Abdo v. Fitzsimmons

Background

These related securities-fraud actions were brought by investors in Delivery Agent, Inc. Plaintiffs alleged that former Delivery Agent directors and officers made material misrepresentations and omissions while attempting to sell Delivery Agent securities. Delivery Agent later filed for Chapter 11 bankruptcy, and plaintiffs’ securities became worthless.

The parties disclosed affirmative expert reports by May 5, 2020, and rebuttal reports were due May 28, 2020. Plaintiffs disclosed Steven M. Berwick’s report, which evaluated the fair market value of Delivery Agent and the securities at the times plaintiffs invested. Berwick concluded that Delivery Agent’s equity value was less than zero and that the securities were valueless on the relevant investment dates.

Defendants disclosed Dennis Chookaszian’s initial expert report by the May 5 deadline. On May 28, defendants disclosed a second Chookaszian report labeled a rebuttal report. That report stated that plaintiffs were sophisticated investors who should have known about Delivery Agent’s financial problems and the risks associated with their investments. Plaintiffs moved to strike the report as an untimely affirmative expert report rather than a proper rebuttal report.

Legal standard

Federal Rule of Civil Procedure 26 requires disclosure of retained expert testimony and permits a rebuttal expert report only when the testimony is intended solely to contradict or rebut evidence on the same subject matter identified by an opposing initial expert. A rebuttal report must attack the opposing expert’s theories; it may not introduce the proponent’s own affirmative theories under the label of rebuttal.

Under Rule 37(c)(1), information that was not properly disclosed generally may not be used in a motion, hearing, or trial unless the failure was substantially justified or harmless.

Court’s analysis

The court found that Berwick’s report addressed fair market value and assumed, without deciding, that defendants had omitted material information and that plaintiffs lacked knowledge of those facts. Berwick did not offer an opinion about whether plaintiffs actually knew or should have known the information or whether they conducted adequate due diligence.

The court concluded that Chookaszian’s report did not dispute Berwick’s valuation method, challenge how Berwick applied that method, or reach a contrary conclusion about the value of the company or securities. Instead, it accepted the valuation conclusion and argued that plaintiffs should have discovered the risks and purported value through due diligence. Those opinions supported defendants’ defenses concerning plaintiffs’ knowledge, negligence, and reasonable reliance rather than rebutting Berwick’s damages analysis.

The court also rejected defendants’ argument that the report directly rebutted Berwick’s opinion that plaintiffs suffered damages. It explained that Berwick’s damages opinion assumed liability and focused on the objective value of the securities. Whether plaintiffs understood the risks or knowingly made the investments were liability issues, not a rebuttal of Berwick’s valuation opinion.

Because the report was an affirmative expert report improperly designated as rebuttal, the court found that defendants had not shown substantial justification for the late disclosure. The disclosure also was not harmless because it deprived plaintiffs of the opportunity to submit an expert report responding to it.

Disposition

Judge Thomas S. Hixson granted plaintiffs’ motion to strike the July 28, 2020 Expert Report of Dennis Chookaszian. The defendants were precluded from using any opinion offered in that report during motion practice or at any hearing, and Chookaszian was precluded from offering trial testimony about any opinion in the report. The order addressed expert disclosure and use of the report; it did not decide the underlying securities-fraud claims.