The United States Court of Appeals for the Tenth Circuit recently issued an opinion regarding expert testimony proffered in support of a private securities fraud action. See In re Williams Securities Litigation-WCG Subclass, No. 07-5119, 2009 WL 388048 (10th Cir., Feb. 18, 2009). The plaintiff subclass in Williams Security Litigation filed fraud claims under Section 10(b) and Section 20(a) of the Securities Exchange Act and Rule 10b-5.
Plaintiffs’ claims arose after The Williams Companies, Inc. spun off its telecommunications subsidiary, Williams Communications Group (“WCG”). Approximately two years later, WCG filed for bankruptcy and its stock plummeted to 6 cents per share. Id. at *1. The plaintiff sub-class retained an expert witness to offer opinion testimony regarding how the decline in the price of the WCG stock was attributable to the alleged misrepresentations, which allegedly caused WCG’s stock to plummet. Id. at *2.
The expert witness offered two alternative theories. The first theory, labeled the “leakage theory,” attributed the decline in WCG’s stock value over a period of time due to alleged fraud that was not revealed to the marketplace by any single corrective disclosure. Instead, the “leakage” of WCG’s true financial condition, which supposedly corrected the misrepresentations, was “leaked” over a period of time by a series of events. Id. Under this “leakage theory,” the expert attributed almost all of WCG’s inflated value to the alleged fraud and assumed that almost the entire decline in price for the stock was a result of the alleged truth gradually leaking into the marketplace, even though the stock’s price decline “closely correlated with the overall decline in the telecommunications industries as a whole.” Id. at *2.
The defense challenged the expert testimony arguing that the expert could not correlate the loss of the stock price with the market’s discovery of the truth concerning the alleged misrepresentations and fraud. Id. The district court agreed that the expert’s first proffered theory “failed to differentiate between losses rooted in causes cognizable under loss causation doctrine, on one hand, and, on the other hand, losses attributable to industry-specific stresses, the meltdown in the telecommunications sector, and other negative developments unrelated to the alleged fraud.” Id. at *3.
Plaintiffs’ expert also offered an alternative scenario. He claimed that WCG’s stock price declined after four specific public disclosures, a delay in its earnings report, an announcement to the public that WCG may default on paying promissory notes, a public announcement that WCG was considering bankruptcy, and WCG’s actual filing for bankruptcy. Id. The expert attributed the decline in the value of the stock to each alleged corrective disclosure. Id.
The district court concluded that this alternative theory was equally unreliable because it was not supported by any showing of any new, company-specific, fraud-related information that was made available to the public related to the disclosures. Significantly, the court relied on the fact that a lawsuit for fraud against WCG had already been filed of public record before the first public announcement regarding a delay in WCG’s earnings reports. Id. Thus, the district court concluded that the expert did not distinguish between the declines attributable to disclosures of fraud and declines attributable to non-fraud events. Id.
The Tenth Circuit affirmed the district court’s ruling noting that, in a private securities fraud action, plaintiffs must prove that the defendant (1) made a material misrepresentation or omission; (2) with scienter; (3) in connection with the purchase or sale of the security; (4) upon which plaintiff relied; (5) plaintiff suffered an economic loss; and (6) that the material misrepresentation was the cause of that loss. See id. at *4 (citing Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, 128 S.Ct. 761, 768 (2008)). The Tenth Circuit affirmed the district court’s ruling, which refused to allow the expert witness to testify because his testimony was deemed unreliable as he failed to attribute the alleged loss to the alleged material misrepresentations. In re Williams Securities Litigation-WCG Subclass, 2009 WL 388048 at *3.
Although this case involved expert opinions specific to securities fraud, the court’s analysis is beneficial to defense counsel seeking to strike expert opinions that fail to account for causation of economic losses. Often accountants or economists attempt to quantify a business’s economic damages, but they fail to eliminate other explanations for how the business may have been affected by other economic activity and industry-wide adversities.
In an unrelated case, the Tenth Circuit entered an opinion with respect to whether expert testimony can be offered to explain whether false confessions occur, and why people may confess falsely. See United States v. Benally, 541 F.3d 990 (10th Cir. 2008), cert. denied, 129 S.Ct. 1020 (Jan. 21, 2009). Mr. Benally confessed to sexually abusing his girlfriend’s nieces. Id. at 992. However, at trial he disavowed his confession and claimed that he was prompted by coercive tactics used by the FBI agents. Id. at 993.
Prior to trial, Mr. Benally notified the government that he anticipated calling a professor of psychology to offer expert testimony on false confessions, including whether false confessions occur and why false confessions are made. Id. Interestingly, the professor of psychology did not personally appear at the Daubert hearing. The district court relied solely on documentary evidence related to the professor and accepted as a proffer a transcript of her testimony in a similar case before a different judge in the same court. Id. After reviewing the transcript and documentary evidence offered by the professor in the other case, the district court ruled that the testimony was inadmissible because it did not meet the standards for relevance or reliability required by Daubert. Id.
Mr. Benally appealed the decision arguing that the opinion testimony was to be offered for a limited purpose, simply to overcome the perception that “sane people either do not confess falsely, or do so only rarely.” Id. at 994. Mr. Benally argued on appeal that the psychology professor was not going to testify that he confessed falsely, but she would testify that false confessions can occur and why, in general, they are made so that his defense would be placed in a “more believable context.” Id.
The Tenth Circuit ruled that the district court did not abuse its discretion in excluding the proffered testimony under Daubert because, although the professor would not testify regarding whether Mr. Benally confessed falsely, the opinion testimony would essentially “vouch for the credibility of another witness,” which encroached upon the jury’s exclusive function to make credibility determinations. Id. at 995. In its ruling, the Tenth Circuit distinguished United States v. Adams, 271 F.3d 1236 (10th Cir. 2001) indicating that Adams permitted expert testimony to show that the defendant had a neuro-cognitive impairment, which supported the possibility that the statements given to the police were false. Adams, 271 F.3d at 1244. The Tenth Circuit noted that Mr. Benally did not contend to have any mental or physical condition that affected his ability to tell the truth or impair his ability to voluntarily confess, which distinguished the facts in his case from Adams. See Benally, 541 F.3d at 996.
The holding in Benally shows a critical distinction when using expert testimony with respect to whether a witness is credible. An expert witness may not testify as to whether a witness is telling the truth or is credible, as that invades the province of the jury, but the expert witness may offer opinion testimony as to the physical and mental limitations of a witness, which could impact that witness’s ability to tell the truth or ability to confess voluntarily. See Benally, 541 F.3d at 996 (citing United States v. Hall, 93 F.3d 1337 (7th Cir. 1996) and United States v. Shay, 57 F.3d 126 (1st Cir. 1995)). The ultimate decision under the latter scenario still rests with the jury, but it equips the jury with the necessary information to determine if the witness was credible - a subtle distinction that may be helpful depending on a case’s facts.
Darren K. Sharp is a partner in the Kansas City office of Armstrong Teasdale LLP, where he has practiced since 1999. He is the Tenth Circuit editor for the DRI Daubert Online newsletter. Mr. Sharp advocates for corporate clients in commercial disputes and business related tort cases in state and federal courts in Kansas, Missouri and Colorado, and has arbitrated commercial disputes before panels and single arbitrators. Mr. Sharp also represents clients in state and federal courts of appeals. Mr. Sharp can be reached at Armstrong Teasdale LLP, 2345 Grand Blvd., Suite 2000, Kansas City, Missouri 64108, ph. 816-221-3420, or by e-mail at dsharp@armstrongteasdale.com.
