Free Appellant's Brief - District Court of Delaware - Delaware

Case 1:07-cv-00799-JJF

Document 81

Filed 04/30/2008

Page 1 of 46

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE ) ) ) Oakwood Homes Corporation, et al., ) ) Debtors. _________________________________________ ) ) OHC Liquidation Trust, ) ) Plaintiff, ) ) v. ) ) Credit Suisse (f/k/a Credit Suisse First Boston, a ) Swiss banking corporation), Credit Suisse ) Securities (USA), LLC (f/k/a Credit Suisse First Boston LLC), Credit Suisse Holdings (USA), Inc. ) (f/k/a Credit Suisse First Boston, Inc.), and Credit ) Suisse (USA), Inc. (f/k/a Credit Suisse First Boston ) ) (U.S.A.), Inc.), the subsidiaries and affiliates of ) each, and Does 1 through 100, ) ) Defendants. ) In re: Chapter 11 Case No. 02-13396 (PJW) Jointly Administered

Civil Action No. 07-0799 (JJF)

Re: Civil Docket Nos. 60-65

CONSOLIDATED ANSWERING BRIEF IN OPPOSITION TO DEFENDANTS' MOTIONS TO EXCLUDE PLAINTIFF'S EXPERT TESTIMONY Tony Castañares (CA SBN 47564) Stephan M. Ray (CA SBN 89853) Scott H. Yun (CA SBN 185190) Whitman L. Holt (CA SBN 238198) STUTMAN, TREISTER & GLATT, P.C. 1901 Avenue of the Stars, 12th Floor Los Angeles, CA 90067 (310) 228-5600 -&Marla Rosoff Eskin (No. 2989) Kathleen Campbell Davis (No. 4229) Kathryn S. Keller (No. 4660) CAMPBELL & LEVINE, LLC 800 N. King Street, Suite 300 Wilmington, DE 19801 (302) 426-1900

Special Counsel for the OHC Liquidation Trust

Dated: April 30, 2008

Case 1:07-cv-00799-JJF

Document 81

Filed 04/30/2008

Page 2 of 46

TABLE OF CONTENTS NATURE AND STAGE OF THE PROCEEDINGS ....................................................................... 1 SUMMARY OF ARGUMENT ........................................................................................................ 1 ARGUMENT .................................................................................................................................... 4 A. B. Plaintiff's Unified Statement Of The Case................................................................ 6 The Tennenbaum Motion Should Be Denied In Its Entirety. ................................... 6 1. 2. Dr. Tennenbaum Is Well Qualified As An Expert........................................ 7 Dr. Tennenbaum Used A Reliable Methodology. ........................................ 8 a. All Of The Techniques Used By Dr. Tennenbaum Have Been Recognized As "Reliable" For KumhoDaubert Purposes............................................................................ 11 The Assorted Criticisms Made By Defendants And Their Disingenuous Expert, Mr. Pfeiffer, Are Fatally Flawed, And Could Only Go To The Issue Of Weight, Not Admissibility......................................................... 13

b.

3. C.

Dr. Tennenbaum's Testimony "Fits" Numerous Issues In This Case..................................................................................................... 17

The Shapiro Motion Should Be Denied In Its Entirety........................................... 21 1. 2. Dr. Shapiro Is Well Qualified As An Expert. ............................................. 21 Dr. Shapiro Used A Reliable Methodology................................................ 27 a. Defendants' Own Expert Witness Validated Dr. Shapiro's Methodology; Indeed, He Used The Exact Same Methods................................................................................. 28 Numerous Courts Have Recognized The Reliability Of The Method Dr. Shapiro Used Here ­ The Systematic Application Of Specialized Knowledge To Facts Gleaned From Documents And Testimony. ...................................................................................... 29 Defendants' Remaining Criticisms Of Dr. Shapiro Are Meritless................................................................................... 31

b.

c.

i

Case 1:07-cv-00799-JJF

Document 81

Filed 04/30/2008

Page 3 of 46

3.

Dr. Shapiro's Testimony, Including That Contained In The Supplemental Shapiro Report, "Fits" Numerous Issues In This Case..................................................................................................... 33 Neither Dr. Shapiro's Testimony Nor Plaintiff's Theory Of The Case Rests Upon Credit Suisse's Strawman Tale Of Direct Fiduciary Duties To "Bondholders"; Plaintiff's Theory Of Duty Is Uncontroversial. ........................................................... 36

4.

D.

Defendants Fail To Provide Actual Evidence Of Any "Unfair Prejudice" That Would Befall Them Were The Jury To Hear Plaintiff's Experts.................................................................................................... 39

CONCLUSION ............................................................................................................................... 40

ii

Case 1:07-cv-00799-JJF

Document 81

Filed 04/30/2008

Page 4 of 46

TABLE OF AUTHORITIES CASES Am. Classic Voyages Co. v. JP Morgan Chase Bank (In re Am. Classic Voyages Co.), No. 07-352, 2008 U.S. Dist. LEXIS 24019 (D. Del. Mar. 25, 2008) ................................11, 15 Betterbox Commc'ns Ltd. v. BB Techs., Inc., 300 F.3d 325 (3d Cir. 2002).................................................................................................7, 24 Brown v. SEPTA (In re Paoli R.R. Yard PCB Litig.), 35 F.3d 717 (3d Cir. 1994), cert. denied, 513 U.S. 1190 (1995).............................5, 10, 11, 24 Cary Oil Co. v. MG Ref. & Mktg., Inc., No. 99-1725, 2003 U.S. Dist. LEXIS 6150 (S.D.N.Y. Apr. 11, 2003) .............................26, 30 Clark v. Heidrick, 150 F.3d 912 (8th Cir. 1998) .....................................................................................................5 Crowley v. Chait, 322 F. Supp. 2d 530 (D.N.J. 2004) ..........................................................................................31 Crowley v. Chait, No. 85-2441, 2006 U.S. Dist. LEXIS 8894 (D.N.J. Mar. 7, 2006)..........................................18 Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579 (1993)......................................................................................................... passim In re Exide Techs., 303 B.R. 48 (Bankr. D. Del. 2003) ..........................................................................................11 Grant Thornton, LLP v. FDIC, 535 F. Supp. 2d 676 (S.D.W. Va. 2007)..................................................................................18 Holbrook v. Lykes Bros. S.S. Co., 80 F.3d 777 (3d Cir. 1996).......................................................................................................27 Inline Connection Corp. v. AOL Time Warner Inc., 472 F. Supp. 2d 604 (D. Del. 2007).........................................................................................16 Kannankeril v. Terminix Int'l, Inc., 128 F.3d 802 (3d Cir. 1997).............................................................................................5, 6, 26 Kittay v. Atl. Bank of N.Y. (In re Global Serv. Group LLC), 316 B.R. 451 (Bankr S.D.N.Y. 2004)......................................................................................19 Kumho Tire Co. v. Carmichael, 526 U.S. 137 (1999)......................................................................................................... passim LNC Invs., Inc. v. First Fid. Bank, N.A., No. 92-7584, 2000 U.S. Dist. LEXIS 10271 (S.D.N.Y. July 24, 2000) ............................30, 31

iii

Case 1:07-cv-00799-JJF

Document 81

Filed 04/30/2008

Page 5 of 46

LaSalle Nat'l Bank v. Perelman, 82 F. Supp. 2d 279 (D. Del. 2000)...........................................................................................35 Mauney v. Boyle, 865 F. Supp. 142 (S.D.N.Y. 1994)...........................................................................................18 Miller v. McCown De Leeuw & Co. (In re Brown Schools), No. 06-50861, 2008 WL 1849790 (Bankr. D. Del. Apr. 24, 2008).........................................19 Odyssey Partners v. Fleming Cos., 735 A.2d 386 (Del. Ch. 1999)..................................................................................................35 Petruzzi's IGA Supermarkets v. Darling-Del. Co., 998 F.2d 1224 (3d Cir.), cert. denied, 510 U.S. 994 (1993)....................................................40 Pineda v. Ford Motor Co., 520 F.3d 237 (3d Cir. 2008)............................................................................................. passim Protocomm Corp. v. Novell Advanced Servs., Inc., 171 F. Supp. 2d 473 (E.D. Pa. 2001) ...........................................................................15, 27, 30 R.A. Mackie & Co. v. PetroCorp Inc., 329 F. Supp. 2d 477 (S.D.N.Y. 2004)......................................................................................11 SR Int'l Bus. Ins. Co. v. World Trade Ctr. Props., LLC, 467 F.3d 107 (2d Cir. 2006).....................................................................................................31 Schneider v. Fried, 320 F.3d 396 (3d Cir. 2003).............................................................................................4, 5, 25 Sharp v. Chase Manhattan Bank USA, N.A. (In re Commercial Fin. Servs., Inc.), 350 B.R. 520 (Bankr. N.D. Okla. 2005) ......................................................................16, 17, 32 Sharp v. Chase Manhattan Bank USA, N.A. (In re Commercial Fin. Servs., Inc.), 350 B.R. 559 (Bankr. N.D. Okla. 2005) ..................................................................................17 Stagl v. Delta Airlines, Inc., 52 F.3d 463 (2d Cir. 1995).......................................................................................................18 Tracinda Corp. v. DaimlerChrysler AG, 362 F. Supp. 2d 487 (D. Del. 2005)...................................................................................11, 16 United States v. 14.38 Acres, 80 F.3d 1074 (5th Cir. 1996) .....................................................................................................6 United States v. Ford, 481 F.3d 215 (3d Cir.), cert. denied, 128 S. Ct. 213 (2007) ..............................................17, 18 United States v. L.E. Cooke Co., 991 F.2d 336 (6th Cir. 1993) .............................................................................................15, 40 United States v. Mathis, 264 F.3d 321 (3d Cir. 2001), cert. denied, 535 U.S. 908 (2002).............................................17
iv

Case 1:07-cv-00799-JJF

Document 81

Filed 04/30/2008

Page 6 of 46

United States v. Mitchell, 365 F.3d 215 (3d Cir.), cert. denied, 543 U.S. 974 (2004)........................................................6 United States v. Rutland, 372 F.3d 543 (3d Cir. 2004).....................................................................................................21 VFB LLC v. Campbell Soup Co., 482 F.3d 624 (3d Cir. 2007).....................................................................................................35 Voilas v. Gen. Motors Corp., 73 F. Supp. 2d 452 (D.N.J. 1999) ......................................................................................25, 30 Vollmert v. Wis. Dep't of Transp., 197 F.3d 293 (7th Cir. 1999) ...................................................................................................12 Wechsler v. Hunt Health Sys., Ltd., 381 F. Supp. 2d 135 (S.D.N.Y. 2003)................................................................................25, 30 STATUTES AND RULES 11 U.S.C. § 547(b)(3). .........................................................................................................................35 11 U.S.C. § 548(a)(1)...........................................................................................................................35 Fed. R. Civ. P. 26(e) ..............................................................................................................................2 Fed. R. Evid. 702 ........................................................................................................................ passim OTHER AUTHORITIES Stephen L. Schwarcz, Commercial Trusts as Business Organizations: An Invitation to Comparatists, 13 DUKE J. COMP. & INT'L L. 321 (2003) ........................................................35

v

Case 1:07-cv-00799-JJF

Document 81

Filed 04/30/2008

Page 7 of 46

NATURE AND STAGE OF THE PROCEEDINGS For the convenience of the Court and the parties, the OHC Liquidation Trust, by and through its duly appointed trustee, Alvarez & Marsal, LLC ("Plaintiff") respectfully submits this consolidated Answering Brief in opposition to the two expert evidentiary motions filed on April 16, 2008 by the defendants in the above-captioned proceeding (collectively, "Defendants" or "Credit Suisse"), specifically their motions to exclude at trial the expert testimony of Dr. Michael Tennenbaum (the "Tennenbaum Motion" [D.I. #60]) and Dr. Alan C. Shapiro (the "Shapiro Motion" [D.I. #63]; together with the Tennenbaum Motion, the "Expert Motions").1 SUMMARY OF ARGUMENT The Expert Motions rest on a fundamental misunderstanding and distortion of (1) the Supreme Court's decisions in Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993) (hereafter, "Daubert") and Kumho Tire Co. v. Carmichael, 526 U.S. 137 (1999) (together with Daubert, "Kumho-Daubert"); (2) Third Circuit case law deploying the Kumho-Daubert analysis; (3) Plaintiff's theory of this case; and (4) the actual backgrounds of, methodologies used by, and opinions of Plaintiff's two experts.2 Once the misunderstandings are clarified and the distortions are lifted, it becomes quite clear that all the testimony to be proffered by Plaintiff's two experts meets the Kumho-Daubert test, and thus that evidence should be admitted at trial pursuant to Federal Rule of Evidence 702.
1

Defendants also submitted separate memoranda of law in support of both the Tennenbaum Motion and the Shapiro Motion, which memoranda will be cited hereinafter as, respectively, the "Tennenbaum Memo" [D.I. #61] and the "Shapiro Memo" [D.I. #64]. To allow Drs. Tennenbaum and Shapiro to articulate their many concerns about the assorted misrepresentations and omissions Defendants make in the Expert Motions using their own words, Plaintiff has submitted concurrently herewith declarations from both of its experts (which are cited hereinafter as "Tennenbaum Decl." and "Shapiro Decl.," respectively).

2

1

Case 1:07-cv-00799-JJF

Document 81

Filed 04/30/2008

Page 8 of 46

Plaintiff's first expert, Dr. Michael Tennenbaum, will testify3 at trial about the financial condition of the Oakwood Homes Corporation and its affiliates (collectively, "Oakwood") at various points in time. More precisely, Dr. Tennenbaum intends to testify that Oakwood was deeply and hopelessly insolvent at least as of September 2001, and that Oakwood's financial condition only worsened thereafter. Specifically, Oakwood's participation in various "securitization" and "LOTUS" transactions during the next year, which were structured by Credit Suisse and indirectly supported by the Credit Suisse "warehouse" facility, resulted in a diminution of Oakwood's assets (i.e., economic damages) of at least $50 million and further eviscerated even the remote chance of Oakwood's return to solvency. Dr. Tennenbaum, a highly credentialed and respected economist with over thirty years of practical consulting and teaching experience, reached these conclusions by applying standard and accepted financial techniques ­ including a discounted cash flow ("DCF") and Black-Scholes call option analysis ­ to Oakwood's contemporaneously available financial data and projections, while taking into account other then-available information and data. The use of this methodology produced results which are testable and verifiable, and thus could be challenged by an opposing expert. The Tennenbaum Report provides a detailed description of the data underlying Dr. Tennenbaum's opinions, the calculations Dr. Tennenbaum performed, and the specific results of that analysis. In contrast, the February 2008 report provided by Defendants' "rebuttal" expert, Mr. Allen Pfeiffer, proffers no competing data, performs no competing calculations, and reaches

3

Dr. Tennenbaum has disclosed his anticipated testimony to Defendants via a 52-page initial expert report (the "Tennenbaum Report" [D.I. #62, Ex. D]) and at his deposition (the "Tennenbaum Depo" [D.I. #62, Ex. E]). Furthermore, Dr. Tennenbaum has concluded that, on the basis of new data and suggested methodologies in Mr. Pfeiffer's report and the documents produced by him last month, Dr. Tennenbaum should provide Defendants with a supplemental report under Federal Rule of Civil Procedure 26(e), which he will do shortly.
2

Case 1:07-cv-00799-JJF

Document 81

Filed 04/30/2008

Page 9 of 46

no contrary conclusions; rather, in the words of Mr. Pfeiffer's team, his report is designed to take "pot shots" at Dr. Tennenbaum.4 These empty challenges go to the weight of Dr. Tennenbaum's testimony, not its admissibility. As such, Defendants are unable to establish any grounds to preclude Dr. Tennenbaum's testimony under the tripartite Kumho-Daubert framework ­ qualification, reliability, and fit ­ and Dr. Tennenbaum should be allowed to testify at trial. Plaintiff's second expert, Dr. Alan C. Shapiro, will testify5 at trial about (1) his detailed review of the facts and transactions at issue in this case, (2) the reasonableness of Credit Suisse's conduct under those facts, (3) the incentives that shaped Defendants' behavior given their multifaceted relationship with Oakwood, and (4) the results of a "market data" analysis of Oakwood's financial condition at various points in time. Dr. Shapiro, an eminent and experienced professor of finance and banking, reached his conclusions about these matters by closely examining the details of the relationship and transactions between Credit Suisse and Oakwood, as well as data about the collective opinion of all "market" participants, and then applying his unique and specialized knowledge to arrive at his conclusions.

4

Defendants have previously filed a copy of Mr. Pfeiffer's 2008 expert report (the "2008 Pfeiffer Report" [D.I. #62, Ex. F]) and the transcript of his deposition testimony (the "Pfeiffer Depo" [D.I. #62, Ex. G]) with the Court. Because Mr. Pfeiffer's current attacks must be read against the backdrop of a draft report he prepared for Credit Suisse in 2007 (the "2007 Pfeiffer Report") ­ which reaches conclusions utterly inconsistent with the 2008 Pfeiffer Report ­ Plaintiff submits a copy of the 2007 Pfeiffer Report as Exhibit "D" to the accompanying declaration of Whitman L. Holt (cited hereinafter as "Holt Decl."). Dr. Shapiro has disclosed his anticipated testimony to Defendants via a 47-page initial expert report (the "Shapiro Report" [D.I. #65, Ex. A]) and at his deposition (the "Shapiro Depo" [D.I. #65, Ex. B]). Dr. Shapiro has further provided a supplemental expert report proffering "market data" evidence of Oakwood's financial state at various times (the "Supplemental Shapiro Report" [Holt Decl. Ex. "A"]). Although Credit Suisse essentially disregards the existence of the Supplemental Shapiro Report in connection with the Shapiro Motion, that report remains quite relevant here, for the reasons explained below at pages 33-36, and thus Dr. Shapiro should unquestionably be allowed to testify about its subject matter at trial.
3

5

Case 1:07-cv-00799-JJF

Document 81

Filed 04/30/2008

Page 10 of 46

Defendants essentially ignore Dr. Shapiro's "market data" analysis, instead attacking his qualifications and methodology while contending that his opinions turn on a legally deficient theory. While there are many problems with Defendants' attacks, the common theme is Defendants' apparently purposive ignorance or distortion of Dr. Shapiro's background and the actual opinions he has rendered. Indeed, Defendants further fail to mention that Dr. Shapiro's methods ­ a studious review of the facts, and application of specialized knowledge to those facts ­ is precisely the same method used by their own "rebuttal" expert, Mr. Thomas Boland,6 who expressly stated that such a method is considered a reliable way to obtain valid expert opinions. Accordingly, Defendants are again unable to establish the absence of any of the three relevant criteria for the admission of Dr. Shapiro's testimony, and he should be allowed to testify at trial. ARGUMENT The Daubert decision enunciates several criteria for trial courts to consider when performing their "gatekeeping" function regarding the admission of scientific expert testimony under Federal Rule of Evidence 702, see 509 U.S. at 589-95, which criteria the Supreme Court extended to non-scientific expertise in Kumho Tire, see 526 U.S. at 147-49. In Schneider v. Fried, the Third Circuit focused the Kumho-Daubert inquiry through the following lens: We have explained that Rule 702 embodies a trilogy of restrictions on expert testimony: qualification, reliability and fit. Qualification refers to the requirement that the witness possess specialized expertise. We have interpreted this requirement liberally, holding that a broad range of knowledge, skills, and training qualify an expert. Secondly, the testimony must be reliable; it must be based on the 'methods and procedures of science' rather than on 'subjective belief or unsupported speculation'; the expert must have 'good grounds' for his on her belief. . . . Finally, Rule 702 requires that the expert testimony must fit the issues in the case. In other words, the expert's testimony must be relevant for the purposes of the case and must assist the trier of fact.
6

A copy of the competing expert report rendered by Mr. Boland (the "Boland Report") and the complete transcript of his deposition testimony (the "Boland Depo") are attached as Exhibits "B" and "C," respectively, to the Holt Declaration.
4

Case 1:07-cv-00799-JJF

Document 81

Filed 04/30/2008

Page 11 of 46

320 F.3d 396, 404 (3d Cir. 2003) (citations, footnote, and quotation marks omitted). A court's attention throughout this three-pronged inquiry "must be solely on principles and methodology, not on the conclusions that they generate." See Daubert, 509 U.S. at 595. Daubert itself also emphasizes that "[t]he inquiry envisioned by Rule 702 is . . . a flexible one." Id. at 594. Indeed, in a recent opinion the Third Circuit reaffirmed that "Rule 702, which governs the admissibility of expert testimony, has a liberal policy of admissibility." Pineda v. Ford Motor Co., 520 F.3d 237, 243 (3d Cir. 2008) (quoting Kannankeril v. Terminix Int'l, Inc., 128 F.3d 802, 806 (3d Cir. 1997)). This "liberal policy" rests against the backdrop of evidentiary rules that "embody a strong and undeniable preference for admitting any evidence which has the potential for assisting the trier of fact." See Kannankeril, 128 F.3d at 806 (emphasis added); accord, e.g., Clark v. Heidrick, 150 F.3d 912, 915 (8th Cir. 1998) ("Rule 702 favors admissibility if the testimony will assist the trier of fact, and doubts regarding whether an expert's testimony will be useful should generally be resolved in favor of admissibility." (citations and quotation marks omitted)).7 Thus, the Expert Motions have a high hill to climb. Daubert also underscores the distinction between the admissibility of evidence and the weight to be given that evidence at trial, noting how "[v]igorous cross-examination, presentation of contrary evidence, and careful instruction on the burden of proof are the traditional and appropriate means of attacking shaky but admissible evidence." 509 U.S. at 596. Accordingly, once the minimal threshold for admissibility is met, such "conventional devices"
7

In the face of this preference for admissibility, the Third Circuit has cautioned district courts to be especially vigilant against the "significant risk that district judges will set the [Rule 702] threshold too high and will in fact force plaintiffs to prove their case twice," likening that risk to the deprivation of a party's Seventh Amendment right to a jury trial. See Brown v. SEPTA (In re Paoli R.R. Yard PCB Litig.), 35 F.3d 717, 750, 750 n.20 (3d Cir. 1994), cert. denied, 513 U.S. 1190 (1995). It seems notable, then, that these particular Defendants have sought to deprive Plaintiff of both the right to a jury and the right to offer expert testimony.
5

Case 1:07-cv-00799-JJF

Document 81

Filed 04/30/2008

Page 12 of 46

remain "the appropriate safeguards" for a party that disputes conclusions reached by the other side's experts. See id.8 This key distinction between considerations that properly go to the weight of the expert testimony rather than its admissibility permeates the entire Kumho-Daubert analysis. See, e.g., Kannankeril, 128 F.3d at 808-09 (repeatedly referencing the weight vs. admissibility distinction during discussion of reliability and qualification aspects of the analysis). As demonstrated in turn below, both the Tennenbaum Motion and the Shapiro Motion ought to be denied because the testimony of both Dr. Tennenbaum and Dr. Shapiro easily satisfies each of the three standards for admissibility ­ qualification, reliability, and fit. A. Plaintiff's Unified Statement Of The Case. We refer the Court to the Unified Statement set forth in our Consolidated Answering Brief in Opposition to Defendants' Attempts to Exclude Certain Non-Expert Evidence (the "Relevance Brief" [D.I. #76]).9 As explained in the Unified Statement, Defendants have consistently relied upon a false "strawman" theory of Plaintiff's case, which continues here. B. The Tennenbaum Motion Should Be Denied In Its Entirety. The Tennenbaum Motion presents essentially two attacks on Dr. Tennenbaum: (1) Dr. Tennenbaum's testimony is unreliable because his "analysis is [] riddled with errors of

8

See also, e.g., United States v. Mitchell, 365 F.3d 215, 245 (3d Cir.) (similarly noting the value of "trial practices and procedural devices" as a check "designed to expose flawed expertise"; reciting "[t]he principle that cross-examination and counter-experts play a central role in the Rule 702 regime," which means "[e]xperts with diametrically opposed opinions may nonetheless both have good grounds for their views, and a district court may not make winners and losers through its choice of which side's experts to admit"), cert. denied, 543 U.S. 974 (2004); United States v. 14.38 Acres, 80 F.3d 1074, 1079 (5th Cir. 1996) ("The perceived flaws in the testimony of [a party's] experts are matters properly to be tested in the crucible of adversarial proceedings; they are not the basis for truncating that process."). We also attach a copy of that Unified Statement as Exhibit "1" for the Court's convenience if the Court is considering the Expert Motions before the motions the Relevance Brief answers.
6

9

Case 1:07-cv-00799-JJF

Document 81

Filed 04/30/2008

Page 13 of 46

approach and execution"; and (2) Dr. Tennenbaum's testimony does not "fit" Plaintiff's theory of the case. (See Tennenbaum Memo at pp. 1-4.) Unfortunately, Defendants' twin attacks rest on a myopic (and incorrect) understanding of both Plaintiff's case and the actual testimony that Dr. Tennenbaum will provide at trial. These dispositive problems are only exacerbated by the flimsy critiques of Defendants' shape-shifting "expert," Mr. Pfeiffer, who initially prepared a 2007 expert report containing several elements even more favorable for Plaintiff's position than the Tennenbaum Report, but now prefers to just ignore that fact and throw blunderbuss "pot shots" at Dr. Tennenbaum without forming even one opinion of his own. Simply put, Defendants have failed to show that Dr. Tennenbaum's methods resemble the "junk science" Kumho-Daubert is designed to exclude, and thus there is no reason to prohibit Dr. Tennenbaum from testifying. 1. Dr. Tennenbaum Is Well Qualified As An Expert. In the Third Circuit recent words, expert "[q]ualification requires that the witness possess specialized expertise." Pineda v. Ford Motor Co., 520 F.3d 237, 244 (3d Cir. 2008) (citation and quotation marks omitted). This requirement is interpreted liberally and covers a range of knowledge and skills. See id. Indeed, the boundary of this standard merely asks that the expert have "skill or knowledge greater than the average layman." See Betterbox Commc'ns Ltd. v. BB Techs., Inc., 300 F.3d 325, 327-28 (3d Cir. 2002) (Alito, J.) (citation omitted). Defendants do not contest Dr. Tennenbaum's qualifications here, and for good reason. Dr. Tennenbaum received a Ph.D. in economics from the University of California, Los Angeles in 1973. In the subsequent thirty-five years, Dr. Tennenbaum honed his specialized knowledge and skills by practicing as a consulting economist and by teaching college-level economics courses. Dr. Tennenbaum has conducted literally thousands of valuation analyses, and has served as an economic expert in a multitude of litigation touching on myriad issues of bankruptcy and commercial law. It is beyond dispute that Dr. Tennenbaum has ample
7

Case 1:07-cv-00799-JJF

Document 81

Filed 04/30/2008

Page 14 of 46

specialized knowledge and skills far "greater than the average layman." Accordingly, Dr. Tennenbaum unquestionably qualifies as an expert for purposes of the Kumho-Daubert analysis. 2. Dr. Tennenbaum Used A Reliable Methodology. In order to evaluate the reliability of Dr. Tennenbaum's methodology, it is first necessary to understand that methodology. Dr. Tennenbaum's assignment was "to provide [his] professional opinion as to the financial condition of [Oakwood] as of various dates of value . . ., and to consider the impact of certain financial activities of the company in view of its financial condition" (Tennenbaum Report at p. 7). Dr. Tennenbaum's analysis began with a thorough "review of numerous documents, including filings with the court, deposition transcripts and exhibits, brokerage firm analyst reports, SEC filings, Oakwood Homes Corporation financial documents, and financial and economic texts and professional journal literature" (id. at p. 3). Specific documents included thousands of pages of "internal Oakwood documents, [Credit Suisse] documents and Price Waterhouse Coopers documents." (See id. at pp. 5-6.) Throughout this intense process of document review and analysis, Dr. Tennenbaum's goal was to identify financial data and projections that would allow him to determine Oakwood's Asset Value and solvency as of September 2001 and September 2002;10 the change in such values between 2001 and 2002; the implied value of Oakwood based upon a call option analysis; the probability of default and return to solvency as of September 2001 and 2002; "[t]he impact of continued
10

Dr. Tennenbaum selected the September dates because they marked the end of Oakwood's fiscal year, thereby yielding actual and contemporaneous financial data, which also happened to fall within close proximity of the petition date. While Defendants accuse Dr. Tennenbaum of "conduct[ing] two valuations of Oakwood at two virtually random times" (Tennenbaum Memo at p. 16), any other date would have required Dr. Tennenbaum to reconstruct financial data and projections, a costly process which would inevitably cause Credit Suisse to charge him with "hindsight bias" and provide fodder for Defendants to challenge the reconstruction. Instead of hopping into that thicket, Dr. Tennenbaum chose to rely on the projections that would allow him to make what he considered to be an informed and accurate analysis of Oakwood's financial state at the relevant times. (See Tennenbaum Depo at 31:11-34:25.)
8

Case 1:07-cv-00799-JJF

Document 81

Filed 04/30/2008

Page 15 of 46

securitization of loans, guarantee of loans and servicing of loans on Oakwood's solvency and default probability between September 2001 and September 2002"; and the "[d]amages suffered by Oakwood's Enterprise as a result of the foregoing issues." (See id. at pp. 7-8.) Dr. Tennenbaum's extensive review of the materials in this case allowed him to identify financial projections that provided a contemporaneous presentation of the expected cash flows from Oakwood's operations. (See id. at pp. 20-32.) Although Dr. Tennenbaum's personal opinion was that certain of the 2001 projections were "aggressive," he concluded that it was proper to use such projections since they represented a portrait of Oakwood's expected prospects in 2001. (See Tennenbaum Decl. ¶ 4.) Plus, the "aggressive" nature of those projections could be explained to some degree by the beliefs of certain equity analysts, including at Credit Suisse, that the manufactured housing industry might stage a possible turnaround of sorts. (See id.) Dr. Tennenbaum's analysis then turned to the application of an analytic tool which is part of any economist's stock in trade: the use of a DCF analysis to determine the enterprise value of a corporation on a given date. Dr. Tennenbaum performed the traditional steps in that analysis, first utilizing the Capital Asset Pricing Model ("CAPM") to determine the required rate of return for an equity investor in Oakwood, and then working that data through the Weighted Average Cost of Capital ("WACC") model to determine the appropriate discount rate by which to value Oakwood's anticipated cash flows. (See Tennenbaum Report at pp. 33-36.) Dr. Tennenbaum further confirmed the results obtained by his use of the CAPM by utilizing the more nuanced Fama-French Three Factor Model. (See id. at p. 37.) Once he had determined the appropriate discount rate, Dr. Tennenbaum ran his DCF calculations on the Oakwood projections, and arrived at the conclusion that (i) Oakwood was quite insolvent and had a remote prospect of a return to solvency in 2001; (ii) Oakwood's enterprise value fell substantially

9

Case 1:07-cv-00799-JJF

Document 81

Filed 04/30/2008

Page 16 of 46

between 2001 and 2002, worsening Oakwood's financial condition and making continued insolvency "a virtual certainty"; and (iii) Oakwood's continued engagement in securitization and "LOTUS" transactions with Credit Suisse "resulted in dissipation of [Oakwood's] Enterprise Value, i.e., reduction in the value of corporate assets." (See id. at pp. 38-44.) In order to confirm the results of his DCF analysis, Dr. Tennenbaum turned to a second mode of analysis: a valuation of Oakwood's equity as "an out-of-the-money call option on the Enterprise Value of the firm" via application of the Black-Scholes model. (See id. at pp. 45-47.) This second level of analysis produced results consistent with the DCF; Oakwood was highly insolvent in September 2001 and suffered a substantial loss in asset value between then and September 2002, or put more informally, Oakwood was "a bad business getting worse." (See id. at pp. 48-50.) Ultimately, based upon his use of the DCF and the Black-Scholes model, Dr. Tennenbaum reached a number of discrete opinions, among them the key conclusion that Oakwood "suffered damages as a result of continued operation of its business model in an amount of at least $50 Million," which harm was in addition to the massive fees that Credit Suisse extracted from Oakwood in 2001-2002. (See id. at p. 51.) Accordingly, it is this actual methodology ­ the application of a DCF and the Black-Scholes model to contemporaneous financial projections ­ that must be determined to be "reliable" for Kumho-Daubert purposes. It is crucial to note at the outset how the Third Circuit took extra care in Pineda to insist that every reliability inquiry "demonstrate the appropriate level of flexibility required by Rule 702 and our past precedent." 520 F.3d at 248. Indeed, the authorities are clear that Plaintiff does "not have to demonstrate to the judge by a preponderance of the evidence that the assessments of [its] experts are correct, [it] only [has] to demonstrate by a preponderance of evidence that their opinions are reliable." Brown v. SEPTA (In re Paoli R.R. Yard PCB Litig.),

10

Case 1:07-cv-00799-JJF

Document 81

Filed 04/30/2008

Page 17 of 46

35 F.3d 717, 744 (3d Cir. 1994), cert. denied, 513 U.S. 1190 (1995). Thus, even if the Court "thinks that the expert's technique has flaws sufficient to render the conclusions inaccurate," it is often still the case that "a jury attempting to reach an accurate result should consider the evidence." See id. at 745. Does Dr. Tennenbaum meet this flexible standard of reliability? a. All Of The Techniques Used By Dr. Tennenbaum Have Been Recognized As "Reliable" For Kumho-Daubert Purposes.

The actual economic techniques that Dr. Tennenbaum used to prepare the Tennenbaum Report are uncontroversial and have been recognized by numerous courts as appropriate and reliable methods of producing expert testimony.11 Indeed, courts in Delaware have applied the precise techniques used by Dr. Tennenbaum, including the CAPM and WACC, for purposes of their own, objective financial analyses. See, e.g., In re Exide Techs., 303 B.R. 48 (Bankr. D. Del. 2003). Thus, any criticisms Credit Suisse may have cannot stem from problems with the methods Dr. Tennenbaum used per se since there is no claim (nor could there be) that Dr. Tennenbaum did not recite or understand the DCF or Black-Scholes formulas, or that he committed some mathematical error when applying those formulas. Rather, all complaints must stem from Defendants' (1) broad disagreement with the use of such methods to measure Plaintiff's damages (i.e., "fit," which is discussed in Part B.3. infra); or (2) minute quibbles with Dr. Tennenbaum's specific applications of those methods.
11

See, e.g., Am. Classic Voyages Co. v. JP Morgan Chase Bank (In re Am. Classic Voyages Co.), No. 07-352, 2008 U.S. Dist. LEXIS 24019 (D. Del. Mar. 25, 2008) (Farnan, J.) (affirming bankruptcy court decision relying on an expert's DCF analysis for evaluating insolvency); Tracinda Corp. v. DaimlerChrysler AG, 362 F. Supp. 2d 487, 494-95 (D. Del. 2005) (Farnan, J.) (admitting expert testimony from witness who "employed a standard DCF analyses according to the same procedures he follows in his practice"); R.A. Mackie & Co. v. PetroCorp Inc., 329 F. Supp. 2d 477, 514 (S.D.N.Y. 2004) (finding that Black-Scholes damages model and opinion based thereon "meet the test for reliability under [FRE] 702" and were "relevant because they assist the Court in understanding the plaintiffs' damage evidence and determining the amount of the plaintiffs' damages").
11

Case 1:07-cv-00799-JJF

Document 81

Filed 04/30/2008

Page 18 of 46

While the quibbles are discussed below, the proper scope of Dr. Tennenbaum's analysis is further clarified at the fore by Vollmert v. Wisconsin Dep't of Transportation, 197 F.3d 293 (7th Cir. 1999), which went beyond admissibility to consider issues of weight. There, the court expressly rejected a party's request for a "roadmap" that "would require an expert to not only provide the justification for the opinion, but also to give a primer on why the facts allow the expert to reach that conclusion." See id. at 300-01. The court concluded that "[a]n expert need not conclusively establish a fact and need not answer all potential challenges to the opinion in order for his opinion to be given weight," reasoning that a contrary rule would require: a radiologist not just to present the X-Ray and her diagnosis, but to explain why the XRay allows her to arrive at that conclusion. The X-Ray itself provides the basis for her conclusion, and that is sufficient to entitle the diagnosis to weight. A person seeking to challenge it can easily do so by having another radiologist read the X-Ray. Id. at 301. So too here; Dr. Tennenbaum does not need to present a "primer" on corporate finance and valuation. Rather, Dr. Tennenbaum must clearly state his final opinions (which he does at pages 9-10 of the Tennenbaum Report) and explain his basis for those opinions (which he does at pages 11-50 of the Tennenbaum Report). If Credit Suisse disagreed with Dr. Tennenbaum's conclusions, methodologies, or inputs, then they were free to have someone else "read the X-Ray" ­ i.e., they had the right to retain their own expert to analyze whatever materials that expert wanted to review and then to reach conclusions based upon such materials. In fact, Credit Suisse hired someone to "read the X-Ray" in this case ­ Mr. Pfeiffer ­ but that person expressly took pains not to reach any definite conclusion about what the X-Ray said, because any such conclusion would be undeniably negative for Credit Suisse's position at trial.12

12

See note 13, infra, for a detailed discussion of Mr. Pfeiffer's initial readings of the X-Ray, which were devastating to Defendants' cause.
12

Case 1:07-cv-00799-JJF

Document 81

Filed 04/30/2008

Page 19 of 46

b.

The Assorted Criticisms Made By Defendants And Their Disingenuous Expert, Mr. Pfeiffer, Are Fatally Flawed, And Could Only Go To The Issue Of Weight, Not Admissibility.

The bulk of Defendants' methodological attacks originate with their "rebuttal" "expert," Mr. Pfeiffer, who was re-retained13 in late January 2008. The focus of his assignment was clear: Mr. Pfeiffer was not to proffer any affirmative opinions of his own, but rather was retained to prepare what members of his team called "pot shots" at Dr. Tennenbaum, with the stated purpose of setting up the Tennenbaum Motion.14 Those "pot shots" form the heart of

13

Before turning to the specifics of his "rebuttal" opinion, it is helpful to consider some history about Mr. Pfeiffer's role in this case, which provides important background context about the confidence one ought to place in Mr. Pfeiffer's work. Mr. Pfeiffer was initially retained as a "rebuttal" expert in April 2007. In connection with that assignment, he and his team prepared a draft report ­ the 2007 Pfeiffer Report [Holt Decl. Ex. "D"] ­ to respond to the conclusions in the Tennenbaum Report. That report was a broad-based attack on the "solvency" aspects of the Tennenbaum Report, which began with a discussion of why Mr. Pfeiffer's "analysis clearly shows that the [2001 projections Defendants now attack Dr. Tennenbaum for using] prepared contemporaneously were not 'extremely aggressive' relative to [Oakwood's] past performance." (See id. at CSFB-00523321.) Based upon his use of what he thought were reasonable projections, Mr. Pfeiffer opined that "Oakwood's default probability using reasonable discount rates and guarantee figures based on contemporaneous projections was consistent with a strong credit rating" (id. at CSFB-00523342), even though Oakwood was by then a "junk" credit in the eyes of the public rating agencies and a "CCC" credit on Credit Suisse's internal scale. In fact, Mr. Pfeiffer's use of "a discount rate that is consistent with the view of a highly respected valuation professor" suggested that Oakwood had net "equity values" of "upwards of $1.0 billion" in mid-2001, in clear contrast to Dr. Tennenbaum's conclusion that Oakwood was hopelessly insolvent as of that time. (See id. at CSFB-00523321 (emphasis added).) Defendants have subsequently produced the data supporting the 2007 Pfeiffer Report's claim that Oakwood was a billion dollar company in mid-2001 [Holt Decl. Ex. "E"]. A quick comparison of the data which could support the "upwards of $1.0 billion" contention reveals that Mr. Pfeiffer's figures demonstrate a diminution of Oakwood enterprise value between September 2001 and September 2002 of somewhere between $428 and $593 million dollars ­ a full order of magnitude higher than Dr. Tennenbaum's calculation of that diminution! (See id. at CSFB-00523846 ­ CSFB00523847.) Since this diminution would allow Plaintiff to assert an astronomically higher damages claim, it is no small wonder that Defendants abandoned the 2007 Pfeiffer Report. See, e.g., February 6, 2008 e-mail from Michael Vitti, CSFB-00521759 (message from a member of Mr. Pfeiffer's team instructing team members to "think about which pot shots we can/should take" on Dr. Tennenbaum, and expressly noting how, consistent with the 2007
13

14

Case 1:07-cv-00799-JJF

Document 81

Filed 04/30/2008

Page 20 of 46

Defendants' requested relief, but they ultimately fail to persuade, for multiple reasons. The first "pot shot" relates to Dr. Tennenbaum's use of the 2001 projections ­ the same ones undergirding the 2007 Pfeiffer Report ­ about which he supposedly "does not know the source of and/or considers unreliable." (See Tennenbaum Memo at pp. 18-19; 2008 Pfeiffer Report at pp. 7-9.) These charges simply are inaccurate misrepresentations; as Dr. Tennenbaum explains, "aggressive" projections are not the same as inherently unreliable projections or projections from an unknown source. (See Tennenbaum Decl. ¶ 4.) Thus, because Defendants' entire attack turns on their faulty perception of what Dr. Tennenbaum believed about the 2001 projections, rather than any actual opinion of Mr. Pfeiffer, it should quickly fall by the wayside. The second "pot shot," which regrettably turbo-charges the rhetoric, is that Dr. Tennenbaum engaged in "sloppy analysis" with a "lack of care," contrary to the DCF methods suggested by "a respected valuation treatise." (See Tennenbaum Memo at p. 20; 2008 Pfeiffer Report at pp. 7-9, p. 8 n.17.) This slander is also wrong. Dr. Tennenbaum applied the widelyaccepted techniques suggested by Professor Damodaran, whose textbook Dr. Tennenbaum often uses in his course, making Defendants' charges totally misleading. (See Tennenbaum Decl. ¶ 9.) Indeed, Dr. Tennenbaum's methodology here was precisely the same as that recommended in a text co-authored by Roger J. Grabowski, a managing director at Mr. Pfeiffer's employer. (See id.) Presumably Mr. Pfeiffer would consider his own colleague's work to be sufficiently reliable. The third "pot shot" relates to Dr. Tennenbaum's supposed "failure" to consider contemporaneous "market data" and the proceeds of the 2004 sale of Oakwood to Berkshire. (See Tennenbaum Memo at pp. 20-21; 2008 Pfeiffer Report at pp. 4-7.) As a threshold matter, this analysis is not required, as this Court recently made clear in the American Classic Voyages Pfeiffer Report, "for the most part the quibbles go against us") [Holt Decl. Ex. "F"].
14

Case 1:07-cv-00799-JJF

Document 81

Filed 04/30/2008

Page 21 of 46

case. See 2008 U.S. Dist. LEXIS 24019, at *7-8 (rejecting contention that the Third Circuit's VFB opinion requires a "market data" analysis, and concluding that contemporaneous DCF was an appropriate expert methodology). Equally important, however, and strikingly absent from Defendants' papers, is the fact that both the "market data" and "sale" approaches confirm and validate the results of Dr. Tennenbaum's analysis. (See Tennenbaum Decl. ¶¶ 5-6.) Indeed, Dr. Shapiro's supplemental report ­ which Defendants inexplicably hope to ignore ­ consists of a pure "market data" approach which confirms that Oakwood was deeply insolvent in 2001 and suffered a steep drop in enterprise value between 2001-2002. (See Supplemental Shapiro Report [Holt Decl. Ex. "A"]; see also Shapiro Decl. ¶ 13; Tennenbaum Decl. ¶ 5.) Indeed, Mr. Pfeiffer's own 2008 "market data" supports the same conclusion, and actually suggests an even larger drop in Oakwood's enterprise value. (See Tennenbaum Decl. ¶ 5.) Thus, as in American Classic Voyages, Dr. Tennenbaum's DCF is fully "consistent with the available marketplace data," which makes it wholly appropriate expert testimony. See 2008 U.S. Dist. LEXIS 24019, at *7. In addition to their defects as matters of actual fact and economic technique, the critiques made by Credit Suisse through Mr. Pfeiffer ultimately go to the specific factual bases of Dr. Tennenbaum's opinion, not to the methodology that he used. Such criticisms are not relevant to the Kumho-Daubert analysis, however, since they merely go to the weight of the testimony.15 As such, Delaware courts in analogous contexts have rejected Daubert motions premised on the

15

See, e.g., United States v. L.E. Cooke Co., 991 F.2d 336, 342 (6th Cir. 1993) ("[A]ny weaknesses in the factual basis of an expert witness' opinion . . . bear on the weight of the evidence rather than on its admissibility."); Protocomm Corp. v. Novell Advanced Servs., Inc., 171 F. Supp. 2d 473, 481 (E.D. Pa. 2001) ("It appears to this Court that defendants are really arguing that [the expert's] opinions are inaccurate in light of the facts. In other words, they focus not on whether the reasoning is valid and the methodology reliable, but rather on whether the conclusions themselves are correct. That is not the proper inquiry in a test for admissibility.").
15

Case 1:07-cv-00799-JJF

Document 81

Filed 04/30/2008

Page 22 of 46

same bases as Defendants' attack, reasoning that such issues simply do not go to admissibility.16 At bottom, Defendants' inability to preclude the admission of Dr. Tennenbaum on "reliability" grounds is forcefully underscored by a recent opinion issued in the Commercial Financial Services case, which also involved an adversary proceeding stemming from complex, value-destroying securitizations that were aided in large part by a prominent investment bank. That scholarly opinion stemmed from a motion to preclude the opinion of plaintiff's solvency expert, who had performed DCF and other analyses to calculate the debtor's solvency at various points. Much like this case, defendant Chase objected to the expert's methodology on virtually every conceivable grounds. See Sharp v. Chase Manhattan Bank USA, N.A. (In re Commercial Fin. Servs., Inc.), 350 B.R. 520, 535 (Bankr. N.D. Okla. 2005) ("Chase quibbles with almost every step of [the expert's] application of the asset approach in rendering her solvency opinion."). The court systematically deconstructed all twelve of Chase's methodological objections, and ultimately admitted the expert's testimony because: she used recognized and logical methods to value assets and liabilities in order to apply the balance sheet test that is the hallmark of a solvency analysis under applicable law, [] her underlying economic assumptions have some evidentiary foundation and are not unrealistic or unreasonable in light of the evidence relied upon, and [] her conclusions logically follow from a well-explained path of data, leaving no "analytical gap" between the facts relied upon and the opinion rendered. Id. at 558-59. Thus, because the testimony was "probative and not palpably irrelevant and unreliable," the proper path for Chase was to challenge the expert's economic assumptions and
16

See, e.g., Inline Connection Corp. v. AOL Time Warner Inc., 472 F. Supp. 2d 604, 612-13 (D. Del. 2007) (concluding that "eight points of argument" about whether an expert used the right assumptions, properly modeled the data, or was sufficiently familiar with the issues "primarily focus on the weight to be afforded his opinions, and not on reliability," and thus were no basis for exclusion); Tracinda Corp. v. DaimlerChrysler AG, 362 F. Supp. 2d 487, 494-95 (D. Del. 2005) (Farnan, J.) (refusing to exclude expert who "employed a standard DCF analyses," that was the subject of testing and critique, notwithstanding arguments about whether he appropriately considered all relevant factors or improperly situated the analysis).
16

Case 1:07-cv-00799-JJF

Document 81

Filed 04/30/2008

Page 23 of 46

methods at trial by utilizing contradictory evidence, all of which would go to weight. See id. This analysis17 applies with equal force here, and demonstrates why Mr. Pfeiffer's various attacks on the factual bases of the Tennenbaum Report, rather than on the analytic methods applied to those facts, provide no rationale to exclude Dr. Tennenbaum's testimony on "reliability" grounds. 3. Dr. Tennenbaum's Testimony "Fits" Numerous Issues In This Case. Defendants devote much of the Tennenbaum Memo to their claim that Dr. Tennenbaum's testimony does not "fit" this case. The Third Circuit has set the bar for "fit" fairly low, however; once the reliability factor has been met, the "fit" element merely requires that the proposed testimony meet "the basic relevancy standard in Federal Rule of Evidence 401" by making "a fact of consequence more probable or less probable than it would be without the evidence." United States v. Ford, 481 F.3d 215, 219-20 (3d Cir.), cert. denied, 128 S. Ct. 213 (2007).18 Here, Dr. Tennenbaum's testimony goes directly to several key factual disputes in this

17

The Commercial Financial Services court also issued a companion opinion, which addressed Chase's challenges to a different expert, one who applied her experience with non-performing credit card debt to the specific debt bought and then securitized by the debtor, all with an eye toward determining whether the debtor overpaid for those bad loans. Chase again made a blizzard of objections to the expert's methodology, particularly the assumptions she used. The court once again rejected the attacks and admitted the testimony, noting how: pre-trial inquiry into the admissibility of an expert opinion should not focus on the choice of facts or assumptions utilized by the expert in reaching a conclusion, although assumptions must have some reasonable evidentiary foundation. . . . Weaknesses in the data upon which an expert relied go to the weight the jury should have given her opinions. The fundamental purpose of conducting a trial is to allow opposing parties an opportunity to convince the fact-finder to accept their version of disputed facts; thus, one party's expert will likely assume a set of facts that the other party vehemently disputes. An expert's assumption of certain facts to the exclusion of others does not necessarily render the expert's opinion unreliable. Sharp v. Chase Manhattan Bank USA, N.A. (In re Commercial Fin. Servs., Inc.), 350 B.R. 559, 568 (Bankr. N.D. Okla. 2005) (citations and internal punctuation omitted). Exactly.

18

See also, e.g., United States v. Mathis, 264 F.3d 321, 333 (3d Cir. 2001) (noting why "[the 'fit'] requirement is not intended to be a high one, however, and its principle is not dissimilar
17

Case 1:07-cv-00799-JJF

Document 81

Filed 04/30/2008

Page 24 of 46

case (by which we mean Plaintiff's actual case, as described in the Unified Statement, not Credit Suisse's strawman), including Oakwood's financial condition, its prospects for a return to any semblance of financial health, whether Oakwood suffered harm as a result of Credit Suisse's malfeasance, and the extent of the damage. One cannot plausibly dispute that Dr. Tennenbaum's testimony makes it far "more probable" that Oakwood suffered damages than if Dr. Tennenbaum offered no testimony at all. As such, Defendants' "fit" critiques must be about something else. In fact, the bulk of Defendants' "fit" analysis is just a thinly-disguised attempt to bolster their claim that summary judgment should be granted on "causation" grounds. Whatever its merits,19 this entire discussion is radically out of place in a Daubert motion, which simply focuses on whether the proffered expert testimony goes to any live issue in the case. And, as discussed in the prior paragraph, Defendants' "fit" critique fails under Ford, 481 F.3d at 219-20.

to the Federal Rules' general provision that, unless otherwise specified, 'all relevant evidence is admissible'" (citation and quotation marks omitted)), cert. denied, 535 U.S. 908 (2002).
19

As explained in our Unified Statement, the "causation" analysis is fairly direct in this case, and is certainly a far cry from the absurd chain-of-causation Defendants posit. Under New York law, proximate causation requires evidence of "but for" causation and proof that the damages were reasonably foreseeable to the tortfeasor, both of which are jury issues. See, e.g., Stagl v. Delta Airlines, Inc., 52 F.3d 463, 473-74 (2d Cir. 1995); Mauney v. Boyle, 865 F. Supp. 142, 147-48 (S.D.N.Y. 1994). Here, the "but for" element is unquestionable: but for Credit Suisse's provision of the "warehouse" and securitizations, Oakwood could not have continued down a value-destroying, business-as-usual path, and Credit Suisse would not have continued enriching itself via massive fees, interest, and other remuneration. Foreseeability is also satisfied, both as to the broader damages and the fees; indeed, as discussed at length in the Relevance Brief, further harm to Oakwood not only was reasonably foreseeable, but also actually was foreseen by Credit Suisse (see D.I. #76 at pp. 15-19 & 25-26), which explains why Defendants are so desperate to exclude the "smoking gun" CRM evidence of this fact. At bottom, then, because other courts have rejected similar causation and damages arguments in generally analogous cases at the post-trial stage (as opposed to the pre-trial or summary judgment stage), there is no real question here about whether the issues of causation and damages should be presented to, and resolved by, the proper body: the jury. See, e.g., Grant Thornton, LLP v. FDIC, 535 F. Supp. 2d 676, 710-14, 725-29 (S.D.W. Va. 2007); Crowley v. Chait, No. 85-2441, 2006 U.S. Dist. LEXIS 8894 (D.N.J. Mar. 7, 2006).
18

Case 1:07-cv-00799-JJF

Document 81

Filed 04/30/2008

Page 25 of 46

Yet that is not the end of the story; there are additional flaws that pervade Defendants' analysis. Defendants initially intimate that Dr. Tennenbaum used a "deepening insolvency" measure of damages, to which they apply an adjectival assault. (See Tennenbaum Memo at p. 2.) That is a mistake. Dr. Tennenbaum's damages analysis is separate from issues of "insolvency" (i.e., the difference between assets and liabilities); instead, it focuses on the diminution in the value of Oakwood's assets. (See Tennenbaum Decl. ¶ 3.) A loss of assets is a classic measure of damages, one unaffected by some courts' rejection of "deepening insolvency" as a separate cause of action. Indeed, if Dr. Tennenbaum had performed a "deepening insolvency" damages analysis, then he would have also included the $40,000,000 increase in Oakwood's liabilities between 2001-2002, which would result in a much larger damages claim of $90 million. (See id.) After debasing "deepening insolvency," 20 Defendants then have the audacity to claim that Dr. Tennenbaum's testimony does not fit this case because he didn't do a deepening insolvency analysis. Specifically, Defendants argue that Dr. Tennenbaum should have constructed a hypothetical bankruptcy scenario for September 2001, and then compared the recovery creditors would have received in that bankruptcy to what they received in the actual Oakwood bankruptcy. (See Tennenbaum Memo at pp. 12-14; see also 2008 Pfeiffer Report at pp. 4, 9-10.) But this approach is nothing if not "deepening insolvency"; after all, a comparison
20

Although Dr. Tennenbaum's damages analysis is not "deepening insolvency," such an approach probably would be appropriate under New York law (which both parties agree applies here, and whose courts have never addressed "deepening insolvency"). See, e.g., Kittay v. Atl. Bank of N.Y. (In re Global Serv. Group LLC), 316 B.R. 451, 458 (Bankr S.D.N.Y. 2004) (explaining why case law "suggest[s] that the New York courts regard 'deepening insolvency' as a theory of damages that may result from the commission of a separate tort"). Indeed, even under Delaware law, "deepening insolvency" remains a viable theory of damages for certain claims at issue here, including breach of fiduciary duty. See, e.g., Miller v. McCown De Leeuw & Co. (In re Brown Schools), No. 06-50861, 2008 WL 1849790, at *7-8 (Bankr. D. Del. Apr. 24, 2008). Thus, Defendants would seem welladvised to temper their enthusiasm about labeling this a "deepening insolvency" case.
19

Case 1:07-cv-00799-JJF

Document 81

Filed 04/30/2008

Page 26 of 46

of creditor recoveries necessarily would require inclusion of the additional liabilities created between 2001-2002 (since those new claims effectively diluted the recovery to preexisting 2001 creditors). Thus, Defendants' preferred approach would only increase Plaintiff's damages claim. Indeed, while Dr. Tennenbaum disagrees with this approach, he nevertheless believes that, even after making several assumptions favorable to Defendants, "a 2001 bankruptcy leaves the asset owners better off than the results of the actual bankruptcy" by at least $20 million in nominal dollars, and perhaps by as much as $78 million. (See Tennenbaum Decl. ¶ 7.) Given that Dr. Tennenbaum's actual damages analysis produced a number in the range of the results under Defendants' approach, it is disingenuous at best to argue that his testimony does not "fit" here. Defendants' final tack is to return to their "causation" argument, asserting that "Dr. Tennenbaum's proposed testimony offers no guidance about causation." (See Tennenbaum Memo at pp. 14-16.) As discussed at page 18 and note 19, supra, this is a summary judgment and trial issue, not a Daubert issue, and it is one that Defendants cannot win given the evidence in the record about the reasonable foreseeability of further damage to Oakwood from continuing a "business-as-usual" course in 2001-2002. Nevertheless, as Dr. Tennenbaum notes, this argument also "misses the point" because it ignores how a sale in 2001 would have realized $350 million, thereby allowing Oakwood to "have avoided any future value reductions whatever their cause." (See Tennenbaum Decl. ¶ 8.) Thus, continuing down the path laid by Credit Suisse was unquestionably a "but for" cause of the $50 million of lost enterprise value, to say nothing of the millions of dollars of fees paid to Credit Suisse. Indeed, the losses and the fees not only were foreseeable consequences of Credit Suisse's conduct, but actually were foreseen by employees of Credit Suisse ­ all the harm is directly traceable to Defendants' wrongful conduct. As such, there is no "causation" issue here, either as to Dr. Tennenbaum or for Plaintiff more broadly.

20

Case 1:07-cv-00799-JJF

Document 81

Filed 04/30/2008

Page 27 of 46

In sum, neither rhyme nor reason nor law supports Credit Suisse's "fit" argument. Dr. Tennenbaum has applied standard economic techniques to the facts of this case, and by doing so yielded results that bear directly on live issues of fact. Hence, he has produced "relevant" evidence that "fits" the case and should be considered by the jury at trial. Defendants, on the contrary, flip-flop incoherently between rejecting and embracing "deepening insolvency" and advance factual arguments that should be considered and weighed by the trier-of-fact, but they fail to raise concerns that justify excluding Dr. Tennenbaum's testimony under Kumho-Daubert. C. The Shapiro Motion Should Be Denied In Its Entirety. The Shapiro Motion presents three attacks on Dr. Shapiro: (1) he is not qualified because he is "a career academic who lacks any professional or academic experience" regarding securitizations; (2) his conclusions are "nothing more than his own wholly subjective opinion and therefore not the product of reliable principles and methods"; and (3) his opinion rests "on the proposition that Credit Suisse . . . had a direct duty to Oakwood's bondholders." (See Shapiro Memo at p. 7.) As discussed in turn below, each of these attacks is fatally undermined by the actual facts of this case, Dr. Shapiro's actual methods and opinions, and the relevant case law. Thus, the Court should reject Defendants' baseless attacks and let Dr. Shapiro testify at trial. 1. Dr. Shapiro Is Well Qualified As An Expert. Defendants expressly concede that Dr. Shapiro has impressive credentials and a vast array of specialized knowledge that could qualify him as an expert. (See Shapiro Memo at pp. 9-10.) Indeed, Defendants raise the specter that Dr. Shapiro's qualifications may be too good and might make him too persuasive to the jury.21 (See id. at pp. 12-13.) The crux of Defendants'

21

The Third Circuit has heard and rejected this theory before. In United States v. Rutland, 372 F.3d 543 (3d Cir. 2004), the defendant argued on appeal "that the probative value of the exceptionally well-qualified expert's testimony is outweighed by unfair prejudice caused
21

Case 1:07-cv-00799-JJF

Document 81

Filed 04/30/2008

Page 28 of 46

concerns, then, is not that Dr. Shapiro is unqualified to be an expert in some cases, but rather that Dr. Shapiro does not have the precise qualifications Defendants believe are necessary under their grotesque theory of the case. This attack on Dr. Shapiro's qualifications fails, for several reasons. First, the basic premise underlying Defendants' argument ­ that this case is merely about "the provision of securitization-related services by an investment bank, or the role of a bank providing such services to a company in financial distress" (Shapiro Memo at p. 2) ­ is wrong. While Dr. Shapiro will opine that the "services" provided by Credit Suisse, which included but were not limited to securitization transactions, were value-destroying, neither his testimony nor Plaintiff's case turns on whether Credit Suisse's execution of the transactions was adequate. Rather, as discussed in our Unified Statement, this case is about far broader questions, such as whether these "services" should have been provided at all (particularly once it was known to Credit Suisse that Oakwood was hopelessly insolvent), and whether Credit Suisse ­ a fiduciary and insider ­ satisfied its legal duties when it failed to investigate the eff