MEMORANDUM AND ORDER
DANIEL H. HUYETT, 3RD, UNITED STATES DISTRICT JUDGE.
Plaintiff James W. Wilkinson is a disgruntled commodities investor who claims that defendant Gregory F. Deutsch ("Deutsch"), plaintiff's broker, churned and excessively traded his commodities account with defendant Rosenthal & Co. ("Rosenthal"). Plaintiff invested almost $ 78,000 in the account over a three month period. By the end of the period substantially all plaintiff's equity in the account was lost, and plaintiff owed Rosenthal an additional $ 18,000 plus interest.
Defendants move to exclude the testimony of plaintiff's expert witness, Jeffrey Jaffe, Ph.D., and to exclude portions of his report. The report concludes, inter alia, that the commodities account was an excessively risky investment given plaintiff's financial position, that the account was excessively traded, and that two types of statements furnished by Rosenthal to plaintiff "presented information that can easily be misinterpreted." Report of Jeffrey F. Jaffe, Court Exhibit 1, at 3, 6, 8, 10 [hereinafter, CX1].
Defendants attack Dr. Jaffe and his report on several fronts. First, they argue that Jaffe's lack of experience and knowledge about commodities and commodities regulation renders his testimony and report entirely inadmissible under Fed.R.Evid. 702. Second, defendants claim that the conclusions of his report are based on "novel" theories of commodities trading and churning and that when balanced against the possibility of misleading the jury, should therefore be ruled inadmissible under Fed.R.Evid. 702 and 403.
A hearing on defendants' motion in limine was held on March 23, 1989. Jaffe was questioned by the parties about the extent of his knowledge of commodities and the basis for the conclusions in his report. After reviewing the record, Jaffe's deposition and hearing testimony, I make the following findings of fact pursuant to Fed.R.Evid. 104(a):
1. Jeffrey F. Jaffe received a Bachelor of Arts from the University of Chicago in 1968, with a major in economics; a Master in Business Administration from the University of Chicago Graduate School of Business in 1971, with a major in finance; and a Philosophiae Doctor in Finance from the University of Chicago Graduate School of Business in 1972. Curriculum Vita of Jeffrey F. Jaffe, Court Exhibit 2 [hereinafter, CX 2].
2. Since 1971, Jaffe has taught finance and related subjects at the undergraduate and graduate levels. Since 1973, Jaffe has taught full-time at the Wharton School at the University of Pennsylvania. From 1973 to 1979, Jaffe was an Assistant Professor of Finance, and from 1979 to the present, an Associate Professor of Finance. He is a tenured member of the faculty at the Wharton School. CX 2.
3. During the pursuit of his post-graduate degrees, Jaffe took no courses concerning commodity futures trading. Deposition of Jaffe, at 6-9 [hereinafter Dep.].
4. Of the numerous courses he taught in the past, or teaches currently, only one involves commodity futures. Dep. at 63-64. That course, entitled "Speculative Markets," includes, among other subjects, introductory principles of what commodity futures contracts are, how they are traded, and basic trading strategies. The course does not involve the rules or regulations of the commodities industry. Dep. at 10-16, 64. During the hearing, Jaffe testified that this course does not deal with excessive trading of a securities account "directly." He further testified that the course deals with excessive trading "indirectly" by including material on the movement of commodities prices over time and speculative strategies.
5. None of Jaffe's published scholarly works concern commodity futures, churning or broker reporting requirements. CX 2, Dep. at 7-15, 18-20.
6. In 1978, Jaffe conducted one study of agricultural commodity futures contract price cycles and returns. The study was not published, and Jaffe does not currently recall the specifics of the results. Dep. at 12-15.
7. In addition to his professorial duties, Jaffe regularly teaches seminars outside the Wharton School. He once taught a half-day seminar involving speculative strategies in the stock market, including stock index futures contracts. Dep. at 30-32.
8. Jaffe also serves as an editor or an ad hoc reviewer for numerous scholarly financial journals. Although he may have served as a reviewer of articles on commodities futures in the past, he has no present recollection of any involvement in any specific article involving commodities. Dep. 17-19.
9. Jaffe also engages in consulting on financial and investment matters. In that capacity, he has served as an expert witness for twenty six lawyers or law firms in matters involving the valuation of companies and real estate, risk and return in speculative markets, project finance, the impact of information on stock market prices, and churning and "unsuitability" standards in "the brokerage industry." CX 2 at 6.
10. However, this is the first matter in which Jaffe has been engaged that exclusively involves futures contracts. On only one or two other occasions has he been engaged to give an opinion on an entire investment portfolio which may have contained any futures contracts. However, Jaffe could not recall any portfolio which definitely contained commodity futures contracts. Dep. 38-58.
11. Jaffe admits that he has no knowledge of futures industry regulations, standards, practices, or laws concerning churning or suitability. Dep., passim. He has never read any caselaw, statutes, or regulations concerning commodities churning or suitability standards, except for one case furnished him by counsel for the plaintiff in connection with this action. Dep. at 93-96, 100-01, 143-50.
12. Jaffe has never worked in any capacity for any company engaged in the futures industry. Dep. at 94-96.
13. In preparing his report, Jaffe never spoke with plaintiff. Rather, he relied on information about plaintiff's financial position, investment objectives, and facts surrounding the opening of the account furnished to him by plaintiff's counsel. This information provides the basis for Jaffe's conclusion that the account was subject to "excessive and inappropriate risk" for plaintiff. CX 1, at 5-6; Dep., at 100.
14. Certain critical pieces of this information given to Jaffe are factually inaccurate. For example, the report states that Wilkinson planned to invest a total of $ 5,000 in the Rosenthal account. CX 1 at 2. In fact, it has been established that Wilkinson invested $ 10,000 when the account was opened.
15. Other financial and investment experience about Wilkinson provided to Jaffe is contrary to the information Wilkinson provided Rosenthal on the forms he completed when he opened the account.
16. At the hearing, Jaffe testified that the methods he used in reaching the conclusions in his report concerning excessive trading did not come from the one commodities case he was provided by plaintiff's counsel. Further, he stated that any use of the methods he used to reach his conclusions were adapted from churning cases involving exclusively common stock portfolios.
17. Jaffe further testified that his techniques are good indicators of whether a commodities account was excessively traded. Further, Jaffe testified his techniques represent the "fairest approach" to providing a "figure reflective of trading" in the account.
18. Aside from Jaffe's testimony concerning the validity of his methods, plaintiff provides no commodities caselaw which approve of computations similar to Jaffe's methods. Plaintiff also provides no scholarly works, papers, articles, treatises, or evidence which otherwise support, confirm, adopt or make any reference to the use of techniques similar to those in the report.
Federal Rule of Evidence 702 states:
If scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education may testify thereto in the form of an opinion or otherwise.
The bounds of admissible expert evidence are first defined by the claims in dispute. "Churning" is "the excessive trading of an account by a broker with control of the account for purposes of generating commissions, without regard to the investment or trading objectives of the customer." In re Lincolnwood Commodities, Inc., [1982-84 Transfer Binder]Comm. Fut. L. Rep. (CCH) para. 21,986 at 28,246 (CFTC Jan. 31, 1984). Thus, the elements of the claim are 1) excessive trading 2) by a broker with control of the account 3) without regard to the investment objectives of the customer. See Bowley v. Stotler & Co., 751 F.2d 641, 644 (3rd Cir. 1985); Chin v. Eastern Capital Corp., [1986-87 Transfer Binder]Comm. Fut. L. Rep. (CCH) para. 23,785 at 34,058 (CFTC 1987); cf. Shad v. Dean Witter Reynolds, Inc., 799 F.2d 525, 529 (9th Cir. 1986) (churning claim under section 10(b) of the Securities exchange Act of 1934, 15 U.S.C. § 78j(b) (1982) has same three elements); Costello v. Oppenheimer & Co., Inc., 711 F.2d 1361, 1367 (7th Cir. 1983) (to establish churning claim under securities laws, plaintiff must show broker control and excessive trading), accord Karlen v. Ray E. Friedman & Co. Commodities, 688 F.2d 1193, 1203 (8th Cir. 1982).
Under Rule 402, expert testimony in a churning case is relevant. Shad v. Dean Witter Reynolds, Inc., 799 F.2d 525, 529-30 (9th Cir. 1986); Chin, [1986-87 Transfer Binder]Comm. Fut. L. Rep. (CCH) at 34,058. Expert testimony may be helpful to the jury under Rule 702 on each of the three elements of the claim. Shad, 799 F.2d at 530.
Defendants first argue that Jaffe is not qualified as an expert for purposes of this case. Jaffe has an MBA and a Ph.D. from the University of Chicago School of Business in Finance. He is an associate professor of finance at Wharton. His expertise is in the area of finance related to the stock and bond markets; he has little, if any, work experience or academic history in the field of commodities. He did some minimal research in the area of financial futures, and was an editor or reviewer of several scholarly publications. Plaintiff claims that through his work for the publications, Jaffe has been exposed to commodities scholarship. Plaintiff also claims that although Jaffe has no knowledge of commodities regulatory authorities, he is still an expert in the field because he has taught one course at Wharton in Speculative Markets, which includes some material on commodities futures.
In this circuit, the standard for admitting expert testimony is "at a minimum, a proffered expert witness on [a subject] must possess skill or knowledge greater than the average layman in determining [the subject]." Aloe Coal Co. v. Clark Equipment Co., 816 F.2d 110, 114 (3rd Cir. 1987). According to the statements of plaintiff's counsel at the hearing, Jaffe is offered to testify as to whether plaintiff's account was excessively traded.
Certainly, Jaffe possesses more than a layman's knowledge of the "introductory" principles he teaches in the Speculative Markets course. Knowledge of basic principles, however, does not qualify him as an expert in determining whether a commodity futures account was excessively traded. A basic understanding of a subject does not necessarily imply qualification as an expert on the precise issue for jury determination. See, e.g., Aloe Coal Co., 816 F.2d at 114 (sales representative familiar with equipment not qualified as expert to testify about the cause of equipment fire); Higginbotham v. Volkswagenwerk Aktiengesellschaft, 551 F. Supp. 977, 982,-83 (M.D.Pa. 1982) (police officer with "minimal training in preliminary aspects" of accident reconstruction not qualified to testify as expert on movement of body inside vehicle), aff'd, 720 F.2d 669 (3rd Cir. 1983). Consequently, if Jaffe is offered to testify about the basic principles of commodities investing, I would find he is qualified by reason of his academic credentials and teaching experience.
Jaffe, however, is offered to opine that the account was excessively traded. During the hearing, Jaffe testified that he has been previously engaged as an expert witness in a number of excessive trading cases involving investment portfolios comprised exclusively or primarily of securities that were not commodity futures. In fact, this is Jaffe's first case exclusively involving commodity futures contracts. Although he claims that he has reviewed articles concerning commodity futures, he cannot remember the substance of any specific article. Jaffe's teaching experience, by his own admission, does not "directly" involve what constitutes excessive trading.
Further, I found his explanation of the course's "indirect" coverage of excessive trading to be vague and generally unhelpful. Because a course includes material on trading strategy does not, without explanation, facially relate that material to the subject of excessive trading in a given account. Also, as discussed below, Jaffe's report erroneously analogizes commodity future accounts to stock and bond securities accounts. This error belies a misunderstanding of the fundamental differences between the two types of investments. These differences are critical to determining whether the account was excessively traded.
At bottom, Jaffe has no experience, skill, knowledge, or education in commodity futures contracts apart from the basic principles he teaches in the Speculative Markets course. Accordingly, Jaffe will be permitted to testify concerning basic principles of commodities investing. As evidenced by the errors in his report discussed below, Jaffe does not demonstrate sufficient knowledge of what constitutes excessive trading in a commodities account to be qualified as an expert on the subject. He will, therefore, not be permitted to testify on what constitutes excessive trading of a commodity futures account.
I turn to the conclusion that the account was excessively traded contained in Jaffe's report. Defendant's argue that the methods used by Jaffe in reaching his conclusion are not found in any commodity futures trading case, and that Jaffe's methods for reaching his conclusion is "novel scientific evidence" which should not be admitted under Rules 702 and 403.
In his report, Jaffe relied on information supplied to him by plaintiff's counsel as the basis for his opinion that the account was an "unsuitable" investment for plaintiff. Clearly, parts of this information are directly contrary to the information supplied to Rosenthal by plaintiff when he opened the account. Other data, such as the amount plaintiff planned to invest, are contrary to the facts established by the documentary evidence concerning the account. Of course, hearsay information supplied by plaintiff's counsel may be a source of information supplied to an expert. Fed.R.Evid. 703 advisory committee's note. However, information which is contrary to the established facts of the case cannot be the type of information "reasonably relied on" to reach a sound opinion by experts in any field.
Further, the notion that a jury should be allowed to rely on expert opinion based on erroneous information is incorrect. The purpose of allowing expert testimony is to assist the jury in understanding the facts of a complicated matter. "When opinions are excluded, it is because they are unhelpful and therefore superfluous and a waste of time." Fed. R. Evid. 702 advisory committee's note. An opinion based on false assumptions is unhelpful in aiding the jury in its search for the truth, and is likely to mislead and confuse.
The heart of defendants' attack is addressed to Jaffe's use of ratios and methods of comparison unknown to the commodity futures industry to reach the conclusions in the section of the report entitled "Trading Activity." During the hearing, Jaffe admitted that his techniques were not based on any commodity churning case, but claimed that his analysis was the "fairest approach" to determining the level of trading activity in the account.
There is no set formula determinative of excessive trading. Chin, [1986-87 Transfer Binder]Comm. Fut. L. Rep. (CCH) para. 23,785, at 34,058; Fields v. Cayman Assoc. Ltd., [1984-86 Transfer Binder]Comm. Fut. L. Rep. (CCH) para. 22,688 at 30,928 (CFTC Jan. 2, 1985); Meridian Brick Co. of Maryland, Inc. v. Murlas Commodities, Inc., [1982-84 Transfer Binder]Comm. Fut. L. Rep. (CCH) para. 22,042 at 28,662 (CFTC March 8, 1984). The Third Circuit expressly endorsed an approach to "objective indicia of excessive trading" in Bowley v. Stotler & Co., 751 F.2d 641, 649-50. The court held that a jury charge in a commodities trading case should emphasize objective indicia of trading activity in an account such as commission-to-equity ratios, in view of the entire activity in the account, the number of day trades, the existence of significant overnight trading, and short term duration trades. Id.; see also Chin, supra, at 34,058 n.2 (factors relevant to the issue of excessive trading include "(1) high commission-to-equity ratios; (2) high percentage of day trades; (3) a broker's departure from a previously agreed upon trading strategy; (4) trading in an account while it is under-margined; and (5) in-and-out trading").
Jaffe's analysis, as detailed below, is a variation on the commission-to-equity ratios approved of in other commodity cases. However, because plaintiff offers no caselaw or scholarly support for the reliability of Jaffe's analysis, I must view the evidence as "novel scientific evidence" under Rule 702.
Rule 702 requires that a district court ruling upon the admission of (novel) scientific evidence, i.e., evidence whose scientific fundamentals are not suitable candidates for judicial notice, conduct a preliminary inquiry focusing on (1) the soundness and reliability of the process or technique used in generating the evidence, (2) the possibility that admitting the evidence would overwhelm, confuse, or mislead the jury, and (3) the proffered connection between the scientific research or test result to be presented, and particular disputed factual issues in the case.