Expert testimony was one of the key issues in a recent case in Federal District Court in Nevada, where a bankruptcy trustee sought to recover $10 million from a Las Vegas casino in an alleged Ponzi scheme. District Judge Phillip M. Pro was presented with Motions for Summary Judgment by Defendant (“Casino”). Also before the Court were the Casino’s motions to exclude the expert testimony of RL, AS, and PD. The plaintiff (“Trustee”) opposed those motions.
The debtor National Consumer Mortgage (“NCM”) was a California company that operated a mortgage broker business. It was owned by owned by two individuals who are family members. A member of the owner’s family (“Sam”) was given financial control of NCM.
In 2004, NCM created a division called the Private Money Group (“PMG”), through which the owner solicited investments from individuals for funding residential mortgages. These were to be secured by deeds of trust—typically they were not. Funds from the investors were deposited into NCM’s account and commingled with NCM’s other funds obtained through the mortgage broker business. NCM filed for bankruptcy, and Trustee was appointed for the debtor’s estate. Trustee initiated this action against the Casino, alleging that the owners and Sam had operated the PMG as a Ponzi scheme. Trustee also claimed that Sam wrote NCM business checks to himself for over $10 million, used the funds to buy cashier’s checks from several banks made payable to himself, put the checks on deposit at the Casino, and then gambled the proceeds at the Casino’s sports book. Trustee sought to recover the $10 million from the Casino under the bankruptcy code and California’s Uniform Fraudulent Transfer Act (“CUFTA”). The Casino denied it had to return the funds to the bankruptcy estate, contending, among other things, that it verified the cashier’s checks were legitimate, and it therefore was a good faith transferee.
In 2010, numerous motions were filed and the complaint was amended. The Casino filed an answer in which it raised the affirmative defense of good faith. The case was transferred to the District Court in Nevada.
The Casino moved to exclude the report and testimony of the Trustee’s casino expert witness, AS. It contended that AS was not qualified to speak to the good faith inquiry of what a reasonable Las Vegas casino would have done during the relevant time as he had no familiarity with the standards and practices of Las Vegas casinos. The defendant also argued AS’s testimony was irrelevant because federal anti-money laundering regulations were irrelevant, as Trustee did not and could not bring such a claim. The Casino argued AS’s testimony consisted of inadmissible conclusions—he did not identify at what point defendant was on inquiry notice. Instead, AS conducted a totality of the circumstances analysis based on hindsight. The Casino also said that AS’s testimony was comprised of inadmissible legal opinions about the requirements of the federal anti-money laundering regulations. In addition, the Casino claimed AS improperly relied on the Trustee’s other expert, RL, to state that Sam engaged in structuring, even though RL admitted he was not an expert in structuring.
Trustee said that the Casino attempted to change the good faith standard from what a reasonable casino would have done to what other Las Vegas casinos were doing at the relevant time. The Trustee argued AS properly concluded that the federal regulations applied to all casinos nationwide, and imposed obligations upon all casinos which—had the Casino complied—would have raised red flags to regarding Sam’s activities. Trustee contended AS did not need specific experience or knowledge regarding the actual practices of Las Vegas casinos. He further contended the defendant offered experts on whether the Casino acted in good faith, and the experts at least in part relied on the Casino’s compliance with Nevada regulations. Trustee claimed that as a result he was entitled to offer AS as a rebuttal witness to show the Casino failed to comply with other applicable regulations and did not act in good faith.
Judge Pro said that the Casino’s argument regarding AS’s lack of familiarity with the standards and practices of Las Vegas casinos rested on the Casino’s erroneous statement of the applicable standard. It was not, as the defendant put it, what other Las Vegas casinos “would have done (or did do) under similar circumstances,” or “whether the Casino’s actions were consistent or inconsistent with other Las Vegas casinos.” The good faith inquiry was what a reasonable casino would do, not what Las Vegas casinos actually were doing. AS opined a reasonable casino would comply with federal anti-money laundering standards that applied to the defendant, other casinos, and other financial institutions regardless of its U.S. location. To the extent the casinos’ actual practices bore on the analysis, the defendant’s criticism went to the weight of AS’s testimony, not its admissibility. As such, the court chose not to exclude AS’s report based on a lack of familiarity with the practices of Las Vegas casinos during the relevant time frame.
The court also rejected the Casino’s argument that AS’s testimony on federal anti-money laundering regulations was irrelevant. Rather, Trustee offered AS’s testimony regarding the federal regulations to rebut the Casino’s good faith defense which was based in part on the Casino’s own expert testimony that the Casino acted in good faith as shown by its compliance with applicable Nevada regulations. The defendant’s expert testified that state gaming law would require casinos to comply with federal regulations. The judge held that such testimony was not inadmissible legal opinion testimony. The Casino’s expert on good faith offered opinions on the Casino’s compliance with Nevada regulations. The other criticisms, including that AS’s opinions did not comport with his prior experience regarding money laundering behavior, went to the weight of his testimony. As a result, the judge also would not exclude AS’s report for reaching improper legal conclusions.
In addition, Judge Pro wrote that he would not exclude AS’s testimony based on his not identifying a precise point in time as to when the Casino was on inquiry notice. It is for the fact finder, the judge said, to determine when along the continuum (if ever) the Casino acted in bad faith. AS’s testimony would likely assist the fact finder in making that determination. As a result, the defendant’s argument on this point went to the weight, not the admissibility of the expert’s testimony.
Similarly, the court rejected the argument that AS improperly relied on expert RL’s report for the underlying data because RL was not an expert in structuring. Trustee did not offer RL as an expert in structuring, however, AS was offered as an expert in structuring. The Casino did not offer any argument, authority, or evidence that AS could not rely on RL’s data analysis to reach his opinion on structuring. Consequently, the court did not exclude AS’s report for relying on RL’s report. However, the court agreed that testimony on an alleged connection between money laundering and the September 11, 2001 terrorist attacks is of little probative value and was substantially outweighed by potential prejudice.
The Casino moved to strike the testimony of Trustee’s other expert, RL on a variety of grounds. Defendant argued that RL was not qualified as an expert because he was not a CPA and not qualified to speak on whether the defendant complied with Generally Accepted Accounting Principles (“GAAP”); also that RL was not qualified because he was not a lawyer, never worked for FinCEN or the Treasury Department, and he admitted he was not an expert on structuring. Further, the Casino claimed RL never worked for a Las Vegas casino and had no knowledge of casino practices during the relevant time frame. Finally, the Casino said that RL was not an expert on the handling of cashier’s checks.
As to whether RL was qualified to construct financial analyses and draw conclusions, Judge Pro said that RL had an accounting degree and was employed for almost 10 years with a gaming resort in positions of Manager of Information Technology, Director of Accounting and Operational Analysis, Vice President of Finance, and Vice President of Process Improvement. RL currently was employed for a company which owned, operated, and managed casino resort properties. Through his career, RL acquired experience in preparing and reviewing financial reports, operating analyses, financial data, operating data, and internal controls within the gaming industry setting. RL reviewed company internal controls and received training on the subject throughout his career. The Casino did not dispute RL’s qualifications except to note that RL never worked for a Las Vegas casino. The Casino’s insistence that RL have Las Vegas casino experience was based on the Casino’s erroneous statement of the good faith standard: RL need not have worked for a Las Vegas casino to testify on the internal controls or financial and operational data of casinos generally, and the Casino did not identify any difference between Las Vegas casinos and other casinos which would render RL’s testimony inadmissible. Thus, the court denied this Motion to Exclude the expert’s testimony.
Finally the Casino argued RL’s opinions lacked a reliable foundation because, although RL testified he prepared a financial analysis in conformity with GAAP, he could not identify what GAAP standards would require the Casino to prepare such an analysis. Judge Pro said that RL did not testify that GAAP required the Casino to perform the analyses he performed. Instead, he testified that he performed his own analysis in conformity with GAAP—he described the processes he used to create his graphs and identified his methodology as “accounting for financial analysis.” The Casino did not dispute the accuracy of any of RL’s calculations or graphs and did not offer the opinion to which the Casino objected. As a result, the court denied the Casino’s Motion to Exclude. Also, the defendant did not identify any material difference between Las Vegas casinos and other casinos that would render RL’s testimony inadmissible.
RL testified he was not saying that the Casino should have compiled these exact reports, but that the defendant had available the same data and, had it analyzed that data, it would have discovered significant changes in Sam’s behavior or other details about Sam’s dealings with the Casino. Judge Pro held that RL’s report was inadequate under Rule 26(a)(2)(B), as it did not set forth the basis or reasons for his opinions. Although his report contained a summary in addition to the charts, the summary merely identified what is in the charts without explaining how he calculated any of the figures represented in the charts. Nevertheless, the court found this to be relatively harmless. The Casino was in possession of RL’s report for some time, but it presented no evidence that it advised Trustee during discovery that RL’s report was inadequate. The Casino had an opportunity at RL’s deposition to explore the bases for his opinions. Although Rule 26(a)(2)(B) is designed in part to obviate the need for depositions if the report adequately sets forth the expert’s opinions and the bases of it, the Casino did not give any evidence that it objected to the report or to deposing RL in the absence of a more complete report, or that the Casino sought any other relief during the discovery period relating to the adequacy of RL’s report. Instead, the defendant waited until the parties had committed enormous resources to completing discovery and submitting the matter on summary judgment to object to the adequacy of RL’s initial report. Under those circumstances, Judge Pro said an order precluding consideration of RL’s deposition testimony on summary judgment was too severe a sanction.
Viewing these facts and others identified in the Trustee’s briefs, expert reports, and testimony in the light most favorable to the Trustee in this “highly fact-driven, case-by-case inquiry,” a reasonable jury could find the defendant did not establish its good faith defense. The court denied the defendant’s Motion for Summary Judgment based on the good faith defense.
The Casino’s Motion in Limine to Exclude the Expert Testimony of RL was granted only so far as reasonable costs and attorney’s fees for the first deposition and otherwise was denied. The defendant’s Motion to Exclude the Expert Testimony of AS was granted to the extent that AS’s testimony regarding the relationship between the federal anti-money laundering regulations and the September 11 attacks was excluded. The motion was denied in all other respects.
In re National Consumer Mortg., LLC, Slip Copy, 2013 WL 164247 (Jan. 14, 2013, D.Nev.)
By: Kurt Mattson, J.D., LLM