This case has featured a trove of decisions from a respected and securities-knowledgeable jurist on the qualifying of experts and the nature of the testimony they can reliably provide to the factfinder. In an earlier Opinion, which the Court refers to as its "Daubert Opinion, the Court ruled on the qualifications and the admissibility of the proffered testimony of five experts, two on behalf of the SEC and three defense experts. In this decision, following closely on the heels of the first, the Lek Defendants proffer testimony from expert Begelman concerning charges against Lek that it aided and abetted traders from a foreign-based brokerage firm (the Avalon Defendants) by carrying their trading accounts and executing their manipulative trades in the U.S. stock markets.
Mr. Begelman's Report, according to the Court, "purports to evaluate Lek Securities' compliance ad surveillance practices in light of industry standards." The Report has four sections, each of which the Court examines. The first section, the expert's comments are mainly "high-level," with the Report noting that Lek processes over a million trades each day and relies for its compliance efforts upon automated systems and "manual post-hoc reviews." His focus becomes clear in the second section, which deals with the difficulties of detecting the trading practice of "layering." Describing layering as "placing non-bona fide limit orders on one side of the market in order to influence a trader’s ability to execute favorable trades on the opposite side of the market," the Court introduces the third section as a narrative on the typical compliance practices, when "adjusting their compliance regime in response to new types of manipulative trading...."
The fourth section concerns itself with Lek's communications with regulators, its requests for guidance when configuring controls and the evolution of support from FINRA. Cross-market reports from FINRA made feasible a new restriction on traders that limited open orders on one side of the market to four at any one time. Based on these analyses, Mr. Begelman opines that the compliance department at Lek adjusted to available technology, regulatory guidance and market controls in a manner consistent "with the industry standard."
The SEC's motion to exclude tests Mr. Begelman's expertise and challenges his Report as "little more than a narrative of Lek Securities' compliance practices...." The Court agrees the Report and the Begelman testimony would be unhelpful to the jury. In determining the qualification of an expert to testify, the Court must compare the areas of expertise possessed to "the subject matter of the proffered testimony." The court must also test the reliability and relevance of the testimony. "Expert testimony will be helpful only if it assists the jury in 'comprehending and deciding issues beyond the understanding of the layperson.'" The Court finds that Mr. Begelman lacks relevant expertise. He has not worked at a broker-dealer and has no experience with compliance procedures relating to the detection of layering. To cure these deficiencies, he might have researched authorities, contacted broker-dealers, compiled data, developed statistics, and delved more deeply into Lek's layering controls. Instead, his "entire report is based on nothing more than [his] claim to expertise through experience;" that experience, however, provides "no basis for this testimony," in the Court's view.
In addition to these findings, the Court also believes that much of the Report contains inadmissible testimony. The evidence it seeks to introduce should be provided by fact witnesses, exhibits and business records. Little of what Mr. Begelman addresses in his Report lies "beyond the ken of a layperson" and deals with "plainly common phenomenon." The motion to exclude is granted."
(ed: *The Court laments the necessity to exclude this testimony as unreliable. It itemizes at the end of its Opinion the many ways the jury would benefit from "descriptions of industry standards," the "challenges" of developing "robust" compliance systems, what best practices would help in detection of layering, and the timeline of programs that have been developed by "well-regarded" broker-dealers. **There may still be time for Lek to find the right experts, as discovery cut-off, according to PACER.gov, is not until October. ***It occurs to us that Lek stands in the position of a clearing broker-dealer, yet it seems the level of culpability/liability is based on a standard that would apply to a broker-dealer's supervision of its own employees.)
