BERNSTEINLITOWITZBERGER BARRACK,RODOS&BACINE …securities.stanford.edu/filings-documents/1004/MCK... · NIKI L. MENDOZA (BarNo. 214646) BENJAMINGALDSTON(BarNo. 211114) 12481 HighBluffDrive,

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BERNSTEIN LITOWITZ BERGER

& GROSSMANN LLPDAVID R. STICKNEY (Bar No. 188574)TIMOTHY A. DeLANGE (Bar No. 190768)NIKI L. MENDOZA (Bar No. 214646)

BENJAMIN GALDSTON (Bar No. 211114)

12481 High Bluff Drive, Suite 300San Diego, CA 92130

Tel: (858) 793-0070

Fax: (858) 793-0323

-and-

MAX W. BERGER

ROCHEL.LE FEDER HANSEN

1285 Avenue of the Americas

New York, NY 10019

Tel: (212) 554-1400Fax: (212) 554-1444

Attorneys for Lead Plaintiff

The New York State Common RetirementFund and Co-Lead Counsel for the Class

BARRACK, RODOS & BACINELEONARD BARRACKM. RICHARD KOMINSJEFFREY A. BARRACKBETH R. TARGAN3300 Two Commerce Square2001 Market StreetTel: (215) 963-0600Fax: (215) 963-0838

-and-STEPHEN R. BASSER (Bar No. 121590)

402 West Broadway, Suite 850

San Diego, CA 92101Tel: (619) 230-0800Fax: (619) 230-1874

UNITED STATES DISTRICT COURTNORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

In re McKESSON HBOC, INC. Master File No. 99-CV-20743 RMW (PVT)

SECURITIES LITIGATION And Related Cases

CLASS ACTION

Date: August 30, 2007

This Document Relates To: Time: 2:00 p.m.

Place: Courtroom 6, Fourth Floor

ALL ACTIONS. Judge: The Honorable Ronald M. Whyte

LEAD PLAINTIFF'S NOTICE OF MOTION AND MOTION IN LIMINE NO. 5

TO PRECLUDE CHRISTOPHER B. BARRY FROM OFFERING

ACCOUNTING AND CAUSATION OPINIONS AT TRIAL

$ 11 LEAD PLAINTIFF'S NOTICE OF MOTION AND MOTION IN LIMINE NO. 5 TO PRECLUDE CHRISTOPI IER B. BARRY FROM

OFFERING ACCOUNTING AND CAUSATION OPINIONS AT TRIAL

Master File No. 99-CV-20743 RMW

ITABLE OF CONTENTS

2Page

3MEMORANDUM OF POINTS AND AUTHORITIES ................................................................ ........1

4

I. Background ......................................................................................................................... ........ 25

6 A. Barry Admits He Is Not Qualified to Offer Expert Accounting Opinions.. ........... .......3.

7 B. Barry Does Not Know The Causation Standard Applicable Here AndHis Use Of The Wrong Standard Taints His Methodology With Unreliability ..... ........6

8

II . Argument ............................................................................................................................ ........ 99

A. Legal Standards for the Admissibility of Expert Opinion Testimony at Trial ....... ........910

11 B. Barry Is Not Qualified to Render Reliable Opinions .............................................. ...... 10

12 C. Barry Uses The Wrong Standards, Tainting His Methodology With

Flaws That Make His Opinions Speculative And Unreliable ................................. ......1213

D. Barry's Opinions Improperly Usurp the Role of the Court .................................... ......1514

III. Conclusion .......................................................................................................................... ......1715

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28 LEAD PLAINTIFF'S NOTICE OF MOTION AND MOTION IN LIMINF. NO. 5 TO PRECLUDE CHRISTOPIIER B. BARRY FROM

OFFERING ACCOUNTING AND CAUSATION OPINIONS Al̀ TRIAL


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'T'ABLE OF AUTHORITIES

Cases Page( s )

Aguilar v. Intl Longshoremen's Union Local No. I.0.966 F.2d 443 (9th Cir. 1992) ................................ ......

Brooke Group Ltd. v. Brown & Williamson Tobacco Corp.,509 U.S. 209 (1993)) ................................................................... ..............................................I3

Claar v. Burlington N. R.R. Co.,

29 h.3d 499 (9th Cir. 1994) ....................................................... ........................................11,11,13

Concord Boat Corp. v. Brunswick Corp.,207 F.3d 1039 (8th Cir.2000) .................................................... ..............................................13

Crow Tribe of Indians v. Racicot,87 F.3d 1039 (9th Cir. 1996)- ................................................... ..............................................15

Dairy Farmers of Any., Inc. v. Travelers Ins. Co.,

391 F.3d 936 (8th Cir.2004) ...................................................... ..............................................13

Daubert v. Merrell Dow Pharm., Inc.,509 U.S. 579 (1993) ................................................................... ..........................1.9, 10, 12, 17

Diviero v. Uniroyal Goodrich Tire Co.,919 F. Supp. 1353 (D. Az. 1996) ............................................... .............................................. I 1

Elsayed Mukhtar v. Cal. State Univ., Ilayward,299 F.3d 1053 (9th Cir. 2002) ................................................... ..............................................15

Garnac Grain Co.. Inc. v. Blackley,932 F2d 1563 (8th Cir. 1991) ................................................... ..............................................1 1

Gen. Elec. Co. v. Joiner,522 U.S. 136 (1997) ................................................................... ........................................1a, 15

Glastetter v. Novartis Pharm. Corp.,

252 F.3d 986 (8th Cir. 2001) ..................................................... ..............................................12

Humphreys v. Regents of the Univ. of Cal., No. C 04-03808,2006 WL. 1867713 (N.D. Cal. July 6, 2006) ............................. ..............................................11

In re Imperial Credit Indus., Inc. Sec. Litig.,252 F. Supp. 2d 1005 (C.D. Ca. 2003) ...................................... ........................................13, 14

LEAD PLAINTIFF s NOTICE OF MOTION AND MOTION IN LIN11NE NO. 5 TO PRECLUDE CFIRISTOPHER B. BARRY FROM


Master He No 99-CV-20743 RMW

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Cases Page ( s)

In re Oracle Sec. Litig.,829 F. Supp. 1176 (N.D. Ca. 1993) ................................... ......................................................14

Jinro Am. Inc. v. Secure Inv., Inc.,

266 F.3d 993 (9th Cir. 2001) ............................................. ................................................10, 11

Kumho Tire Co., Ltd. v. Carmichael,526 U.S. 137 (1999)_ ........................................................ ..................................................9, 10

Maffei v. N. Ins. Co. of New York.

1.2 I.3d 892 (9th Cir. 1993) ............................................... ......................................................15

Marx & Co., Inc. v. Diners' Club, Inc.,550 F.2d 505 (2d Cir.). cert. denied, 434 U.S. 861 (1977) ................................................15, 17

McHugh v. United Serv. Auto. Ass'n,164 F.3d 451 (9th Cir. 1999) ............................................. ......................................................15

Mills v. Elec. Auto-Lite Co.,396 U.S. 375 (1970)_,_ .................................................... .................................. ....8, 14, 1.6

O'Conner v. Commonwealth Edison Co..13 F.3d 1090 (7th Cir. 1994) ............................................. ......................................................15

Perkins v. Volkswagon of Am., Inc.,596 F.2d 681 (Sth Cir. 1979) .............................................. ..................................... .......11

TSC Indus. Inc. v. Northway Inc.,426 U.S. 438 (1976)_ ......................................................... ......................................................16

The Pinal Creek Group v. Newmont Mining Corp.,

352 F. Supp. 2d 1037 (D. Az. 2005) .................................. ......................................................16

Turpin v. Merrill Dow Pharlns., Inc.,959 F.2d 1349 (6th Cir. 1992) ........................................... ................................................13, 15

United States v. Bilzerian,926 F.2d 1285 (2nd Cir. 1991) ........................................... ................................................15, 17

United States v. Duncan,42 F.3d 97 (2d Cir. 1994) ................................................... .................. ... .............

United States v. MaraBelles,724 F.2d 1374 (9th Cir. 1984) ........................................... ......................................................10

LEAD PLAINTIFFS NOTICE OF MOTION AND MOTION IN LIMINE NO. TO PRECLUDE CHRISTOPHER B. BARRY FROM



iii

ICases Page

2United States v. Scop,

3 846 p.2d 135 (2d Cir.). revW in part on reh'g on other grounds, 856 F.2d 5 (2d

Cir.1988) ............................................................................................................................15, 17

4

Virgin Atl. Airways Ltd. v. British Airways PLC,

69 F. Supp. 2d 571 (S.D.N.Y. 1999) ........................................................................................13

6Weisgrarn v. Marley Co.,

7 528 U.S. 440, 120 S. CO. 1011 (2000) ......................................................................................13

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28 LEAD PLAINTIFF'S NOTICE OF MOTION AND MOTION IN LIMINE NO 5 TO PRECLUDE CHRISTOPHER S. BARRY FROM

OFFERING ACCOUNTING AND CAUSA"T ION OPINIONS AT TRIAL

Master File Na. 99-CV-20743 RMWiv

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PLEASE TAKE NOTICE that pursuant to the Stipulation and Case Management Order No. 5

entered in this case on November 16, 2006 (Docket No. 1535), at the Pretrial Conference scheduled at

2:00 p.m. on August 30, 2007, in the courtroom of the Honorable Ronald M. Whyte, 280 South First

Street, San Jose, California 95113, Lead Plaintiff, the New York State Common Retirement Fund will,

and hereby does, move in Brine for an Order precluding Christopher B. Barry from offering

accounting and causation opinions at trial. This notice and motion relies on the accompanying

memorandum and declaration of Jeffrey A. Barrack in support thereof, Lead Plaintiffs submissions in

opposition to the motion for summary judgment, and the submissions in opposition to Bear Stearns'

motions to strike the declarations of Messrs. Atkins, Berliner and Nye.

MEMORANDUM OF POINTS AND AUTHORITIES

Lead Plaintiff, the New York State Common Retirement Fund, by its undersigned counsel,

hereby moves for an order precluding Christopher B. Barry, a proffered expert of defendant Bear

Stearns & Co., Inc. ('`Bear Stearns"), from testifying at trial in response to the opinions of two of Lead

Plaintiffs experts, Robert Berliner and Blaine Nye. Unlike Berliner and Nye, Barry lacks sufficient

qualifications in accounting and causation to offer technical and specialized opinions as an expert on

those subjects at trial. Barry, therefore, utilized improper accounting and causation methodologies and

standards in formulating his opinions, resulting in unreliable and speculative accounting and causation

opinions . Barry' s opinions with respect to generally accepted accounting principles ("GAAP") and

with respect to causation violate Rule 702 of the Federal Rules of Evidence, are not admissible at trial

under Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579 (1993), and its progeny, and will not assist

the trier of fact to understand the evidence or determine facts in issue. Barry's testimony on GAAP

and causation only serves to confuse the issues and are also excludable for that reason under Rule 403.

LEAD PLAINTIFF'S NOTICE OF MOTION AND MOTION IN LIMINE NO. 5 TO PRECLUDE CHRISTOPHER B. BARRY FROM



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1. Background

Barry was asked by counsel for Bear Stearns to respond to the expert reports submitted by

Lead Plaintiff in this case . J.T Atkins is Lead Plaintiff s expert on investment banking and fairness

opinions. Robert Berliner is Lead Plaintiffs expert on generally accepted accounting principles and

generally accepted auditing standards . Blaine Nye is Lead Plaintiff s expert on damages. They each

I submitted Rule 26 expert reports.

Barry's Rule 26 report was served on February 9, 2007. Attached to Barry's report as

Appendix A is his curriculum vitae, which demonstrates a complete absence of sufficient education,

experience , licensure or other specialized qualifications in the :Fields of accounting and auditing . Id. at

Appendix A. The CV also demonstrates that Barry is neither an econoanetrician nor a chartered

financial analyst. Id. The opinions in Barry's report with regard to the expert opinions of Messrs.

Berliner and Nye are based on. his academic experience in the field of business management.' Id. at

1J3-6.

Barry is a college professor who teaches finance and business administration at Texas

Christian University in Fort Worth, Texas. Barry has a Bachelor of Science degree in industrial

management, a Masters Degree in Business Administration that he earned from Indiana University in

1972, and a Doctoral Degree in Business Administration that he earned one year later from Indiana

University in 1973. Barry is not a certified public accountant, and he lacks any specialized training or

experience i n accounting , auditing or with GAAP.

Furthermore, Barry creates a legal requirement for establishing "loss causation" that does not

exist, and is certainly not the standard for demonstrating loss causation for a Section 14(a) claim under

1 While Barry's opinions in response to J.i, Atkins are also not based on adequate specialized qualifications to make themprobative because Barry lacks any meaninuaful investment banking experience, Lead Plaintiff does not seek to excludethose opinions in the instant motion. Lead Plaintiff reserves its right to conduct voir dire of Barry at trial and object to the

admissibility of Barry's opinions regarding J.T. Atkins' testimony at that time.

Lrr\tl r[-tV IN I Srr a Ivv I ]1- F. tic lv±V 1 IViti e !N J IvjV I ttjir IIN L..FwU;EN'S:: IV V. J 3 V rl\r4LAuuc t- fi\ If 1 vrrnnr\ u. 6ri1\R I S --i



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the Securities Exchange Act. Rather. Barry confuses the Section 14(a) standard with the standard for

demonstrating causation . under Section 10(b). As a result , his methodology for opining on loss

causation is flawed, and yields irrelevant and unreliable opinions. Significantly, Barry did not conduct

an event study in connection with his loss causation opinions. Barry's lack of relevant expertise and

his use of flawed methodologies demonstrate that he has no probative specialized knowledge on

GAAP and causation. Barry's deposition testimony shows that his accounting and causation opinions

in his Rule 26 report are not proper expert opinions and are not admissible at trial.

A. Barry Admits He Is Not Qualified to Offer Ex p ert Accounting Opinions

In its motion to strike Berliner's declaration, Bear Stearns concedes that it does not have the

benefit of an accounting expert."' Likewise, Barry himself made it clear during his deposition that lie

is not an accounting expert, nor an auditing expert:

Q. Do you consider yourself an expert in accounting?

A. I would not have my -- you know, I wouldn 't say that I'm an accounting expert in

the sense that, yeah, I'm not a CPA, for example. ... I wouldn 't really call myself an

accounting expert per se.

Ex. 2 (Barry N.T. at 23 :16-24 (emphasis added)); see also id. at 148:7-149:5 (- 1 am not an auditor").`

Barry's admission that he is not an accounting or auditing expert is not surprising, given his

complete lack of adequate qualifications in accounting and auditing.

Q. And you said that you use -- you're familiar with accounting, but you're not an

expert in accounting; is that fair?

2 See Bear Stearns' Motion to Strike Portions of the Report of Robert W. Berliner, at pp. 3, $, submitted under seal by

Bear Stearns on or about June 22, 2007 (` ... Bear Stearns was unable to enrage or designate an appropriate expert to

rebut these opinions [by Berliner]. As a result, Bear Stearns was denied the assistance of such an expert during discovery

and the opportunity to present rebuttal testimony.... Thus, Bear Stearns did not have the benefit of an accounting expert

to consult on the issues during the extensive discovery in this case.")

3 All Exhibits referenced herein are contained in the declaration of Jeffrey A. Barrack , unless otherwise noted.

LEAD PLAINTIFF'S NOTICE OF MOTION AND MOTION IN LIMINE NO. 5 TO PR.[ CLUDE CHRISTOPHER B. BARRY FROM

OFFLRUNCG ACCOUNTING AND CAUSATION OPINIONS AT TRIALMaster File No. 99-CV-20743 RMW

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A. I guess what I'm trying to say is that what I said early on was that in order to be

good in finance, you have to have an understanding of accounting, but I would not call

nzyself an accounting expertfor litigation purposes.

Q. Do you believe that you're qualified to give an expert opinion on materiality from

an accounting and auditing point of view? ...

A. I -- I'm very comfortable with being able to respond to the way that someone [else]

attempted to do a materiality argument; that, I'm comfortable with doing. I wouldnt

call myself a -- an audit expert who would do the materiality , you know, for a

company per se. *

Q. Am I correct that you cannot tell us as you sit here what accounting standards

govern -- I'm sorry. what accounting standards address the issue of materiality, what

GAAP standards?

A. Well, I mean, I'm certainly aware that GAAP addresses the issue of materiality.

Whether or not these things need to be reported or not is a function of that, but they

also depend upon the auditors or the CPAs in general analysis of whatever it is -- I

mean, there may be very different set of issues that arise in a particular case. So I'm not

saying -- so, yes, I would say I can 't cite for you here's a specific set of accounting

things that you have to do to conclude on materiality . I wouldn't say that. **

Q. But you can't articulate , you can't state as we sit here today what GAAP or GAAS

standards apply; correct ? "Yes" or "no"?

A. I would say "yes" and "no." Yes, I know that there are issues that have to do with

whether or not there is a significant effect or an appreciable effect. No. I can 't tell you

what specific accounting methodologies have to be applied in reaching that

conclusion.

Q. What accounting literature did you consult in preparing your rebuttal to Mr.

Berliner?

A. To Mr. Berliner?

Q. Yes.

A. I just looked specifically at what it was that he said and the conclusion that he

reached about materiality. And you'll notice that I didn't say that he is -- I didn't try to

make an accountant expert opinion about that. I tried to make the point they haven't

been able to demonstrate that there would be a material price effect of the information

that they had at the time, and he hasn't demonstrated that.

Q. Are you offering an opinion as to whether the accounting issues that Bear Stearns

was aware of in its due diligence for the merger were material to HBOC's financials

from the standpoint of accounting or auditing pronouncements relating to materiality?

LEAD PLAINTIFF'S NOTICE OF MOTION AND MOTION IN LIMINE NO 5 TO PRECLUDE CI IRISTOPHER B. BARRY FROM


Master File No 99-CV-20743 RMW

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A. And you asked do I have an opinion about that?

Q. Are you intending to offer an opinion on that?

A. And what I was intending to offer an opinion was that Mr. Berliner didn't show that

the information known by them was material. That's what I'm trying to say . Irin not

specifically trying to say that I should do a materiality analysis and here it is. But I

didn't -- .I don't believe that what he did in his analysis presents materiality conclusions

properly.

Q. Do you understand that Mr. Berliner offered an opinion on materiality from an

accounting standpoint'?

A. Yes, I do.

Q. If you didn't look at materiality from an accounting standpoint, how can you rebut

his testimony? * * *

A. Okay? So what I'm stating here is that -- and I state this in especially in'96 and '97,

is that Mr. Berliner reaches a claim that there's materiality, Deloitte & Touche reach the

opinion that it wasn't.4 Arthur Andersen reached the opinion that it wasn't. The work

that M.r. Atkins has attempted to do in this case to demonstrate that there should be

some effects, he's failed to do so. It hasn't been significant. He hasn't been able to

show that there should have been price effects. So using the -- my understanding of

materiality, which would be that if it was material, then the release of it would have

had price effects, that has not been shown in this matter, and he hasn't demonstrated

that it would have.

Q. Is that the principal standard that you believe accountants use to determine whether

something is material?

A. It's definitely the case that accountants want to know if this thing would have an

impact, if it would affect valuation in some sense or prices in some sense. They

certainly do look at that. And so in related to that notion of materiality, that's my

conclusion.

Id. at 267:5-272:24 (emphasis added).

Barry's deposition testimony establishes that he has no qualifications in accounting or auditing,

does not know the generally accepted accounting standards that address materiality determinations,

a In fact, the testimony of Deloitte's witness, Teresa Briggs, is directly inconsistent, and is at odds, with what Barry says.

See Declaration of David Stickney in opposition to motion for summary judgment, Vol. 4, at Briggs Exhibit (Briggs N.T.

at 194:6-16, 196:11-24, 197:13-23, 271:18-272:25).

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and as an alternative, he utilized his personal "understanding of materiality" to reach his conclusions

in response to the GAAP opinions on materiality offered by Mr. Berliner, a highly qualified

accounting and auditing expert. See declaration of Robert Berliner in opposition to motion to

summary judgment (Docket No. 1600).

B. Barry Does Not Know The Causation Standard Applicable Here And

His Use Of The Wrong Standard Taints His Methodology With Unreliability

Barry's deposition testimony demonstrates that he creates legal requirements that do not exist.

Barry applied a standard he understands to be related to a substantially different claim, and his

understanding of that standard is wrong.

Q. Do you understand that there are differences in the types of activity that Section14(a) regulates and Section 10(b) regulate?

A. I understand as a technical matter that, for exal-nple, just -- that with a variety of

different types, they are different in some respects. Like I mentioned 10, 11, and 12,

and now 14 as well, that they have different characteristics. I understand that they do.

Q. Are you aware that Section 14(a) and Rule 14a-9 apply to proxy voting and only to

proxy voting? ...

A: I mean, I certainly recall -- I don't recall in detail the specifics of what it was that I

read, I don't know, three years or so ago, two or three years ago, specifically addressing

that, but I know that what was being addressed specifically with regard to the damage

calculations being done in the matter had to do with that type of topic.

Id. at 37:2-39:2; see also id. at 64:2-24.

Based on a legal requirement that does not exist, Barry attempts to criticize Lead Plaintiff's

expert, Blaine Nye by contending that Nye failed to show that Bear Stearns' fairness opinion caused

artificial inflation in the price of McKesson stock. Id. at 54:11-16. Nye testified that by being an

essential link in bringing about the merger, Bear Stearns' false fairness opinion caused the transfer of

inflation from HBOC to McKesson and thereby caused McKesson's stock to become artificially

inflated. Upon further examination, Barry admitted that that his causation opinions do not relate to the

LEAD PLAINTIFF'S NOTICE OF MOTION AND MOTION IN I.IMINI: NO. 5 TO PRECLUDE CHRISTOP}1ER B. 13ARRY FROM

OFFERINO ACCOUNTING AND CAUSATION OPINIONS AT TRIAL

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transfer of artificial inflation from HBOC shares to McKesson shares by operation of the exchange

ratio. 1cL at 164:3-165:15.

Immediately after those telling admissions. Barry essentially agreed with the very principle

utilized by Blaine Nye to detect and measure the losses directly caused by Bear Stearns- opinion in the

proxy statement. According to Barry:

If you make the assumption that prior to the merger there was inflation already in

HBOC and it still existed at the time in which the transfer occurred. and the exchanges

occurred, which the HBOC shareholders got McKesson shares, then, yes, there would

be a movement ... of inflation to McKesson shares.

Id. at 160:4-16.

Q. Would you agree that if you knew how much inflation or if you came to a

conclusion as to how much inflation existed in HBOC stock immediately prior to the

merger, it would be a simple mathematical calculation to figure out how much was

transferred to McKesson stock?

A. That can easily be calculated.

Q_ Using the exchange ratio?

A. Yes.

Id. at 164:3-166:1. Nye identified and quantified the amounts of artificial inflation in HBOC stock at

the time of the merger with the use of an event study and calculated the portion that was transferred to

McKesson shareholders. See declaration of Blaine Nye in opposition to motion for summary

judgment. at ¶jJ3-7, 9 (Docket No. 1594) (citing Nye's Rule 26 Report, attached thereto, at ¶124); see

also Ex. 3 (Nye N.T. at 34: 17-35:8 , 212:1-214:22).

Barry has no idea how much inflation existed immediately prior to the merger on January 11,

1999. Ex. 2 (Barry N.T. at 15 5 :21-160:16). He never even attempted to detect or measure it. Id. In

point of fact, Barry did not perform an event study in connection with his loss causation opinions-

When further examined at his deposition, Barry explained the purported "causation"" standard

he applied to reach his conclusions. He testified that he sought to determine whether Nye

LEAD PLAINTIFF'S NOTICE OF MOTION AND MOTION IN I..IN11NI. NO. 5 TO PRECLUDE CHRISTOPHER B. BARRY FROM

OFFERING ACCOUNTING AND CAUSATION OPINIONS A I' TRIAL


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"demonstrated that if everything that Bear Stearns knew had been in fact disclosed by the company

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prior to that time, that there would have been any price effect whatsoever." Ex. 2 (Barry N.T. at

166:21-167: 14). Tie stated that the standard , or methodology, used to reach his conclusions was an

"attempt to identify the specific effects on stock prices or damages (if any) that might have occurred

because of the accounting information that Bear Stearns was aware of when it issued its fairness

opinion." See declaration of Christopher Barry in support of motion for summary j€:tdgment, exhibit A

(Barry Report) at 11 Ile., 50 (Docket no. 1586). Barry, who has previously testified as an expert in

Section 10(b) cases, but not in a Section 14(a) case, clearly does not appreciate the differences,

between these statutes. Barry's approach appears to be geared for determining loss causation in a

fraud-on-the-market case under Section 10(b). It is not, however, the correct standard for determining

causation tinder Section 14(a).5

Nowhere in his Rule 26 report or his testimony does Barry provide any basis in law or

economic theory for applying such a standard to the task of detecting and measuring causation and

damages in a Section 14(a) claim. Indeed, Barry admitted in his deposition that his standard is not

based on the law and theory that address the harm caused by false and misleading proxy statements

soliciting shareholder votes. Ex. 2 (Barry N.T. at 64:2-24). Nowhere does Barry explain how his

As discussed in Lead Plaintiffs Memorandum In Opposition To Bear Stearns' Motion To Strike The Declaration Of Dr.

Blaine F. Nye And The Declaration Of Edward J. Sincavage, the causation requirement in Rule 14a-9 cases is

fundamentally different from the causation requirement Rule lob-5 cases due to the differences in the nature of the

respective types of claims. Unlike Section 10(b), which is concerned with artificial inflation of the price at which

securities are purchased caused by the dissemination into the market of false or misleading information, Section 14(a) is

intended to remedy the corruption of shareholder proxy voting by false or misleading statements in the proxy solicitation

materials. Mills v. Elec. Auto-Lite Co., 396 U.S. 375, 381 (1970). Corruption of the voting process - unlike price inflation

- is not an economic issue that can be proven with the kind of analysis typically provided by economic experts in Rule

lob-5 fraud-on-the-market cases. As the Supreme Court explained, the Mills test was intended to "avoid the

impracticalities of determining how many votes were affected, and, by resolving doubts in favor of those the statute is

designed to protect, will effectuate the congressional policy of ensuring that the shareholders are able to make an informed

choice when they are consulted on corporate transactions." 396 U.S. at 385. Under ,14ills the loss causation inquiry

focuses on whether the trutlsuetion approved as a result of the proxy vote -- not the "particular defect in the solicitation

materials" caused economic loss to the shareholders. 396 U.S. at 384. The method for proving a defendant's

responsibility for economic harm prescribed by Hills is to establish (a) the materiality of the defendant's false statements

in the proxy solicitation materials, (b) that the proxy solicitation was an essential link in the transaction, and (c) that the

transaction caused economic harm. This is precisely what Dr. Nye demonstrates in his Report.

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personal standard for detecting and measuring the loss suffered by the class here is sound. testable,

accepted, or yields reliable results.

11. Argument

A. Legal Standards for the Admissibility of Expert Opinion Testimony at Trial

Rule 702 of the federal Rules of Evidence states: "If scientific, technical. or other specialized

knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a

witness qualified as an expert by knowledge, skill, experience, training, or education, may testify

thereto in the form of an opinion or otherwise." The Supreme Court interpreted Rule 702 and

articulated general guidelines for its application in Dauber!, 509 U.S. 579, and Kumho Tire Co., Ltd v.

Carmichael, 526 U.S. 137 (1999). Daubert, the seminal opinion, focused on scientific testimony;

Kuinho made clear that Dcwbert 's principles apply to "technical or other specialized knowledge" as

well. Kumho, 526 U.S. at 141, 147-49.

As an initial matter, as recognized by the Supreme Court in Dauber!:

[T]he word "knowledge" connotes more than subjective belief or unsupported

speculation.... [I]n order to qualify as "scientific knowledge," an inference or assertion

must be derived by the scientific method. Proposed testimony must be supported by

appropriate validation-i.e., "good grounds," based on what is known. In short, the

requirement that an expert's testimony pertain to "scientific knowledge" establishes a

standard of evidentiary reliability.

Dauhert at 590; see also id. at n. 9 (equating "evidentiary reliability" with "trustworthiness")

Subsequently, the Court in Kumho expressly extended Dauber7's standard of "evidentiary reliability"

to all experts , not just scientific ones . Kumho, 526 U.S. at 147-48 . As recognized by the Ninth Circuit.

"that standard: `requires a valid ... connection to the pertinent inquiry as a precondition to

admissibility. And where such testimony's factual basis, data, principles, methods, or their application

are called sufficiently into question ... the trial judge must determine whether the testimony has a

LEAD PLAINTIFF'S NOTICE OF MOTION AND MOTION IN LIMINE NO. 5 TO PRECLUDE CHRISTOPHER B. BARRY FROM

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reliable basis in the knowledge and experience of [the relevant] discipline."' Jinro Ain. Inc_ v. Secure

Lm,v., Inc., 266 F.3d 993. 1005 (9th Cir. 2001) ( quoting Kuinho Tire. 526 U.S. at 149).

Also as recouznized by the Ninth Circuit, Daubert invoked "an important constraint on expert

testimony:"

Rule 403 permits the exclusion of relevant evidence if its probative value is

substantially outweighed by the danger of unfair prejudice, confusion of the issues. or

misleading the jury...... Judge Weinstein has explained: -Expert evidence can be both

powerful and quite misleading because of the difficulty in evaluating it. Because of this

risk, the judge in weighing possible prejudice against probative force under Rule 403 ...

exercises more control over experts than lay witnesses."

Jinro, 266 F.3d at 1005 (quoting Daubers, 509 U.S. at 595).

Applying these principles in Jinro, the Ninth Circuit held that the district court abused its

discretion in admitting testimony of a purported expert where it was not reliable and, in any event, it

was unduly prejudicial and should have been excluded under Rule 403.

Barry's opinions likewise fail to satisfy these requirements for admissibility as they relate to

the accounting and causation issues raised by Lead Plaintiff's well-qualified experts, Robert Berliner

and Blaine Nye.

B. Barry Is Not Qualified to Render Reliable Opinions

Barry's testimony on materiality is in direct response to Berliner's testimony regarding

materiality from an accounting standpoint . Barry is admittedly not qualified as an expert in

accounting, and for that reason, his testimony about the materiality determinations made by certified

public accountants in this case, and his own materiality conclusions based thereon, are not reliable

accounting, opinions, and are therefore inadmissible at trial. See United Stales v. MaraBelles, 724 F.2d

1374. 1381-82 (9th Cir. 1984) (citing Rule 702). While courts should be "i tindful of Rule 702 and

[the] case law's recognition of practical knowledge and experience as providing an adequate basis for

expert testimony[, where the] deposition testimony of [the witness ] indicates that [his] practical

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knowledge does not provide [him] with the requisite expertise in auditing or accounting," as here, the

expert testimony should be excluded. See Garnac Grain Co., Inc. v. Blackley. 932 F.2d 1563, 1566-67

(8th Cir. 1991). Where, as here, the expert testifies in such a way that indicates he has "very little

knowledge, understanding or experience"' in the field on which his testimony is based, the testimony

should be excluded. Diviero vv. Uniroyal Goodrich Tire Co., 919 F. Supp. 13 5 3)... 1357-58 (D. Az.

1996) (citing Clear v. Burlington A,. R.R. Co.. 29 F.3d 499, 502 (9th Cir. 1994)). The witness's

expertise and experience must "fit" the facts of the case. Id. (citing Dauubert; Perkins v. t'olksrw agon of

Am., Inc., 596 F2d 681; 682 (5th Cir. 1979)). Where an expert's limited experience or other

qualifications prevent his opinions from fitting the requirements of the discipline in which he is

opining, as here, he does not satisfy the reliability requirement for expert testimony. See Humphreys

v. Regents of the Univ. of Cal.. No. C 04-03808, 2006 WL 1867713 (N.D. Cal. July 6, 2006); Garnac

Grain. v, Blackley, 932 F.2d at 1567 (inability to identify generally accepted accounting principles

indicative that witness not an expert in accounting); see also Jinro, 266 F.3d at 1005-06 (district court

abused discretion in admitting testimony of proffered expert whose purported qualifications amounted

to little more than his limited exposure from his work experience, finding that '-[hJe did not have the

legal, business or financial expertise" to testify as an expert on the matter).

Here, in sharp contrast to Lead Plaintiff's expert, Robert Berliner, who is a certified public

accountant and who is undisputably qualified, Barry admits he is not an expert in accounting or

auditing. Barry admits that he would not consider himself an expert in accounting. Barry could not

identify what generally accepted accounting principles address the question of materiality at issue in

this case. He even admits that he used his own, personal, "understanding" of what materiality means.

Barry's admissions demonstrate that he is not qualified to render reliable accounting opinions.

Likewise, Barry's testimony is tantamount to an admission that he has no idea what the

standard for causation is in connection with a claim for a misleading proxy solicitation under Section

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14(a). Further- while Barry acknowledges that it would be "easy" to measure the amount of artificial

inflation that was transferred from HBOC shares to McKesson shares by operation of the exchange

ratio that was the subject of Bear Stearns' fairness opinion, he also admits that he is not offering an

opinion about that. Barry did not conduct an event study and he says nothing about the statistical

signi ficance of the corrective disclosures in this case . Barry's knowledge about the causation issue in

this case has no indication of reliability. In short, Barry has not shown that he possesses the technical

or other specialized knowledge necessary for detecting and measuring the harm suffered by the class

here.

Barry's accounting and causation opinions are not helpful to the trier of fact. The standards

governing the admissibility of expert testimony at trial require the Court to separate expert evidence

that is based on "good grounds from subjective speculation that masquerades as scientific knowledge."

Glasteller v. Novartis Pharm. Corp., 252 F.3d 986, 989 (8th Cir. 2001) (internal quotations omitted).

Barry's personal unqualified opinions are not admissible Rule 702 expert testimony. Permitting

Barry' s accounting and causation opinions to be presented to the trier of fact would only serve to

confuse the issues, mislead the fact-finder as to the appropriate standards, and otherwise cause unfair

prejudice to the class. For all of these reasons Rule 403 of the Federal Rules of Evidence requires

exclusion of Barry's opinions in response to Berliner and Nye.

C. Barry Uses The Wrong Standards, Tainting His Methodology With

Flaws That Make His Opinions Speculative And Unreliable

In exercising its gate-keeping function, a district court should make "a preliminary assessment

of whether the reasoning or methodology underlying the testimony is scientifically valid and of

whether that reasoning or methodology properly can be applied to the facts in issue." Daz.ibert, 509

U.S. at 592-593. Thus, even if Barry were qualified as an expert in fields of accounting and Section

14(a) causation -- which the evidence demonstrates he is not -- his opinions are still not based on

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relevant methodology and are therefore speculative and lacking in reliability. See id., Concord Bout

Corp. v. Brunswick Corp.. 207 1- 3d 1039, 1056-57 (8th Cir.2000) (citing Virgin Atl. Airivoys Ltd. v.

British Airrw-a 's PLC, 69 F. Supp. 2d 571. 580 (S.D.N.Y. 1.999); T' eisgram v. Ifarlev Co., a28 U.S.

440, 120 S.Ct. 1011, 1015, 1020 (2000); Brooke Group Ltd v. Brown & t 'illiamson Tobacco Corp..

509 U.S. 209, 242 (1993)); see also Dairy Farmers ofrlna., Inc. v. Travelers Ins. Co.. 391 F.3d 936.

943 (8th Cir.2004); Burlington N. R.R. Co.. 29 F.3d at 502-03.

In addition, the expert's opinion must be excluded if it is not based on facts or data of a type

reasonably relied upon by experts in the field in forming inferences or opinions upon the relevant

subject. See In re Imperial Credit Incurs., Inc. Sec. Litig., 252 F. Supp. 2d 1005, 1013-14 (C.D. Ca.

2003).6 With respect to the issue involved here, Barry admits that he has no idea what the generally

accepted accounting principles are addressing materiality. He could not testify about the accounting

or auditing methods applicable to materiality determinations.

I don't remember the details of that.... I can't cite for you here's a specific set of

accounting things that you have to do to conclude on materiality . ... I can't tell you

what specific accounting methodologies have to be applied in reaching that

conclusion. ... I'm not specifically trying to say that I should do a materiality

analysis and here it is.

See Ex. 2 (Barry N.T. at 267:5 -272:24 (emphasis added)). Barry's opinions concerning materiality are

not based on accounting or other methodology recognized by generally accepted accounting

principles. Barry admits he did not perform an accounting materiality analysis. Barry even admits

that the methodology he used for reaching his materiality opinions was based on "using ... my

understanding of materiality." Id. Barry's materiality opinions are nothing other than his personal

commentary on the evidence.

"Expert testimony is useful as a guide to interpreting .., facts, but it is not a substitute for them." Brooke Group Ltd., 509

U.S. at 242. A court should not admit opinion evidence that "is connected to existing data only by the ipso dixit of the

expert." Gen_ Elec. Co. v. Jo/ncr. 522 U.S. 136, 146 (1997) (citing Turpin v. Merrill Dow Pharms_, Inc., 959 F.2d 1349,

1360 (6th Cir. 1992)).

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Barry's opinions on causation in this Section 14(a) case are equally unreliable because he

similarly fails to utilize, and evidently does not even know, the standards for detecting and measuring

causation for a Section 14(a) claim. Ex. 2 (Barry N.T. at 37:2-39:2, 64:2-24). Ile could not articulate

what harm the statute seeks to protect against and he could not articulate how one detects and

measures the harm caused by a shareholder vote tainted by a false and misleading proxy statement. Id.

He did not perform an event study, a failure fatal to the admissibility of his loss causation opinions.

See, e.g., Imperial Credit, 252 F. Stipp. 2d at 1015-16; In re Oracle Sec. Lrtig., 829 F. Supp. 1176,

1181-82 (N.D. Ca. 1993). Barry criticized Nye for failing to measure the artificial inflation created by

Bear Stearns' false statements, showing that Barry failed to grasp that the Section 14(a) claim in this

case is not based upon Bear Stearns having created artificial inflation by its false fairness opinion, but

rather having caused the transfer of artificial inflation to McKesson shareholders. Id. at 54:11-16.

And with regard to the opinions of Blaine Nye that detect and measure the transfer of inflation from

HBOC shares to McKesson shares by operation of the exchange ratio, Barry admits he offers no

opinion on that. Id. at 164:3-166:1. Barry then injects his own personal standard, without bases in

Section 14(a) principles, and offers his opinions based thereon. Id. at 166:21-167:14 (seeking to link

"effects on stock prices" with "accounting information that Bear Stearns was aware of when it issued

its fairness opinion")

Barry fails to provide any bases in law or economic theory for applying such a standard to the

task of detecting and measuring causation and c armages in connection with a Section 14(a) claim.

Furthermore, he fails to measure the undisputed artificial inflation in HBOC stock that existed at the

time of the merger. Indeed, as Lead Plaintiff has demonstrated in its memoranda in opposition to the

motion for summary judgment and in opposition to the motion to strike the declaration of Blaine Nye,

Section 14(a) losses for material false statements such as a :false fairness opinion are those that flow

from the transaction itself. See Mills, 396 U.S. at 388 ("Where the defect in the proxy solicitation

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relates to the specific terms as of the merger the district court might appropriately order an accounting

to ensure that the shareholders receive the value that was represented as coming to them."). Barry

admits in his deposition testimony, on the contrary, that his standard is not based on methods,

standards and principles for detecting and measuring the harm caused by a false and misleading proxy

statement used to solicit shareholder votes for a merger. Id. at 64:2-24. Nowhere does Barry explain

how his personal standard for detecting and measuring the loss suffered by the class here is sound,

testable, accepted, or capable of yielding reliable results. Rule 702, Fed. R. Evid, Advisory

Committee Notes to 2000 Amendments (citing O'Conner v. Commonwealth Edison Co., 13 F.3d 1090

(7th Cir. 1994)); see Turpin, 959 F.2d at 1360 ; Gen. Elec, v. Joiner, 522 U.S_ at 146. Therefore

Barry's accounting and causation opinions should be excluded as unreliable. Id.

D. Barry's Op inions Improperly Usur p the Role of the Court

Generally, the use of expert testimony is not permitted if it will. "usurp either the role of the

trial judge in instructing the jury as to the applicable law or the role of the jury in applying that law to

the facts before it." United States v. Bilzerian, 926 F.2d 1285, 1294 (2nd Cir. 1991); accord United

States v. Scop, 846 F.2d 135, 140 (2d Cir.), rev'd in part on reh'g on other grounds, 856 F.2d 5 (2d

Cir.1988); Marx & Co., Inc. v. Diners' Club, Inc., 550 F.2d 505, 510-11 (2d Cir.), cert. denied, 434

U.S. 861 (1977). Expert testimony cannot be used to guide the jury as to whether something is legally

significant. McHugh v. United Serv. Auto. Assn, 164 F.3d 451, 455 (9th Cir. 1999); see Crow Tribe of

Indians v. Racicot, 87 F.3d 1039, 1045 (9th Cir. 1996) (the role of experts is to interpret and analyze

factual evidence in light of their scientific , technical or other specialized knowledge ); Maffei v. N. Ins.

Co. ofNew York, 12 F.3d 892, 898-99 (9th Cir. 1993) (an insurance expert's declaration that sulphur

dioxide cloud constituted a "hostile fire" as described in insured's policies was improper expert

testimony); Aguilar v. Intl Longshoremen's Union Local No. 10, 966 F.2d 443, 447 (9th Cir. 1992);

Elsayed Mukhtar v. Cal. State Univ., Hayward, 299 F.3d 1053, 1066 fn. 10 (9th Cir. 2002); McHugh,

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164 F.3d at 454: see also The Pinal Creek Group vv. Newinonl Mining Corp., 352 F. Stipp. 2d 1037,

1042-43 (D. Az. 2005). In addition . when an expert ` -undertakes to tell the jury what result to reach.

this does not aid the jury in making a decision, but rather attempts to substitute the expert's,' udgment

for the jury's." United States v. Duncan, 42 F.3d 97. 101 (2d Cir. 1994). Experts are not permitted to

invade the province of the court, and where their opinions do so, they are inadmissible at trial.

juryBarry's accounting and causation opinions invade the province of the judge to instruct the J

as to legal meaning. For example, Barry's standard of accounting materiality ("fundamentally what it

amounts to is that if this thing is not likely to affect the value or the price , is not likely to have an

impact, then it's probably not material. [It is a question oft whether or not there is a significant effect

or an appreciable effect... a material price effect of the information that they had at the time." Ex. 2

(Barry N.T. at 267:5-272:24)), is not correct either as a statement of law , see TSC Indtis. Inc. v.

Norihwaoy Inc., 426 U.S. 438, 449 (1976), or GAAP. S'ee Report of Robert Berliner at l-1 through 1-9,

annexed to the declaration of Robert Berliner in opposition to motion for summary judgment

(Discussing Staten-tent of Financial Accounting Concepts No. 2. Qualitative Characteristics of

Accounting Information ("FASCON 2"), and Staff Accounting Bulletin 99, Materiality ("SAB 99"))

(Docket No. 1600). Barry offers no basis for this standard, and it is not at all related to FASCON 2 or

SAB 99.

Likewise, while the causation standard for a Section 14(a) claim is articulated in Mills, 396

U.S. at 385 (when, as here, a proxy solicitation is an essential link in accomplishing a transaction such

as a corporate merger, only proof of materiality is required to establish "a causal relationship between

the violation and the injury for which he seeks redress"), Barry's causation standard is one he

misappropriates from a substantially different claim without bases in any authority. Id. at 166:21-

167:14 (seeking to link "effects on stock prices" with "accounting information that Bear Stearns was

aware of when it issued its fairness opinion"); see also Barry Report, supra, at ^'1 I I e.. 50. Indeed, in

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his declaration submitted in support of Bear Stearns' summary judgment motion. Barry contradicts his

own standard by asserting that proof of causation is impossible here under any "valid economic

t ieoiy." See Barry Decl. at 2. But Barry never performs one generally accepted procedure to detect

and measure l osses here , and unlike Lead Plaintiffs expert. Blaine Nye. did not conduct an event

I study.

Barry nevertheless offers accounting and causation opinions in such a way as to influence the

jury to thinking. that his materiality and causation standards have some sort of legal meanin4g, and in so

doing, he steps far beyond his proper role to interpret and analyze factual evidence, and improperly

invades the province of the court to instruct the jury on the legal meaning of accounting standards

addressing materiality and methods for detecting losses in securities cases. Barry's testimony is not

admissible because it will usurp the role of the Court. Bilzerian, 926 F.2d at 1294; accord Scop, 846

F.2d at 140; Marx, 550 F.2d at 510-11. Such opinions tend only to cause confusion of the issues,

mislead the fact-finder and otherwise cause unfair prejudice, and are also excludable under Rule 403.

For these reasons too, Barry's accounting and causation testimony is not admissible at the trial of this

case.

III. Conclusion

For the reasons stated above, Lead Plaintiffs motion for an order excluding Barry from

testifying in response to Berliner and Nye at trial should be granted. Barry lacks sufficient

qualifications in accounting. Barry also utilized improper accounting and causation standards, tainting

his methodologies with flaws that make his opinions speculative and unreliable. Barry effectively

invades the province of the Court. Barry's opinions with respect to GAAP and causation violate Rule

702 of the F ederal Rules of Evidence , are not admissible at trial under Daubert v. Merrill Dow

Pharmn., Inc., and its progeny, and will not assist the trier of fact to understand the evidence or

LEAD PLAINTIFF'S NOTICI' OF MOTION AND MOTION IN LIMINE NO ^ TO PRECLUDE Cl-IRISTOPIiI R B BARRY


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determine facts in issue . Barry's testimony on GAAP and causation only serves to confuse the issues

and mislead the fact-finder, and is also excludable for that reason under Rule 403.

Dated: July 30, 2007 Respectfully submitted,

BARRACK, RODa & BACINE

By:LE NA D BARRACKM. R ARD KffMINSJEFFREY A. BARRACKBETH R. TARGAN3300 Two Commerce Square2001 Market StreetTel: (215) 963-0600Fax: (215) 963-0838

-and-STEPHEN R. BASSER (Bar No. 121590)402 West Broadway, Suite 850San Diego, CA 92101Tel: (619) 230-0800Fax: (619)2')0-1874

-and-

BERNSTEIN LITOWITZ BERGER& GROSSMANN LLP

DAVID R. STICKNEYTIMOTHY A. DeLANGENIKI L. MENDOZABENJAMIN GALDSTON12481 High Bluff Drive, Suite 300San Diego, CA 92130Tel: (858) 793-0070Fax: (858) 793-0323

-and-MAX W. BERGERROCHELLE FEDER HANSEN1285 Avenue of the AmericasNew York, NY 10019Tel: (212) 554-1400Fax: (212) 554-1444

Attorneys for Lead PlaintiffThe New York State Common RetirementFund and Co-Lead Counsel for the Class

LEAD PLAINTIFF'S NOTICE OF MOTION AND MOTION IN LIMINE NO. 5T0 PRECLUDE. CHRISTOPHER B. BARRY FROM

OFFERING ACCOUNTING AND CAUSATION OPINIONS AT TRIAL.


18

Documents

BERNSTEINLITOWITZBERGER BARRACK,RODOS&BACINE …securities.stanford.edu/filings-documents/1004/MCK... · NIKI L. MENDOZA (BarNo. 214646) BENJAMINGALDSTON(BarNo. 211114) 12481 HighBluffDrive,