Securities and Exchange Commission v. Airborne Wireless Network

Background

The Securities and Exchange Commission brought an enforcement action against Airborne Wireless Network, Kalistratos Kabilafkas, related individuals, and two trusts identified as relief defendants. The Commission alleged that, from August 2015 through May 2018, Kabilafkas carried out a scheme to obtain undisclosed control of Airborne, place millions of shares with associates and nominees, promote the company’s stock, and sell shares into an artificially inflated market.

The Commission also alleged that defendants submitted false statements to a transfer agent, brokers, and investors, and caused Airborne to file reports that failed to disclose who owned and controlled the company and misrepresented certain transactions. The alleged misstatements included Airborne’s reporting about shares issued to Eric Scheffey and the value and business potential of the Infinitus patent.

The parties filed cross-motions for summary judgment. Defendants relied on a report by Armand Musey, a financial and telecommunications valuation specialist, to support their argument that the alleged misstatements were not important to investors as a matter of law. The Commission asked the court to exclude Musey’s opinions and proposed testimony under the federal evidence rule governing expert testimony, and to disregard evidence or arguments based on the report in connection with summary judgment.

Legal standard

Under Rule 702 of the Federal Rules of Evidence and the Supreme Court’s decision in Daubert v. Merrell Dow Pharmaceuticals, the court acts as a gatekeeper for expert testimony. The party offering the expert must show that the expert is qualified, that the testimony is reliable, and that it is relevant and helpful to the jury. The court also may exclude otherwise relevant testimony if its value is substantially outweighed by the risk of unfair prejudice, confusion, or misleading the jury.

Rulings on Musey’s report

The court held that Musey could testify about the general state of the broadband industry from 2015 to 2020 and the likelihood that startups would fail. The court also allowed his opinions that significant marketing expenditures can be common for startups, as well as his financial-market and business-strategy opinions concerning Airborne’s 2018 financing, short selling, and the company’s share-price decline, which appeared in Sections 17 and 18 of his report.

The court excluded Musey’s legal definitions of “materiality,” meaning whether information is important to a reasonable investor. The court stated that it, rather than an expert, would instruct the jury on the legal definition of materiality.

The court also excluded Musey’s opinions about whether specific allegations in the case would be material to reasonable investors. It found that his conclusion that investors would not care about information unrelated to company cash flow was unsupported and failed to account for the possibility that such information could be important if it formed part of an alleged scheme to defraud investors. Musey could testify that financial literature generally describes reasonable investors as primarily concerned with factors affecting cash flow, but he could not give the broader conclusion that non-cash-flow information connected to an alleged fraud was immaterial.

The court excluded Musey’s discussion of the Infinitus patent. Although Musey criticized a draft valuation report stating that the patent had a fair value of zero and estimated that $582 million would be needed to bring the proposed products to market, he did not provide an actual valuation or estimate the value of potential infringement claims. The court found that his speculation would not help the jury.

The court excluded Musey’s analysis of the transaction involving Scheffey. Musey used a valuation model to estimate the value of warrants and argued that the reported share price was not misleading. The court concluded that this analysis did not address the Commission’s evidence that Scheffey received nearly three million additional shares that were not disclosed in Airborne’s filings. Because the analysis did not resolve the alleged omission, the court found it irrelevant to the issues for the jury.

The court excluded Musey’s five stock-price “event studies.” The studies examined market reactions to several Airborne disclosures, but the court found that they analyzed truthful or incomplete disclosures rather than the allegedly false or omitted information. In the court’s view, the studies therefore could not show how reasonable investors would have reacted to learning the alleged true facts or to learning that the disclosures were false.

Disposition

The court granted in part and denied in part the Commission’s motion to exclude the opinions and potential testimony of Armand Musey. It directed the Clerk of Court to close docket entry 186. The court stated that the effect of the testimony it allowed would be addressed in its decision on the pending summary-judgment motions.