United States District Court, S.D. New York
OPINION & ORDER
M. WOOD, UNITED STATES DISTRICT JUDGE
action, the Securities and Exchange Commission
("SEC") asserts claims under Section 10(b) of the
Securities Exchange Act of 1934 (the "Exchange
Act") and Rule 10b-5 thereunder, and Sections 17(a)(1),
(2), and (3) of the Securities Act of 1933 (the
"Securities Act") against Defendants Ralph C.
Johnson, American Growth Funding II, LLC ("AGF
II"), Howard J. Allen III, Kerri L. Wasserman, and
Portfolio Advisors Alliance, Inc. The SEC alleges that
Defendants violated these securities laws by making
materially false statements to investors and potential
investors. Defendants deny these allegations. Defendants AGF
II and Johnson (the "AGF Defendants") have now
moved to exclude the Expert Report of Harris L. Devor, CPA
(the "Devor Report").
reasons stated below, the AGF Defendants' Motion is
DENIED because (1) the opinions contained in paragraphs 13 to
32 of the Devor Report are admissible under Rule 402 because
they are relevant to proving the materiality of
Defendants' misrepresentations, (2) the opinions
contained in paragraphs 33 to 57 of the Devor Report are
admissible under Rule 402 because they are relevant (i) to
proving that Defendants acted with scienter and (ii)
to rebutting the AGF Defendants' defense of good faith,
(3) the opinions contained in the Devor Report are admissible
under Rule 403, because "unfair surprise" is not a
proper ground for excluding the opinions contained in the
that report and because those opinions are unlikely to
confuse the issues or mislead the finder of fact.
The SEC's Allegations
alleges that, in 2008, Defendant Johnson began operating a
company called American Growth Funding LLC ("AGF").
(Compl., ¶ 20.) To raise money for AGF, Johnson used a
number of investment vehicles, including Defendant AGF II.
(Id.) Defendants sold "units" in AGF II to
investors, promising a 1% return each month in exchange for
investor funds. (Id., ¶ 21.) After receiving
these investor funds, AGF II loaned these funds to AGF,
which, in turn, loaned them to various third-party
businesses. (Id., ¶ 23.)
to the SEC, Defendants made multiple material
misrepresentations in connection with raising money for AGF
II. (Compl., ¶¶ 1-7.) As relevant here, the SEC
alleges that Defendants distributed Private Placement
Memoranda ("PPMs") in 2011 and 2012 stating that,
"[a]s has been policy in the past, [AGF IPs] annual
financial statements will continue to be audited."
(Compl., ¶¶ 24, 28.) In fact, however, AGF IPs 2011
and 2012 financial statements were not audited until 2014, at
which time they were audited by non-party Seymour Weinberg.
(Devor Report, ECF No. 85-1, ¶ 32.)
The Devor Report
February 3, 2017, the SEC served Defendants with an expert
report prepared by a certified public accountant, Harris L.
Devor (the "Devor Report"). (ECF No. 84, at 3.) In
essence, the Devor Report consists of two parts. First, Mr.
Devor describes the characteristics of an external audit and
explains why external audits, including those of AGF IPs
financials, matter to investors. (ECF No. 85-1, ¶¶
13-32.) Second, Mr. Devor describes AGF IPs financials,
explains that certain types of analyses were needed to
properly audit those financials, and explains why Mr.
Weinberg's 2014 audits did not properly analyze those
financials. (Id., ¶¶ 33-57.) In
particular, Mr. Devor asserts that, because AGF IPs
investments consisted almost completely of a loan receivable
from AGF, and because that receivable was of questionable
value, any legitimate audit of AGF IPs financial statements
needed to analyze the underlying financials of AGF.
(Id.) Mr. Weinberg's audits of AGF IPs
financials did not do so. (Id.) Thus, Mr. Devor
concludes that Mr. Weinberg essentially "failed to
perform an audit at all." (A*, ¶¶ 41-49, 57.)
Relevant Procedural History
commenced this action on February 3, 2016. (Compl., ECF No.
1.) Defendants filed their respective Answers on April 22,
2016. (ECF Nos. 30, 32.) On or about February 3, 2017, the
SEC served the Devor Report. (See ECF No. 84, at 3.)
On March 9, 2017, Defendants Johnson and AGF II moved to
exclude the Devor Report. (ECF No. 83.) On June 9, 2017,
after discovery had closed, the SEC moved for summary
judgment. (ECF No. 119.)
Defendants have moved to exclude the Devor Report on the
grounds that the opinions contained therein are irrelevant
under Rule 402 and are unfairly surprising and misleading
under Rule 403. (Defs.' Mem., ECF No. 84, at 4-11.)