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Securities and Exchange Commission v. The Nutmeg Group, LLC

United States District Court, N.D. Illinois, Eastern Division

October 31, 2017

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
THE NUTMEG GROUP, LLC; RANDALL GOULDING; and DAVID GOULDING, Defendants, DAVID GOULDING, INC.; DAVID SAMUEL, LLC; FINANCIAL ALCHEMY, LLC; PHILLY FINANCIAL, LLC; and ERIC IRRGANG, Relief Defendants.

          ORDER

          JEFFREY T. GILBERT MAGISTRATE JUDGE

         Plaintiffs Motion to Reconsider Order Barring Mari Reidy from Offering Opinion Testimony on Certain Accounting Matters ("Motion to Reconsider") [ECF No. 910] is denied. See Statement below for further details.

         STATEMENT

         1. On April 28, 2017, the Court issued a Memorandum Opinion and Order [ECF No.880] in which it ruled on Defendants' and Relief Defendants' Motion in Limine to Bar the Testimony of Mari Reidy and Peter Hickey and the Admission of Their Respective Reports ("Defendants' Motion to Bar") [ECF No. 852]. The Court held that portions of the testimony the SEC intended to elicit at trial from Mari Reidy ("Reidy"), an employee of the accounting firm Crowe Horwath LLP ("Crowe Horwath"), was expert testimony that could not be presented as such because the SEC had not disclosed Reidy as a testifying expert under Rule 26(a)(2) of the Federal Rules of Civil Procedure. Exclusion of undisclosed expert testimony is automatic and mandatory under Rule 37(c)(1) of the Federal Rules of Civil Procedure unless the nondisclosure was substantially justified or is harmless. The SEC bore the burden of showing its failure to disclose Reidy as a testifying expert was substantially justified or is harmless. The SEC did not address either issue in its response to Defendants' Motion to Bar, and the Court did not make any explicit findings with respect to justification or harm in its Opinion. See David v. Caterpillar, Inc., 324 F.3d 851, 857 (7th Cir. 2003) (noting a district court need not make explicit findings). The Court ultimately barred Reidy from offering expert testimony in this case for the reasons discussed in its Opinion and Order [ECF No, 880] but did not constrain her from testifying about facts and opinions that are within the permissible scope of lay testimony under the Federal Rules of Evidence.[1]

         2. The SEC now has moved for reconsideration of the Court's decision limiting Reidy's testimony in this case. The SEC does not contend that the Court erred in distinguishing between the portions of Reidy's proposed testimony that would constitute expert opinion and the portions that could be admissible as lay fact or opinion testimony. Instead, the SEC asserts Reidy should be allowed to offer expert testimony in this case because, as the Court understands the SEC's arguments: (1) Reidy is an expert witness within the meaning of Rule 26(a)(2)(C) and the SEC either should be allowed to disclose her as such now, on the eve of trial, or its prior references during discovery and pretrial proceedings to matters about which Reidy was expected to testify and to the reports generated by Crowe Horwath should be deemed to be an effective Rule 26(a)(2)(C) disclosure, and (2) the SEC's failure to disclose Reidy expressly as a Rule 26(a)(2)(C) testifying expert earlier in this case was substantially justified or is harmless.

         I.

         3. A motion to reconsider cannot be used to make new arguments that could have been but were not raised before. Birdo v. Dave Gomez, 214 F.Supp.3d 709, 714 (N.D. 111. 2016); SEC v. Nutmeg Grp., LLC, 2016 WL 3023291, at *4 (N.D. 111. May 24, 2016); Geraty v. Vill of Antioch, 2015 WL 127917, at *3 (N.D. 111. Jan. 8, 2015). In their Motion to Bar and the supporting briefs, Defendants and Relief Defendants (collectively, "Defendants") argued in part that the Court should bar Reidy from testifying because the SEC did not disclose her as a testifying expert. Defendants' Motion to Bar, [ECF No. 852], ¶¶ 2-3, 6, 24, 51; Defendants' Reply in Support of their Motion to Bar, [ECF No. 864], at 13; Defendant Randall Goulding's Reply in Support of Defendants' Motion to Bar ("Randall's Reply"), [ECF No. 865]. In its brief in opposition to the Motion to Bar, the SEC explicitly recognized that Defendants raised this argument. Plaintiffs Response to Defendants' Motion to Exclude the Testimony of Mari Reidy and Peter Hickey ("The SEC's Response"), [ECF No. 859], at 8. The SEC also concedes as much in its Motion to Reconsider. Motion to Reconsider, [ECF No. 910], at 4. In response to Defendants' Motion to Bar, though, the SEC did not engage with Defendants' argument that it had not properly disclosed Reidy as a testifying expert in accordance with Rule 26(a)(2). Instead, the SEC argued that Reidy qualified as a court-appointed expert under Federal Rule of Evidence 706 and should be allowed to testify in that capacity. The Court rejected this argument on the merits, holding that Reidy did not meet the requirements of a Rule 706 expert. The SEC did not argue that it had previously or properly disclosed Reidy as a testifying expert under Rule 26(a)(2)(B) or (C), or that it should be allowed to do so now. To the contrary, the SEC conceded Reidy "was never . . . disclosed as an expert witness by the SEC." The SEC's Response, [ECF No. 859], at 6. As already noted, the SEC also did not address whether its admitted failure to disclose Reidy was substantially justified or is harmless. The SEC did not make these arguments even though it acknowledged that one of the bases of Defendants' Motion to Bar was that Reidy was offering what amounted to expert testimony without having been disclosed as a testifying expert.[2]

         4. Because the SEC did not previously make the arguments it is now advancing in its Motion to Reconsider, it cannot raise them now on "reconsideration" under the cases cited above. This is a sufficient basis upon which to deny the SEC's Motion to Reconsider. The Court, however, will not rely solely on the SEC's failure to make these arguments in response to Defendants' Motion to Bar as a basis to deny the SEC's Motion to Reconsider. Rather it will go on also to address the merits of the arguments the SEC now is making.

         II.

         5. The SEC argues either that it should be deemed to have previously disclosed Reidy as a testifying expert under Rule 26(a)(2)(C) or it should be allowed to do so now because its failure to do so earlier was substantially justified or is harmless. To be clear, the SEC never expressly disclosed Reidy as a Rule 26(a)(2)(C) expert. Likewise, it has been clear for years that the SEC was relying upon Reidy's work as a forensic accountant for Crowe Horwath, which was hired by Defendant The Nutmeg Group, LLC ("Nutmeg") at the SEC's behest early in the gestation of this long-running lawsuit, to help support aspects of the SEC's case against Defendants including its claim that certain Defendants should be made to disgorge alleged economic benefits they received improperly from Nutmeg or the Funds.[3] Defendants also have argued, using several different procedural vehicles, that the SEC should not be allowed to rely on Reidy because they disagreed with what Reidy had to say, as far as they understood it, and also because they did not think the SEC had provided them with enough information about what Reidy would say to defend adequately against it. Defendants also repeatedly argued that Reidy was not qualified to offer opinions about certain aspects of her work if the SEC intended to offer those opinions at trial. For whatever reason, however, the SEC never expressly disclosed Reidy as a testifying expert witness in this case in accordance with the Federal Rules of Civil Procedure.

         6. In fact, the SEC repeatedly has avoided identifying Reidy as its expert. For example, during a status hearing on May 26, 2016, two weeks before it submitted its Preliminary Witness List for trial [ECF No. 845], the SEC's counsel said of Reidy, "she's not our expert, but she will be a witness." Transcript of May 26, 2016 Status Hearing, [ECF No. 929], at 21. The SEC's counsel recognized that Defendants would be filing motions and arguing that Reidy's testimony should not be allowed at trial but said "I don't know if that's technically a Daubert issue, " which appeared to be an indication that Reidy was not being offered as an expert witness subject to challenge under the Daubert line of cases. Id. At no point, did the SEC characterize Reidy as a Rule 26(a)(2)(B) or (C) expert. Further, as noted above, in response to Defendants' Motion to Bar, the SEC argued that Reidy could provide the testimony it intended for her to provide as a court-appointed expert under Federal Rule of Evidence 706, not because she had been disclosed as an expert under Rule 26(a)(2). In fact, as already noted, the SEC conceded in briefing the Motion to Bar that Reidy "was never . .. disclosed as an expert witness by the SEC." The SEC's Response, [ECF No. 859], at 6.

         7. In its Preliminary Witness List filed on June 9, 2016 [ECF No. 845], two weeks after the May 2016 hearing referenced above, the SEC described Reidy in different terms than it described the witness it properly had disclosed as a testifying expert. For instance, the SEC said it "expected" Peter Hickey, a properly disclosed Rule 26(a)(2)(B) witness for the SEC, "to testify as an expert witness regarding the opinions expressed in his Expert Report." Id. at 3. The SEC did not use the same kind of language when it described Reidy in the immediately subsequent paragraph. Rather, the SEC characterized Reidy as "an accountant . . . expected to testify regarding the retention of Crowe Horwath LLP by the Receiver to provide a forensic accounting of Nutmeg and the Funds; the work performed by herself and her team; her Reports of September 28, October 20 and November 16, 2010 which summarize her work - including the conclusions which she drew based upon her accounting expertise and her work on this matter -all of which are expected to be consistent with her deposition testimonies." Id. Absent from this description is any designation of Reidy as an expert witness per se. Although the SEC does say that some of Reidy's anticipated testimony would include conclusions "based upon her accounting expertise and her work on this matter, " the disclosure is otherwise opaque and, again, substantially different both from the way in which the SEC characterized the expert testimony it expected to elicit from Peter Hickey and from what would have been required for a disclosed testifying expert witness under Rules 26(a)(2)(B) or (C).

         8. The theory that the SEC is now advancing appears to be that it effectively satisfied Rule 26(a)(2)(C)'s expert disclosure requirement by referencing the work Reidy and Crowe Horwath did for the Receiver when it made and supplemented its Rule 26(a)(1)(A) disclosures, identifying Reidy as a potential witness on forensic accounting matters, and referencing the reports prepared by Crowe Horwath for the court-appointed Receiver, Leslie Weiss. This is a new theory, never before articulated by the SEC. It surfaced only after the Court issued its ruling on Defendants' Motion to Bar. The. Court is unwilling to view the SEC's prior references to Reidy as some sort of a stealth disclosure that she was a Rule 26(a)(2)(C) witness for the SEC. The Court also does not believe the SEC intended those references to be construed as such. Under Rule 26(a)(2)(C), a party must serve a disclosure that states "(i) the subject matter on which the witness is expected to present evidence under Federal Rule of Evidence 702, 703, or 703; and (ii) a summary of facts and opinions to which the witness is expected to testify." Fed.R.Civ.P. 26(a)(2)(C). To comply with the second requirement, the disclosure must include "a brief account of the [expert's] main opinions, " including the expert's "view or judgment regarding a matter that affects the outcome of the case, " and a brief account in summary form of the main facts directly related to the disclosed opinions. Little Hocking Water Ass'n, Inc. v. E.I. DuPont de Nemours & Co., 2015 WL 1105840, at *9 (S.D. Ohio Mar. 11, 2015). No such disclosure was made in this case, at least expressly, by the SEC.

         9. The SEC essentially is arguing that a sufficient expert disclosure for Reidy now can be inferentially cobbled together from its Rule 26(a)(1)(A)(i) disclosure, its Rule 26(a)(1)(A)(iii) disclosure that it would seek to recover (or disgorge) monies from certain Defendants based on work Reidy and Crowe Horwath had done for the Receiver, its written discovery responses to the same effect, its repeated references to Crowe Horwath's reports to the Receiver, and the production of those reports to Defendants. That does not work. Even if the Federal Rules of Civil Procedure allowed a party to make an expert witness disclosure in this kind of a Rube Goldberg-like fashion, [4] nowhere does the SEC succinctly identify the discrete opinions Reidy is expected to give or summarize the main facts related to those opinions, as Rule 26(a)(2)(C) requires. Instead, the SEC identified certain conclusions the SEC understood Reidy and Crowe Horwath had reached in its Rule 26(a)(1)(A)(iii) disclosures and interrogatory answers and then referred Defendants to Crowe Horwath's three reports, which even the SEC admitted it had so much difficulty deciphering that it needed to take Reidy's deposition to figure out all of ...


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