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In re Longtop Financial Technologies Ltd. Securities Litigation

United States District Court, S.D. New York

July 3, 2014


Filed July 2, 2014

Page 454

For Lead Plaintiffs: Kimberly A. Justice, Esq., Gregory M. Castaldo, Esq., Richard A. Russo, Esq., Margaret E. Onasch, Esq., John A. Kehoe, Esq., John J. Gross, Esq., Kessler Topaz Meltzer & Check, LLP (PA), Radnor, Pennsylvania; Daniel L. Berger, Esq., Deborah A. Elman, Esq., Jeff A. Almeida, Esq., Reena S. Liebling, Esq., Grant & Eisenhofer, P.A. (NY), New York, New York.

Derek Palaschuk, Defendant, Pro se, Vancouver, Canada.

Page 455


Shira A. Scheindlin, U.S.D.J.


On August 30, 2013, in accordance with the discovery schedule, plaintiffs served their expert report on the remaining defendant

Page 456

in this case, Derek Palaschuk. On September 4, 2013, Palaschuk served a report authored by his own expert, Alan D. Bell. Plaintiffs moved to exclude Bell's report and testimony on November 20, 2013. The same day, Palaschuk moved for summary judgment[1].

Palaschuk subsequently expressed concern that plaintiffs raised new arguments in their summary judgment briefing that Bell had not been given the opportunity to address. I granted Palaschuk permission to file a ten-page supplemental expert report addressing solely those allegations that were not raised in either the Complaint or plaintiffs' interrogatory responses.[2] Palaschuk filed his supplemental report, authored by Roger D. Siefert, on February 14, 2014. On February 26, 2014, plaintiffs moved to exclude the report and Siefert's testimony.

For the reasons that follow, plaintiffs' motions to exclude the reports and testimony of Bell and Siefert are GRANTED in part and DENIED in part.


A. The Bell Report

1. Bell's Credentials

Bell is a certified public accountant (" CPA" ) licensed in Texas.[3] He has an undergraduate degree in Petroleum Engineering from Colorado School of Mines and a Masters in Business Administration from Tulane University.[4] Bell worked as an engineer for Chevron Oil Company from 1969 to 1972, and then as an auditor for Ernst & Young LLP (" E& Y" ) from 1973 to 2006.[5] At E& Y, Bell assisted clients in complying with the Sarbanes-Oxley Act (" SOX" ) and other public reporting requirements in their initial public offerings, secondary offerings, and periodic financial reports.[6] Bell served as the Chief Restructing Officer in a bankruptcy proceeding in 2009, and currently serves on the board of directors and audit committees of multiple private and public entities.[7] He has been retained as an expert in multiple lawsuits.[8] Bell describes himself as a " retired senior audit partner in the international energy industry, with extensive experience dealing with the Securities and Exchange Commission, working with senior executives and boards of directors of public companies." [9]

Palaschuk states that he selected Bell largely based on his knowledge of Generally Accepted Accounting Principles (" GAAP" ), since many of plaintiffs' allegations centered on Longtop's allegedly improper accounting for social welfare obligations and its relationship with a third party entity that directly employed most of Longtop's staff (" XLHRS" ).[10] However,

Page 457

plaintiffs have now abandoned those allegations and do not plan to pursue them at trial.[11]

2. Bell's Opinions

The Bell Report summarizes various third party audits and reports on Longtop's finances during the class period, and concludes that it was reasonable for Palaschuk to " rely" on them.[12] For example, Bell points out that during almost the entire Class Period, DTT returned clean audits on Longtop's financial statements and noted no material weaknesses in internal controls, indications of fraud, or disagreements between DTT and Longtop's management.[13] DTT also certified that Longtop's financial statements were prepared in accordance with GAAP.[14]

Bell concedes that DTT's audit for fiscal year 2006 identified deficiencies in Longtop's internal controls, but concludes that any problems must have been corrected because the subsequent audit identified no such deficiencies.[15] He further explains that the problems identified by DTT were not fraud-related red flags for Palaschuk because " it is not uncommon for a company that is preparing to go public to identify internal control weaknesses." [16] Newly registered companies are given two years to become compliant with SOX, and in Bell's experience " there is always a significant amount of work that is performed from the time that a company plans to go public through the two year transition period until that company has to have an audit opinion on their internal controls." [17]

Bell makes the same point with respect to the " fraud risk factors" DTT identified in 2007 and 2008. According to Bell, " [t]he identification of risk factors is not an indication of fraud; it is part of the audit process" and therefore did not put Palaschuk on ...

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