United States District Court, D. Delaware
Defendants filed a motion to exclude
the expert testimony of Dr. Alan Hess. (D.I. 382, 595). The
Government filed a response. (D.I. 397). The Court heard
testimony from Dr. Hess and Defendants' expert, Dr. David
Smith, on November 29, 2017. (D.I. 599). At the hearing, the
Court requested, and the parties subsequently submitted,
supplemental letters in regard to Dr. Hess's proffered
testimony. (D.I. 609, 618, 622, 641-1).
Defendants originally filed their motion, arguments related
to Dr. Hess's testimony and objections thereto have come
and gone. I think two principal issues remain in
regard to Dr. Hess. The first is whether he can testify about
the four event studies he performed on Wilmington Trust's
earnings releases. The second is whether he can testify about
Uniform Bank Performance Report data.
event study is a statistical regression analysis that
examines the effect of an event on a dependent variable, such
as a corporation's stock price." In re Imperial
Credit Indus., Inc. Sec. Litig., 252 F.Supp.2d 1005,
1014 (CD. Cal. 2003). The Third Circuit has stated that it
"do[es] not view the event study as an impermissible
methodology under the reliability factors mentioned in
Daubert, 509 U.S. at 594-95." United States
v. Schiff, 602 F.3d 152, 174 n.3l (3d Cir. 2010).
Government offers the testimony of Dr. Hess to prove the
materiality of the false statements alleged in the Third
Superseding Indictment. (See D.I. 622 at 1). In
particular, as I understand it, Dr. Hess would testify about
the four event studies he performed as evidence of the
relationship between the Bank's reporting of its past due
loans and its stock price. (See D.I. 609 at 2). The
event studies correspond to four dates on which the Bank
announced its quarterly earnings information. Subsequent to
the four announcements, the Bank's stock price dropped.
The earnings announcements include various
"factors" contributing to the Bank's earnings
results. Those "factors" include, among others, the
Bank's provision for loan losses. (E.g., D.I.
599, PTX-5 at p. 1). At the hearing, Dr. Hess testified that
the Bank's provision for loan losses is related to its
number of past due loans. (See Id. at 20:20-23).
Further, in its supplemental letter, the Government proffered
that trial evidence, including the Bank's internal
guidelines, will show the connection between the Bank's
number of past due loans and its loan loss provision. (D.I.
609 at 2).
argue Dr. Hess's testimony about the event studies should
be excluded because the Government has not established the
"requisite relationship" between the Bank's
reporting of its past due loans and its provision for loan
losses. (D.I. 618 at 2). More specifically, they argue that
Dr. Hess failed to control for other metrics that may impact
the Bank's provision for loan losses (id.) or
for other information included in its earnings releases
(id. at 8). Further, they argue that the Government
mischaracterizes the Bank's internal rating guidelines.
(Id. at 2-3).
Dr. Hess considered the Bank's reporting of its past due
loans generally, as part of his event study analysis, he
neither identified any curative disclosure nor attempted to
separate out the subset of past due loans at issue in the
Indictment. Thus, Dr. Hess's analysis and testimony do
not prove the materiality of the alleged misstatements.
See United States v. Schiff, 538 F.Supp.2d 818, 838
(D.N.J. 2008), aff'd, 602 F.3d 152 (3d Cir.
2010) ("Without a causal link to the curative disclosure
of the misstatement charged in the indictment, evidence of a
stock price drop is not probative of the materiality of that
alleged misstatement.. . ."). I think his testimony
about the event studies is probative, however, to the extent
that a showing that the Bank's reporting of its past due
loans is material makes it more likely that a lie about its
past due loans is material. See Fed. R. Evid. 401.
In my opinion, Defendants' objections to Dr. Hess's
first three event studies are better suited for
at this point, it is not apparent to me that the Government
needs Dr. Hess's testimony in light of the other evidence
I understand it will introduce at trial regarding the
materiality of the alleged misstatements. Cf. United
States v. Driggs, 823 F.2d 52, 54 n.2 (3d Cir. 1987)
(noting that part of Rule 403 balancing "involves
evaluating the presence or absence of a genuine need for the
evidence in question"). Thus, while I reject
Defendants' Daubert challenge to Dr. Hess's
testimony about the January 29, April 23, and July 23, 2010
event studies, I will RESERVE DECISION on
the admissibility of his testimony about those three event
studies. The Government should wait until the end of its case
to offer Dr. Hess's testimony about those event studies.
the November 1, 2010 earnings release, I agree with
Defendants that Dr. Hess's testimony about that event
study is unreliable. Unlike the earnings releases in January,
April, and July 2010, the November 2010 earnings release
coincided with the announcement of Wilmington Trust's
merger with M&T Bank. At the hearing, Dr. Hess
acknowledged that, while he could have, he did not
disentangle the earnings release from the merger
announcement. (See D.I. 599 at 60:17-61:24). I am
not convinced by the Government's argument that Dr.
Hess's methodology accounted for the merger announcement
because of the "substantial overlap" between the
merger price and the Bank's increased provision for loan
losses, which were both reflected in the stock price
following the November announcement. (See D.I. 609
at 4). Because Dr. Hess did not account for the merger, I
think any opinion he might offer about the relationship
between the Bank's reporting of its past due loans and
its stock price on November 1, 2010 would not be the product
of a reliable methodology. See Fed. R. Evid. 702(c).
Dr. Hess is thus PRECLUDED from testifying
about the November 1, 2010 event study.
hearing, Dr. Hess testified about Uniform Bank Performance
Report data. In particular, he opined that UBPR data, offered
as Government Exhibit 18, was consistent with his regression
analysis. (See D.I. 599 at 69:25-70:5). Further, in
its supplemental letter, the Government proffered that the
UBPR data "shows where [the Bank's] significant
financial metrics diverged from those of its peer
institutions." (D.I. 609 at 5). Defendants argue the
UBPR data is irrelevant and unreliable. (D.I. 618 at 8).
seems to me that the UBPR data does nothing more than show a
comparison between Wilmington Trust's financial
performance and the performance of certain "peer
banks" selected by the Federal Financial Institutions
Examination Council. I am hard pressed to see how that
comparison is relevant to the materiality of the Bank's
reporting of its past due loans. To the extent it is
relevant, its probative value is substantially outweighed by
the image it creates of Wilmington Trust lagging
significantly behind its peer banks. See Fed. R.
Evid. 403. Dr. Hess is thus PRECLUDED from
testifying about the UBPR data. Defendants' motion (D.I.
595) to exclude Dr. Hess's UBPR data analysis on the
basis that the Government violated its disclosure obligations
pursuant to Federal Rule of Criminal Procedure 16(a)(1)(G)
(D.I. 596) is therefore moot.
Defendants' motion to exclude (D.I. 382) is
DENIED in part, GRANTED in
part, and RESERVED in part. Defendants'
second motion to exclude (D.I. 595) is
is SO ORDERED.