The Expert's Examiner


SEC v. Lek Securities Corp., No. 1:17-cv-01789 (S.D. N.Y., 5/8/19).
August 6, 2019

As this case approaches trial, it continues to provide instructive opinions on the qualifications and reliability of proffered experts; here, the court reviews a prior ruling (see TEE 2019-01). Defendants stood in a tight spot after the Court's admissibility rulings in its March 14 Opinion, which we covered last quarter in the first edition of The Expert Examiner (TEE). There, the Court overruled objections to the SEC's two experts, Hendershott and Pearson, while the defense's experts were wholly disqualified (Bodek) or limited substantially in their proffered testimony (Grigoletto and Ross). In a manipulation case of this complexity, where the Avalon Defendants, are comprised of a foreign-based trading outfit and traders from Eastern Europe and Asia, allegedly assisted by the Lek Defendants, the loss of expert testimony can hobble the defense.

Defendants' experts David J. Ross and Alan Grigoletto were originally offered in rebuttal of the Hendershott testimony for the SEC. Terrence Hendershott, in his report, analyzes limit orders, cancellations, and executions made by the Avalon traders for the practice of "layering." Layering concerns the placement of "visible limit orders" that are intended, not for execution, but to create the appearance of activity in the market and to influence the orders of other investors. Defendants ask the Court, through a motion for reconsideration, to expand the limits placed on Ross and Grigoletto's expert testimony.

Mr. Grigoletto's testimony was largely excluded on the SEC's motion. "He will be permitted to testify about certain inferences to be drawn from the fact that Avalon’s Loud-side orders remained in the market for an average duration of 10.18 seconds and were primarily at or inside the NBBO," the Court states in review. "He will also be permitted to testify about certain inferences to be drawn from the fact that the stock price either remained unchanged or moved in the opposite direction of Avalon’s stock trades made in connection with some Cross-Market Loops." However, the previous ruling excluding testimony on a 45-minute segment of Avalon's trading in a single stock (CAB) will stand, as the testimony was geared to discrediting the Hendershott analysis of a half million layering loops as flawed. For that matter, the Court observes, "Grigoletto did not even assert in his report in connection with the 45 minutes of CAB trading he examined that Avalon’s Layering Loops during that period did not contribute to order imbalances in the market."

There was also an interesting Opinion passage about experts opining on the significance of a fact witness' testimony. Expert Grigoletto sought to opine on a SEC complaint and order in the Citadel case, because Defendants allegedly relied on that text to guide their conduct. The Court cuts off that line of attack, however, and puts the Citadel matter off-limits. "Even if a Citadel witness testified at trial about its observations of marketplace behavior, no expert may advise the [factfinder] about the inferences it may properly draw from a fact witness’s testimony. [Emphasis added]. Grigoletto did no independent analysis of the trading discussed in the Citadel complaint and has no relevant testimony to offer on this matter," the Court rules.

Taking a different tack on the Ross proffer, the Court approves the addition of two analyses to this second defense expert's testimony. The Court's original "Daubert Opinion" restricted Mr. Ross' testimony to four calculations that appeared in his reports. Each focused on the trading data -- the length of time quotations were left open before cancellation, their proximity to the NBBO, and the like -- and were requested by the Lek Defendants. The Court picks one calculation among several more Mr. Ross placed in his report, designed to compare the Layering Loops to Avalon's other trading at Lek Securities. That calculation holds that only 1.4% of Avalon's trading involved the Layering Loops. The other two, the Court finds, have "[f]aulty and misleading assumptions ... embedded within them." On another point, it permits a second calculation, i.e., "Ross’s calculation that 99.73% of Avalon Group 038’s trading Loops consisted entirely of stock orders, or what he calls 'Stock Loops.'” These calculations do not necessitate expert credentials regarding trading; the Court grants the addition of the two calculations, but continues to regard Mr. Ross as lacking the expertise to opine on the layering aspect of the trading or the so-called Cross-Market Strategy. Reconsideration of this determination is denied.

(ed: At the August Conference, SER Member Joe Spiegel drew attendee’s attention to this case and the excellent instruction it has produced on the qualification of experts. We agree! Judge Cote’s decisions illustrate the strategic importance of utilizing experts effectively and properly matching the expert and the issue in question.)

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