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Securities & Exchange Commission v. McGinnis

United States District Court, D. Vermont

April 3, 2018

SECURITIES & EXCHANGE COMMISSION, Plaintiff,
v.
CHAD C. McGINNIS, SERGEY PUGACH, and JANUSZ SUCHOWIEJKO, Defendants, and BELLA PUGACH, Relief Defendant.

          OPINION AND ORDER DENYING DEFENDANTS' MOTION TO STRIKE THE JULY 3, 2017 SUPPLEMENTAL EXPERT REPORT OF DANIEL L. REGARD II (DOC. 421)

          Christina Reiss Judge

         Plaintiff Securities & Exchange Commission (the "SEC") brings this action pursuant to Section 10(b) of the Securities Exchange Act of 1934 ("the Act") and Rule 10b-5 thereunder, 15 U.S.C. § 78j(b), and Section 17(a) of the Act, 15 U.S.C. § 77q(a), against Defendants Chad C. McGinnis, Sergey Pugach, and Janusz Suchowiejko (collectively, the "Defendants").

         Pending before the court is Defendants' motion to strike the July 3, 2017 supplemental expert report of Daniel L. Regard II (the "Supplemental Expert Report"), filed on January 4, 2018. (Doc. 421.) The SEC opposed the motion, filing its response on February 5, 2018. Defendants replied on February 15, 2018, at which point the court took the matter under advisement.

         The SEC is represented by Dugan Bliss, Esq., Gregory A. Kasper, Esq., and James A. Scoggins, Esq. Defendant McGinnis is represented by Evan I. Cohen, Esq., Kevin M. Henry, Esq., and Michael Q. English, Esq. Defendant Pugach is represented by Christopher L. LaVigne, Esq., Craig S. Nolan, Esq., and Kevin L. McRoskey, Esq. Defendant Suchowiejko is represented by Maryanne E. Kampmann, Esq.

         I. Factual and Procedural Background.

         This lawsuit concerns the SEC's allegation that Defendants violated the securities laws by engaging in insider trading related to Keurig Green Mountain ("KGM") stock. On July 2, 2014, the court issued its first Scheduling Order, providing that: (i) the SEC submit expert reports by November 17, 2014; (ii) the SEC's experts be deposed by December 15, 2014; (iii) the Defendants submit their expert reports by December 30, 2014; and (iv) the Defendants' experts be deposed by January 30, 2015. Pursuant to the Scheduling Order, on November 17, 2014, the SEC proffered Mr. Regard's initial expert report (the "First Report").

         As Managing Director of Intelligent Discovery Solutions, Inc., Mr. Regard is an electronic technology specialist with more than twenty years of experience providing expert analysis on issues including electronic discovery, computer forensics, database development, and application software and data analysis. His First Report was based on his evaluation of the forensic images of four computers that KGM produced to the parties in 2013 using two forensic tools, EnCase and X-Ways, to conduct his analysis.[1] The First Report purportedly demonstrated that, in 2013, Defendant McGinnis, then an employee of KGM, repeatedly used his KGM login credentials to access KGM's material nonpublic information ("MNPI"). It further allegedly revealed: that Defendant McGinnis repeatedly accessed the home page of the KGM Sales Portal where KGM stored certain MNPI; that, on two specific occasions, Defendant McGinnis viewed other charts on the Sales Portal home page, tracking sales of specific product lines at KGM, including the K-Cup; and that Defendant McGinnis viewed material on the Sales Portal hours before making trades prior to KGM's May 8, 2013 earnings announcement. In December 2015, Defendants deposed Mr. Regard as to the contents of the First Report.

         In January and February of 2015, Defendants filed motions for summary judgment. On January 21, 2015, the court granted a stay of discovery until after the court ruled on Defendants' motions. During the pendency of these summary judgment motions, Defendant McGinnis met and conferred with KGM regarding KGM's response to subpoena requests that Defendant McGinnis had previously served. When negotiations broke down, on July 8, 2015, Defendant McGinnis filed a motion to compel KGM to permit the inspection of KGM's active server containing its H: drive and all backup tapes of the server containing the H: drive for the periods prior to and following each earnings announcement identified by the SEC in its First Amended Complaint. Defendant McGinnis believed that these materials were relevant to the SEC's claims regarding his alleged access to MNPI and to the conclusions set forth in Mr. Regard's First Report. The parties agreed to a series of extensions in responding to the motion to compel while attempting to reach an agreement on the scope of KGM's production.

         On September 23, 2015, during the parties' negotiations, the court denied Defendants' motions for summary judgment. This, in turn, lifted the stay on discovery. According to the first Scheduling Order, Defendants were required to submit their expert reports within thirty days of the court's summary judgment Order. On October 2, 2015, Defendant McGinnis reached an agreement with KGM whereby he would withdraw his motion to compel without prejudice in exchange for KGM's production of certain materials. In order to address KGM's production, Defendant McGinnis moved to extend the deadline for the submission of Defendants' expert reports for an additional seventy-five days. In opposing the motion, the SEC argued that, if the court granted Defendants an extension of time, then it should also be afforded the opportunity to submit a supplemental expert report "to address this new information[]" provided by KGM. (Doc. 315 at 11.) On October 28, 2015, the court granted Defendant McGinnis's motion to amend the discovery schedule, extending the time for Defendants to serve their expert reports.

         Before Defendants served their expert reports, on February 12, 2016, the court granted an emergency motion to stay discovery. On August 10, 2016, the court lifted the stay and denied without prejudice Defendants' unopposed joint motion to extend the stay. The parties agreed that Defendants would serve their expert reports on January 9, 2017. Prior to this deadline, however, Defendants filed a joint motion to modify the Scheduling Order to further extend the time for Defendants to submit their expert reports, which the court granted on January 25, 2017.

         On March 31, 2017, Defendants filed a motion to further modify the Scheduling Order, seeking to require the SEC to submit any supplemental expert reports which "would relate to materials that were produced by non-party [KGM] in the autumn of 2015, i.e., after the SEC's experts submitted their initial expert reports and were deposed in December 2015." (Doc. 400 at 1-2.) The SEC partially opposed Defendants' motion to modify the Scheduling Order, arguing that it should not be required to disclose its supplemental expert reports at this stage of the case. In opposing Defendants' motion, the SEC did not disagree with Defendants' characterization that any supplemental expert report it submitted would address the KGM discovery. At an April 3, 2017 status conference, the SEC represented to the court that "[f]he question is really just the [KGM discovery] that was produced; is there going to be a supplemental report, and if so, . . . when it would be produced." (Doc. 404 at 7.) On May 19, 2017, the court granted in part and denied in part the SEC's motion to enter an amended discovery schedule. Pursuant to the court's Scheduling Order, the SEC was required to "submit any supplemental expert report(s) on July 3, 2017." (Doc. 414 at 6.)

         After the court's ruling, the SEC sought and obtained additional funding for Mr. Regard so that he could determine whether a supplemental report concerning the KGM production was necessary and, if so, complete a supplemental report by July 3, 2017. On July 3, 2017, the SEC served Mr. Regard's Supplemental Expert Report. The Supplemental Expert Report is based on Mr. Regard's forensic evaluation of two of the computers he previously analyzed in the First Report. In the Supplemental Expert Report, Mr. Regard stated that "since [his] initial report on November 17, 2014, there have been major and minor improvements to the forensic tools [he] use[s][]" and that his "use of these tools and [his] understanding of various artifacts on various operating systems have, accordingly, improved as well." (Doc. 421-7 at 4.) In May 2017, Mr. Regard "applied these newer tools in a supplemental analysis of [Defendant] McGinnis'[s] work-assigned laptop[.]" Id. In doing so, he allegedly "identified previously undetected evidence of [Defendant McGinnis's] use of the BATCHOPS user account, and previously undetected evidence of access to [MNPI] on that same work-assigned laptop, as well as access to likely [MNPI] on an unnamed work-assigned laptop that [Defendant McGinnis]" previously used. Id. This newly discovered evidence purportedly dates back further than the other forensic evidence previously found by Mr. Regard.

         According to the SEC, this previously unknown evidence rendered the First Report incomplete, requiring a supplemental report. However, the Supplemental Expert Report does not address any of the 2015 KGM production. In an email to Defendants sent on August 21, 2017, counsel for the SEC clarified that "the evidence most recently produced by KGM did not necessitate [the] supplemental expert report[, ]" but that "advances in forensic tools that have occurred during the pendency of this case[]" required Mr. Regard to supplement his First Report. (Doc. 421-9 at 2.)

         Because the Supplemental Expert Report contained references to new evidence of Defendant McGinnis's alleged access to MNPI, Defendant McGinnis served a subpoena on KGM for documents and information related to the Supplemental Expert Report. KGM, however, refused to produce any ...


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