Filed: Sep. 08, 2008
Latest Update: Feb. 21, 2020
Summary: 1, Stock options give the holder the ability to purchase a company, stock at a set price.share in 1998. Moreover, in this, case, despite ample opportunity to do so, House made no request for, a voir dire until Sherwin began his testimony.Cf. United States v. Brien, 59 F.3d 274, 276-77 (1st Cir.
United States Court of Appeals
For the First Circuit
No. 07-2789
FIRST MARBLEHEAD CORPORATION,
Plaintiff, Appellee,
v.
GREGORY J. HOUSE,
Defendant, Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Patti B. Saris, U.S. District Judge]
Before
Torruella, Lipez, and Howard,
Circuit Judges.
Peter N. Wang, with whom Yonaton Aronoff and Foley & Lardner
LLP, was on brief for appellant.
Kenneth J. DeMoura, with whom Michael D. Riseberg, Colleen M.
Nevin, and Adler Pollock & Sheehan P.C., was on brief for appellee.
September 8, 2008
TORRUELLA, Circuit Judge. Gregory J. House, a former
employee of First Marblehead Corporation, was unable to exercise
his incentive stock options because he failed to do so within three
months of his resignation. In a set of claims removed to federal
district court under diversity jurisdiction, House alleged, inter
alia, that he had relied on First Marblehead's negligent
misrepresentations that the options would be viable for ten years.
A jury found that House had reasonably relied on those negligent
representations. However, the jury concluded that House would not
have exercised those options during the three months after his
resignation and thus awarded no damages. House now appeals,
challenging the admission of certain expert testimony and the
district court's denial of his motion for a new trial. After
careful review, we conclude there was no error and affirm the
jury's verdict.
I. Background
The background facts in this case are generally
undisputed. In 1996, House was recruited by his friend and First
Marblehead Chief Executive Officer ("CEO"), Daniel Meyers, to work
at First Marblehead, a start-up student loan servicing company.
House was offered a position as President of First Marblehead Data
Services. House accepted the job and as part of his employment, he
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was granted incentive stock options to purchase 2,500 shares at a
strike price of $32 per share.1
First Marblehead's stock option plan ("the Plan")
provided that the options would have a duration of ten years.
Unbeknownst to House, the Plan also had a provision that in the
event of an employee's departure from the company, the options
would expire within three months of the date of resignation. House
attested, and First Marblehead does not seriously challenge, that
he did not receive a copy of either the Plan or the written
document memorializing the grant of the options. Furthermore,
communications between House and various First Marblehead
executives -- CEO Myers, Executive Vice President Ralph James, and
outside general counsel, Rod Hoffman -- reiterated that the options
would be good for ten years and made no mention of the three-month
expiration provision in the event of resignation.2
1
Stock options give the holder the ability to purchase a company
stock at a set price. It would have cost $80,000 to exercise all
2,500 options.
2
Indeed, Hoffman testified that at some point, he realized that
he had omitted the three-month expiration provision from the Plan.
He authored a "Corrections and Amplifications" memo, which clearly
stated that in the event of a resignation, the options must be
exercised within three months:
I found that I had misstated one of the terms of the
option in the summary memo . . . . Mea culpa. A copy of
that revised memo is attached . . . . You will note that
the change is to Section II.4 which describes what
happens to the options upon termination of employment.
Although Hoffman testified that he delivered this revised memo to
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In February 1998, House resigned from First Marblehead;
no one at the company mentioned the three-month period within which
he would have to exercise his options. In 2001, First Marblehead
acquired the assets of a nonprofit student loan company, TERI. The
acquisition allowed First Marblehead to increase its loan volume
significantly. Due in part to the success of the TERI acquisition,
First Marblehead became a publicly traded company in 2003, which
resulted in a dramatic increase in the value of the company's
stock. Several months later, after hearing about the company's
successful initial public offering, House contacted Meyers and
inquired about exercising his options. House was then informed
that the options had expired in May 1998, three months after his
resignation.
House and First Marblehead initially attempted
negotiation; First Marblehead averred that the options had expired
and House asserted that his options were worth $7 million. At some
point, First Marblehead sought a declaratory judgment in
Massachusetts Superior Court that the options had expired three
months after his resignation. On the basis of diversity
jurisdiction, House removed the action to federal court and
asserted two counterclaims: breach of contract and promissory
estoppel. House then added a third claim for negligent
the company, the parties generally agree that House never received
it.
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misrepresentation. On First Marblehead's motion for summary
judgment, the district court dismissed the case entirely. On
appeal, we upheld summary judgment on the breach of contract and
promissory estoppel claims, but vacated and remanded for further
proceedings on the negligent misrepresentation claim. First
Marblehead Corp. v. House, 473 F.3d 1 (1st Cir. 2006).
As the case proceeded to trial, First Marblehead made it
known that it intended to call Robert Sherwin as an expert witness
and submitted his expert report. House objected to Sherwin's
report and anticipated testimony, arguing that it was irrelevant
and that Sherwin was not a qualified expert. The district court
declined to rule and reserved the issue for trial.
At trial, House testified that had he known of the three-
month expiration, he would have exercised his options during that
period: "There's zero chance . . . in the God's green earth that I
was going to let [the options] lapse into worthlessness. That
would not have happened." He claimed, without equivocation, that
he would have paid the $80,000 necessary at the time to exercise
all 2,500 of his options. He maintained that the company's success
was "nearly guaranteed." According to House's calculations, had he
exercised his options within the three-month period, the 2,500
shares would have eventually amounted to 150,000 shares of common
stock (as a result of subsequent stock splits) and, had he
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continued to keep his shares through the company's public offering,
the value of his stock would have been worth $8.4 million.
First Marblehead argued, contrary to House's testimony,
that the company's success was not such a foregone conclusion. As
of House's resignation in 1998, the company had lost money during
each of the first seven years since its inception; the market value
of the stock had dropped from $32 per share in 1997 to $20 per
share in 1998. Meyers and James both testified that the company
struggled to obtain necessary financing and it was in a precarious
financial situation until the successful acquisition of TERI in
2001 and the company's initial public offering of stock. First
Marblehead submitted a 2005 e-mail from House to his brother in
which he wrote that in 1998, shortly before leaving the company, he
had attempted to sell his options back to the company at a
substantial discount; House stated that "the options were not worth
a great deal." In the e-mail, House went on to say: "Seven years
later, in October of 2003, the company, lo and behold and to my
great surprise, went public."
At issue in this appeal is the testimony of First
Marblehead's expert witness, Robert Sherwin, who testified over
House's objection. Sherwin is a certified public accountant, with
a bachelor's degree in economics and a law degree from the
University of Chicago. At the time of trial, he was employed by
Analysis Group, a consulting company that specializes in economics,
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finance, and strategy consulting. He concentrates in two areas of
economics: financial economics and industrial organization.
Sherwin testified that during the three-month period in
which House would have had to exercise his stock options (had he
known of their expiration), the "stock was not worth $80,000, or
worth at best $80,000." He further testified that in his opinion,
it would not have made financial sense for House to exercise the
options at that time for several reasons. First, House would not
have obtained an immediate financial gain because the stock was not
worth more than the $80,000 House would have had to pay to obtain
them. Second, First Marblehead was, at the time, a private company
and it would have been more difficult to sell those private shares
than shares in a publicly traded company. Third, such a
significant investment in one stock would be risky and contrary to
the principle of diversification. Fourth, Sherwin testified that
House's own financial position at the time made such an investment
even riskier: "House at the time was going through a divorce, had
limited assets in the bank, he had no stock that he owned . . .
[$80,000 worth of stock] would probably be more than a hundred
percent of [his investable assets]."
On July 23, 2007, the jury returned a verdict in which it
found that House had reasonably relied on the negligent
misrepresentations of First Marblehead regarding the expiration of
his incentive stock options. However, the jury concluded that even
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if House had been aware of the three-month expiration period, he
would not have exercised the options; the jury thus awarded House
no damages. The district court denied House's motion for a new
trial. House now appeals.
II. Discussion
We review the district court's decision regarding the
admissibility of expert testimony for abuse of discretion. See
Wilder v. Eberhart, 977 F.2d 673, 676 (1st Cir. 1992) (citing Int'l
Adhesive Coating Co., Inc. v. Bolton Emerson Int'l,
851 F.2d 540,
544 (1st Cir. 1988)); see also Rodríguez v. Smithkline Beecham,
224
F.3d 1, 8 (1st Cir. 2000). Our deference to the district court's
judgment is consistent with the discretion given to the district
court by the Federal Rules of Evidence, which "afford district
courts substantial latitude in the admission or exclusion of
opinion evidence." Crowe v. Marchand,
506 F.3d 13, 16 (1st Cir.
2007); see also Espeaignnette v. Gene Tierney Co. Inc.,
43 F.3d 1,
11 (1st Cir. 1994) ("A trial judge's rulings in this sphere should
be upheld unless manifestly erroneous." (quoting United States v.
Sepúlveda, 15 F.3d 1161, 1183 (1st Cir. 1993) (internal quotation
marks omitted))). Moreover, even if an evidentiary ruling is
deemed erroneous, we will not disturb the jury's verdict if "it is
highly probable that the error did not affect the outcome of the
case." McDonough v. City of Quincy,
452 F.3d 8, 19-20 (1st Cir.
2006).
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Federal Rule of Evidence 702 requires that before giving
testimony as an expert, a witness must be "qualified as an expert
by knowledge, skill, experience, training, or education" and
provide such knowledge that "will assist the trier of fact to
understand the evidence or to determine a fact in issue."
Furthermore, the expert's testimony must be "based upon sufficient
facts or data" that result from the application of "reliable
principles and methods." Fed. R. Evid. 702. The purpose of these
requirements is to "ensure, as a condition of admissibility, that
proffered expert testimony rests on a sufficiently trustworthy
foundation." Crowe, 506 F.3d at 17 (citing Daubert v. Merrell Dow
Pharms., Inc.,
509 U.S. 579, 597 (1993)).
House challenges Sherwin's qualifications to testify as
an expert and also argues that the substance of his testimony was
improper. With respect to Sherwin's qualifications, House contends
that Sherwin's experience is limited to industrial organization and
securities pricing, and he therefore lacks the expertise to testify
about how individuals choose investments and arrange portfolios.
House argues that such testimony would have been appropriate from
a certified financial planner, which Sherwin is not.
First Marblehead rejects House's myopic view of Sherwin's
credentials. Sherwin has nearly two decades of experience as a
consultant in economics, finance, and strategy consulting. With
respect to his testimony regarding investment diversification,
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Sherwin works on the 401(k) committee at his consulting firm and
advises employees in their various investments. Additionally, he
testified that his experience includes providing investment advice
to accredited investors. While a certified financial planner who
focuses entirely on individual investment decisionmaking would also
have been qualified to provide this testimony, we are unconvinced
that Sherwin's own credentials are such that he is unqualified to
testify as an expert in this case.3 See United States v. Vargas,
471 F.3d 255, 262 (1st Cir. 2006) ("It is not required that experts
be 'blue-ribbon practitioners' with optimal qualifications" (citing
United States v. Mahone, 453 F.3d 68, 71 (1st Cir. 2006))). We
thus conclude that the district court's decision to find Sherwin
qualified to testify as an expert falls well within the district
court's "broad discretionary powers in determining the
qualification . . . of expert witnesses." Diefenbach v. Sheridan
Transp.,
229 F.3d 27, 30 (1st Cir. 2000) (quoting Richmond Steel
Inc. v. Puerto Rican Am. Ins. Co.,
954 F.2d 19, 20 (1st Cir.
1992)).
3
House also argues that the district court should have provided
him with the opportunity to conduct a voir dire of Sherwin outside
the hearing of the jury. We are unmoved by this argument; our Rule
702 inquiry does not demand that the district court follow any
particular procedure. See United States v. Díaz,
300 F.3d 66, 73-
74 (1st Cir. 2002) (citing
Daubert, 509 U.S. at 594; Kumho Tire Co.
Ltd. v. Carmichael,
526 U.S. 137, 152 (1999)). Moreover, in this
case, despite ample opportunity to do so, House made no request for
a voir dire until Sherwin began his testimony.
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Second, with respect to whether the testimony was helpful
to the jury, House makes two somewhat inconsistent arguments for
why the district court erred: (1) Sherwin's testimony was
irrelevant because the jury is tasked with determining what House
-- and not a reasonable investor -- would have done with the
options had he known about the three-month expiration period; and
(2) by testifying as to what a reasonable investor would have done,
Sherwin's testimony improperly invaded the province of the jury.
With respect to the issue of relevance, "expert testimony
must be relevant . . . in the incremental sense that the expert's
proposed opinion, if admitted, likely would assist the trier of
fact to understand or determine a fact in issue." Ruiz-Troche v.
Pepsi Cola of P.R. Bottling Co., 161 F.3d 77, 81 (1st Cir. 1998)
(citing
Daubert, 509 U.S. at 591-92). In this case, Sherwin's
testimony was proffered by First Marblehead to explain to the jury
how stock options function and how an investor would think about
exercising those options. Those are not topics ordinarily within
the knowledge of the jury and thus are appropriate for expert
testimony. See United States v. Shay,
57 F.3d 126, 132-33 (1st
Cir. 1995) ("The fundamental question that a court must answer in
determining whether a proposed expert's testimony will assist the
trier of fact is 'whether the untrained layman would be qualified
to determine intelligently and to the best degree, the particular
issue without enlightenment from those having a specialized
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understanding of the subject matter involved.'" (quoting United
States v. Montas, 41 F.3d 775, 783 (1st Cir. 1994)).
Sherwin testified that based on House's financial
circumstances in early 1998 and the uncertainty surrounding First
Marblehead's financial future, it would not have made financial
sense for someone in House's position to exercise the options.
Sherwin testified that:
the stock would have been worth no more than
the amount [House] would have had to have
paid, potentially less than that . . . . [and]
the stock would not be particularly suitable
for someone in Mr. House's position in terms
of the risk and the liquidity and the
diversification areas of financial
performance.
Sherwin explained that an incentive stock option plan provides an
employee with the opportunity to purchase stock at a set strike
price and, potentially, realize an immediate financial gain if the
value of the stock is higher than the purchase price. In 1998 when
House would have had to decide whether or not to exercise the
options, he would have had to pay $80,000 for stock that was worth
-- at most, $80,000; House would not have enjoyed any immediate
financial gains. Sherwin further explained that based on House's
financial position -- House's salary at the time was $70,000, he
had only $50,000 in personal assets, and he would have had to
borrow around $30,000 in order to purchase the options -- such a
large investment in one privately held company was risky. The
district court's conclusion that Sherwin's testimony was relevant
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and provided helpful context for the jury was well within the
court's broad discretion.
Testimony that provides a necessary context and
framework, especially in cases involving complex or unfamiliar
concepts, can be appropriate for expert testimony without
improperly interfering with the jury's assessment of credibility.
Cf. United States v. Brien, 59 F.3d 274, 276-77 (1st Cir. 1995)
(observing that in the context of identification, expert testimony
could "give the jury background information about the mechanism of
memory, types of errors, error rates, and other information not
commonly possessed by the jury"). Our review of the record makes
clear that Sherwin's testimony was careful to provide the jury with
the information to evaluate House's assertions as to what he would
have done in 1998, and stopped short of giving Sherwin's own
opinion as to what he believed House would have done. At no point
did Sherwin opine on the credibility of House's testimony; his
comments were limited to expressing an opinion on the financial
risk involved in the decision. The determination of whether House
was credible or not was appropriately left to the jury.
We therefore conclude that the district court's decision
to admit Sherwin's expert testimony was not an abuse of discretion.
House also appeals the denial of his Rule 59 motion on the sole
basis that the admission of Sherwin's testimony was substantial
error and highly prejudicial. Given our determination that the
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district court did not err in deeming Sherwin qualified and his
testimony relevant, the district court did not abuse its discretion
in denying House's motion for a new trial. See Crowe, 506 F.3d at
19.
III. Conclusion
For the foregoing reasons, we affirm the district court's
decision to allow the expert testimony and affirm the district
court's denial of the motion for a new trial.
Affirmed.
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