SUPERCUTS:Securities and Exchange Commission v. David E. Lipson
In Securities and Exchange Commission v. David E. Lipson (January 5, 1999, U.S. District Court, N.D. Illinois, No. 97 C 2661), the plaintiff sought to bar the defendant's expert from testifying at trial and to strike his report. This case involved the allegation that Lipson, who was the CEO of Supercuts, Inc., traded in shares of Supercuts stock on the basis of internal company reports revealing poor sales performance.
The expert for the defendant opined that Lipson and others at Supercuts in March and April 1995 considered the internal financial reports unreliable and that the relevant financial reports were in fact unreliable.
The CPA expert neither audited the internal financial reports nor performed an analysis to determine whether the internal financial reports reliably reported corporate revenues or how they compared to budgeted amounts. He also did not compare the internal reports to publicly filed reports.
The expert reiterated his opinion in his report that Lipson "didn't think the reports were very reliable" and "didn't pay much attention to them, didn't read them since the middle of 1994." The expert also gave deposition testimony that not only Lipson, but also certain others in Supercuts management considered the information in the internal financial statements useless.
The court evaluated the expert's opinions in light of the Daubert principles and noted that besides being reliable, acceptable, and valid, the methodology underlying the expert's testimony must be helpful to a trier of fact. The court stated the following:
Daubert also makes it clear that even if proffered expert opinion meets the reliability standard, the expert testimony will not be admitted unless it will assist the trier of fact in understanding the evidence or determining a fact
in issue.
The conclusions relating to the CPA expert's opinion concerning what Lipson or other Supercuts management believed about the reliability of the internal financial statements is telling. The court found that the expert's training and experience as an accountant did not equip him "to divine" what Lipson believed about the reliability of the reports.
The expert's opinion concerning whether the internal reports in March and April 1995 were in fact unreliable is within the scope of an accountant. However, under the evidence presented at the hearing in this case the court found that the expert's opinion on this subject failed to meet the criteria for admissibility.
The court concluded as follows:
[The expert's] opinion suffers from an additional, and serious, defect that independently undermines its reliability. [The expert's] report reveals that his opinion about the reliability of the internal financial reports is intertwined with, and in part based upon, statements by the defendant and others that the reports were unreliable and that they considered them to be so. Allowing an opinion about the objective reliability of certain records to be influenced by the subjective statements of an interested party about what he believed does not, in this court's view, comport with the principles and methodology of the accountancy profession. [Emphasis added.]
Based on the foregoing reasoning, the court found that "defendant is not entitled to bolster his defense by having [the expert] provide under the banner of expert opinion what is, in fact, an extra summation of the evidence that fails to meet Rule 702's standards of reliability and helpfulness."
Lesson to be learned: Stay within your area of expertise when giving expert testimony. Also, when you rely on a party-in-interest, support the representations of the parties with evidence, if available. This is similar to the acceptance of management's representation in an audit. Obtain corroborating evidence and, if none is available because of the nature of the representation, consider the other work you have done to support your opinion and the reasonableness of the representations. Only then decide if you can render an opinion on the issue in question.
Gone are the days when experts could testify to almost anything within reason with only the weight of "because I say it is" to support their opinions. Courts are parsing the reports and testimony of experts to determine whether the expert is qualified to give the opinions being expressed, whether the testimony will assist the trier of fact, and whether the opinions are based on a valid, appropriate, and acceptable methodology properly applied to the facts in the case. *
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Editor:
Dan L. Goldwasser, Esq.
Vedder, Price, Kaufman,
Kammholz & Day
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