Marketxt Holdings Corp.

UNITED STATES BANKRUPTCY COURT 	NOT FOR PUBLICATION
SOUTHERN DISTRICT OF NEW YORK
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In re: 	. 	Chapter 11
.
MARKETXT HOLDINGS CORP., et al. 	. 	Case No. 04-12078 (ALG)
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Debtors. 	.
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MEMORANDUM OF DECISION
A P P E A R A N C E S:
KAYE SCHOLER LLP
Counsel for the Plan Committee
By: Lester M. Kirshenbaum, Esq.
Margarita Y. Ginzburg, Esq.
Dina S. Rovner, Esq.
425 Park Avenue
New York, NY 10022
WINDELS MARX LANE
& MITTENDORF LLP
Counsel for the Responsible Officer
By: Howard L. Simon, Esq.
156 West 56 th Street
New York, NY 10019
PULLMAN & COMLEY, LLC
Counsel for Laurence Miller, Keith Miller and Robert Cope
By: Irve J. Goldman, Esq.
850 Main St., P.O. Box 7006
Bridgeport, CT 06601
DAVIDOFF MALITO & HUTCHER LLP
Counsel for Laurence Miller, Keith Miller and Robert Cope
By: Joshua Krakowsky, Esq.
605 Third Avenue
New York, NY 10158
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ALLAN L. GROPPER
UNITED STATES BANKRUPTCY JUDGE
Before the court is a motion in limine filed by the Responsible Officer and Plan
Committee in the above-captioned confirmed Chapter 11 case seeking to exclude certain
evidence offered in support of a proof of claim filed by Keith Miller, Laurence Miller, and
Robert Cope (collectively “Claimants”). For the reasons set forth below, the Objectants’ motion
is granted.
BACKGROUND
The Claimants have filed a proof of claim on behalf of themselves and the “Miller
Trading Group” (“MTG”) seeking damages for the breach of a “Broker Agreement” (Claimants’
Ex. 478) entered into between Laurence Miller and Momentum Securities, LLC. The Claimants
allege that the estate of MarketXT Holdings Corporation is liable as the successor to Tradescape
Corporation (“Tradescape”), which was guarantor of the Broker Agreement. The Responsible
Officer and the Plan Committee (collectively “Objectants”) have objected to the proof of claim.
The Objectants’ motion seeks to exclude certain portions of the direct testimony of
several of Claimants’ witnesses as (i) opinion testimony not admissible under Federal Rule of
Evidence 701 and (ii) as irrelevant or unduly burdensome under Rules 402 and 403. Claimants
argue in their response that the relevant testimony is admissible under Rule 701 as lay opinion
based on the witness’ personal experience, that the portions said to be inadmissible under Rules
402 and 403 are relevant for the purposes of calculating damages, and that the motion in limine
sweeps too broadly and the arguments raised therein should be addressed individually at trial.
The trial on the objection to the Claimants’ claim commenced on December 2, 2010. As
of the end of the proceedings on December 23, 2010, declarations setting forth the direct
testimony of Robert Cope, Steven Fleckner, Keith Miller, Laurence Miller, Vedant Mimani,
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Anton Penayatov, Richard Reich, and Charles Ian Salvador had been admitted into evidence,
subject to possible later exclusion to the extent the motion in limine was granted, and the cross-
examination and re-direct of each of those witnesses had been completed.1
DISCUSSION
I. 	Objection to Lay Opinion Testimony Under Rule 701
The Objectants’ motion seeks to exclude, as improper lay opinion under Rule 701, certain
direct testimony and exhibits presented by the Claimants in their own declarations and in
declarations from several third party witnesses, none of whom was qualified as an expert. The
subject matter of the testimony includes the state of the securities markets, the state of the day-
trading industry, customs and practices within the day-trading industry, and the alleged potential
profitability of the MTG, measured by its own characteristics and by comparison with the
performance of allegedly similar groups.
The determination of the motion depends in large part on the application of Fed. R. Evid.
701, which provides that:
If the witness is not testifying as an expert, the witness' testimony
in the form of opinions or inferences is limited to those opinions or
inferences which are (a) rationally based on the perception of the
witness, (b) helpful to a clear understanding of the witness'
testimony or the determination of a fact in issue, and (c) not based
on scientific, technical, or other specialized knowledge within the
scope of Rule 702.
Rule 701 allows the admission of non-expert opinion testimony from a witness, within
limitations designed to prevent the “simple expedient of proffering an expert in lay witness
clothing.” Fed. R. Evid. 701, Advisory Committee’s Note (2000 amendments). In this case, the
Claimants have submitted reports from two proposed expert witnesses, Alan Goldberg and
1 As provided in a pretrial order, all direct testimony has been adduced in declaration form, with live cross-
examination and re-direct.
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Warren Freistadt. Their application to call a third expert, Joseph Cammarata, was denied.2
Indeed, the right to call a second expert was a significant concession to the Claimants, and there
is no basis on which they can reasonably demand yet another expert. Thus, the proffered
testimony cannot be admitted at this late date as expert testimony, and none of the witnesses
within the scope of the present motion has been or can be qualified as an expert under Rule 702.
The Second Circuit distinguished between admissible lay opinion testimony and
testimony that could only be adduced from an expert in Bank of China v. NBM LLC, 359 F.3d
171 (2d Cir. 2004). In that case, Bank of China called an employee to testify as to the nature of
certain financial transactions, customary practices underlying such transactions, and whether
certain hypothetical dealings would constitute fraud. The Circuit Court held that those portions
of the witness’ testimony that were based on personal experience gathered in the course of
performing an investigation as a Bank of China employee were admissible “so long as the
testimony was based on the investigation and reflected his investigatory findings and
conclusions, and was not rooted exclusively in his expertise . . . .” However, since the witness
was not qualified as an expert, the Court held that all opinion testimony not based on such
personal knowledge was inadmissible. Id. at 182. Under Bank of China, lay opinion testimony
is admissible only when based on the witness’ direct personal experience, whether or not the
expertise of the witness aided his perceptions, and any testimony that is primarily a description
of industry custom or an analysis based on specialized knowledge is excludable where the
witness has not been qualified as an expert. Bank of China, 359 F.3d at 182; see also In re Perry
H. Koplik & Sons, Inc., 382 B.R. 599, 603 (Bankr. S.D.N.Y. 2008).
2 Order dated May 28, 2009, Dkt. No. 1648, Case No. 04-12078. Motion denied at a hearing on September 1, 2010,
Transcript pg. 21, Dkt. No. 1755.
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As a limited exception to the above principle, “most courts have allowed the owner or
officer of a business to testify to the value or projected profits of the business, without the
necessity of qualifying the witness . . . .” Fed. R. Evid. 701, Advisory Committee’s Note, citing
Lightning Lube, Inc. v. Witco Corp., 4 F.3d 1153, 1174-75 (3d Cir. 1993); see also Lifewise
Master Funding v. Telebank, 374 F.3d 917, 930 (10th Cir. 2004). However, an owner or officer
of a business may provide lay opinion testimony as to its value or lost profits only if the
testimony is limited to those opinions derived from the witness’ personal knowledge of the
business and simple calculations of lost profits by comparison with its historical results. For
example, in Securitron Magnalock Corp. v. Schnabolk, 65 F.3d 256, 265 (2d Cir. 1995), the
Second Circuit held that the testimony of a company’s president could be admitted as lay opinion
regarding “the company’s sales over a period of years, noting a slow-down, and testifying to the
estimated losses attributable to the [fraud].” The testimony in that case was supported by an
established record of yearly sales growth and decreased sales following the allegedly fraudulent
acts. See also Versai Mgmt. Corp. v. Clarendon Am. Ins. Co., 597 F.3d 729, 737 (5th Cir.
2010)(finding testimony of company president admissible to demonstrate lost apartment rental
revenue due to hurricane wind damage); Lightning Lube, 4 F.3d at 1174-75 (admitting testimony
from company president as to lost revenue predictions in tortious interference action based on
existing contracts and projected future earnings growth).
By contrast, in Lifewise Master Funding v. Telebank, 374 F.3d at 929-30, the Circuit
Court excluded the testimony of a company’s president as to projections of lost profits based on
a damages model prepared in anticipation of litigation because the company’s president was not
qualified as an expert, and only an expert witness could opine on a damages model that involved
“technical, specialized subjects” not appropriate for lay opinion testimony under Rule 701. The
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Court distinguished cases such as Lightning Lube and Securitron Magnalock, where the
challenged testimony was based on a simple calculation of decreased sales. See also Von der
Ruhr v. Immtech Intern. Inc., 570 F.3d 858 (7th Cir. 2009)(opinion testimony excluded as
speculative); Victor G. Reiling Assoc. v. Fisher-Price, Inc., 406 F. Supp. 2d 171, 174 (D. Conn.
2005).
a. 	Objection to Laurence Miller’s Testimony
The foregoing principles may be applied as follows with regard to the proffered
testimony of Laurence Miller on the issue of the value of the MTG and the lost profits allegedly
suffered as a result of the claimed breach of the Broker Agreement. For example, the Objectants
seek to exclude Claimants’ Exhibit 475 (“Claimants’ 475”), referred to at trial as Objectants’
Trial Exhibit 321, as well as Miller’s direct testimony on that exhibit. Claimants’ 475, prepared
by Laurence Miller for use at trial, purports to be a damages model based on the revenues of the
MTG prior to the date of the Broker Agreement with Tradescape, restated to incorporate the cost
basis estimated by the Claimants’ proposed expert witness Alan Goldberg to apply under the
Broker Agreement. The conclusion invited by Claimants’ 475 and by the supplemental
declaration of Laurence Miller is that the lost profits are even higher than the amount projected
by the Claimants’ second proposed valuation expert, Warren Freistadt. 3 The Claimants argue
that the testimony is admissible as lay opinion under Rule 701, supported by Miller’s experience
at the MTG. The Objectants counter that any testimony based on complex lost profits
projections or restatements should be excluded as expert testimony not admissible under Rule
701.
3 Miller’s testimony, of course, might seem to impeach that of his own expert, but that issue is beyond the scope of
the present motion.
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Upon consideration of the scope of the analysis and the assumptions inherent in the
purported restatement of profits in Claimants’ 475, it must be concluded that the exhibit and the
testimony of Laurence Miller regarding that exhibit are not proper lay testimony under Rule 701
and amount to a proffer of “an expert in lay witness clothing.” Whereas the testimony allowed
as lay opinion in Securitron Magnalock was straightforward and direct, “based on evidence of
decreased sales,” the projections Mr. Miller seeks to introduce combine the revenues of a period
prior to the Broker Agreement with hypothetical costs for the MTG at Tradescape, based on a
model that incorporates the types of assumptions used in an expert report. Like the testimony in
Lifewise, Miller’s testimony goes beyond his “personal knowledge and his experience as
[president] of the company” and enters a realm of calculation beyond the pale of lay opinion
under Rule 701. See Lifewise, 374 F.3d at 930. Miller would have to be qualified as an expert in
order to testify on this basis.
Moreover, although the issue need not be reached, based on the record of the trial to date,
Laurence Miller’s evidence regarding Claimants’ 475 would appear to be too speculative to be
“helpful to a clear understanding of the witness’ testimony or the determination of a fact in
issue,” as required by Rule 701. Under New York law, which is applicable to the contract at
issue, when damages are based on loss of future profits,
[T]he 	damages 	may 	not 	be 	merely 	speculative, 	possible 	or
imaginary, but must be reasonably certain and directly traceable to
the breach, not remote or the result of other intervening causes. In
addition, there must be a showing that the particular damages were
fairly within the contemplation of the parties to the contract at the
time it was made.
Kenford Co. v. County of Erie, 67 N.Y.2d 257, 493 N.E.2d 234, 502 N.Y.S.2d 131
(1986)(“Kenford I”)(internal citations omitted); see also Kenford Co. v. County of Erie, 73
N.Y.2d 312, 540 N.Y.S.2d 1, 537 N.E.2d 176 (1986)(“Kenford II”). In Kenford I, the Court
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assessed the sufficiency of evidence with regard to a jury verdict for lost profits damages under a
contract for the operation of a domed stadium. The Court of Appeals held that despite the
presentation by recognized experts of economic analysis as to lost profits, the projected damages
were too speculative to support a jury award. Id. at 261. The Court found that the 20-year
period of the forecast inherently involved too much uncertainty, no matter how reliable the
expert analysis. Id. at 262. Furthermore, the New York court stated, “If it is a new business
seeking to recover for loss of future profits, a stricter standard is imposed for the obvious reason
that there does not exist a reasonable basis of experience upon which to estimate lost profits with
the requisite degree of reasonable certainty.” Id. (citing Cramer v. Grand Rapids Show Case
Co., 223 N.Y. 63, 119 N.E. 227 (1918)).
The Second Circuit has interpreted Kenford I to require that, “[E]vidence of lost profits
from a new business venture receives greater scrutiny because there is no track record upon
which to base an estimate.” Schonfeld v. Hilliard, 218 F.3d 164, 172 (2d Cir. 2000). In
Schonfeld, experienced cable television operators sought lost profits damages for the failure of a
new television network they had sought to launch. In considering whether the venture was
subject to heightened scrutiny as a “new business,” the Court noted that despite the historical
success of the parties in previous, separate ventures, the parties had never jointly operated a
venture together and thus had no historic record of operations that could provide a basis for lost
profits projections. Id. at 173. The Circuit Court affirmed the District Court’s holding that a
projection of profits based on a multiplicity of untested assumptions was legally insufficient to
support an award of damages. Id. at 174.
As stated above, the projections in Claimants’ 475 are not based on the actual
performance of a business venture but are a composite of revenue from trading operations of a
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different group prior to joining Tradescape, overlaid with estimated costs under the Broker
Agreement and a projection of the number of traders that, Claimants’ assert, Tradescape should
have hired. Furthermore, the projections discuss revenue in the context of assumptions regarding
the anticipated profitability of those traders, the retention of additional profitable traders over a
period of time, and the profitability of the securities markets themselves. Whereas in Securitron
Magnalock the testimony of the company’s president was based on actual historical operating
data, the projections in Claimants’ 475 and the related testimony are projections based on
assumptions and calculations. It might be that an expert could opine on the basis of this data –
the determination of this question will await the submission of Mr. Freistat’s report. In any
event, and whether or not the MTG should be considered a “new business” under New York law,
it is clear that lost future profits must be proven with reasonable certainty and without undue
speculation. The Court cautions that this is a standard which is not satisfied, on the present
record, by Claimants’ 475 or the testimony of Laurence Miller regarding Claimants’ 475.
b. 	Objection to Opinion Testimony of Other Witnesses
The Objectants seek to exclude testimony by numerous other witnesses as improper lay
opinion beyond the scope of Rule 701 on subjects such as the state of the day-trading industry,
the state of the securities markets, customary practices in the day-trading industry, the benefit to
traders and a trading group of having more “buying power” available to leverage trading, and the
status of the MTG compared to other trading groups. Without addressing each item of testimony
objected to, the Claimants argue that the Objectants mischaracterize the nature of the testimony
and that in each instance the opinion given by the witness is within his personal knowledge and
proper lay opinion.
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As stated above, the Second Circuit’s holding in Bank of China is controlling as to the
distinction between permissible lay opinion and improper testimony under Rule 701. See also In
re Perry H. Koplik & Sons, 382 B.R. at 599 (applying Bank of China). The Claimants do not
dispute the controlling standard of law, but rather argue that the testimony is only proffered to
prove each witness’ own knowledge of the facts to which they are testifying and that no
specialized knowledge is necessary to make such observations. The Claimants’ repeated refrain
is that the witness is merely “relaying his observations and perceptions,” and that the testimony
in fact provides “examples of permissible opinions from witnesses who spent a substantial
amount of time in a particular industry relaying their observations and perceptions.”4
Under Rule 701 and Bank of China, this is not enough, and based on the present state of
the record, certain categories of testimony must be excluded as improper lay opinion under Rule
701. 	Most clearly, any comparison of the MTG to other trading groups for purposes of
demonstrating the MTG’s profitability or potential for success is a subject reserved for expert
testimony. As stated in In re Charter Communications, “The art of valuing a business requires
the exercise of well-informed judgment.” 419 B.R. 221, 235 (Bankr. S.D.N.Y. 2009). In that
case, experts from several financial advisory institutions testified on the subject of enterprise
valuation employing a variety of methodologies, including comparable companies. In this case,
the Claimants will have an opportunity to proffer expert testimony on the subject of lost profits
and business valuation. Given the inherently subjective and fact-intensive nature of valuation
and projection of profits, however, testimony from non-experts regarding the profitability of the
MTG or of other traders and the day-trading industry, the benefit of greater buying power, and
the state of the securities markets must be excluded as improper lay opinion.
4 Memorandum in Opposition, pg. 7.
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II. 	Objection to Irrelevant or Unduly Burdensome Testimony Under Rules 402 and 403
The Objectants also seek to exclude as irrelevant under Rule 402 or as unduly
burdensome under Rule 403 certain testimony, including Claimants’ 475, the supplemental
declaration of Laurence Miller and statements by other witnesses as to the performance of
individual traders and other trading groups. 	Under Rule 402, “Evidence which is not relevant is
not admissible.” Fed. R. Evid. 402. Rule 401 defines “relevant evidence” as “having a tendency
to make the existence of any fact that is of consequence to the determination of the action more
probable or less probable than it would be without the evidence.” Fed. R. Evid. 401. Evidence
which is relevant may be excluded under Rule 403 if “its probative value is substantially
outweighed by the danger of unfair prejudice, confusion of the issues, or misleading the jury, or
by considerations of undue delay, waste of time, or needless presentation of cumulative
evidence.” Fed. R. Evid. 403.
The Court agrees that non-expert testimony as to the performance of trading groups other
than the MTG is irrelevant and unduly burdensome to the extent that it is introduced for purposes
of comparison with the MTG, although, as discussed above, any such comparison may be a
proper subject for expert testimony. Non-cumulative evidence regarding the performance of
individual traders who were allegedly part of the MTG may be relevant and probative of facts at
issue in this case, but projections and comparisons based on any such evidence should be the
subject of the testimony of a qualified expert.
III. 	Scope of Objections
The Claimants also oppose the motion in limine, in part, on the ground that it is overly
broad and that the objections raised therein should be addressed individually at trial, citing
National Union Fire Ins. Co. v. L.E. Myers Co. Group, 937 F.Supp. 276 (S.D.N.Y. 1996). In
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National Union Fire, an insurance company sought to exclude all extrinsic evidence related to
the interpretation of certain policy provisions. The Court denied the motion as overbroad,
indicating that the motion failed to refer to any particular item of evidence or identify which
party intended to offer such evidence and for what purpose. Id. at 287. In this case, by contrast,
the Objectants have highlighted the portions of the direct testimony declarations to which they
object and stated the grounds for each objection. The excerpts identified are sufficiently limited
and the scope of the motion is not overbroad. In addition, the present motion has not been
considered in isolation, but rather in the context of the proposed testimony of each of the
witnesses.
The Claimants have also sought to have each objection raised in the motion addressed
individually at trial in order to assure that all the relevant facts are considered in reaching each
ruling. The Court has endeavored to do so to date and to provide every opportunity to the
Claimants to present evidence in support of their proof of claim. The Claimants will be provided
a further opportunity to support the proffered testimony by responding to a settled order, as set
forth below.
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CONCLUSION
For the reasons stated, the Court will exclude certain testimony and related exhibits
which are improper lay opinion, not probative of the issues in this case, or unduly speculative on
the issue of lost profits. The Objectants are directed to settle an order specifying in an appendix
or otherwise the evidence objected to that should be excluded by application of the principles set
forth herein. Such order shall be served on Claimants’ counsel on 10 days’ notice. The Court
will enter an appropriate order based on the Objectants’ proposal and the Claimants’ response.
Dated: New York, New York
January 7, 2011
/s/ Allan L. Gropper
UNITED STATES BANKRUPTCY JUDGE
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