contained in the defendant's proffer." Luce, 469 U.S. at 41.
II. Evidence of Events Occurring After the Filing of the FTC Complaint
RMED requests that this Court bar the introduction of evidence of events occurring after the filing of the FTC complaint in June 1994. In its initial moving papers, plaintiff does not indicate exactly what events it is seeking to exclude. Apparently, RMED does not wish to exclude evidence of all events after June 1994. See Plaintiff's Reply at 2-3 (indicating that RMED intends to introduce a proxy statement issued by defendants in 1996). In their opposition papers, defendants assume that plaintiff seeks to exclude evidence of defendants' settlement agreement with the FTC and evidence of acquisitions Sloan's made in 1996 and 1997. See Defendants' Opposition at 1-2. Plaintiff does not object to defendants' characterization of its motion, see Plaintiffs Reply at 3, and therefore the Court will assume that is in fact the request.
Plaintiffs main contention is that the settlement information and later acquisitions are irrelevant. Evidence is relevant if it has "any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence." Fed.R.Evid. 401. This standard "is not high."U.S. v. Southland Corp., 760 F.2d 1366, 1375 (2d Cir. 1985) (Friendly, J.) (internal quotations omitted).
Plaintiff also contends that this Court's prior summary judgment opinion in this matter "is dispositive of the motion at bar." See Defendant's Opposition at 2. This characterization is incorrect because it fails to consider the posture the Court must take in a summary judgment opinion. In the section of the Opinion to which plaintiff cites, the Court simply ruled that there was an issue of material fact as to scienter. See RMED Int'l. Inc., 185 F. Supp.2d at 404. If the language of the Opinion seems to imply anything more, that is only because the Court was drawing all justifiable inferences in plaintiffs favor, as it should in a summary judgment decision.
In order to prevail in an action under section 10(b) and Rule 10b-5, a plaintiff must show that the defendant made a material false statement or omitted a material fact in connection with the purchase or sale of securities, with scienter, and that the plaintiffs reliance on defendant's action caused the injury. See Kalnit v. Eichler, 264 F.3d 131, 138 (2d Cir. 2001); Ganino v. Citizens Utils Co., 228 F.3d 154, 161-62 (2d Cir. 2000). Materiality and scienter are determined based on the facts as they existed at the time of the alleged misstatement or omission. See Castellano v. Young Rubicam, Inc., 257 F.3d 171, 185 (2d Cir. 2001); Ganino, 228 F.2d at 165; SEC v. Downe, No. 92 Civ. 4092, 1993 WL 22126, at *10 (S.D.N.Y. Jan. 26, 1993) (Leisure, J.). These determinations are "to be made upon all the facts as of the time of the transaction and not upon a 20-20 hindsight view long after the event."Spielman v. Gen. Host Corp., 402 F. Supp. 190, 194 (S.D.N.Y. 1975) (Weinfeld, J.).
However, simply stating that materiality and scienter are determined based on the facts at the time of the alleged misstatement does not mean that later occurring evidence is irrelevant. See SEC v. Trikilis, No. CV 92-1336, 1992 WL 301398, at *4 n. 4 (C.D. Cal. July 28, 1992) (stating that "the information must have been material at the time of the tip to be actionable [but] [t]his does not imply that evidence of materiality appearing after the tip is not permissible"), vacated on other grounds by 1993 WL 43571 (C.D. Cal. Jan. 22, 1993). For example, fluctuations in a stock's price have been admitted as evidence of the materiality of a false statement. See, e.g., United States v. Bilzerian, 926 F.2d 1285, 1298 (2d Cir. 1991) (stating that "whether a public company's stock price moves up or down or stays the same after the filing of a Schedule 13D does not establish the materiality of a statement made, though stock movement is a factor the jury may consider relevant").
Plaintiff states that this is a "minor exception to [the] rule" and that such evidence is used to calculate damages. Plaintiff's Reply at 3. However, RMED cites no cases that state this is only an exception to a rule. Furthermore, the use of this type of evidence certainly can be used for more than damages. See Bilzerian, 926 F.2d at 1298 (stating that evidence of movement in a stock's price may be consider when determining materiality); see also San Leandro Emergency Med. Group Profit Sharing Plan v. Philip Morris Cos., Inc., 75 F.3d 801, 809 (2d Cir. 1996).
The evidence regarding the FTC settlement and the later acquisitions is relevant to materiality, scienter and falsity. Defendants intend to show at trial that throughout settlement negotiations, the FTC assured Catsimatidis that if divestiture of supermarkets was required, Red Apple could divest a sufficient number of stores to satisfy the FTC and therefore Sloan's would not be affected. Defendants' Opposition at 4-5. If this is in fact the case, it is certainly relevant to both the materiality of the alleged omissions and scienter. See Castellano, 257 F.3d at 181 (stating that "the "materiality of the information misstated or withheld is determined in light of what the defendants knew at the time the plaintiff committed himself to sell the stock'" (quotingMichaels v. Michaels, 767 F.2d 1185, 1195 (7th Cir. 1985)); see also Herskowitz v. Nutri/System, Inc., 857 F.2d 179, 188 (3rd Cir. 1988) (stating that evidence of company' s post-merger performance may be relevant to evidence pre-merger intentions). The fact that the ultimate settlement did not require Sloan's to divest itself of any stores can be considered by the jury as evidence that the FTC did indeed make the assurances that Catsimatidis claims it did. Thus, it is evidence of the facts at the time of the alleged misconduct and not a prism through which the jury can judge the actions based on 20-20 hindsight.
Neither party has raised as an issue Rule 408 of the Federal Rules of Evidence which bars the introduction of certain information regarding settlements. Presumably, this is because neither side thinks that it is applicable in this matter, and the Court tends to agree.
In its annual report to shareholders in February 1993, Sloan's stated that it would "continue to actively seek additional businesses, preferably within the food industry." Plaintiff contends that this is a materially false statement. Evidence that Sloan's did indeed acquire additional businesses is relevant to the defendants' state of mind — i.e. scienter — at the time the statement was made. It could tend to show that defendants' did not have an intent to defraud when it made the statement. Additionally, it is evidence of whether the statement was true at the time. Accordingly, plaintiff's in limine motion to exclude evidence of the FTC settlement and the later acquisitions based on relevancy grounds is denied.
III. Expert Rebuttal Evidence
Plaintiff's second in limine motion asks the Court to bar the introduction of expert rebuttal evidence with respect to the testimony of plaintiff's expert witness. The briefing on this motion focused almost exclusively on whether defendant could serve an additional expert report and whether it would admissible. Therefore, the Court will focus solely on that issue.
In their opposition to the motion, defendants indicated that they intend to serve an additional expert report by Lucy Allen, the same expert that authored their original expert report, and contend that they have the right to do so under Rule 26(e)(1) of the Federal Rules of Civil Procedure. Plaintiff, however, contends that such a report would only be a rebuttal to plaintiff's expert, which falls under Rule 26(a)(2)(c), and therefore is untimely. The defendants have notified the Court that since the briefing of this motion, they have produced the additional report.
By cover letter dated December 9, 2002, defendants sent the Court a copy of the new report. By telephone on December 10, 2002, counsel for defendant notified the Court that plaintiff was served with a copy of the report on December 9, 2002.
A party may supplement its required Rule 26 disclosures, including expert reports, up to thirty days before trial. Fed.R.Civ.P. 26(e)(1). An expert report that is "intended solely to contradict" an opposing expert must be served within thirty days of the production of the report it is rebutting. Fed.R.Civ.P. 26(a)(2)(c) (emphasis added). Therefore, the timeliness of an expert report depends on whether the report is supplemental or solely rebuttal. Certainly, the difference can be a fine one. In this matter, however, the Court need not parse through the expert reports at this juncture to determine the nature of the new report.
Regardless of whether the new report is supplemental or rebuttal, the Court will allow it. Exclusion of expert testimony is a "drastic remedy."McNerney v. Archer Daniels Midland Co., 164 F.R.D. 584, 587 (W.D.N.Y. 1995). Precluding testimony of an expert, even when there has not been strict compliance with Rule 26, "may at times tend to frustrate the Federal Rules' overarching objective of doing substantial justice to litigants." In re Kreta Shipping, S.A., 181 F.R.D. 273, 277 (S.D.N.Y. 1998). When determining whether to exclude expert testimony, a court should consider:
(1) the prejudice or surprise in fact of the party against whom the excluded witnesses would have testified, (2) the ability of that party to cure the prejudice, (3) the extent to which waiver of the rule against calling unlisted witnesses would disrupt the orderly and efficient trial of the case or of other cases in the court, and (4) bad faith or willfulness in failing to comply with the district court's [scheduling] order.Id. (quoting In re Paoli R.R. Yard PCB Litig., 35 F.3d 717, 791 (3d Cir. 1994)) (alteration in original). Allowing service of a new report authored by Allen will not disrupt the trial, which is set to begin almost a month from now. Furthermore, there is no evidence of bad faith by the defendants. Finally, any prejudice is easily cured by allowing plaintiff to depose Allen if they so desire. See Grdinich v. Bradlees, 187 F.R.D. 77, 79 (S.D.N.Y. 1999) (stating that prejudice can be alleviated by allowing allegedly prejudiced party to depose the expert). Therefore, the Court denies plaintiff's in limine motion and will allow Allen to testify about the new report, with the proviso that plaintiff must be permitted to depose Allen, if it so wishes, by December 31, 2002.
The Court has reviewed both of Allen's reports. As stated above, it is unnecessary for the Court to determine if the new report is supplemental or rebuttal in nature. However, it is quite likely, based on the review, that if the Court did need to make such a determination, it would find the report to be supplemental and not solely rebuttal.
IV. Lack of Reliance by Class Members Other than RMED
RMED's final in limine motion asks the Court to exclude evidence of any lack of reliance by class members other than plaintiff. RMED contends that only evidence regarding the named plaintiff's lack of reliance is admissible because of a prior ruling by this Court and that evidence showing other class member's lack of reliance may be presented in proceedings after the trial if the class is successful. Defendants argue that the evidence plaintiff asks the Court to exclude is relevant to the issue of whether the market for Sloan's shares was open and efficient market, a key issue in the determination of whether plaintiff can proceed under a "fraud on the market" theory.
Whether or not a market for a stock is open and efficient is a question of fact. In re Laser Arms Corp. Sec. Litig., 794 F. Supp. 475, 490 (S.D.N.Y. 1989), aff'd 969 F.2d 15 (2d Cir. 1992). Plaintiff contends that this Court conclusively decided that the market for Sloan's shares was open and efficient in the February 21, 2002 summary judgment Opinion and Order. This argument is similar to an argument plaintiff made in connection with its request to exclude evidence of events occurring after the filing of the FTC complaint and it suffers from the same deficiency.See supra footnote 3. In the earlier decision, the Court only ruled that plaintiff has put forth sufficient evidence of an efficient market to survive summary judgment. Plaintiff does not need to show individual reliance in its case in chief. However, defendant can rebut the presumption of reliance, including by a showing that the market is inefficient. The jury will ultimately decide whether the market is efficient and defendants are entitled to put on evidence in that respect.
In reply to defendants' opposition, RMED put forth another ground to exclude the evidence. When a plaintiff shows material omissions, reliance is presumed. Burke v. Jacoby, 981 F.2d 1372, 1379 (2d Cir. 1992) (citing Affiliated Ute Citizens v. United States, 406 U.S. 128, 153-54 (1972)). Plaintiff implicitly argues that because there are allegedly material omissions in this case, reliance is presumed whether or not there is an open and efficient market and therefore there is no need for defendant to argue the market was inefficient. This argument is flawed, however, because there is also alleged material false statements at issue, to which no presumption of reliance attaches absent a showing of an efficient market. The jury could decide that there was a material false statement and no material omissions. In such a situation, the efficiency of the market would be very important to determining reliance. As such, this argument is of no avail to RMED.
RMED only included this argument in its reply papers. To grant RMED's motion based on arguments that defendants did not have a full opportunity to contest would be unfair. The Court will address these arguments only because they are without merit. See Dunlop-McCullen v. Pascarella, No. 97 Civ. 0195, 2002 WL 31521012, at *22 n. 43 (S.D.N.Y. Nov. 13, 2002) (Leisure, J.).
Therefore, plaintiff's in limine motion to exclude evidence regarding an alleged lack of reliance by class members other than RMED is denied.
The ruling today is a narrow one. Today's Opinion and Order should certainly not be read as ruling that the evidence is admissible for all purposes, or even that it is admissible at all (although it is quite likely admissible for purposes of showing an inefficient market). Simply put, the Court today holds that the February 21, 2002 Opinion and Order in this case does not render this evidence inadmissible. In their opposition brief, defendants imply that if they successfully show that the market for Sloan's stock was inefficient, they can show at trial that members of the class other than RMED should not recover because they did not rely on the alleged misstatements or omissions. The Court, while not ruling on this issue today, is skeptical that the trial should proceed in this manner. The reliance of each of the numerous members of the class other than RMED may well be better handled in separate proceedings after the class trial. This issue, however, is for another day.