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Securities and Exchange Comm'n v. Johnson

November 29, 2007

SECURITIES AND EXCHANGE COMM'N, PLAINTIFF,
v.
CHARLES JOHNSON, JR., ET AL., DEFENDANTS.



The opinion of the court was delivered by: Gladys Kessler United States District Judge

MEMORANDUM OPINION

Plaintiff Securities and Exchange Commission ("SEC") brings this action against four individual Defendants (John Tuli, Kent Wakeford, Christopher Benyo, and Michael Kennedy, collectively "Defendants"), alleging a fraudulent scheme to materially and improperly inflate the announced and reported revenues of PurchasePro.com, Inc. ("PurchasePro"). This matter is before the Court on Defendants' Joint Motion to Exclude the Testimony of Albert A. Vondra. Upon consideration of the Motion, Opposition, Reply, and the entire record herein, and for the reasons stated below, Defendants' Joint Motion to Exclude the Testimony of Albert

A. Vondra [Dkt. No. 183] is granted in part and denied in part.

I. BACKGROUND

Defendants in this case are former executive-level employees of PurchasePro, a Nevada corporation, and America Online, Inc. ("AOL"). The SEC alleges that between November 2000 and June 2001, Defendants participated in a scheme to commit securities fraud.

The alleged purpose of the scheme was to improperly inflate PurchasePro's reported revenues and to otherwise misrepresent PurchasePro's business activities for the last quarter of 2000 and the first quarter of 2001. According to the SEC, to further their scheme, Defendants back-dated sale documentation so that $3.65 million in revenue would be recognized in the fourth quarter of 2000 and the first quarter of 2001, although that revenue was not actually earned in those quarters.*fn1 The SEC claims that PurchasePro improperly included those back-dated transactions in revenue information announced in an April 26, 2001 national press release, an April 26, 2001 conference call, and in PurchasePro's Form 10-Q for the first quarter of 2001, filed with the SEC on May 29, 2001.

The SEC has announced its intention to include as part of its case in chief at trial expert opinion testimony from Albert A. Vondra, a twenty-eight year veteran of PriceWaterhouseCoopers, a certified public accountant ("CPA"), a certified fraud examiner ("CFE"), and an attorney admitted to practice in the state of Ohio. The SEC intends to use Vondra's testimony to explain to the jury the concept and importance of revenue recognition, as well as how the relevant Generally Accepted Accounting Principles ("GAAP") which govern the profession and certain auditing standards apply to the facts of this particular case. Opp. at 4. In addition, the SEC intends to rely on Vondra's conclusion that recognizing the $3.65 million revenue claim in the first quarter of 2001 was improper under GAAP, and that this amount was material to PurchasePro's financial position. Id.

Defendants do not contest Vondra's qualifications as an expert; rather, they contend that his opinions are premised on an unreliable methodology, are the product of an unreliable application of that methodology, and fall within the province of the jury. On October 17, 2007, Defendants jointly filed a motion to exclude Vondra's testimony.

II. LEGAL FRAMEWORK

The admissibility of expert testimony is governed by the analysis set forth by the Supreme Court in Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993), and the Federal Rules of Evidence. In Daubert, the Supreme Court described the trial judge's gatekeeping function and her responsibility "to ensure that any and all scientific testimony or evidence admitted is not only relevant, but reliable." 509 U.S. at 589. As our Court of Appeals has recognized, Daubert lowered the threshold for admissibility of scientific evidence, envisioning a "limited gatekeeper role" for trial judges.*fn2 Ambrosini v. Labarraque, 101 F.3d 129, 134 (D.C. Cir. 1996)(quotations omitted). In Kumho Tire Co. v. Carmichael, 526 U.S. 137, 141 (1999), the Supreme Court clarified that the trial judge's gatekeeping function applies not only to proffered expert scientific testimony, but also to "testimony based on 'technical' and 'other specialized' knowledge." The Court emphasized that in exercising their gatekeeping function, district judges have broad discretionary authority "to determine [the] reliability [of an expert's testimony] in light of the particular facts and circumstances of the particular case." Id. at 158.

Daubert requires the trial court to undertake a two-prong analysis that centers on evidentiary reliability and relevancy. Ambrosini, 101 F.3d at 133. The trial court must determine "first whether the expert's testimony is based on 'scientific knowledge'; and second, whether the testimony 'will assist the trier of fact to understand or determine a fact in issue.'" Id. (quoting Daubert, 509 U.S. at 592).

The first prong of the Daubert analysis requires the trial court to assess the methodology employed by the expert as a means of ensuring evidentiary reliability. Id. Although Daubert identified four factors a district court may consider in assessing scientific validity, the Court emphasized that the inquiry is a "flexible one," and that the factors it discussed were not necessarily applicable in every case, dispositive, or exhaustive. Id. (citing Daubert, 509 U.S. at 593-95). Rather than mandating the mechanical application of a set list of factors, the Court cautioned in Kumho that Daubert factors "do not constitute a 'definitive checklist or test,'" 526 U.S. at 150, and that "whether Daubert's specific factors are, or are not, a reasonable measure of reliability in a particular case is a matter that the law grants the trial judge broad latitude to determine." Id. at 153. The Court cautioned that in applying the first prong of the Daubert analysis, the trial court must focus "solely on principles and methodology, not on the conclusions they generate." Daubert, 509 U.S. at 595.

The second prong of the Daubert test concerns relevance or "fit" which, the Supreme Court warned, "is not always obvious, and scientific validity for one purpose is not necessarily scientific validity for other, unrelated purposes." Id. at 591. The dispositive question with respect to "fit" or relevance is whether the testimony will "assist the trier of fact to understand the evidence or to determine a fact in issue." Daubert, 509 U.S. at 591 (quoting Federal Rule of Evidence 702) (quotations omitted).

As our Court of Appeals has explained, a judge is not required to become an expert in the field of the proffered expert in order to assess "fit"; rather, "once an expert has explained his or her methodology, and has withstood . . . evidence suggesting that the methodology is not derived from the scientific method, the expert's testimony, so long as it 'fits' an issue in the ...


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