Securities Expert’s Analysis of Empirical Studies Excluded

The plaintiffs sued the defendant company after suffering an economic loss after purchasing stocks of the company. The plaintiffs alleged that the defendants concealed important information about product defects.

Zach Barreto

Written by
— Updated on January 12, 2022

Securities Expert’s Analysis of Empirical Studies Excluded

Court: United States District Court for the District of Arizona
Jurisdiction: Federal
Case Name: Smilovits v. First Solar Inc.
Citation: 2019 U.S. Dist. LEXIS 221424

The plaintiffs claimed that once the company revealed the product’s flaws to the public, the stock price plummeted. 

The plaintiffs retained a securities expert to opine on the seven hallmarks of a successful 10b5-1 plan. The defendants argued the expert’s opinion and hallmarks relied on speculation. As such, the defendants claimed the court should exclude the expert’s opinion under Rule 702.


The plaintiffs bought stocks of the defendant company, which produces solar panel modules. The individual defendants were the company’s officers and executives who bought or sold the company’s stock during the Class Period. Allegedly, the individual defendants concealed information from the market. The information they concealed was on manufacturing and design defects that caused faster power losses in specific modules. Then, stock prices declined, going from $300 per share to $50 per share. This came after the CEO left, disappointing financial results, and the release of quarterly financial disclosures reporting product defects.

The plaintiffs alleged that the defendants committed many acts of deception during the Class Period. According to the plaintiffs, the defendants recorded false information on the financial statements and concealed defective flaws. The plaintiffs also claimed the defendants misappropriated the costs and nature of the defects. Additionally, the plaintiffs alleged that when the company eventually revealed the product flaws and related financial obligations to the public, the stock price had plummeted. As a result, the plaintiffs suffered an economic loss.

The Plaintiffs’ Securities Expert Witness

The plaintiffs retained a securities expert witness to opine on the sale of company shares by the individual defendants in compliance with Securities Exchange Commission Rule 10b5-1 of the trading plans. The expert was a professor at the University of Chicago Law School.

The securities expert stated that 10b5-1 policies are designed to provide business executives with the ability to trade based on diversification and not inside knowledge. The expert then submitted that there are seven hallmarks of a successful 10b5-1 plan:

  1. A significant time gap between the implementation of the agreement and the first trade
  2. Planned trades regularly
  3. Selling over a long time
  4. Purchases in relatively consistent size and relatively small quantities compared to the total shareholdings
  5. Sales at a variety of stock prices
  6. No adjustment or cancelation of the stock price
  7. Involvement of the board and general counsel in plan alteration, adoption, and termination decisions

The defendants moved to exclude the expert’s testimony under Rule 702. The defendants argued that the expert’s opinions and purported hallmarks relied on speculation. Furthermore, the defendants claimed the expert’s opinion failed every prong of Daubert’s test of reliability. The plaintiffs argued the expert was eminently qualified to give his opinions. The plaintiffs also claimed the Daubert reliability factors do not apply to non-scientific trademarks. According to the plaintiffs, the trademarks satisfy the requirements of Rule 702. Furthermore, the trademarks would assist the jury in deciding whether the individual defendants carried out the stock trades in good faith or avoided 10b5-1 prohibitions.


The court noted that for the jury to perform an objective review of the related transactions, it was vital for them to understand the purpose of the 10b5-1 plans and their legal requirements, their operation, and suspicious trading habits. The expert testified the object of his seven hallmarks was to help the jury identify these plans. The hallmarks would also help the jury decide whether the individual defendants’ activity was questionable. The securities expert witness testimony was considered to be helpful.

The defendants maintained that the expert’s hallmarks were not reliable. The defendants then argued the hallmarks were untestable, unpublished, and had no known error rate. Additionally, the defendants asserted that the hallmarks lacked a general acceptance in the field of securities regulation. The court noted the expert based his view on a review of the case records, his position on the Financial Industry Regulatory Authority, his expertise as a security enforcement management consultant, his research on 10b5-1 proposals used by different companies over the last decade, and his specialized knowledge on insider trading, corporate governance, and executive compensation.

The expert’s opinions on 10b5-1 plans and his alleged hallmarks were essential to the affirmative defense as per the court. His opinion on whether the behavior of the particular defendant was questionable was also essential to the affirmative defense. The court then noted the defendants could object to the trial if the expert offered inadmissible legal opinions.

The Securities Expert’s Empirical Studies

The expert discussed empirical studies that implied that “insiders systematically abuse Rule 10b5-1.” The defendants argued the expert did not reliably apply empirical studies to the facts of this case. The court noted the expert had testified that he hadn’t compared the defendant executives’ trading behavior to other companies in the empirical studies. The plaintiffs did not prove the credibility of the securities expert’s opinion. The opinion was that the 10b5-1 trades of the individual defendants were compatible with abusive plans in the empiric studies. The court excluded this opinion.


The court granted the defendants’ Daubert motion in part and denied it in part.

Key Takeaways for Experts

This case illustrates the importance of applying research found to the case at hand. In this case, the expert didn’t apply the empirical studies to the facts of this case. In addition, the expert didn’t compare the defendants’ trading behavior to other companies in the studies. As such, the court excluded his opinion relating to the empiric studies. When using other research in your testimony, it’s crucial to relate how this research or study applies to a particular case.

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