NOT PRECEDENTIAL

                      UNITED STATES COURT OF APPEALS
                           FOR THE THIRD CIRCUIT


                                      No. 12-2130


                                   PURE EARTH, INC.

                                           v.

                                   GREGORY W. CALL

                                           v.

        PURE EARTH, INC.; MARK ALSENTZER; BRENT KOPENHAVER

                                    Gregory W. Call,
                                                       Appellant


                   On Appeal from the United States District Court
                       for the Eastern District of Pennsylvania
                              (D. C. No. 2-09-cv-04174)
                    District Judge: Honorable Legrome D. Davis


                               Argued on May 16, 2013

              Before: SLOVITER, FUENTES and ROTH, Circuit Judges

                            (Opinion filed: July 19, 2013)

Natalie D‘Amora, Esquire
John P. Kahn, Esquire
David H. Marion, Esquire
Stella M. Tsai, Esquire (Argued)
Archer & Greiner
1650 Market Street
One Liberty Place, 32nd Floor
Philadelphia, PA 19103-7393
                            Counsel for Appellant


Andrew A. Chirls, Esquire (Argued)
Haines & Associates
1835 Market Street, Suite 2420
Philadelphia, PA 19103

                            Counsel for Appellee




                                       OPINION


ROTH, Circuit Judge:

       This appeal arises out of Gregory W. Call‘s claims of securities fraud, breach of

contract, and breach of warranty by Pure Earth, Inc., its CEO Mark Alsentzer, and its

CFO Brent Kopenhaver (collectively, the PEI Defendants). The only question on appeal

is the narrow issue of the District Court‘s exclusion of the testimony of Call‘s expert,

Stephen Scherf. For the reasons that follow, we conclude that the District Court

improperly excluded Scherf‘s testimony. We therefore will remand the case to the

District Court for further proceedings.

I.     Background1

       Pure Earth, Inc., (Pure Earth) is a publicly traded waste-management company; its

stock, however, is not widely traded. Pursuant to a Stock Purchase Agreement executed

in March 2007, Call agreed to sell three companies under his control to Pure Earth in

1
 We write primarily for the parties, who are familiar with the facts of this case.
Therefore, we will set forth only those facts necessary to our analysis.

                                             2
exchange for Pure Earth stock. Call agreed to the exchange based on, among other

things, a representation made by Alsentzer and Kopenhaver that at that time there were

no government investigations pending against Pure Earth or its subsidiaries. This

representation was false because the New York City Business Integrity Commission

(BIC) had been investigating one of Pure Earth‘s largest subsidiaries for alleged

connections to organized crime. In November 2007, the BIC denied the subsidiary‘s

renewal of its registration, effectively revoking its license to operate in the waste-

management industry. As a result, Pure Earth‘s stock price began to fall dramatically.

The stock is now almost worthless.

       In September 2009, the PEI Defendants filed suit against Call, alleging that he had

breached the Stock Purchase Agreement. Call filed counterclaims, asserting securities

fraud in violation of § 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5

and breach of contract and breach of warranty claims under Pennsylvania law.

       Call retained Stephen Scherf as an expert.2 Scherf produced a report summarizing

the terms of the Stock Purchase Agreement and its subsequent amendments. The report

highlighted the misrepresentations concerning the BIC investigation and discussed the

historical stock price of Pure Earth. In his report, Scherf concluded that ―[a]fter the

market learned that Pure Earth has [sic] lost its license to haul waste in New York, the

stock price gradually decreased to the current trading price of just $0.17.‖



2
 Scherf is a CPA and has a Master of Science in Finance. Among his qualifications, he
lectures on business valuation and economic damages and has testified frequently as an
expert witness.

                                              3
       The District Court found that Scherf‘s report was unreliable under Federal Rule of

Evidence 702 because it did not establish the elements of loss causation and damages.3

The court therefore excluded the report. As to loss causation, the District Court held that

the report‘s fundamental shortcoming was its failure to establish how much Pure Earth‘s

stock was overvalued in March 2007 as a result of the misrepresentation made by

Alsentzer and Kopenhaver. The District Court held that, for the expert testimony on loss

causation to be admissible, Scherf needed to show that the decline in Pure Earth‘s stock

value was a ―consequence of dissemination to the market of information regarding the

true valuation that caused the subsequent deflation of the stock price.‖ The court found

that Scherf‘s report failed in this respect because he did not establish how the decline was

attributable to the misrepresentation. The court also held that Scherf‘s loss causation

analysis did not use the standards or controls that were generally accepted in the scientific

community because he did not ―develop a model of the normal returns in the subject

stock price based on references to independent data that captures market and other

developments that are independent of the events being tested.‖

       In addition, the District Court held that Scherf‘s report was inadmissible to

calculate the damages sustained by Call. The District Court held that, due to his failure to

isolate the causal factors leading to the stock‘s then-trading value of $0.17, Scherf had set

forth no evidence showing that his damages assessment was accurate.




3
 The District Court made no ruling on Scherf‘s general qualifications to speak as an
expert on non-typical loss causation or damages.

                                              4
       During a two-day bench trial, the District Court excluded additional testimony

proffered by Call on the subject of loss causation and damages on relevance grounds.

Ultimately, the District Court held that the PEI Defendants could not prevail on any of

their claims against Call. As to Call‘s counterclaim, the court found that the PEI

Defendants engaged in fraudulent conduct in connection with the sale to Call of the PEI

stock but that Call could not succeed on his claims against the PEI Defendants because he

could not establish damages on his securities fraud and common law claims, nor could he

establish loss causation on his securities fraud claim. Therefore, neither side was entitled

to financial recovery.

       Call appealed.

II.    Discussion4

       Call contends that the District Court improperly excluded the Scherf report under

Federal Rule of Evidence Rule 702 by applying the wrong legal standard in its loss

causation and damages analysis. We agree. As a result, we will reverse the District

Court‘s decision excluding Scherf‘s testimony.

       We ordinarily review a district court‘s decision to exclude evidence under Federal

Rule of Evidence 702 for an abuse of discretion. Heller v. Shaw Indus., Inc., 

, 151 (3d Cir. 1999). However, our review of whether a district court has properly

followed Rule 702 as prescribed in Daubert v. Merrell Dow Pharmaceuticals, Inc., 

(1993), is plenary. 

Court had subject matter jurisdiction under 28 U.S.C. § 1331. We have
appellate jurisdiction under 28 U.S.C. § 1291.

                                             5
       A.     Rule 702

       Rule 702 provides that a witness may be qualified to testify as to his expert

opinion if his ―scientific, technical, or other specialized knowledge will help the trier of

fact to understand the evidence or to determine a fact in issue[.]‖ Fed. R. Evid. 702.

Rule 702 and Daubert require a district court to ensure that ―expert testimony is not only

relevant, but reliable.‖ ZF Meritor, LLC v. Eaton Corp., 

, 291 (3d Cir.

2012). ―As we have made clear, ‗the reliability analysis [required by Daubert] applies to

all aspects of an expert‘s testimony: the methodology, the facts underlying the expert‘s

opinion, [and] the link between the facts and the conclusion.‘‖ 

) (alterations in original). The standard for determining reliability ―is not

that high.‖ In re Paoli R.R. Yard PCB Litig., 

, 745 (3d Cir. 1994). Thus,

plaintiffs offering expert testimony do not ―have to prove their case twice—they do not

have to demonstrate to the judge by a preponderance of the evidence that the assessments

of their experts are correct, they only have to demonstrate by a preponderance of

evidence that their opinions are reliable.‖ 

    Securities Fraud

       Securities fraud is banned by § 10(b) of the Securities Exchange Act of 1934 and

SEC Rule 10b-5. McCabe v. Ernst & Young, LLP, 

, 424 (3d Cir. 2007). A

private right of action for securities fraud has six elements: (1) a material

misrepresentation or omission; (2) scienter; (3) a connection with the purchase or sale of

a security; (4) reliance—also known as transaction causation; (5) economic loss—i.e.




                                              6
damages; and (6) loss causation—a causal connection between the material

misrepresentation and the loss. 

loss causation inquiry asks ―whether the misrepresentation or omission

proximately caused the economic loss.‖ 

(citing Semerenko v.

Cendant Corp., 

, 185, 187 (3d Cir. 2000); see also EP MedSystems, Inc. v.

EchoCath, Inc., 

, 884 (3d Cir. 2000) (noting that loss causation requires a

―practical approach, in effect applying general causation principles‖). In the Third

Circuit, the loss causation analysis differs between typical and non-typical § 10(b) claims.

. A typical § 10(b) claim involves a situation in which a

plaintiff claims that the defendant made material public misrepresentations or omissions

in order to affect the price of a publicly traded stock. 

This is the well-

known ―fraud on the market‖ scenario alleged in the vast majority of securities fraud

cases. See, e.g., 

(misstating earnings reports in a public

statement). On the other hand, a non-typical case involves a misrepresentation or

omission that directly induces another party to enter into a private transaction. See, e.g.,

(individualized misrepresentation inducing investors to

purchase stock).

       We distinguish between typical and non-typical § 10(b) cases because public

announcements are made to the market at large in a typical § 10(b) claim, but in a non-

typical § 10(b) claim, private misrepresentations are made to induce a particular

individual to buy or sell securities. Thus, typical versus non-typical cases relate to the

nature of a plaintiff‘s reliance in different ways. In a typical § 10(b) case, the plaintiff‘s


                                               7
reliance is on a misstatement that is made to artificially inflate the pricing of a security in

the public markets. 

. Therefore, to prove loss causation in a

typical § 10(b) case, the plaintiff must show that his losses are related specifically to the

market‘s discovery of the misrepresentation and the corresponding decrease in price due

to that misrepresentation. 

non-typical case, the plaintiff‘s reliance

interest is different because he acts due to a personalized misrepresentation. See 

the personalized misrepresentations which are made in a non-typical case

do not implicate larger market forces, this Court has recognized that ―the factual

predicates of loss causation fall into less of a rigid pattern‖ in non-typical cases. 

the District Court correctly noted, this is a non-typical § 10(b) case because it

involves a specific misrepresentation made to Call to induce him to enter into a securities

transaction. However, the District Court erred because it used a typical § 10(b) analysis

when it excluded the Scherf report as unreliable. The District Court held that the Scherf

report would have been admitted if it could reliably show that Pure Earth‘s stock was

―overvalued‖ and ―that the subsequent declines [were] the consequence of dissemination

to the market of information regarding the true valuation that caused the subsequent

deflation of the stock price.‖ By framing the issue in this manner, the District Court

imposed a burden of proof for loss causation seen in typical securities fraud cases – it

required evidence ―of other larger market dynamics to show a causal connection between

the misrepresentations and the decline in the stock prices.‖




                                               8
       But this is a non-typical case, so proving loss causation is less complex. Scherf‘s

report needed only to offer a reliable conclusion that the misrepresentation regarding the

BIC investigation ―negatively affected the value‖ of the Pure Earth stock. 

(citation omitted). His loss causation analysis did not need to employ the

detailed market studies seen in typical securities fraud cases.

       Looking at this case through a non-typical lens, Scherf‘s report would assist the

trier of fact to understand loss causation. Although there may have been several causes

that contributed to the decline in the value of Pure Earth‘s stock, Scherf needed to show

only that the misrepresentation regarding the existence of the BIC investigation was a

proximate cause—not the sole cause—of the loss. 

; Chattman

v. Toho Tenax Am., Inc., 

, 352 (6th Cir. 2012) (noting that multiple

proximate causes of an injury are possible under the common law of torts). Scherf‘s

report would appear to make such a showing, and Scherf has the qualifications to make

such a report. Therefore, Scherf‘s report should have been admitted as expert evidence

on loss causation.

       The District Court also erroneously inserted typical § 10(b) requirements in its

damages analysis. Damages in a § 10(b) case are usually measured using the ―out-of-

pocket rule,‖ which calculates damages as ―the difference between the price paid for a

security and the security‘s ‗true value‘‖ at the time of purchase. Sowell v. Botcher &

Singer, Inc., 

, 297 (3d Cir. 1991). Similarly, damages in a breach of

contract case are to be measured as of the date of the breach. Scully v. US Wats, Inc., 

, 510 (3d Cir. 2001) (applying Pennsylvania law).


                                              9
       Here, the District Court held that Scherf needed to isolate the causal factors that

contributed to Call‘s loss in order to determine the true value of the Pure Earth stock. In

other words, the District Court wanted Scherf to perform a study ruling out other market

factors that contributed to the decline in value of Pure Earth‘s stock. This was improper

for two reasons. First, the District Court conflated the loss causation analysis (which

focuses on evidence of a connection between the misstatement and decline in stock

value) with a damages analysis (which focuses on the stock‘s true value on the day it was

purchased). Second—and more importantly—the District Court applied standards

appropriate only in a typical § 10(b) case by holding that a fraud on the market-style

model was relevant to the damages analysis in a non-typical § 10(b) case.

       The District Court overcomplicated the damages analysis. To establish damages,

Call needed to prove what the value of the PEI stock in March 2007 would have been if

the facts of the BIC investigation were known at that time. Call had the burden of

proving damages and those damages could not be ―too speculative, vague or contingent

and are not recoverable for loss beyond an amount that evidence permits to be established

with reasonable certainty.‖ Spang & Co. v. U.S. Steel Corp., 

, 877 (Pa.

1988) (quoting Restatement (Second) of Contracts § 352; Murray on Contracts, § 226).

Again, the Scherf Report could have assisted the trier of fact to understand the factors

involved in valuation of the stock in order to determine the amount of damages. It should

therefore have been admitted as expert evidence on damages.




                                             10
III.   Conclusion

       For the foregoing reasons, we will reverse the judgment of the District Court and

remand this case for a new trial and further proceedings consistent with this opinion.




                                            11
Pure Earth Inc. v. Gregory W. Call, No. 12-2130
SLOVITER, Circuit Judge, dissenting.


        Because I believe that it was not an abuse of discretion
for the District Court to conclude that the portions of Scherf’s
report related to causation and damages were unreliable, I
respectfully dissent.

       The majority applies plenary review to the District
Court’s decision to exclude portions of Scherf’s report. That
standard is only appropriate when reviewing a district court’s
interpretation of Federal Rule of Evidence 702. See Heller v.
Shaw Indus., Inc., 

, 151 (3d Cir. 1999). The
majority, however, does not take issue with the District
Court’s interpretation of Rule 702, but with its interpretation
of securities law.

       Securities law is irrelevant here. The appropriate
measure for the reliability of expert testimony does not
depend on what the testimony is being introduced to prove,
but on whether the expert reaches his/her conclusions by
applying “reliable principles and methods” to the facts in the
case. FED. R. EVID. 702. Scientific methods that would be
unreliable in a typical securities fraud case do not become
reliable because they are being used in a non-typical case.
Thus, the opinion’s lengthy discussion of securities law is
immaterial, and its use of plenary review is erroneous.

       We must instead review the District Court’s decision
to exclude Scherf’s expert testimony for abuse of discretion.
Scherf’s conclusions were based on the correlation . . .
between the misrepresentations [made to Call]” and the
subsequent decline in the price of Pure Earth’s stock. App. at
166. Correlation is not causation. As Scherf himself noted,
“[i]n order to ensure that the fluctuations in stock price
experienced by Pure Earth were not the result of outside
factors” the report needed to control for other variables. App.
at 168. The report, however, only compared the trajectory of
Pure Earth’s stock price to the Dow Jones Industrial Average
and to waste-management companies with dramatically
different business models. The District Court did not abuse
its discretion by concluding that such inapt comparisons
undermined the reliability of Scherf’s testimony and therefore
justified excluding it under Rule 702.1

       For these reasons, I would affirm the District Court.


1
  As the majority notes, Call was not required to provide a
market study in this, a non-typical securities fraud case. He
was, however, required both to prove that the
misrepresentation was a proximate cause of the loss and to
establish damages as a result of this misrepresentation. Call
could have introduced a different expert report to achieve
these ends. For example, an expert familiar with waste-
hauling companies might have been able to reliably assess
Pure Earth’s value both with and without a New York City
hauling license. Such an assessment would not have
depended on Pure Earth’s stock price and so would not have
had to account for other causes of the stock’s decline.
Scherf’s report, however, drew conclusions based on Pure
Earth’s stock price. It was appropriate for the District Court
to conclude that in order for such a study to be reliable, it had
to account for other market factors that could have
contributed to the stock’s decline.




                                2