The opinion of the court was delivered by: Sweet, District Judge
The parties to this consolidated securities action have moved in limine to exclude certain evidence from the trial, which is anticipated to commence on April 7.
1. Preclude Defendants from calling witnesses, who are
not made available to testify live at trial;
2. Exclude testimony about Self-Regulatory
Organizations ("SRO") Regulatory Provisions Defendant
Bear Stearns & Co., Inc. ("Bear Stearns") seeks
1. Exclude evidence as irrelevant, inadmissible, and
2. Exclude audio-tapes and related transcripts;
3. Exclude evidence as to Bear Stearns relating to the
U.S. Attorney's Criminal Proceedings and the SEC's
Proceedings against David Blech ("Blech");
4. Hold a separate trial from Defendants Blech,
David Blech & Company, Inc. ("DBCO"), and Baird
Patrick & Co., Inc. ("Baird Patrick") and to
bifurcate the issues of liability and damages;
5. Modify the Court's Class Certification Order and to
exclude certain evidence.
Defendant Baird Patrick & Co. ("Baird Patrick")
1. Exclude Blech's plea allocution and the amended
complaint in the SEC proceedings against Blech.
The motions are dispensed of as follows for the
reasons set forth below:
I. Plaintiffs' motion to preclude Defendants from
calling witnesses, who are not made available to
testify live at trial is denied as unnecessary.
II. Plaintiffs' motion to exclude testimony about SRO
Regulatory Provisions is denied.
III. Bear Stearns' motion to exclude evidence as
irrelevant, inadmissible, and prejudicial is denied in
part and granted in part. Those records, which are
business records and admissions against interest, will
be admitted against Baird Patrick and as evidence of
the Blech scheme to defraud.
IV. Bear Stearns' motion to exclude audio-tapes and
related transcripts is denied in part and granted
V. Bear Stearns' motion to exclude evidence relating
to the U.S. Attorney's Criminal Proceedings and the
SEC's Proceedings against Blech is denied in part
and granted in part.
VI. Bear Stearns' motion for a separate trial and
bifurcation is denied. The requested instruction
will be given.
VII. Bear Stearns' motion to modify the Court's Class
Certification Order and to exclude certain evidence
is granted in part and denied in part.
VIII Baird Patrick's motion to exclude Blech's plea
allocution and the amended complaint in the SEC
proceedings against Blech is denied in part and
granted in part.
The plaintiffs have challenged the qualifications and testimony of Bear Stearns experts Daniel R. Fischel ("Fischel") and Baird Patrick's expert Vincent Buchanan ("Buchanan"). Bear Stearns and Baird Patrick have challenged the qualifications of the plaintiffs' experts Howard Berg ("Berg") and Blaine F. Nye ("Nye"). As set forth below, all experts are qualified and objections to their testimony are sustained in part.
This class action alleging securities violations by Bear Stearns, a clearing broker for DBCO; Baird Patrick, a broker; DBCO; and various issuers, was initiated on October 21, 1994.
Discovery was commenced and completed, and various motions have been disposed of, familiarity with which is assumed. See In re Blech Sec. Litig., 928 F. Supp. 1279 (S.D.N.Y. 1996) ("Blech I"); In re Blech Sec. Litig., 961 F. Supp. 569 (S.D.N.Y. 1997) ("Blech III"); In re Blech Sec. Litig., No. 94 Civ. 7696 (RWS), 2002 WL 31356498 (S.D.N.Y. Oct. 17, 2002) ("Blech IV").
Defendant Blech is in bankruptcy proceedings in New York, and consequently, this action has been stayed against him pursuant to the automatic state provisions of the Bankruptcy Code. Defendant DBCO went out of business in 1994, is now defunct, and has not been represented by counsel or been in active party in this litigation for several years. Certain settlements with initial defendants have been reached, and the remaining active defendants are Bear Stearns and Baird Patrick. The instant motions were fully submitted on February 24, 2003.
I. Motion to Preclude Defendants from Calling
Witnesses who Are Not Made to Testify Live
Plaintiffs have sought a pretrial ruling that any witnesses under defendants' control, who testify on the defense case, be made available to testify live on the Plaintiffs' case rather than by deposition. The application appears unnecessary.
The parties will identify their witnesses in the pretrial order. If the Plaintiffs wish to present in their case witnesses under the defendants' control, they will identify them and, if necessary, subpoena them. It is assumed that this formality will not be required, and that the parties will be willing to produce witnesses under their control.
II. Motion to Exclude Testimony about SRO Regulatory
The Plaintiffs have moved in limine to exclude testimony about Self-Regulatory Organizations ("SRO") Regulatory Provisions. For the reasons discussed below, the motion in limine is denied.*fn1
In 1982, the New York Stock Exchange deleted those portions of NYSE Rule 405 that had imposed supervisory duties on clearing brokers and made NYSE Rule 382 "the exclusive [NYSE] Rule which concerns itself with the [clearing] relationship." NYSE Rule 382, as amended, permits clearing brokers to contractually allocate all supervisory and other responsibilities vis-a-vis the customer solely to the introducing broker and requires the clearing agreement to specifically address the clearing broker's and the introducing broker's respective responsibilities in the following seven areas: (1) opening, approving and monitoring of accounts; (2) extension of credit; (3) maintenance of books and records; (4) receipt and delivery of funds and securities; (5) safeguarding of funds and securities; (6) confirmations and statements; and (7) acceptance of orders and execution of transactions, thereby giving recognition not only to a clearing broker's more ministerial activities but also to a clearing broker's normal function as a creditor.
The Clearing Agreement entered into between Bear Stearns and DBCO ("Clearing Agreement") allocated the responsibilities between DBCO and Bear Stearns for monitoring its customers' accounts and ensuring that the trading therein complied with applicable rules and regulations and for responding to customer inquiries and complaints remaining in compliance with the net capital rules and reporting requirements, and for reporting on at least a monthly basis "all financial information and reports" filed with the National Association of Securities Dealers, the SEC or any SRO, including monthly and quarterly Financial and Operational Combined Uniform Single Reports ("FOCUS" Reports), issuing confirmations, monthly account statements and notices directly to customers and for supplying daily reports, including customer confirmations, margin status reports, money line reports and daily commission detail reports.
B. Evidence Relating To SRO Rules Is Relevant To
An Evaluation Of Bear Stearns' Conduct
Evidence of Bear Stearns' compliance with the SRO Rules 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. Indeed, the standard for finding relevance "is not high." United States v. Southland Corp., 760 F.2d 1366
, 1375 (2d Cir. 1985), cert. denied, 474 U.S. 825
Here, evidence that Bear Stearns' conduct was consistent with the SRO Rules (and the Clearing Agreement which derives from the SRO Rules and allocates responsibilities and defines rights and obligations in accord with custom and practice in the clearing industry) is directly relevant to demonstrate (i) the industry standard for routine conduct for a clearing broker and creditor, and (ii) whether or not Bear Stearns' conduct under those standards was entirely routine and appropriate conduct for the industry or engaged in non-actionable aiding and abetting or whether it "crossed the line" and became an active participant in David Blech's manipulative scheme.
The Blech IV decision held that "an otherwise innocent act if undertaken with an intent to manipulate the market, can become a contrivance to accomplish a security fraud," In re Blech Sec. Litig., No. 94 Civ. 7696 (RWS), 2002 WL 31356498, at *17 (S.D.N.Y. Oct. 17, 2002) (holding a question of fact existed as to Bear Stearns' intent in purportedly withholding stock from short sellers and delaying sell-outs under Reg T, even if such actions were "not a security violation in and of [themselves]"), and stated that the issue was whether Bear Stearns performed its clearing functions "knowingly in such a manner as to enhance the Blech market manipulation scheme." In re Blech Sec. Litig., 2002 WL 31356498, at *6.
Here, Bear Stearns maintains (i) that its conduct was not motivated by a fraudulent intent, but rather by the normal and routine motivations of a clearing broker and creditor, (ii) that information in Bear Stearns' possession concerning DBCO's trading activities, obtained as a result of its normal, routine functions as a clearing broker acting in compliance with industry practice, did not constitute knowledge of Blech's fraudulent scheme, and (iii) that, although certain information in Bear Stearns' possession might (in theory) have caused DBCO's compliance department or regulatory authorities to conduct an investigation, because Bear Stearns had no obligation under the SRO Rules to do so, Bear Stearns was not acting either recklessly or with a motive to commit fraud by not investigating any alleged "red flags."
Whether its conduct constituted a direct, knowing participation in Blech's fraud is the ultimate issue. The SRO Rules are evidence of industry practice but do not constitute an exemption from liability. The effect of any "red flags" in the context of Rules is relevant. The 1999 amendment to NYSE Rule 382 enacted after the events at issue is not relevant to Bear Stearns' conduct in 1994. See Van Alen v. Dominick & Dominick, Inc., 441 F. Supp. 389, 396 (S.D.N.Y. 1976) (testimony of defendant firm's officers that they believed the firm was operating within the guidelines set forth by the NYSE found relevant to defendant's lack of scienter), aff'd, 560 F.2d 547 (1977); RMED Int'l, Inc. v. Sloan's Supermarkets, Inc., 94 Civ. 5587 (PKL) (RLE), 2002 WL 31780188, at *2 (S.D.N.Y. Dec. 11, 2002) (evidence of defendant's state of mind at the time could tend to show he did not act with scienter).
Indeed, the Court's Blech IV decision expressly recognized that a factual issue at trial will be whether Bear Stearns performed its functions pursuant to the SRO Rules and the Clearing Agreement "knowingly in such a manner as to enhance the Blech market manipulation scheme." In re Blech Sec. Litig., 2002 WL 31356498, at *6.
Thus, the SRO Rules and compliance with the rules are relevant to analyses performed and opinions given by Plaintiffs. Bear Stearns' affirmative defenses that (i) "in the conduct of its affairs . . . [it] did not know, and in the exercise of reasonable care could not have known, of any of the acts, misstatements or omissions by [Blech or DBCO]" (Block Aff. Ex. 10 (Answer) ¶ 118) and (ii) "Bear Stearns acted at all times relevant to the allegations of the Complaint in good faith" (Block Aff. Ex. 10 (Answer) ¶ 119).
The Plaintiffs' motion in limine to exclude testimony regarding SRO Regulatory provisions is, therefore, denied.
III. Motion to Exclude Evidence as Irrelevant,
Inadmissible, and Prejudicial
Defendant Bear Stearns has moved in limine pursuant to Rules 402, 403, 602, 802, 805, and 1002 of the Federal Rules of Evidence to preclude Plaintiffs from offering the following evidence:
1. Internal materials of Defendant DBCO — including
memoranda and employee notes — ("Internal DBCO
2. Communications by Stanley Berk ("Berk
Communications"), including a spreadsheet of trades
created by Berk in connection with this litigation and
various regulatory investigations ("Berk
Spreadsheet"); and 3. Communications by Defendant
Baird Patrick and its equities trader, Alifehim
Prodani ("Prodani") ("Baird Patrick Communications").
The Internal DBCO Documents include intra-office memoranda and letters, handwritten notes by DBCO employees, internal policies and procedures memoranda, and other documents showing daily DBCO activities.
Benesch's April 1994 Memo On or about April 19, 1994, DBCO's former compliance director, John Benesch ("Benesch") sent an internal memorandum to David Blech ("Blech") and Steve Ross ("Ross") — DBCO's top two executives — detailing serious concerns about DBCO's trading practices ("April 19th Benesch Memo"). The concerns reflected in the memo include, among other things:
• Unauthorized trades, supported by various verbal
and written customer complaints;
• Large blocks being executed within the last half
hour and many crosses with specific market makers;
• Numerous customer tickets stamped after the close;
• Possible wash sales between D. Blech & Co.
market making account and certain employee or family
• Numerous sellouts, reneges and cancels all
indicating possible unauthorized trading, and !
Positions in error account held well over 1 or 2
Such concerns, according to the memo, were unresolved after months of internal discussion and DBCO's compliance director believed that "[DBCO] will not pass its next regulatory audit without certain restrictions or sanctions being placed on our business by the NASD."
As to relevance, under Fed.R.Evid. 401, evidence of the existence and scope of the Blech scheme is a "fact that is of consequence to the determination of the action," and the Benesch memo is evidence that makes the existence of that fact "more probable."
The Benesch memo is not hearsay because it is a business record under Fed.R.Evid. 803(6). Fed.R.Evid. 803(6) favors admission of evidence if the evidence has any probative value at all. Phoenix Assocs. III v. Stone, 60 F.3d 95, 101 (2d Cir. 1995). Documents may be admitted as business records under Rule 803(6), even though they are not the business records of one of the parties, and here DBCO is still a defendant in this litigation. United States v. Consolidated Edison Co. of N.Y., 580 F.2d 1122, 1131 n. 18 (2d Cir. 1978); Schactman Fagan, Inc. v. Winthrop Labs., Inc., 1985 WL 3126, *1 (S.D.N.Y. Oct. 15, 1985). The key determination as to whether a document falls under the business record exception to the hearsay rule is whether the document is trustworthy. Miss. River Grain Elevator, Inc. v. Bartlett & Co., Grain, 659 F.2d 1314, 1319 (5th Cir. 1981).
The Benesch memo was prepared by Benesch, DBCO's compliance director, and the preparation of the memorandum was within Benesch's regular business activity. It was prepared by a person in a position of knowledge of the facts conveyed, at a time when he had no motive to lie. Accordingly, the Benesch memo constitutes a business record under Rule 803(6) and is, therefore, excluded from the hearsay rule.
As to Fed.R.Evid. 403, the prejudice claimed by Bear Stearns must be substantial and unfair. Perry v. Ethan Allen, Inc., 115 F.3d 143, 151 (2d Cir. 1997); Weinstein's Federal Evidence, § 403.04 (Matthew Bender 2003). Here, the probative value of the Benesch memo is not outweighed by any prejudicial value. The Benesch memo tends to prove DBCO's manipulative conduct, which the Plaintiffs must prove as part of their case in chief.
DBCO's former compliance assistant and liaison with the DBCO trading room, Michelle Kristel ("Kristel"), maintained a notebook from May through August 1994 ("Kristel Notebook"). The notebook relates parts of conversations among various DBCO employees characterized as "hearsay within hearsay," under Rule 805 as well.
As to Fed.R.Evid. 401, the Kristel Notebook does provide relevant and reliable evidence of DBCO's trading practices. Although characterized as a personal diary by Bear Stearns, the Kristel Notebook constitutes a business record under Rule 803(6). The notebook was compiled as part of Kristel's duties as an employee in the compliance department of DBCO. It was kept "in the course of a regularly conducted business activity," and "it was the regular practice of that business activity to make" the business record. Fed.R.Evid. 803(6). It represents a record of various events that she observed and contemporaneously recorded in her notebook, as part of her duties as a compliance officer of DBCO. The fact that these notes are handwritten and contained in a written notebook does not defeat the applicability of the business record exception in Rule 803(6). United States v. McPartlin, 595 F.2d 1321, 1347-48 (7th Cir. 1979), cert. denied, 444 U.S. 833 (1979) (court held that personal a appointment book was a business record within Rule 803(6) as it was part of a regular business activity and entries were made with regularity, at or near the time of the event described in the appointment book); United States v. Hedman, 630 F.2d 1184, 1197-98 (7th Cir. 1980), cert. denied, 450 U.S. 965 (1981) (court held that diary which contained a detailed description of bribes paid over the years was a business record under Rule 803(6) because the diary was kept as a business activity and entries were made with regularity at or near the time of the recorded events).
The Kristel Notebook also constitutes an admission by a party-opponent under Fed.R.Evid. 801(d)(2), offered against DBCO as evidence of the illegal conduct which occurred at DBCO during the relevant time period.
Portions of the notes contain hearsay within hearsay under Fed.R.Evid. 805, in particular conversations Kristel had with other DBCO employees, DBCO memoranda, and trading tickets, all constitute inadmissible hearsay within hearsay. With respect to the DBCO documents, such as internal memoranda and trading tickets that formed part of the Kristel Notebook, these documents conform to the business records exception of the hearsay rule and, therefore, are not hearsay. Certain of the conversations would constitute admissions of a party-opponent under Rule 801(d)(2). A further hearing may be required before introduction of the notebook to identify such conversations.
Benesch and Kristel made certain handwritten notes.
Benesch made a note in preparation for the April 19th Benesch Memo, stating:
Bear Stearns is controlling certain aspects of our
operations and trading. They have conducted conference
calls instructing & informing us of the excessive
violations & that we are above all clearance firms
when it comes to these problems & their auditors
will pick up these excessive practices.
(Block Aff. Ex. 6 at 2.)
Kristel made an undated notation stating, "Trading is given account numbers after the close — in some cases with DB trades 2-3 days after Trade Date."
Benesch's "memo to the file," dated April 13, 1994, describes various conversations within DBCO regarding "verbal complaints," concerns that the firm might "fall below net capital," and late trades. His "memo to the file," dated April 19, 1994, states, "New management may be put into place, effectively removing D[avid] B[lech] from day-to-day power. Compliance issues will be addressed."
Benesch's March 24, 1994 "memo to the file" describes a conversation in which Benesch told DBCO's Mark Germain about his "great concerns" regarding DBCO's operations — "[A]s usual MG said to handle it & I informed him that the only way to was to either go to Bear Stearns, Citibank, SEC or quit. MG said to handle it but I replied that I don't have the authority or backing."
Benesch's handwritten notes of a purported May 4, 1994 conversation with Blech and DBCO's Steve Ross state: "The sellouts under David's RR # are wide spread and in accounts that should or could pay for such positions but now only reflect possible unauthorized trading but that the title of such [accounts] cause doubt if such clients will ever complain (i.e., Esther [Blech, a relative])."
Kristel's handwritten memorandum to Benesch summarized Rick Silverman's statements on May 12, 1994 that "illegal" activity was occurring in DBCO accounts.
Benesch's May 13, 1994 memorandum to Blech and Ross stated that there had been little progress on the corrective procedures suggested in the April 19, 1994 memo and confirming that Blech and Ross would provide Benesch with "counsel of your choice" to review the compliance concerns.
Further, as with the other DBCO documents discussed above, Bear Stearns contends these notes are inadmissible hearsay and hearsay within hearsay against Bear Stearns under Rules 802 and 805 and should be excluded under Rule 403.
The notes were taken by Benesch and by Kristel as part of their normal business activities, as compliance officers of DBCO, and reflect the compliance-related observations of both Benesch and Kristel. The notes are business records, not hearsay, under Rule 803(6). As to the hearsay within hearsay objection, a further hearing may be required to identify conversations constituting admissions.
Bear Stearns seeks to exclude other internal DBCO documents. The documents include sample DBCO order tickets with date stamps and an April 26, 1994 memo from Kristel to Blech about "time stamp deficiencies" on certain order tickets; Spindel's January 17, 1994 letter to Blech resigning as DBCO's financial and operations principal and describing various concerns with "capital, operations, and regulatory climate and leadership"; Benesch's July 7, 1994 memo resigning as compliance director and his September 6, 1994 memo resigning his employment; and various internal DBCO documents detailing firm policy and procedures, including a ...