Discredited Expert Witness Earns Law Firm Up To $1.5M Sanction

Going to trial knowing that their case was based on an expert witness opinion that was “deeply flawed,” the plaintiffs' attorneys at the law firm of Schlichter Bogard & Denton were “objectively reckless,” a federal judge has ruled, sanctioning them personally up to $1.5 million.

In Obeslo et. al. v. Great West Capital Management, LLC et al. (No. 16-cv-00230-CMA-SKC, 2020 BL 297664, D. Colo, Aug. 10, 2020), Schlichter recruited the plaintiffs to join the suit through a newspaper advertisement, claiming that the fees charged by Great-West violated § 36(b) of the Investment Company Act of 1940 (ICA), which prohibits fees that are “so disproportionately large that [they] bear[] no reasonable relationship to the services rendered and could not have been the product of arm's length bargaining.” To support their claim, Schlichter engaged J. Chris Meyer, a former investment management executive, as their mutual funds expert witness.

Great West initially moved for summary judgment, but U.S. District Judge Christine M. Arguello found that there was a genuine dispute of material fact as to Great West's fees, based on the opinions of Meyer. Great West then moved to strike Meyer as an expert witness as unqualified under Federal Rule of Evidence 702. Judge Arguello noted the weaknesses in Meyer's qualifications and conclusions that Great West had raised, but found they did not preclude him from testifying.

In her August decision in the case, Judge Arguello found that, on cross-examination, Meyer's opinion was “thoroughly discredited,” finding his testimony not only generally inadequate, but also that his specific theories regarding the plaintiffs' alleged damages were “legally flawed.” Elaborating on his testimony, Judge Arguello noted that on cross examination Meyer had conceded:

• At his last investment firm position, some 11 years earlier, there were "complaints about [his] lack of transparency in the board materials [he] prepared," and he had made significant errors in his calculations;
• His opinion on the profitability of one of the funds was based on no authority — accounting, legal, or otherwise.
• His damages calculations did not take into account relevant information.
• He was unfamiliar with relevant changes in the mutual fund industry that had occurred in the past 11 years.
• He failed to do an economies of scale study on each fund as was required.
• He had nothing to base his opinion on to say that 35 basis points for recordkeeping is excessive.
• He criticized Great-West for not putting their 35-basis-point fee out to bid, yet admitted under cross‑examination that “[i]n reality, [that] probably can't be done” and that he “probably shouldn't have included that” in his report.

Judge Arguello found that there were “abundant examples of other weaknesses and inconsistencies” in Meyer's testimony which she would not bother to list.

In her sanction order, Judge Arguello noted that Schlichter should have voluntarily dismissed the case after Great West had pointed out the weaknesses in Meyer's opinions and presented credible evidence that their fees were reasonable, especially given that “no plaintiff … had ever prevailed on a §36(b) claim in [the] 50 years of the statute's existence.” Schlichter's decision to proceed to trial was “objectively reckless.”

Judge Arguello also noted the “manufactured nature of the case” as the plaintiffs Schlichter had recruited through the newspaper advertisement were generally satisfied with their investments and had little to gain from the litigation. The case was, as Great West pointed out, “inherently lawyer driven” as Schlichter “stood to gain tens of millions of dollars.”

Judge Arguello found the Schlichter attorneys personally liable for Great West's “excess costs, expenses, and attorney fees” for the entire length of the trial, up to a maximum of $1,500,000.

While sanctions may not dissuade attorneys from dubious litigation, perhaps it may dissuade some from retaining dubious expert witnesses.