Opinion
Case No. SA CV 02-301-GLT (MLGx).
October 6, 2004
PARTIAL ORDER ON DEFENDANTS' MOTIONS FOR SUMMARY JUDGMENT
Defendants' motion for summary judgment is GRANTED in part.
I. BACKGROUND
Plaintiffs, stockholders of Defendant Broadcom, allege Defendants inflated the company's reported earnings and misled investors through a series of misrepresentations and fraudulent accounting methods between July 31, 2000 and February 26, 2001. Plaintiffs allege causes of action under section 10(b) of the Securities Exchange Act and Rule 10b-5. Plaintiffs opted not to join a consolidated class action against the Defendants; instead, they bring suit as individuals.
Defendants move for summary judgment on damages. In Defendants' first motion regarding failure to present evidence on damages, they argue Plaintiffs stipulated to provide an expert report specifying their damages by a certain date, but provided it late. Depending on how one views the facts, the delay was between a few weeks and seven weeks. The delay, Defendants contend, is without substantial justification and caused harm, and therefore the evidence should be precluded. Without evidence of damages, Defendants conclude Plaintiffs cannot establish a prima-facie case, and the Court should therefore grant the motion for summary judgment.
In Defendants' second motion regarding alleged inflation, they argue thirty-one of the forty-seven Plaintiffs cannot establish damages because Plaintiffs profited from the alleged fraud by selling their shares of stock at an artificially inflated price. Because damage is an element of Plaintiffs' prima-facie case and because Plaintiffs cannot establish it, Defendants ask the Court to grant their motion for summary judgment.
II. DISCUSSION
Summary judgment is proper if "there is no genuine issue as to any material fact and . . . the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c).
A. Failure to Present Evidence of Damages
1. Rule 37(c)(1): Failure to Disclose
Under Federal Rule of Civil Procedure 37(c)(1), "A party that without substantial justification fails to disclose information required by Rule 26(a) . . . is not, unless such failure is harmless, permitted to use as evidence at trial, at a hearing, or on a motion any witness or information not so disclosed."
Rule 26(a) governs disclosure of expert testimony, which is at issue here.
Rule 37(c)(1) provides for two exceptions: harm and substantial justification. Plaintiffs do not appear to address the substantial-justification exception; therefore, the Court focuses on harm.
a. Harm
Defendants contend they are harmed in two ways. First, they argue they are harmed because they deposed Plaintiffs' expert without the benefit of a written calculation of damages. Second, by delaying the production of their damages until after Defendants produced their expert report, Defendants argue they are harmed because Plaintiffs can adjust their calculations to avoid the issues identified by Defendants' damages experts. In their Reply, Defendants assert Plaintiffs have produced two additional expert reports, as predicted, and the two reports use a different methodology or include varying damages figures.
Plaintiffs argue Defendants timely received their expert report, from which Defendants can determine the exact amount of damages. Plaintiffs also argue only one exhibit of the report was nineteen days late and, under these facts, the cases do not support granting summary judgment, which would be an extreme sanction for a relatively short delay.
The cases Defendants cite do not support precluding evidence of damages under these facts. For example, in Yeti By Molly, Ltd. v. Deckers Outdoor Corp., 259 F.3d 1101 (9th Cir. 2001), the Ninth Circuit affirmed the district court's decision to exclude expert testimony provided two-and-a-half years late. Id. at 1105. In NutraSweet Co. v. X-L Engineering Co., 227 F.3d 776 (7th Cir. 2000), the Seventh Circuit limited a party's expert testimony after the party "repeatedly missed deadlines." Id. at 782-83. Here, even assuming there is a delay, it is far less than two-and-a-half years, and Defendants do not argue Plaintiffs have "repeatedly missed deadlines."
In Ouevedo v. Trans-Pacific Shipping, Inc., 143 F.3d 1255 (9th Cir. 1998), plaintiff "submitted his designation of the one liability expert allowed by the court twenty days late, but did not provide the reports and statements of his expert witness . . . until he submitted his opposition to the defendants' motions for summary judgment." Id. at 1258. Here, Plaintiffs submitted their expert report absent one exhibit well before Defendants filed their motions for summary judgment.
Defendants have not established harm, and the Court denies their first motion for summary judgment as too extreme a remedy. The Court is mindful of Defendants' inability to provide expert responses or to depose Plaintiffs' expert on the new information. The Court allows Defendants to provide expert responses and depose Plaintiffs' expert yet again.
B. Benefit From Inflation
Based on analysis provided in Plaintiff's expert report, Defendants contend thirty-one Plaintiffs actually profited from selling Broadcom stock at an artificially inflated price. Accordingly, Defendants continue, they cannot establish damages, which is a required element under their prima-facie case.
Plaintiffs argue Defendants' contention is based on applying the "last in, first out" ("LIFO") accounting methodology, which is not supported by the case law. The case law, according to Plaintiffs, supports application of the "first in, first out" ("FIFO") methodology. Moreover, according to Plaintiffs' expert, the FIFO method is customarily required in calculating damages in these types of cases, not the LIFO method (Hakala Decl. ¶¶ 6-7) and applying the FIFO method demonstrates the presence of damages.
The issue is whether all sales must be considered in calculating damages or, stated differently, whether a LIFO-like or FIFO methodology applies.
At oral argument on the motion, Plaintiffs contended the "LIFO-FIFO" debate was not really joined until Defendants' reply brief, and Plaintiffs have not had a fair opportunity to brief the issue. Defendants contend the issue has been full briefed.
The "LIFO-FIFO" distinction is a critical factor in this case. So that both sides can be confident they have fully presented their position, the Court will allow further briefing on the "LIFO-FIFO" issue.
C. The Du and Phillips Plaintiffs
Defendants assert Plaintiffs Benjamin Du and Carmela Du (as individuals and as trustees of the Benjamin Du and Carmela Du Family Trust) and Toby Phillips (as an individual and as administrator of the Toby Phillips IRA), neither benefitted nor were harmed by Defendants' alleged misrepresentations because they neither bought nor sold Broadcom securities during the relevant period. (Novak Decl. Exs. J-N.) Plaintiffs do not contest this.
The facts are undisputed. The Du's admitted neither they nor their family trust traded in Broadcom securities between July 31, 2000 and February 26, 2001. (Novak Decl. Exs. J-L.) Phillips admitted the Toby Phillips IRA did not trade in Broadcom securities between July 31, 2000 and February 26, 2001, and he, apart from serving as a trustee of XXL Pictures, Inc.'s Pension Plan and Trust, did not trade in Broadcom securities between July 31, 2000 and February 26, 2001. (Novak Decl. Exs. M-N.)
The law is clear. Only actual purchasers and sellers of securities may bring an action for securities fraud under 10(b) and 10b-5. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 730-31 (1975).
The Court grants Defendants' motion for summary judgment as to the Du and Phillips Plaintiffs.
III. DISPOSITION
Defendants' motion for summary judgment for failure to present evidence of damages is DENIED. Defendant may have until November 8, 2004, to file expert responses and until November 30, 2004, to depose Plaintiffs' expert. If the parties need the Court to set additional dates to implement this order, either party may make application to the Court.
Defendants' motion for summary judgment concerning the "LIFO-FIFO" issue is taken under submission. Plaintiff may have until October 19, 2004 to file its further opposition on that single issue. Defendants may have until November 1, 2004, to file a further reply on that single issue. Service on opposing counsel shall be by fax, e-mail, or personal delivery. The Court will advise the parties if oral argument is required.
Defendants' motion for summary judgment as to the Du and Phillips plaintiffs is GRANTED.