Economic Expert Testimony Exclusion Is The Basis For Reversal

March 2008

The Tenth United States Circuit Court of Appeals in Denver reversed a trial court that prevented the jury from hearing expert economic testimony. The trial court excluded the expert testimony, ruling the defense failed to provide (i) necessary and timely substantiation about the reliability of the testimony, and (ii) the expert’s methodology.

The excluded economist (Daniel Fischel, a well-know professor and expert witness) had planned to provide rebuttal testimony that:

1. Certain disclosures were not material to trading results at issue and would not have had a major impact on the company's stock prices.
2. The results of a statistical analysis demonstrating Nacchio’s stock sales did not appear reliant on the insider information he was privy to as chief executive, but instead were the result of typical behavior with stock options that would soon expire.

Trial Court’s slight of economic testimony is reversed

The district court’s ruling was effectively a decision that the defendant had not established the reliability of economics, statistical, and financial testimony. It was a rejection of economic analysis. Any judge reading the reversal should be slow to exclude this type of testimony. In reversing the trial court, the Appellate Court said:

“…the Court also separately concluded that the testimony would not be helpful to the jury under Federal Rule of Evidence 403 or 702, because expert economic analysis would ‘invit[e] the jurors to abandon their own common sense and common experience and succumb to this expert’s credentials, and concluded that ‘the bulk of [Fischel’s] testimony is simply a recitation of facts which is improper under Rule 602.’… The judge concluded that all of these things were ‘within the common knowledge of the jury’ and that ‘the jury simply d[id]n’t need this so-called expert witness to testify that diversification is an issue in this case.’

“This misunderstands the nature of economic expertise. An economic expert is permitted not only to tell the jury that an economic concept “is an issue” but to analyze the concept and offer informed opinions. In other words, expert testimony may assist the trier of fact to understand the facts already in the record, even if all it does is put those facts in context. ….That is why expert economic testimony is routine when a materiality determination requires the jury to decide the effect of information on the market. ….Armchair economics is not the way to decide complex securities cases [citations omitted].”

In concluding that the trial court exercised an abuse of discretion, the Appellate panel described a correct way of testing the admissibility of the proffered testimony, as follows:

“The judge could have put Professor Fischel on the stand to ask him about his methodology, allowed the government to do so, asked Mr. Nacchio’s lawyers if they would like to address the issue for the first time, or even simply let them speak to see if they had a meritorious objection. Having permitted none of those things, however, it would have been an abuse of discretion to make a Daubert finding of unreliability. … [The district judge] also excluded the testimony because he thought it would not be helpful to the jury, was more prejudicial than probative, and consisted of impermissible facts rather than opinions. See Fed R. Evid. 403, 602, 702. We reverse these alternative conclusions as well.”

The Appellate panel then concluded that the denied economics testimony was material, as follows:

“We are persuaded that the exclusion of Professor Fischel was not inconsequential under any standard. The theory of Mr. Nacchio’s defense was that the stock price was not affected by his disclosures, that his conduct had an innocent explanation, and that a reasonable investor would not have found his inside information very important. Professor Fischel’s testimony, as described in the disclosure, could have addressed each of these issues, and if credited by the jury, might have changed the jury’s mind”.

"The improper exclusion of Professor Fischel's testimony prejudiced Mr. Nacchio's defense, so we must reverse his conviction,"

The Tenth Circuit also took the unusual step of removing the trial judge from the case, stating, “We have concluded that it would be unreasonably difficult to expect this judge to retry the case with a fresh mind.”

Background of the underlying conviction

Joseph Nacchio’s criminal conviction for insider trading was one of the more important Enron-era executive trials. Nacchio was Quest’s chief executive from 1997 to 2002. He led a spectacular acquisition of US West in 2000, which transformed Qwest from a startup into one of the country's largest telecommunications companies. Nacchio was ousted in June 2002 when Qwest closely avoided bankruptcy after an accounting scandal and the tech downturn. Qwest later restated $2.2 billion of revenue recorded during Nacchio’s tenure.

A Denver jury convicted Nacchio in April 2007 on 19 felony counts for stock trades he made in early 2001, months prior to Qwest's financial troubles emerged publicly, but at a time when insiders knew of Quest's challenges. Nacchio was acquitted on 23 other charges. U.S. District Court Judge Edward Nottingham sentenced Nacchio in July to six years in federal prison, $19 million in fines (the maximum $1 million per successful count), and $52 million forfeiture of profits on the stock trades.

The appeals court had allowed Nacchio to remain free on $2 million bail pending the outcome of his appeal.

The government now has the option to petition for the entire 10th U.S. Circuit Court of Appeals to re-hear the appeal, to appeal to the Supreme Court, or to retry the case with a new judge.