Abdo v. Fitzsimmons

• Court: District Court, N.D. California
• Decided: July 20, 2020
• Docket: 3:17-cv-00851
• Status: Unknown

Opinion

1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 JOHN E ABDO, et al., Case No. 17-cv-00851-TSH

8 Plaintiffs, ORDER RE MOTION TO STRIKE 9 v. EXPERT REBUTTAL REPORT

10 MICHAEL FITZSIMMONS, et al., 11 Defendants. 12 RISING TIDE I, LLC, et al., Case No. 17-cv-01232-TSH 13 Plaintiffs, 14 v.

15 MICHAEL FITZSIMMONS, et al., 16 Defendants.

17 18 I. INTRODUCTION 19 Pending before the Court is Plaintiffs’ Motion to Strike Expert Rebuttal Report of Dennis 20 Chookaszian. ECF Nos. 164(Abdo)/161(Rising Tide).1 Plaintiffs move to strike the report on the 21 ground that it is not an actual rebuttal report and thus was not disclosed in compliance with 22 Federal Rule of Procedure 26. Defendants have filed a Response, ECF Nos. 174/170, and 23 Plaintiffs a Reply, ECF Nos. 177/173. The Court finds this matter suitable for disposition without 24 oral argument and VACATES the July 30, 2020 hearing. See Civ. L.R. 7-1(b). Having 25 considered the parties’ positions, relevant legal authority, and the record in this case, the Court 26 GRANTS the motion. 27 1 II. BACKGROUND 2 Delivery Agent, Inc. was a company involved in the television-commerce, or “t- 3 commerce,” space. Abdo First Amended Complaint (“FAC”)/Rising Tide FAC (jointly, “FACs”) 4 ¶ 2, ECF Nos. 63/53. Delivery Agent claimed that it had developed proprietary technology to 5 connect viewers through smart TVs to products and companies advertised on air. See id. In these 6 related actions, investor-Plaintiffs allege that Defendants, all former directors and/or officers of 7 Delivery Agent, Inc., violated various federal and state securities fraud laws through material 8 misrepresentations and omissions they made in attempting to sell Delivery Agent securities to 9 Plaintiffs. FACs ¶¶ 1, 3-5. In particular, they allege that Defendants misrepresented or concealed 10 highly damaging information about the proprietary nature of Delivery Agent’s core technology, 11 the functionality of its products including the smart TV feature, the success of important market 12 tests, the trustworthiness of Delivery Agent’s most senior executives, and events that made a 13 successful Initial Public Offering (“IPO”) impossible. FACs ¶ 5. Delivery Agent eventually had 14 to file for Chapter 11 bankruptcy in September 2016, and Plaintiffs’ securities are now worthless. 15 FACs ¶ 6. 16 Defendants have asserted forty-some affirmative defenses. See Answers, ECF Nos. 85; 17 86/79; 80. Some of the defenses relevant for purposes of this Motion are those asserting, in 18 essence, that Plaintiffs are sophisticated investors who either knew that the securities deals offered 19 by Delivery Agent were too good to be true or did not do enough diligence to uncover that 20 Delivery Agent was a financially challenged company. More specifically, Defendants argue that 21 the Plaintiffs “knew or should have known the actual facts that they now claim made any alleged 22 statement of material fact untrue or any alleged omission of material fact necessary to make the 23 statements not misleading.” ECF Nos. 85 at 93-94; 86 at 69/79 at 79; 80 at 63. Defendants also 24 assert that Plaintiffs’ “own negligence, breaches of duties, actions, omissions, or other fault 25 proximately contributed to the injuries allegedly suffered by Plaintiffs, and bars any recovery to 26 the extent thereof.” ECF Nos. 85 at 94; 86 at 69/79 at 79; 80 at 64. 27 This motion relates to a purported expert rebuttal report. The parties were required to 1 5, 2020. See ECF Nos. 150/150. Rebuttal experts and reports were due by May 28, 2020. Id. 2 Expert discovery, scheduled to close on June 23, has been extended and is scheduled to close on 3 September 30, 2020. ECF Nos. 169/165. Briefing on dispositive motions is to be completed by 4 December 3, 2020, with a hearing on those motions to be held on January 28, 2021. ECF Nos. 5 173/169. 6 On May 5, 2020, Plaintiffs disclosed to Defendants the report of Steven M. Berwick, one 7 of their affirmative experts. See Decl. of Matthew Graham in Supp. of Pls.’ Mot. to Strike 8 (“Graham Decl.”) ¶ 2, Ex. A (the “Berwick Report”), ECF Nos. 165-1/161-2. Plaintiffs engaged 9 Berwick, a Certified Public Accountant, to provide an opinion on the fair market value (“FMV”) 10 of Delivery Agent and the subject securities at the various times of investment by Plaintiffs. Id. ¶ 11 13. Plaintiffs explain that they will offer Berwick’s testimony to establish their out-of-pocket 12 damages, or the difference between what they paid and what they received. Mot. to Strike at 6. 13 To perform his valuation, Berwick considered the three most common valuation approaches— 14 income-based, asset/cost-based, and market-based—and concluded that the asset/cost-based 15 approach was most appropriate for valuing the subject securities. Berwick Report at ¶¶ 22-46. 16 Applying that approach, Berwick concluded that Delivery Agent’s equity value was at all times 17 less than zero, and accordingly the securities purchased by Plaintiffs between June 18, 2014 and 18 April 20, 2016 were valueless on the dates they were bought. Id. ¶ 16. 19 On May 5, 2020, Defendants disclosed the report of Dennis Chookaszian, one of their 20 affirmative experts, who opined that Defendants had “acted in accordance with principles of good 21 corporate governance following certain events in 2014”. Mot. at 6-7. On May 28, Defendants 22 disclosed another Chookaszian report, as self-styled “rebuttal report” (the “Rebuttal Report”). 23 Graham Decl. ¶ 3, Ex. B, ECF No. 161-3. The Rebuttal Report purports “to review and respond to 24 certain conclusions made in the Berwick Report.” Id. ¶ 2. Chookaszian summarized his opinion 25 as follows:

26 Based upon my review of the relevant documents, my experience as an investor in numerous non-public companies, and a finance 27 academic, as well as my experience on the boards of various private in investing in Delivery Agent, especially in light of the Going 1 Concern Opinions, Delivery Agent’s lack of profitability, and numerous rounds of financing. Appropriate due diligence would have 2 revealed the purported valuation of Delivery Agent and Plaintiffs’ securities as of the investment dates. Therefore, any loss suffered by 3 Plaintiffs was reasonably foreseeable at the time of their investments given the numerous known risks associated with their investments. 4 5 Id. ¶ 3. 6 Plaintiffs move to strike the Rebuttal Report, arguing that it is a disguised affirmative 7 expert report that is untimely; there is no substantial justification for its untimeliness; and the 8 admission of the report would be unfair and prejudicial to Plaintiffs. 9 III. LEGAL STANDARDS 10 Rule 26(a)(2)(A) of the Federal Rules of Civil Procedure requires parties to disclose the 11 identity of any expert witness they may use at trial to present opinion testimony. Fed. R. Civ. P. 12 26(a)(2)(A). “[T]his disclosure must be accompanied by a written report—prepared and signed by 13 the witness—if the witness is one retained or specially employed to provide expert testimony in 14 the case . . . .” Fed. R. Civ. P. 26(a)(2)(B). A party also must disclose as rebuttal experts those 15 experts whose testimony will be “intended solely to contradict or rebut evidence on the same 16 subject matter identified by an initial expert witness.” Fed. R. Civ. P. 26(a)(2)(D)(ii). Because 17 rebuttal experts and reports are designated as such, their testimony must contradict or rebut 18 evidence or theories of the opposing expert witness. See Optronic Techs., Inc. v. Ningbo Sunny 19 Elec. Co., 2019 WL 4780183, at *6 (N.D. Cal. Sept. 30, 2019) (citing Fed. R. Civ. P. 20 26(a)(2)(D)(ii)); Bakst v. Cmty. Mem’l Health Sys., Inc., 2011 WL 13214315, at *34 (C.D. Cal. 21 Mar. 7, 2011) (“[S]upplemental or ‘rebuttal’ experts, therefore, ‘cannot put forth their own 22 theories; they must restrict their testimony to attacking the theories offered by the adversary’s 23 experts.’”) (quoting Int’l Business Machines Corp. v. Fasco Indus., Inc., 1995 WL 115421, *3 24 (N.D. Cal. Mar. 15, 1995)); Clear-View Techs., Inc. v. Rasnick, 2015 WL 3509384, at *4 (N.D. 25 Cal. June 3, 2015) (“Permitting [parties] to backdoor [affirmative] expert testimony under the 26 guise of ‘rebuttal’ testimony would render Rule 26’s limits generally meaningless . . . .”). 27 IV. DISCUSSION 1 respond to Berwick’s affirmative report. Berwick’s report offered an opinion on the FMV of 2 Delivery Agent and the securities Plaintiffs were sold. The FMV, as Berwick explained it, is “the 3 price, expressed in terms of cash equivalents, at which property would change hands between a 4 hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s 5 length . . . when both have reasonable knowledge of the relevant facts.” Berwick Report ¶ 21, n.5. 6 Reaching the FMV required no determination of whether or not Plaintiffs had reasonable 7 knowledge of the relevant facts, nor whether Plaintiffs had done their due diligence before 8 investing. It is true, as Defendants point out, that Berwick was asked to assume that Plaintiffs 9 “invested without knowing material facts about Delivery Agent and its prospects.” Id. ¶ 13. 10 Berwick explained:

11 It is my understanding that the purpose of making these assumptions is to allow a determination of what the [FMV] . . . would have been . 12 . . taking into account what Plaintiffs assert were the true facts . . . that investors unafilliated with Defendants (such as Plaintiffs) invested 13 without knowing material facts about Delivery Agent and its prospects . . . . 14 15 However, Berwick did not opine as to whether that assumption was true or false or likely or 16 unlikely; he was told simply to assume that Defendants omitted material facts about Delivery 17 Agent and its prospects. The question of whether they actually did, or whether any investors were 18 unaware of material facts, was an issue entirely beyond the scope of Berwick’s report. 19 Chookaszian’s report, on the other hand, concludes that Plaintiffs “knew or reasonably 20 should have known of the serious risks in investing in Delivery Agent.” Rebuttal Report ¶ 3. It 21 does not dispute the method of valuation used by Berwick or rebut Berwick’s application of that 22 method to determine FMV, and it does not offer a conclusion contrary to Berwick’s on the FMV 23 of Delivery Agent or the securities when they were sold. Chookaszian even acknowledges that he 24 was “not [] asked to opine upon the accuracy of the valuation in the Berwick Report.” Id. ¶ 2, n.4. 25 Also, Chookaszian implicitly accepts Berwick’s FMV conclusions when he opines that, “due 26 diligence would have revealed the purported valuation of Delivery Agent and Plaintiffs’ securities 27 on the investment dates.” Id. ¶ 3. And he expressly agrees with Berwick’s bottom line FMV 1 notice of . . . the Company’s inability to fulfill its financial obligations over the corresponding 2 years, its valuation and, therefore, the difficulty of obtaining additional financing including and 3 particularly through an IPO.”); ¶ 11 (“Delivery Agent was never profitable and was not predicted 4 to be profitable in the year that Plaintiffs first invested (2014). Plaintiffs were either grossly 5 negligent in their evaluation of the situation, or were well-aware of the fact that Delivery Agent 6 was repeatedly unprofitable.”). 7 Instead of introducing Chookaszian’s Rebuttal Report to actually rebut Berwick’s report, 8 Defendants quite clearly use it to advance their defense that Plaintiffs “knew or should have 9 known the actual facts that they now claim made any alleged statement of material fact untrue or 10 any alleged omission of material fact necessary to make the statements not misleading.” But that 11 defense goes to a core allegation of Plaintiffs’ case-in-chief, to wit, that they “reasonably relied on 12 [Defendants’] statements in purchasing securities in Delivery Agent.” Rising Tide FAC ¶ 74; see 13 also, e.g., id. ¶¶ 75, 79, 87, 90; Abdo FAC ¶¶ 75, 86. “If [a] rebuttal expert’s testimony is offered, 14 however, to ‘contradict an expected and anticipated portion of the other party’s case-in-chief, then 15 the witness is not a rebuttal witness or anything close to one.’” Clear-View Techs., 2015 WL 16 3509384, at *2 (quoting Amos v. Makita U.S.A., 2011 WL 43092, at *2 (D. Nev. Jan. 6, 2011) 17 (citing In re Apex Oil Co., 958 F.2d 243, 245 (8th Cir.1992)). 18 Defendants counter that the Rebuttal Report “directly rebut[s] Berwick’s opinion that 19 Plaintiffs suffered damages” and a cornerstone basis for his opinion because it “explains that 20 Plaintiffs suffered no cognizable damage because, as sophisticated investors, they understood the 21 potential risks and benefits of a bargain they knowingly struck.” Opp’n at 1-2; id. at 8 (“. . . the 22 testimony further serves to undermine Berwick’s conclusions that Plaintiffs suffered damages . . 23 .”). However, those are liability arguments. As a damages expert, Berwick simply assumed 24 liability. The crux of his opinion was that the securities Plaintiffs bought were objectively 25 valueless at the time Plaintiffs bought them. See Berwick’s Report ¶ 16. The Rebuttal Report 26 does nothing to rebut or contract that opinion, and indeed agrees with it. 27 Lastly, Defendants argue that the Rebuttal Report “focuses on the same documents and 1 Chookaszian responds.” Opp’n at 3-4. The first part of that assertion is inaccurate, and the second 2 part is inconsequential. To the first point, Berwick’s report was based on a review of evidence 3 like Delivery Agent’s historical balance sheets and facts such as Delivery Agent’s equity state, its 4 assets (tangible and intangible) and liabilities (accounts payable, accrued expenses, long-term 5 debt, etc.) for relevant time periods, its history of profits (none) and hope for future profits (also 6 none), its cash flow, and the fact that it was “presumed to be insolvent” and filed for Chapter 11 7 bankruptcy in 2016. Berwick’s Report ¶¶ 37-44. The core of the Rebuttal Report was 8 Chookaszian’s assessment that Plaintiffs are “sophisticated venture-stage investors,” Rebuttal 9 Report ¶¶ 3, 7, who should have been aware of the risks of investing in Delivery Agent and the 10 purported value of the securities. These facts, even if true, have nothing to do with Berwick’s 11 determination of the FMV of either the company or the securities. To the second point, 12 Chookaszian’s references to Berwick’s report alone do not a rebuttal report make: Chookaszian 13 does repeatedly reference Berwick’s report, but it is only to say, more or less: “Even if the 14 securities were worth nothing, as Berwick says, Plaintiffs should have known.” See, e.g., id. ¶ 6 15 (“Plaintiffs should have learned from the factors [Berwick uses] as part of their due diligence and 16 associated warnings of the investment being high-risk, as well as Plaintiffs’ awareness of the 17 assets and liabilities of Delivery Agent used by Mr. Berwick in any purported valuation . . . .”), ¶ 7 18 (“Plaintiffs were aware of the various risks associated with investing, including those associated 19 with a new technology.”), ¶ 10 (“It is inconceivable to me that Plaintiffs, as experienced venture- 20 stage investors and experts on due diligence, would have invested . . . without having read these 21 Going Concern Opinions that Mr. Berwick relies so heavily on for his conclusions.”). That is 22 simply not a rebuttal. 23 Because Chookaszian is an affirmative expert and his Rebuttal Report is improperly 24 designated as such, the report must be stricken and Defendant “not allowed to use that information 25 [] to supply evidence on a motion, at a hearing, or at a trial, unless the failure was substantially 26 justified or is harmless.” Fed. R. Civ. P. 37(c)(1)); see also Clear-View Techs., 2015 WL 27 3509384, at *5 (citing Rule 37(c)(1)). Defendants do not attempt to make such a showing. They 1 to think of one. Because Chookaszian did submit a separate affirmative expert report by the May 2 5 deadline, he was clearly available to Defendants. Further, the late disclosure is not harmless 3 because it deprived Plaintiffs of the opportunity to submit an expert report to rebut the Rebuttal 4 Report. Therefore, Rule 37(c)(1) demands that the Court strike the report. 5 The Court is unpersuaded that the time is not ripe to rule on this motion. Defendants argue 6 that “[a] motion aimed at excluding an expert report from consideration by the fact finder[] is of a 7 type better suited for determination at trial . . . .’” Opp’n at 5 (quoting N. County Communs. Corp. 8 v. Verizon Global Networks, Inc., 2010 WL 11453258, at *1 (S.D. Cal. Nov. 10, 2010)). But as 9 Plaintiffs point out, none of the three cases cited by Defendants arose in the context of a motion to 10 strike an expert report as improper rebuttal. Instead, in all three the moving party sought to 11 exclude an expert’s opinion on the grounds that it was an impermissible legal opinion or that it 12 was irrelevant. Id. at *1 (moving to strike expert “on the grounds that his opinion constitutes 13 impermissible legal opinions and otherwise lacks relevance”); Best Buy Stores, L.P. v. Manteca 14 Lifestyle Ctr., LLC, 859 F. Supp. 2d 1138, 1146 (E.D. Cal. 2012) (moving to exclude expert 15 testimony that was an “impermissible expert opinion and lack[ed] relevance”); DeFazio v. 16 Hollister, Inc., 2009 WL 276758, at *1 (E.D. Cal. Feb. 5, 2009) (moving to strike “impermissible 17 legal opinions” that “otherwise lack[ed] relevance”). In other words, those cases involved the 18 question of whether an expert’s opinion was permissible under the Federal Rules of Evidence, an 19 issue “of a type better suited for determination at trial or even during the summary judgment stage 20 of the case, when it is clearer if and how the parties intend to rely on the opinion.” N. County 21 Communs. Corp., 2010 WL 11453258, at *1 (citations omitted). The issue before the Court— 22 whether a party properly disclosed an expert report pursuant to discovery rules—is suitable for 23 determination now, where the disclosure chapter of discovery has already closed. Also, 24 Defendants have long known they will be challenging Plaintiffs’ due diligence efforts and the 25 reasonableness of Plaintiffs’ reliance, and the Court can think of no good reason for why 26 Chookaszian’s report was not properly and timely disclosed. The report will be stricken. 27 V. CONCLUSION 1 28, 2020 Expert Report of Dennis Chookaszian. Defendants are precluded from using any opinion 2 || offered in that report during motion practice or at any hearing, and Chookaszian is precluded from 3 offering trial testimony about any opinion in that report. 4 IT IS SO ORDERED. 5 6 || Dated: July 20, 2020

THOMAS S. HIXSON 8 United States Magistrate Judge 9 10 11 12

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