United States District Court, D. Arizona
Mark Smilovits, individually and on behalf of all others similarly situated, Plaintiffs,
First Solar, Inc.; Michael J. Ahearn; Robert J. Gillette; Mark R. Widmar; Jens Meyerhoff; James Zhu; Bruce Sohn; and David Eaglesham, Defendants.
G. CAMPBELL SENIOR UNITED STATES DISTRICT JUDGE
securities fraud class action is set for trial in January
2020. The parties filed nine motions to exclude expert
testimony under Federal Rule of Evidence 702 and Daubert
v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579
(1993). The Court ruled on six of the motions in an earlier
order. Doc. 674. This order addresses the remaining motions.
First Solar, Inc. produces photovoltaic solar panel modules.
Its stock is publicly traded on the NASDAQ stock exchange.
Plaintiffs purchased First Solar stock between April 30, 2008
and February 28, 2012 (the “Class Period”).
See Doc. 171 at 22. The Individual Defendants are
First Solar officers and executives who purchased or sold
First Solar stock during the Class Period while allegedly
concealing information from the market about manufacturing
and design defects causing faster power loss in certain
declines in First Solar's stock price, beginning on July
29, 2010, followed the departure of First Solar's CEO,
disappointing financial results, and the release of quarterly
financial disclosures reporting the product defects.
See Doc. 401 at 7-8. First Solar's stock fell
from nearly $300 per share to less than $50 per share during
the Class Period. See Id. at 2.
allege that Defendants engaged in several acts of fraud
during the Class Period, including concealing the product
defects, misrepresenting the cost and scope of the defects,
and reporting false information on financial statements. Doc.
93 at 7-20. Plaintiffs further allege that when First Solar
later disclosed the product defects and attendant financial
liabilities to the market, the stock price fell, causing
economic loss to Plaintiffs. Id. at 124-41.
assert violations of §§ 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Securities Exchange
Commission (“SEC”) Rule 10b-5. Id. at
135-36. Section 10(b) “makes it unlawful to ‘use
or employ, in connection with the purchase or sale of any
security[, ] . . . any manipulative or deceptive device or
contrivance in contravention of such rules and regulations as
the [SEC] may prescribe.'” In re Oracle Corp.
Sec. Litig., 627 F.3d 376, 387 (9th Cir. 2010) (quoting
15 U.S.C. § 78j(b)). Rule 10b-5 forbids, in connection
with the purchase or sale of a security, “the making of
any ‘untrue statement of a material fact' or the
omission of any material fact ‘necessary in order to
make the statements made . . . not misleading.'”
Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341
(2005) (quoting 17 C.F.R. § 240.10b-5). The scope of
Rule 10b-5 is coextensive with that of § 10(b). See
Oracle, 627 F.3d at 387; Stoneridge Inv. Partners,
LLC v. Sci.-Atlanta, Inc., 552 U.S. 148, 157 (2008). To
establish a violation of § 10(b) and Rule 10b-5,
“a plaintiff must prove (1) a material
misrepresentation or omission by the defendant; (2) scienter;
(3) a connection between the misrepresentation or omission
and the purchase or sale of a security; (4) reliance upon the
misrepresentation or omission; (5) economic loss; and (6)
loss causation.” Stoneridge, 552 U.S. at 157.
claim that the Individual Defendants are liable for the
alleged § 10(b) and Rule 10b-5 violations as
“controlling persons” under § 20(a). Doc. 93
at 136, ¶¶ 257-58. To establish a claim under
§ 20(a), a plaintiff must first prove a primary
violation of § 10(b) or Rule 10b-5 and then show that
the defendant exercised actual power over the primary
violator. See In re NVIDIA Corp. Secs. Litig., 768
F.3d 1046, 1052 (9th Cir. 2014).
Rule 702 and Daubert Standards.
Rule 702, an expert may offer “scientific, technical,
or other specialized knowledge” if it “will
assist the trier of fact to understand the evidence, ”
provided the testimony rests on “sufficient facts or
data” and “reliable principles and methods,
” and “the witness has reliably applied the
principles and methods to the facts of the case.”
Fed.R.Evid. 702(a)-(d). The proponent of expert testimony has
the ultimate burden of showing, by a preponderance of the
evidence, that the proposed testimony is admissible under
Rule 702. See Cooper v. Brown, 510 F.3d 870, 942
(9th Cir. 2007); Fed.R.Evid. 104(a). The trial court acts as
a gatekeeper for expert testimony to assure that it
“both rests on a reliable foundation and is relevant to
the task at hand.” Daubert, 509 U.S. at 597;
see Davis v. McKesson Corp., No. CV-18-1157-PHX-DGC,
2019 WL 3532179, at *3-4 (D. Ariz. Aug. 2, 2019).
Defendants' Motion to Exclude Henderson's Testimony
(Docs. 532, 633).
retained M. Todd Henderson, a professor at the University of
Chicago Law School, to opine on the sales of company stock by
the Individual Defendants pursuant to Rule 10b5-1 trading
plans (“10b5-1 plans”). Doc. 532-1 at 3.
Henderson explains that 10b5-1 plans are meant to provide
company executives with the ability to trade for
diversification reasons and not on the basis of inside
information. Id. at 4. Henderson opines that there
are seven “hallmarks” of a valid 10b5-1 plan: (1)
a significant time lag between the plan's adoption and
the first trade; (2) regularly scheduled trades; (3) sales
over long periods of time; (4) sales of relatively consistent
size and relatively small amounts compared with overall
shareholdings; (5) sales at a range of stock prices; (6) no
changes or cancellations of the plan; and (7) a high level of
board and general counsel involvement in plan adoption,
alteration, and termination decisions. Id. Henderson
further opines the Individual Defendants' 10b5-1 plans
during the Class Period contained few or none of these
hallmarks and are consistent with plans from his empirical
research in which insiders earned large abnormal returns
based on inside information. Id.
move to exclude Henderson's testimony under Rule 702,
arguing that his opinions and purported hallmarks are based
solely on speculation and fail every prong of
Daubert's reliability test. Docs. 532 (lodged
sealed motion), 633 (public redacted version). Plaintiffs
counter that Henderson is eminently qualified to offer his
opinions, that the Daubert reliability factors do
not apply to the non-scientific hallmarks, and that the
hallmarks satisfy Rule 702's reliability requirements and
will assist the jury in deciding whether the Individual
Defendants' stock trades were made in good faith or to
evade the prohibitions of Rule 10b5-1. Doc. 556 at 6-17.
10b5-1 Plans and the Need for Expert Testimony.
10b5-1 provides an affirmative defense to securities fraud
allegations of trading “‘on the basis of'
material nonpublic information[.]” 17 C.F.R. §
240.10b5-1. A corporate-insider may defend his trades by
showing that they were made pursuant to a “written plan
for trading securities” created before he learned of
the material non-public information at issue in the suit.
Id. at (c)(1)(i)(A). To be valid, the plan must list
the amount and price of the securities to be sold or
purchased, provide the date of the transactions, and prevent
the insider from exercising any subsequent influence over
how, when, or whether to effect purchases or sales.
Id. at (c)(1)(i)(B). The trade must also have been
executed according to the plan's terms. Id.
(c)(1)(i)(C). Finally, the plan must have been entered
“in good faith and not as part of a plan or scheme to
evade the prohibitions of [Rule 10b5-1].” Id.
at (c)(1)(ii); see CSX Corp. v. Children's Inv. Fund
Mgmt. (UK) LLP, 654 F.3d 276, 303 n.13 (2d Cir. 2011)
(“[T]he affirmative defense is available only when the
plan to purchase or sell securities was ‘given or
entered into in good faith.'”); Elec. Workers
Pension Tr. Fund of IBEW Local Union No. 58 v. CommScope,
Inc., No. 5:10-CV-00062-RLV, 2013 WL 4014978, at *7
(W.D. N.C. Aug. 6, 2013) (“[Rule 10b5-1] clearly
requires a showing of good faith [that] . . . require[s]
additional evidence to be presented by Defendants[.]”);
Stocke v. Shuffle Master, Inc., 615 F.Supp.2d 1180,
1193 (D. Nev. 2009) (“[A Rule] 10b5-1 trading plan does
not provide an absolute defense to a claim of insider
trading. Rather, it requires an additional factual finding of
good faith.”). A plaintiff may present circumstantial
evidence giving rise to an “inference of bad faith
and scienter for § 10(b) and Rule 10b-5 purposes”
by showing that the corporate-insider's trades under a
10b5-1 plan are “unusual” or
“suspicious.” In re Enron Corp. Sec.,
Derivative & ERISA Litig., 258 F.Supp.2d 576, 593
(S.D. Tex. 2003).
Individual Defendants claim that their stock trades during
the Class Period were proper because they were made largely
pursuant to valid 10b5-1 plans. See Doc. 311 at
65-68. Plaintiffs counter that the Individual Defendants
engaged in improper insider trading, and that their
suspicious trading behavior is relevant evidence of scienter
and materiality. Doc. 556 at 10.
order for the jury to make an informed analysis of the
relevant trades, it will be helpful for them to understand
the purpose of 10b5-1 plans and their legal requirements, the
various features of such plans in practice, and trading
behaviors that may be suspicious. See Doc. 556 at
10-11. Henderson explains that the purpose of his opinions,
and his application of the seven hallmarks he identifies for
valid 10b5-1 plans, is to help the jury understand such plans
and determine whether the Individual Defendants' trading
behaviors are suspicious. Doc. 532-3 at 6-7. Because 10b5-1
plans generally are beyond the ken of the average juror,
Henderson's expert testimony on these issues will assist
the jury in understanding the evidence and determining facts
in issue. See In re Novatel Wireless Sec. Litig.,
No. 08CV1689 AJB RBB, 2012 WL 5463214, at *4 (S.D. Cal. Nov.
8, 2012) (rejecting a Rule 403 challenge to
“Henderson's opinion setting forth the ‘seven
hallmarks' [because it] describes for the jury the best
practices when employing 10b5-1 trading plans”);
United States v. Robinson, No. 98 CR 167 DLC, 2000
WL 65239, at *3 (S.D.N.Y. Jan. 26, 2000) (expert testimony on
the “‘hallmarks' of financial fraud
schemes” would help the jury understand the evidence);
United States v. Jergensen, No. 8:16-CR-235(BKS),
2017 WL 11458077, at *4 (N.D.N.Y. Oct. 6, 2017) (same).
The Reliability of Henderson's Hallmarks.
contend that Henderson's hallmarks are not reliable
because they cannot be tested, have never been published,
have no known error rate, and lack general acceptance in the
securities regulation field. Doc. 532 at 9-11. But these
factors are neither exclusive nor dispositive in a Rule 702
inquiry, see Daubert, 509 U.S. at 593-94, and
“may not be pertinent in assessing reliability,
depending on the nature of the issue, the expert's
particular expertise, and the subject of his testimony[,
]” Primiano, 598 F.3d at 565. As the Supreme
Court has explained, although some expert testimony
“rests upon scientific foundations, ” in other
cases “the relevant reliability concerns may focus upon
personal knowledge or experience. Daubert makes
clear that the factors it mentions do not constitute
a definitive checklist or test.” Kumho Tire Co. v.
Carmichael, 526 U.S. 137, 150 (1999) (citations omitted;
emphasis in original). The Ninth Circuit likewise holds that
“[t]he Daubert factors (peer review,
publication, potential error rate, etc.) simply are not
applicable to [testimony] whose reliability depends heavily
on the knowledge and experience of the expert, rather than
the methodology or theory behind it.” United States
v. Hankey, 203 F.3d 1160, 1169 (9th Cir. 2000).
do not dispute that Henderson is a highly qualified expert in
securities regulation. See Doc. 532-1 at 6-7
(Henderson's qualifications); In re Novatel,
2012 WL 5463214, at *4 (“Henderson is qualified
pursuant to Rule 702 to testify as an expert regarding the
use of 10b5-1 trading plans.”). Henderson's
opinions are based on a review of the documents in this case,
his position on the Financial Industry Regulatory Authority,
his experience as a management consultant advising companies
on security regulation matters, his extensive research on
thousands of 10b5-1 plans used by various companies over the
past decade, and his specialized knowledge in the areas of
corporate governance, executive compensation, and insider
trading. Id. at 3. Under Rule 702 and
Daubert, expert testimony “is reliable if the
knowledge underlying it has a reliable basis in the knowledge
and experience of the relevant discipline.”
Primiano, 598 F.3d at 565 (citation omitted). The
Court finds that Henderson's experience in the field of
securities regulation generally, and his knowledge about the
creation and use of 10b5-1 plans in particular, form a
sufficient foundation for his opinions on the purported
hallmarks of a valid plan. See In re Novatel, 2012
WL 5463214, at *5 (“Henderson's training, education
and practical experience provide a sufficient basis for his
opinions regarding 10b5-1 trading plans”); United
States v. Barreiro, No. 13-CR-00636-LHK, 2016 WL 259590,
at *2 (N.D. Cal. Jan. 21, 2016) (testimony on whether
“notes of expenditures have the hallmarks of business
or personal expenditures” was within the expert's
“specialized knowledge and training as a CPA and a
certified fraud examiner”); S.E.C. v. Lines,
No. 07 CIV. 11387 (DLC), 2010 WL 2926591, at *1 (S.D.N.Y.
July 26, 2010) (rejecting the argument that the expert
identified no reliable methodology to support his description
of the common characteristics of a “pump and dump
scheme” where the expert was “well qualified by
years of experience as a regulator to describe this species
of securities fraud, and [gave] an extensive and detailed
report explaining the hallmarks of such a scheme”).
Defendants' criticisms of Henderson's methodology and
his purported hallmarks for valid 10b5-1 plans are matters
for the jury's consideration in weighing the evidence.
See Lines, 2010 WL 2926591, at *1 (the arguments
that “many of the characteristics that the expert
identifies as associated with pump and dump schemes can also
be found in legitimate transactions, and [that] he did not
adequately consider factors that tend to show that a
transaction is not a pump and dump scheme, may be proper as
lines of cross-examination but do not render the testimony
note that “[t]he first time [the] hallmarks appeared in
a bulleted list was for an expert opinion on behalf of
Plaintiffs[.]” Doc. 532 at 10. But Henderson explains
that “the general impression of [the hallmarks], each
of them in different forms or different words[, ] was used by
[him] countless times before then[.]” Doc. 532-3 at 16.
The Court cannot conclude that Henderson developed the
hallmarks solely for purposes of litigation.
further contend that Henderson's opinions are replete
with improper legal conclusions and that his hallmarks are
contrary to law because Rule 10b5-1 offers an affirmative
defense for individuals who comply with the Rule's three
express legal requirements. Doc. 532 at 12, 14-16. But to
avail themselves of the affirmative defense, Defendants must
show that their 10b5-1 plans were entered “in good
faith and not as part of a plan or scheme to evade the
prohibitions of [Rule 10b5-1].” 17 C.F.R. §
240.10b5-1(c)(1)(ii). Henderson's opinions about 10b5-1
plans generally, his purported hallmarks of valid plans, and
whether the Individual Defendants' trading behavior is
suspicious are relevant to the affirmative defense. Henderson
states that he will offer no legal opinion on the Individual
Defendants' trading plans and behavior or any other issue
in the case. Doc. 532-3 at 6, 19-21. Defendants may object at
trial if they believe Henderson crosses the line into
inadmissible legal opinions. The same is true with respect to
any potential opinions on the mental state or credibility of
witnesses, which would be improper. See Doc. 532 at
Henderson's Analysis of Empirical Studies.
discusses empirical studies purportedly showing that
“insiders systematically abuse [Rule 10b5-1].”
Doc. 532-1 at 5; see Id. at 36-43 (citing M. Todd
Henderson, Alan D. Jagolinzer & Karl A. Muller,
Offensive Disclosure: How Voluntary Disclosure Can
Increase Returns from Insider Trading, 103 Geo L.J. 1275
(2015); Jagolinzer, Alan D., SEC Rule 10b5-1 and
Insiders' Strategic Trade, Management Science
Quarterly (Feb. 2009)). Henderson opines that “[t]he
characteristics of the Individual Defendants' trades
under their plans are consistent with plans ...