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United States v. Hatfield

May 12, 2010

UNITED STATES OF AMERICA,
v.
SANDRA HATFIELD, DAVID H. BROOKS, PATRICIA LENNEX, DEFENDANTS.



The opinion of the court was delivered by: Seybert, District Judge

MEMORANDUM AND ORDER

Pending before the Court is the Government's motion to exclude certain aspects of Defendant David Brooks' proposed expert testimony. For the foregoing reasons, that motion is GRANTED IN PART AND DENIED IN PART.

I. Professor Christopher M. James

Mr. Brooks intends to call Professor Christopher M. James to testify about the effect certain alleged acts had upon DHB's stock price. The Government argues that such testimony "is commonly known as 'loss causation'" evidence, which the Government contends matters only in civil securities fraud cases. The Government is wrong. Whether the Superseding Indictment's charged acts affected DHB's stock price goes directly to whether this conduct mattered to investors, and thus to materiality. See, e.g., U.S. v. Bilzerian, 926 F.2d 1285, 1298 (2d Cir. 1991) (stock price movement does not establish materiality, but "is a factor the jury may consider relevant"); In re Monster Worldwide, Inc. Sec. Litig., 251 F.R.D. 132, 138 (S.D.N.Y. 2008). Thus, for materiality purposes, it is more than appropriate to bring in an expert witness to address how the incidents at issue affected DHB's stock price. See S.E.C. v. Koenig, 557 F.3d 736, 743 (7th Cir. 2009) (rejecting defense objections to SEC use of expert testimony that addressed materiality by "using stock price changes (net of changes in the market as a whole) to isolate the effects of particular disclosures").

The Government also argues that the Court should exclude Professor James' testimony because the Court precluded the Government's DHB investor witnesses from testifying about their personal losses. This argument is meritless. The Court limited the investors' testimony because, in this case, "victim impact testimony," posed a substantial danger of unfair prejudice while contributing only negligible probative value. See Docket No. 781 at 5. Professor James' dispassionate professional opinion concerning market losses poses no such risks. Professor James will not inflame the jury's passions by testifying about how the alleged frauds caused him to lose his house or cancel cancer treatment. Instead, according to Mr. Brooks' proffer, he will attempt to explain whether DHB's alleged nondisclosures had any economic impact on its stock price. See Docket No. 1002 at 3. Such testimony is highly probative and not remotely prejudicial.

II. Gary Karlitz

The Government also objects to proposed expert Gary Karlitz, on two grounds. First, the Government objects to Mr. Karlitz's proposed testimony concerning TAP's profit margins, which will endeavor to show that TAP earned substantially less than the 50% gross margins the Government has claimed. The Government contends that this testimony is unnecessary because it will stipulate that TAP's profit margins would be lower if "an alternate methodology" was used. Docket No. 993 at 2. But the Government's offer of a stipulation does not negate Mr. Brooks' right to put on his own defense. On its direct case, the Government put forth its own witness, Teresa Bernard, who, aided by charts, testified at length to support the Government's claim that TAP's margin exceeded 50%. The Government cannot, by stipulation, prevent Mr. Brooks from producing his own witness to set forth Mr. Brooks' version of events in a similar manner.

The Government also objects to Mr. Karlitz's testimony concerning whether DHB's related party disclosures were sufficient and reasonable. The Government contends that such testimony goes to the "ultimate issue" in the case, and should accordingly be excluded. Docket No. 993 at 3 (citing Bilzerian, 926 F.2d at 1294). Mr. Brooks responds that Mr. Karlitz will not testimony about the ultimate issue -- federal securities law disclosure requirements -- but only about related accounting principles.

The Court agrees with Mr. Brooks. Compliance with applicable accounting standards, such as GAAP, "neither establishes nor shields guilt in a securities fraud case." U.S. v. Rigas, 490 F.3d 208, 220 (2d Cir. 2007). Accordingly, in a federal securities fraud case, jurors are not required to "accept the accountants' evaluation" about "whether a given fact was material." Id. (citations and quotations omitted). So Mr. Karlitz's proposed testimony neither goes to any ultimate issue nor usurps the jury's role. But it is still relevant. This is because compliance with applicable accounting standards "may negate the government's claim of an intent to deceive." Id. (citations and quotations omitted). Thus, Mr. Karlitz can provide his expert opinion concerning DHB's TAP disclosures in relation to the applicable accounting standards.

III. Kenneth McGraw

The Government also seeks to preclude proposed expert Kenneth McGraw from testifying concerning the "reasonableness" of Mr. Brooks' compensation. The Court agrees that Mr. McGraw's testimony should be excluded. As this Court has previously noted, the "reasonableness" of Mr. Brooks' compensation is irrelevant. It is perfectly legal for companies to pay their executives obscene, irrational amounts of money. It is also perfectly legal for companies to underpay key employees. For purposes of this trial, what matters is not whether Mr. Brooks' compensation was reasonable, but whether DHB authorized it and disclosed it to shareholders. Based on Mr. Brooks' proffer, Mr. McGraw's testimony does not go to either of those factual issues. But it does run the serious risk of confusing the jury into believing that Mr. Brooks' guilt has something to do with whether DHB paid him a reasonable amount. See Cordius Trust v. Kummerfeld, 99-CV-3200, 2008 WL 113683, *5 (S.D.N.Y. 2008) (excluding expert testimony based on risk of jury confusion). Thus, the Court excludes it.

Mr. Brooks also argues that the Government opened the door to Mr. McGraw's "reasonableness" testimony when the Government's witness, Douglas Burns, commented that he would have remembered signing Mr. Brooks' 1996 Employment Agreement because it provided a potentially "staggering amount" of compensation to Mr. Brooks. This argument has some merit, but is ultimately not persuasive. Mr. Burns did not offer an expert opinion. He explained the factual basis for his version of events: he did not sign Mr. Brooks' 1996 Employment Agreement, and recalls not signing it, because he never would have approved the amount of compensation it awarded Mr. Brooks. That being said, Mr. Burns' testimony did open the door to similar factual testimony from defense witnesses.

IV. Gil Wolpin

Lastly, the Government seeks to preclude Gil Wolpin from testifying about the historical market rates for charter aircraft. The Government contends that Mr. Wolpin's testimony is irrelevant because it "has presented no evidence that the hourly rates in the trip schedules were fraudulent." Moreover, the Government contends that: (1) from 2002 until August 12, 2004 ("First Time Period"), Mr. Brooks was entitled only to the "total cost" for the "business use" of his plan, not market charter rates; and (2) from August 12, 2004 onward ("Second Time Period"), Mr. Brooks billed DHB at a specified hourly rate and cannot now claim that he should have billed DHB more. In addition, the Government contends ...


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