Excluding Standard Of Care Accountant Expert Testimony Under FRE 403

In tax evasion trial, defense expert testimony about accountants’ professional standard of care was excluded as likely to mislead and prejudice the jury under FRE 403; probative value of this expert evidence on the duty of care owed to the defendant by her accountants (failure to probe if income from defendant’s solely-owned company was deposited in company accounts) was outweighed by the potential of the evidence to mislead the jury and shift its focus from defendant’s alleged criminal intent (in keeping undisclosed multiple accounts) to her accountants’ job performance, in United States v. St. Pierre, 599 F.3d 19 (1st Cir. March 17, 2010) (No. 09-1237)

One requirement under FRE 702 and Daubert for the admission of expert opinion testimony is that it be “helpful” to the jury. Often this criterion of helpfulness appears to replicate the requirement of FRE 403 that the testimony not be “substantially outweighed by the danger of unfair prejudice, confusion of the issues, or misleading the jury….” Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 595 (1993) (quoting FRE 403). In one case, the First Circuit noted the important role FRE 403 properly played in assessing the admissibility of expert opinion.

In the case, defendant St. Pierre wholly owned agency Staab that registered truck trailers for the state of Maine. As sole owner of Staab, the defendant could legally pay her personal bills from Staab’s proceeds “so long as she reported” it on her personal income return to the IRS. After a random audit, the IRS determined that the defendant evaded taxes by not reporting this payment of her personal bills as income. At the defendant’s trial, “the central issue was whether [the defendant] had the requisite state of mind” for tax evasion, namely, a “consciousness” of wrongdoing.

At trial the defendant conceded that she had underreported her income. However, the defense argued that she lacked the necessary state of mind for tax evasion as “she was financially unsophisticated and had relied on her accountants to capture [the] income” to report. The prosecution sought to show the defendant’s criminal intent through evidence that the defendant’s accountants had explained to her the obligation to report as income personal bills paid by Staab and that the defendant also maintained “undisclosed bank accounts for depositing” money from Staab.

To support her defense theory, defendant sought to introduce expert testimony regarding the professional standard of care that the accountants owed to the defendant – that they had:

“erred in failing to ask her about [Staab] company income not deposited in company accounts. The purpose was to show that she reasonably relied on her accountants to capture all of her income for her tax returns. The government objected, arguing that even if her accountants were careless, such evidence was irrelevant to whether St. Pierre knew she was understating her income on her returns.”

St. Pierre, 599 F.3d at 22.

The trial judge excluded the evidence under FRE 403. The jury convicted the defendant and she appealed, citing as error the exclusion of the expert testimony on accountants’ professional standard of care. The circuit conceded as a starting point that the proffered evidence was relevant, explaining “Cases can be imagined where an accountant’s neglect could bear on the likelihood that a taxpayer’s under-reporting was due to honest reliance rather than deliberate dishonesty. And, although not at all a straightforward inference in this case, in some situations the professional standards governing accountants might in turn have some bearing on whether there was such neglect.” St. Pierre, 599 F.3d at 23.

The First Circuit was skeptical of this theory but concluded that “[t]he trial judge was probably wise to invoke Rule 403, thereby assuming arguendo some possible relevance of the proffered evidence, however minimal or doubtful.” As explained by the circuit:

[T]he scheme as charged and proved in this case was not hospitable to such reasoning. The government’s evidence allowed the jury to find that St. Pierre, in diverting company income to personal ends but not reporting it as income to the company or herself, had acted against warnings; that St. Pierre had used multiple personal accounts not disclosed to accountants; that the scale of diversion was huge; that the accountants were unaware of most of what was occurring; and that St. Pierre herself engaged in creating false documents to cover her tracks.

By contrast, St. Pierre’s proposed accounting standards evidence, by shifting the focus to whether the accountants were doing a good job, did have a potential to confuse and mislead a jury-precisely because her accountants’ failure to prevent the fraud would not be a defense. To the extent that St. Pierre relied on what she said her accountants or lawyer or bankers told her, she was permitted to offer such evidence. Her own beliefs about what they were responsible for doing might also be pertinent to her state of mind. Evidence of accounting standards, unknown to St. Pierre, had at best little tendency to negate the damning inferences against her, and Rule 403 was properly applied.

St. Pierre, 599 F.3d at 23.

St. Pierre demonstrates the significant role FRE 403 can play in the determining the admissibility of expert opinion testimony. What the case does not help answer is the location, if any, of a dividing line between testimony that would be deemed not helpful to the jury under FRE 702, perhaps because the evidence is confusing or a waste of time, from evidence that simply fails the FRE 403 balance of probative value against “the danger of unfair prejudice, confusion of the issues, or misleading the jury.”

Federal Rules of Evidence