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In re DVI Inc. Securities Litigation

September 3, 2010


The opinion of the court was delivered by: Legrome D. Davis, J.




This securities fraud class action is brought by shareholders of Diagnostic Ventures, Inc. ("DVI") who allege that Defendants were involved in a scheme of misrepresentations and omissions designed to artificially inflate the price of DVI's securities and conceal deceptive accounting and lending practices. Plaintiffs' Fifth Amended Consolidated Class Action Complaint ("FAC") was filed on April 6, 2006 against directors and officers of DVI, "Special Relationship" entities, independent auditor Deloitte & Touche, LLP, underwriter/lender Merrill Lynch & Co., Inc., and other third-party entities, (FAC, Doc. No. 270-2).*fn1 On May 31, 2005, this Court granted in part and denied in part Defendants' motions to dismiss, (Mem. & Order Mots. Dismiss, May 31, 2005, Doc. No. 181). On April 29, 2008, this Court granted Lead Plaintiffs' Motion for Class Certification, appointing Plaintiffs Cedar Street Fund, Cedar Street Offshore Fund, and Kenneth Grossman as class representatives, (Mem. & Order Class Certification, Apr. 29, 2008, Doc. No. 609).*fn2 Following a period of prolonged and contentious discovery, Defendant Deloitte & Touche (hereinafter, "Deloitte" or "Defendant") filed a Motion for Summary Judgment on April 30, 2009, (Def.'s Mot. Summ. J., Doc. Nos. 685, 689, & 691), and a Motion to Exclude Lead Plaintiffs' Alleged Loss Causation Expert on April 30, 2009, (Def.'s Mot. Exclude, Doc. Nos. 686 & 690), which are presently before this Court. Lead Plaintiffs (hereinafter, "Plaintiffs") filed a Motion to Exclude Defendant Deloitte's Purported Loss Causation Expert Kenneth Lehn on July 6, 2009, (Pls.' Mot. Exclude, Doc. No. 702), which is also presently before this Court.

This Court has previously set forth the relevant history of DVI, and the alleged fraudulent schemes engaged in by DVI, its subsidiaries, its directors and officers, and outside entities. (See Mem. & Order Mots. Dismiss, May 31, 2005, Doc. No. 181; see also Mem. & Order on Class Certification, Apr. 29, 2008, Doc. No. 609.) Accordingly, we incorporate herein the factual background provided in our previous Orders. We now recount only the facts relevant to the instant Motions. Unless stated otherwise, the following facts are not in dispute.

Defendant Deloitte was DVI's independent certified public accountant from May 1987 until June 2003, when it resigned. (See FAC ¶ 59, attached to Def.'s Statement Undisputed Facts ("SOF") as Ex. A.) Deloitte issued unqualified audit opinions on DVI's financial statements in its Form 10-Ks for fiscal years 1999, 2000, 2001, and 2002. (Id. at ¶ 2.) The audit opinions contained the following language:

We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. . . . We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of DVI, Inc., and its subsidiaries as of June 30, [1999, 2000, 2001, 2002], and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, [1999, 2000, 2001, 2002] in conformity with generally accepted accounting principles. (Id. at ¶ 4.) Plaintiffs claim that the above-referenced financial statements in DVI's Form 10-Ks were false and misleading, and that Deloitte issued unqualified audit reports despite its knowledge that the financial statements were "materially false and misleading." (Id. at ¶¶ 1, 3; Pls.' Resp. Def.'s SOF ¶ 3.) Plaintiffs also claim that Deloitte issued false and misleading statements regarding their review of DVI's publicly filed quarterly financial statements in its Form 10-Qs for the quarters ending within fiscal years 1999, 2000, 2001, and 2002. (Pls.' Resp. Def.'s SOF ¶ 3 (collecting exhibits); Pls.' SOF ¶ 49; Defs.' Resp. Pls.' SOF ¶ 49.)

Specifically, Plaintiffs assert that Deloitte was aware that DVI materially understated its loan loss reserves,*fn3 yet it continued to issue unqualified audit opinions on DVI's financial statements for the relevant fiscal years.*fn4 DVI's loan loss reserves were a significant audit area during Deloitte's work on DVI's Form 10-Ks and during its review of DVI's Form 10-Qs. (Pls.' SOF at ¶ 32; Def.'s Resp. Pls.' SOF ¶ 32 ("[D]uring the course of its audits . . . D&T performed audit testing on DVI's estimates of its loan loss reserves.").) Deloitte also assessed the adequacy of DVI's internal controls as they related to DVI's loan loss reserves, was aware of weaknesses in the internal controls, and criticized their effectiveness. (Pls.' SOF ¶ 35 (collecting exhibits); id. at ¶ 36 (collecting exhibits, e.g., FY 2001 Mgmt. Letter from Deloitte, Aug. 10, 2001, attached to Pls.' SOF as Ex. 33 (explaining that the policies surrounding allowance for loan losses are "outdated and have not been revised in more than three years"); FY 2002 Mgmt. Letter from Deloitte, Oct. 11, 2002, attached to Pls.' SOF as Ex. 34 ("The Company may not be evaluating its allowance for credit losses in accordance with generally accepted accounting principles.").) Deloitte disputes that it criticized the effectiveness of the internal controls and characterizes its review as providing only "recommendations . . . and observations." (Def.'s Resp. Pls.' SOF ¶ 36.) In addition, "Deloitte knew that DVI was engaged in 'aggressive' and 'creative' accounting practices" in an effort to understate its loan loss reserves, including "rewriting loans to avoid reporting them as delinquent," "overadvancing on loans in order for customers to repay other delinquent loans," "transferring delinquent loans to other obligors who had insufficient capital to service the debt," and "repurchasing delinquent loans from securitizations." (Pls.' SOF ¶ 37 (collecting exhibits).) Moreover, memoranda and email exchanges within Deloitte and between Deloitte and DVI reveal Deloitte's knowledge of DVI's misstatements of its loan loss reserves. (Id. at ¶ 38 (collecting exhibits).) For example, in an email exchange on March 6, 2002 among the Deloitte team, one individual writes:

The true answer is that the retained interest should reflect the loss assumption and as losses are purchased back, the retained interest value should go up. . . . [T]he retained interest may not be where it should be[,] and we'll never know because they don't track leases the way they need to on the issue. Now, we have our backs against the wall and are forced to argue a position with no back-up support.

(Michael Bogansky Email, Mar. 6, 2002, attached to Pls.' SOF as Ex. 58.) Similarly, in a memorandum prepared by Deloitte in preparation for a meeting with DVI on August 22, 2002, Deloitte discussed substantial adjustments that DVI was required to make but never did, including an "understatement of the provision for losses on receivables of $1.2 million and an overstatement of the retained interest of $1.2 million." (DVI Audit Status Update, Aug. 22, 2002, attached to Pls.' SOF as Ex. 63.)

Plaintiffs also assert that Deloitte knew about DVI's liquidity crisis and the deceptive practices used to conceal it,*fn5 yet it continued to issue unqualified audit opinions on DVI's financial statements for fiscal years 1999, 2000, 2001, and 2002.*fn6 For example, DVI was at risk of defaulting on a loan covenant under its primary lending agreement with Fleet Bank, which required its debt to equity ratio to be below 10:1, and Deloitte was aware that its ratio was just over 9:1. (Pls.' SOF ¶¶ 52, 53 (collecting exhibits); Defs.' Resp. Pls.' SOF ¶¶ 52, 53.)

Plaintiffs' accounting expert concluded that DVI was in "de facto" violation of the covenant because of its improper accounting practices, but Deloitte disputes this finding. (Pls.' SOF ¶ 55 (citing Epstein Report 54, attached to Pls.' SOF as Ex. 3); Def.'s Resp. Pls.' SOF ¶ 55 (citing Steven Garfinkel Dep. 1968:5-23, Mar. 31, 2006, attached to Def.'s Resp. Pls.' SOF as Ex. E).) Deloitte was aware that DVI attempted to raise additional capital but that these efforts failed, except for $25 million in convertible debt and $12 million of debt secured by ineligible collateral. (Pls.' SOF ¶¶ 56, 57 (collecting exhibits, e.g., Bd. of Dir. Minutes, Oct. 22, 2001, attached to Pls.' SOF as Ex. 130; Deloitte Fraud, Control Env't, Engagement Risk, June 30, 1999, attached to Pls.' SOF as Ex. 125 (finding that DVI had insufficient working capital or credit to enable the business to operate at a profitable capacity)); Def.'s Resp. Pls.' SOF ¶¶ 56, 57.) In addition, Deloitte knew that DVI was engaged in "aggressive and creating accounting practices," as described above, to conceal the amount of delinquencies it publicly reported and to improperly inflate its income. (Pls.' SOF ¶¶ 38, 51; see also Examiner's Report 159, Apr. 7, 2004, attached to Pls.' SOF as Ex. 131 (explaining Deloitte raised issues regarding suspect practices in Management Letters to DVI).) Deloitte also had access to, reviewed, and understood DVI's borrowing base reports, which showed that DVI pledged ineligible collateral and double-listed collateral to obtain advances from the Fleet credit facility because access to additional capital was restricted. (Pls.' SOF ¶¶ 58, 60 (collecting exhibits, e.g., John Ellingson Dep. 83:15-85:5, June 17, 2008, attached to Pls.' SOF as Ex. 133); Examiner's Report 157-58 (finding that double-pledging collateral on various warehousing credit lines began in January 2002 through May 2003, and use of ineligible collateral began in September 2001 through May 2003).) Based on this knowledge, Plaintiffs' accounting expert concluded that Deloitte should have issued an adverse opinion rather than a "clean" audit report. (Pls.' SOF ¶ 61 (citing Epstein Report 64, 89-90).) Deloitte disputes that it had knowledge that DVI listed ineligible loans based on the borrowing base reports, and states that a review of borrowing base reports was outside the scope of its audit. (Def.'s Resp. Pls.' SOF ¶¶ 58, 60 (citing Garfinkel Dep. 1767:18-23).)

In addition, Deloitte was involved in responding to SEC inquiries into DVI's accounting from February 2002 through Deloitte's resignation in June 2003.*fn7 (Pls.' SOF ¶ 40 (collecting exhibits, e.g., John Boyle Email to D&T, Feb. 27, 2002, attached to Pls.' SOF as Ex. 76 (discussing approaches to questions regarding loss reserves)); Feb. 12, 2002, May 8, 2002, September 23, 2002, February 25, 2003, July 11, 2003 SEC Letters, attached to Pls.' SOF as Exs. 80-84, respectively; Sandra Pfeffer Dep. 106:8-10, Apr. 16, 2008, attached to Def.'s Resp. Pls.' SOF as Ex. F (explaining that she provided comments to DVI about its responses to the SEC).) For example, in an email exchange between Robin Morris of Deloitte and Brian Schaller, formerly of Deloitte, regarding the February 2003 SEC letter, Ms. Morris stated that the comments in the SEC's letter regarding the recording of loans was "pretty interesting." (Email Exch., Mar. 6-7, 2003, attached to Pls.' SOF as Ex. 66; see also Robin Morris Email, Feb. 10, 2003, attached to Pls.' SOF as Ex. 87 ("[O]ur good client has received 3 letters from the SEC in the past year, . . . word has come back to DVI from the SEC to their lawyer that the SEC is in 'disagreement with their accounting.'").) The SEC's inquiries raised concerns about DVI's accounting of numerous transactions; however, Deloitte disputes that these inquiries indicated that the financial statements needed to be restated, as none were. (Pls.' SOF ¶ 41; Def.'s Resp. Pls.' SOF ¶ 41.) The scope of the SEC's inquiry broadened following its February 2003 letter.

On May 20, 2003, DVI filed its Form 10-Q for the third quarter fiscal year 2003 late, noting that Deloitte and DVI disagreed about the accounting treatment of a transaction involving a radiology facility in Corpus Christi, Texas. (See, e.g., May 13, 2003 Conference Call, 8-9, attached to Pls.' SOF as Ex. 157; Deloitte Letter to SEC, June 17, 2003, attached to Def.'s Resp. Pls.' SOF as Ex. T.) On June 2, 2003, Deloitte resigned as DVI's independent auditor. (Pls.' SOF ¶ 42; see Termination Letter, June 2, 2003, attached to Pls.' SOF as Ex. 91.) On June 17, 2003, Deloitte submitted a letter to the SEC in response to DVI's Form 8-K filed on June 9, 2003 regarding Deloitte's resignation. (See Deloitte Letter to SEC, June 17, 2003.) In this letter, Deloitte explained that it advised DVI management on May 20, 2003 that its review of the interim financial statements to be included in the Form 10-Q for the period ending March 31, 2003 was not complete, and recommended that DVI delay filing. Deloitte also raised concerns with management relating to the accounting on certain transactions, and explained that it was "unable to conclude on the appropriateness of [DVI's] accounting" for these transactions due to insufficient information. (Id.) Then, on June 27, 2003, DVI announced that the SEC rejected its Form 10-Q for the period ending March 31, 2003, because the interim financials contained therein were not reviewed by an independent auditor. (See S&P cuts DVI counterparty credit ratings, Reuters, June 27, 2003, attached to Pls.' SOF as Ex. 162.)

Lastly, two other material facts are disputed between the parties, both of which are discussed in detail in Sections III.B and IV.B & C. First, Plaintiffs and their loss causation expert, Mr. Chad Coffman, assert that DVI was insolvent at the start of the Class Period and that if DVI had truthfully reported its loan loss reserves or the magnitude of its loan covenant violations, DVI's "demise would have been accelerated." (Pls.' SOF 59, 60.1 (collecting exhibits).) Deloitte disputes these conclusions. (Def.'s Resp. Pls.' SOF ¶ 59.) Second, the parties dispute which announcements during the Class Period represent partial disclosures that reveal the alleged fraud. (Def.'s SOF ¶¶ 5-21; Pls.' SOF ¶¶ 62-134.) With this brief background in place, we now turn to the Motions presently before us.


The parties dispute the proper standard for loss causation. Because this standard dictates the resolution of the Summary Judgment and Exclusion Motions, we find it necessary to review the legal principles of loss causation at the outset. "Section 10(b) of the Securities Exchange Act forbids (1) the 'use or employ[ment of] . . . any manipulative or deceptive device or contrivance,' (2) 'in connection with the purchase or sale of any security,' and (3) 'in contravention of [SEC] rules and regulations.'" McCabe v. Ernst & Young, 494 F.3d 418, 424 (3d Cir. 2007) (quoting 15 U.S.C. § 78j(b)). "SEC regulations, in turn, make it unlawful '[t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading,' in connection with the purchase or sale of any security." Id. (quoting 17 C.F.R. § 240.10b-5(b) ("Rule 10-b5")). The Supreme Court has identified six required elements of a § 10(b) private damages action: "(1) a material misrepresentation (or omission); (2) scienter, i.e., a wrongful state of mind; (3) a connection with the purchase or sale of a security; (4) reliance, often referred to . . . as 'transaction causation;' (5) economic loss; and (6) 'loss causation,' i.e., a causal connection between the material misrepresentation and the loss.'" Id. (quoting Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341-42 (2005)). Defendant moves for summary judgment on the basis of Plaintiffs' failure to prove loss causation; therefore, this Court's review is limited to this element only.

"Loss causation . . . is a causal connection between the material misrepresentation [or omission] and the loss [suffered]." Id. (quoting Dura, 544 U.S. at 342). The Third Circuit adopts a "practical approach [to loss causation], in effect applying general causation principles." McCabe, 494 F.3d at 426 (citing EP MedSystems, Inc. v. EchoCath, Inc., 235 F.3d 865, 884 (3d Cir. 2000)). Under Third Circuit law, "[i]n order to satisfy the loss causation requirement . . . , the plaintiff must show that the defendant misrepresented or omitted the very facts that were a substantial factor in causing the plaintiff's economic loss." McCabe, 494 F.3d at 426; see also Semerenko v. Cendant Corp., 223 F.3d 165, 184-85 (3d Cir. 2000) (loss causation element satisfied when plaintiff shows that the price of the security at the time of purchase was inflated "due to an alleged misrepresentation," and that the alleged misrepresentation "proximately caused the decline in the security's value"). The Supreme Court has held that loss causation is not established merely by showing that the price of the security was artificially inflated at the time of purchase because of the defendant's misrepresentations.*fn8 See McCabe, 494 F.3d at 433 (quoting Dura, 544 U.S. at 342). Rather, to satisfy loss causation, a plaintiff must show that "the share price fell significantly after the truth became known." See Dura, 544 U.S. at 347; see also In re Ikon Office Solutions, Inc. Sec. Litig., 131 F. Supp. 2d 680, 687 (E.D. Pa. 2001) (stating that to prove loss causation in the Third Circuit, plaintiff must show that he/she purchased a security at price inflated due to the alleged misrepresentation, and that the stock price dropped in response to disclosure of the alleged misrepresentation (quoting Semerenko, 223 F.3d at 184)); Alaska Elec. Pension Fund v. Flowserve Corp., 572 F.3d 221, 229 (5th Cir. 2009) (stating that plaintiff must establish that there was disclosure of "negative truthful information that was related to the allegedly false, non-confirmatory, positive statement made earlier"); Lentell v. Merrill Lynch & Co., 396 F.3d 161, 173 (2d Cir. 2005) (explaining that plaintiff must show "that the misstatement or omission concealed something from the market that, when disclosed, negatively affected the value of the security"). Dura did not address what types of events or disclosures may reveal the truth, nor did it address how specific such disclosures must be. See In re Bradley Pharms., Inc. Sec. Litig., 421 F. Supp. 2d 822, 828 (D.N.J. 2006); In re Omnicom Group, Inc. Sec. Litig., 541 F. Supp. 2d 546, 551 (S.D.N.Y. 2008) ("Dura does not require that a corrective disclosure 'take a particular form . . . . It is the exposure of the falsity of the fraudulent representation that is the critical component . . . ." (quoting In re Winstar Comm'ns, No. 01-3014, 2006 WL 473885, at *14 (S.D.N.Y. Feb. 27, 2006))), aff'd 597 F.3d 501 (2d Cir. 2010). The Third Circuit has also not specifically ruled on this issue,*fn9 but other circuit courts and district courts in this circuit have examined the types of disclosures required to satisfy loss causation.

In general, a "corrective disclosure" must reveal at least part of the falsity of the alleged misrepresentation, and it must reveal new information to the market. See, e.g., In re Retek Inc. Sec. Litig., 621 F. Supp. 2d 690, 698 (D. Minn. 2009); In re Omnicom Group, Inc., 541 F. Supp. 2d at 551; see also In re Williams Sec. Litig.-WCG Subclass, 558 F.3d 1130, 1140 (10th Cir. 2009) ("[The disclosure] must at least relate back to the misrepresentation and not to some other negative information about the company."). Despite Defendant's effort to convince the Court otherwise, "to be corrective, the disclosure need not precisely mirror the earlier misrepresentation."*fn10 In re Williams, 558 F.3d at 1140; Alaska Elec. Pension Fund, 572 F.3d at 230; see also In re Bristol-Myers Squibb Sec. Litig., No. 00-1990, 2005 WL 2007004, at *20-21 (D.N.J. Aug. 17, 2005). "If a fact-for-fact disclosure were required to establish loss causation, a defendant could defeat liability by refusing to admit the falsity of its prior misstatements." Alaska Elec. Pension Fund, 572 F.3d at 230 (citing In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1422 (9th Cir. 1994)); see also In re Williams, 558 F.3d at 1140. Nor does the disclosure have to be a "single, unitary disclosure." See In re Bradley Pharms., Inc., 421 F. Supp. 2d at 828-29. If a "'complete' disclosure were required, defendants could 'immunize themselves with a protracted series of partial disclosures.'" Alaska Elec. Pension Fund, 572 F.3d at 230 (quoting Freeland v. Iridium World Commc'ns, Ltd., 233 F.R.D. 40, 47 (D.D.C. 2006)). Instead, the truth may be revealed through a series of partial disclosures through which the truth gradually "leaks out." See, e.g., Dura, 544 U.S. at 342 (acknowledging that relevant truth can "leak out"); Lormand v. US Unwired, Inc., 565 F.3d 228, 261 (5th Cir. 2009) ("[L]oss causation may be pleaded on the theory that the truth gradually emerged through a series of partial disclosures and that an entire series of partial disclosures caused the stock price deflation." (collecting cases)); In re Williams, 558 F.3d at 1140; In re Bradley Pharm., Inc., 421 F. Supp. 2d at 829 ("The revelation of the 'truth' . . . occurred through a series of disclosing events."); see also In re Motorola Sec. Litig., 505 F. Supp. 2d 501, 543 (N.D. Ill. 2007) (adopting In re Bradley Pharm., Inc. approach). Similarly, disclosure of the fraud may be "indirect" through "disclosure of another event," though in such a situation, the plaintiff must "provide proof that the market recognized a relationship between the event disclosed and the fraud." See McKowen Lowe & Co. v. Jasmine, Ltd., No. 94-5522, 2005 WL 1541062, at *8 (D.N.J. June 30, 2005) (citing In re Ikon, 131 F. Supp. 2d at 690), aff'd, 231 F. App'x 216 (3d Cir. 2007); see also In re Retek Inc., 621 F. Supp. 2d at 699 (adopting McKowen Lowe & Co. approach). A disclosure of disappointing earnings or other indications of the "true financial condition" of the company, without any evidence of a link between the disclosure and the fraud, is not a corrective disclosure.*fn11 See In re Ikon, 131 F. Supp. 2d at 689-90; Archdiocese of Milwaukee Supporting Fund, Inc. v. Halliburton Co., 597 F.3d 330, 337-38 (5th Cir. 2010); In re Retek, 621 F. Supp. 2d at 702-03. And, finally, the market does not have to learn of possible fraud from the company itself, but may be informed by "whistleblowers, analysts questioning financial results, resignation of CFOs or auditors, announcements by the company of changes in accounting treatment going forward, newspapers and journals, etc." See, e.g., In re Intelligroup Sec. Litig., 527 F. Supp. 2d 262, 297 n.18 (D.N.J. 2007) (quoting Enron Corp. Sec. Derivative & "ERISA" Litig., No. MDL-1446, 2005 WL 3504860, at *16 (S.D. Tex. Dec. 22, 2005)).

The Second Circuit has taken a slightly different approach to loss causation, the "materialization of the concealed risk" standard, which has been applied by district courts in this circuit and cited favorably by other circuits.*fn12 See, e.g., In re Cigna Corp. Sec. Litig., 459 F. Supp. 2d 338, 349 n.22 (E.D. Pa. 2006) ("Courts have recently held that a plaintiff must explicitly show that the market reacted negatively to either a corrective event or disclosure or a materialization of the concealed risk." (citing Lentell, 396 F.3d at 173-75)); In re Williams, 558 F.3d at 1140; In re Tellium, Inc., Sec. Litig., No. 02-5878, 2005 WL 2090254, at *3 (D.N.J. Aug. 26, 2005) (adopting Lentell standard). Under this standard, "to establish loss causation, a plaintiff must [prove] . . . that the misstatement or omission concealed something from the market that, when disclosed, negatively affected the value of the security." Lentell, 396 F.3d at 173. This requires a plaintiff to prove "both that the loss [was] foreseeable and that the loss [was] caused by the materialization of the concealed risk." Id. (emphasis in original). To establish that the loss was foreseeable, a plaintiff must show that the "risk that caused the loss was within the zone of risk concealed by the misrepresentations and omissions alleged by the disappointed investor." In re Vivendi Universal, S.A. Sec. Litig., 634 F. Supp. 2d 352, 363 (S.D.N.Y. 2009) (quoting Lentell, 396 F.3d at 173 (emphasis in original)). To prove that the "loss [was] caused by the materialization of the concealed risk," a plaintiff may either (1) show that the market reacted negatively to a corrective disclosure, as described above, or (2) show that a "defendant's misstatements or omissions concealed a risk that later materialized to cause the plaintiff's loss."*fn13 See In re AOL Time Warner, Inc. Sec. Litig., 503 F. Supp. 2d 666, 677 (S.D.N.Y. 2007) (citing Lentell, 396 F.3d at 173, 175, 176). When relying on this standard, a plaintiff must allege with some degree of particularity what risk the defendant's misstatements allegedly concealed. See id. at 678.

With these loss causation principles in mind, we turn to the instant Motions and find that a genuine issue of fact exists with regard to whether the "very facts omitted by [Defendant] were a substantial factor in causing [P]laintiffs' economic loss." See McCabe, 494 F.3d at 436.

Accordingly, we deny Defendant's Motion for Summary Judgment.


Defendant moves to exclude Plaintiffs' purported loss causation expert, Mr. Chad Coffman, and Plaintiffs move to exclude Defendant's purported loss causation expert, Dr. Kenneth Lehn. Both parties argue that the other's expert is unreliable. Mr. Coffman and Dr. Lehn opined on whether Defendant's conduct proximately caused Plaintiffs' losses. Mr. Coffman submitted his initial report on October 1, 2008, in which he posited two theories to assess loss causation and damages, an insolvency approach and event study approach. (Coffman Expert Report, attached to Pls.' Resp. Def.'s Mot. Exclude as Ex. 1 (hereinafter, "Coffman Report").) Dr. Lehn submitted his report on November 17, 2008, in which he reviewed and responded to Mr. Coffman's report, and opined on whether Plaintiffs suffered damages as a result of Defendant's actions. (Lehn Expert Report, attached to Pls.' Mot. Exclude as Ex. 1 (hereinafter, "Lehn Report").) Dr. Lehn also performed an event study approach in his report. (Id.) Mr. Coffman's rebuttal report was submitted on December 17, 2008. (Coffman Rebuttal Report, attached to Pls.' Resp. Def.'s Mot. Exclude as Ex. 2.) For the reasons that follow, this Court finds that Mr. Coffman's insolvency theory cannot support liability because it conflicts with the Supreme Court and Third Circuit precedent on loss causation, and it therefore is inadmissible as unreliable and unfit. With respect to the event study theories, this Court finds that both Mr. Coffman and Dr. Lehn's methodologies are reliable. However, as discussed in Sections IV.B & C, because some of the disclosure events relied upon are not corrective disclosures as a matter of law, these aspects of the experts' reports must be excluded.

A. Legal Standard

Pursuant to the Federal Rules of Evidence, this Court must act as a "'gatekeeper' to ensure that 'any and all relevant expert testimony or evidence is not only relevant, but also reliable.'" Pineda v. Ford Motor Co., 520 F.3d 237, 243 (3d Cir. 2008) (quoting Kannankeril v. Terminix Int'l, Inc., 128 F.3d 802, 806 (3d Cir. 1997)). This Court, however, is reminded that the Rules of Evidence "embody a strong preference for admitting any evidence that may assist the trier of fact," and take a "liberal policy of admissibility" with respect to expert testimony. Id. (citing Kannankeril, 128 F.3d at 806). Rule 702,*fn14 which governs the admissibility of expert testimony, has three major requirements: "(1) the proffered witness must be an expert, i.e., must be qualified; (2) the expert must testify about matters requiring scientific, technical or specialized knowledge; and (3) the expert's testimony must assist the trier of fact." Id. at 244 (internal citations omitted). The Third Circuit has summarized these requirements as "a trilogy of restrictions on expert testimony: qualification, reliability[,] and fit." Schneider v. Fried, 320 F.3d 396, 404 (3d Cir. 2003).

1. Qualification

"Qualification refers to the requirement that the witness possess specialized expertise." Schneider, 320 F.3d at 404. The Third Circuit has interpreted the qualification requirement liberally, holding that a "broad range of knowledge, skills, and training qualify an expert." Id. (quoting In re Paoli R.R. Yard PCB Litig., 35 F.3d 717, 741-43 (3d Cir. 1994)). The circuit court has explained that this liberal approach "extends to the substantive as well as the formal qualifications." Pineda, 520 F.3d at 244. "It is an abuse of discretion to exclude testimony simply because the trial court does not deem the proposed expert to be the best qualified or because the proposed expert does not have the specialization that the court considers most appropriate." Id. (quoting Holbrook v. Lykes Bros. S.S. Co., 80 F.3d 777, 782 (3d Cir. 1996)).

2. Reliability

Second, "an expert's testimony is admissible so long as the process or technique the expert used in formulating the opinion is reliable." Id. at 247 (citing Paoli, 35 F.3d at 742); see also Schneider, 320 F.3d at 404 ("[T]he expert must have good grounds for his [or] her belief."). "The admissibility inquiry thus focuses on principles and methodology, not on the conclusions" that they generate. In re TMI Litig., 193 F.3d 613, 665 (3d Cir. 1999) (citing Kannankeril, 128 F.3d at 806). The Third Circuit has explained that "[w]hile a litigant has to make more than a prima facie showing that his expert's methodology is reliable, . . . 'the evidentiary requirement of reliability is lower than the merits standard of correctness.'" Pineda, 520 F.3d at 247 (quoting In re Paoli, 35 F.3d at 744). In evaluating whether a methodology is reliable, a district court may consider the following factors:

(1) whether a method consists of a testable hypothesis; (2) whether the method has been subject to peer review; (3) the known or potential rate of error; (4) the existence and maintenance of standards controlling the technique's operation; (5) whether the method is generally accepted; (6) the relationship of the technique to methods which have been established to be reliable; (7) the qualifications of the expert witness testifying based on the methodology; and (8) the non-judicial uses to which the method has been put.

Id. at 247-48 (noting that factors were enunciated in Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579 (1993), and United States v. Downing, 753 F.2d 1224 (3d Cir. 1985)). These factors are "neither exhaustive nor applicable in every case," and we are reminded that the "inquiry envisioned by Rule 702 is . . . a ...

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