Securities Expert Witness Evaluates Expired Stock Options

Securities Expert WitnessCase: First Marblehead Corp v. House, 541 F.3d 39 (2008)


Plaintiff First Marblehead Corp., a former employer, sued defendant Gregory House, a former employee, seeking a declaratory judgment that the employee’s stock options had expired three months after his resignation.

The plaintiff was granted incentive stock options as part of his employment. The stock option plan provided that the options would have a duration of 10 years. Unbeknownst to the employee, the plan also had a provision that in the event of an employee’s departure from the company, the options would expire within three months of the date of resignation. The employee resigned in 1998. In 2003, the employee sought to exercise his options. The jury found that the employee had reasonably relied on negligent representations regarding the expiration of his incentive stock options. However, the jury concluded that the employee would not have exercised those options during the three months after his resignation and thus awarded no damages. The appellate court determined that the district court did not abuse its discretion in admitting the testimony of the employer’s expert because the district court properly found that the employer’s expert was qualified under Federal Rule of Evidence 702, and the expert’s testimony as to what a reasonable investor would have done with the options was relevant and provided helpful context for the jury. The United States District Court for the District of Massachusetts denied the employee’s motion for a new trial. The employee appealed.

Expert Witness:

Defendant First Marblehead made it known before trial that it intended to call Robert Sherwin as an expert witness and submitted his expert report. Sherwin was a certified public accountant, with a bachelor’s degree in economics and a law degree from the University of Chicago. At the time of trial, he was employed by Analysis Group, a consulting company that specializes in economics, finance, and strategy consulting. He concentrated in two areas of economics: financial economics and industrial organization.

Daubert Challenge:

The defendant, House, objected to Sherwin’s report and anticipated testimony, arguing that it was irrelevant and that Sherwin was not a qualified expert. The district court declined to rule and reserved the issue for trial.


The appellate court affirmed the district court’s decision to allow the expert testimony and affirmed the district court’s denial of the motion for a new trial. Federal Rule of Evidence 702 requires that before giving testimony as an expert, a witness must be qualified as an expert by knowledge, skill, experience, training, or education and provide such knowledge that will assist the trier of fact to understand the evidence or to determine a fact in issue. Furthermore, the expert’s testimony must be based upon sufficient facts or data that result from the application of reliable principles and methods. The purpose of these requirements is to ensure, as a condition of admissibility, that proffered expert testimony rests on a sufficiently trustworthy foundation.

The court reasoned that it is not required that experts be “blue-ribbon practitioners” with optimal qualifications. Sherwin had nearly two decades of experience as a consultant in economics, finance, and strategy consulting. With respect to his testimony regarding investment diversification, Sherwin worked on the 401(k) committee at his consulting firm and advised employees in their various investments. Additionally, he testified that his experience includes providing investment advice to accredited investors. While a certified financial planner who focuses entirely on individual investment decisionmaking would also have been qualified to provide this testimony, the Court was unconvinced that Sherwin’s own credentials were such that he was unqualified to testify as an expert in this case.

Additionally, with respect to the issue of relevance, expert testimony must be relevant in the incremental sense that the expert’s proposed opinion, if admitted, likely would assist the trier of fact to understand or determine a fact in issue. Sherwin’s testimony was proffered by First Marblehead to explain to the jury how stock options function and how an investor would think about exercising those options. The Court stated that those are not topics ordinarily within the knowledge of the jury and thus are appropriate for expert testimony. Testimony that provides a necessary context and framework, especially in cases involving complex or unfamiliar concepts, can be appropriate for expert testimony without improperly interfering with the jury’s assessment of credibility.


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