Tenth Circuit En Banc Hears Argument In Nacchio Insider Trading Case on Expert Testimony Issues

10th Circuit Court

Supplemental briefing on expert evidence issues was previously ordered in United States v. Nacchio, 535 F.3d 1165 (10th Cir. July 30, 2008) (No. 07-1311)

In a case to watch, on September 25, 2008, the Tenth Circuit, sitting en banc, heard argument on the insider trading case concerning defendant Nacchio, former CEO of Qwest Communications International, Inc. He was charged with 42 counts of insider trading and convicted on 19 counts. He was sentenced to serve six years in prison and ordered to pay a $19 million fine and forfeit about $52 million. A divided panel had originally reversed the convictions based on the exclusion of defense expert Professor Daniel Fischel, who would have testified that the pattern of the defendant’s stock trades where explained by factors other than insider information. See United States v. Nacchio, 519 F.3d 1140 (10th Cir. 2008).

Defense expert Fischel, a Northwestern Professor of Law and Business, and former dean of the University of Chicago Law School, would have testified concerning some of the following opinions:

  • The pattern and timing of the defendant’s charged stock sales were consistent with the pattern and timing in prior years.
  • Some stock sales were consistent with the defendant’s preference to receive cash for growth shares, the defendant’s previously stated desire to sell shares, and diversify his portfolio.
  • The defendant did not possess any material insider information, and if he had, more shares would have been sold.
  • During the time in question, other executives at comparable companies sold large numbers of shares.

As Federal Evidence Blog previously reported, for the en banc rehearing, the Tenth Circuit had ordered supplemental briefing on four issues concerning the threshold showing and burden required to present the expert testimony, and if the trial court abused its discretion whether the appropriate remedy would be a limited remand or retrial. The Nacchio appeal presents some interesting issues concerning the application of the expert evidence rule, FRE 702, including the burden the proponent of expert testimony must establish, the role of the trial court in ruling on expert testimony, and whether the trial court abused its discretion in excluding the defense expert opinions concerning the defendant’s stock trading patterns.

In sum, the parties took the following positions on the supplemental briefs ordered by the circuit:

Defendant Nacchio argued:

  • The defense expert, Professor Daniel Fischel, had been previously retained by the government and others, testifying more than 200 times. He never been excluded before as an expert witness.
  • The excluded expert testimony based on economic evidence concerning the trading patterns was “essential” and the “heart’ of the defense on the issues of materiality and intent. For example, the expert testimony would have responded to the government claim that the defendant possessed material inside information.
  • The defense did not have notice of any obligation to request a hearing or to proffer written expert testimony concerning the reliability of the methodology since the government did not dispute the reliability. The discovery rules do not mandate a written proffer each time an expert is called.
  • The defendant was denied an adequate opportunity to present evidence of the expert’s methodology.
  • Since the trial court abused its discretion, and given the importance of the excluded expert testimony in the case, a new trial should be ordered.
See Appellant’s Supplemental En Banc Brief (filed Aug.29, 2008); Appellant’s Supplemental En Banc Reply Brief (filed Sept. 15, 2008)

The government contended:

  • The trial court properly excluded the expert testimony under FED. CRIM. P. 16, and FRE 403, 602, 702, and 703. The initial disclosure of the defense expert testimony was unsupported by any methodology and would have misled the jury.
  • The defense had sufficient notice of the need present reliability evidence or to request a hearing and held the burden to establish the admissibility of the expert testimony.
  • The defense claim about the importance of the defense expert testimony is based on hindsight, and overlooks that the trial court allows Professor Fischel to testify as a summary witness, which included testimony about the defendant’s trading patterns.
  • Any error in excluding the defense expert testimony was harmless as the expert testimony would not have affected the verdict.
  • Assuming error, a limited remand would be appropriate to allow the trial court in the first instance to determine any admissibility issues. Consequently, a new trial is not required.
See Government’s Supplemental En Banc Brief (filed Aug. 29, 2008); Government’s Supplemental En Banc Reply Brief (filed Sept. 15, 2008); Addendum, Supplemental En Banc Reply Brief (filed Sept. 15, 2008).

The en banc argument was argued by two of the most seasoned appellate attorneys in the country. Edwin Kneedler, principal deputy solicitor general, argued for the government. The defendant was represented by Maureen Mahoney, head of the appellate and constitutional practice at Latham & Watkins in Washington, D.C. and who successfully argued the Arthur Andersen criminal case before the Supreme Court in 2005.

While it is difficult to predict any outcome, according to initial news reports on the argument, several of the judges viewed the defense argument skeptically. For some sources on the current argument:

For those interested in learning more, the University of Denver Sturm College of Law, which has been following the case closely. It has conveniently provided the primary trial and all of the appellate briefs on its web site.



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