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Article: Ninth Circuit Grapples with “Boiler Room” Expert Opinions

March 01, 2016
Business Litigation Reports

Where does lay opinion stop and expert opinion begin? While assessing convictions for wire and mail fraud associated with the defendants’ movie investment schemes, the Ninth  Circuit considered this important question in United States v. Lloyd, 807 F.3d 1128 (9th Cir. 2015). Beyond its colorful facts, Lloyd is notable for the Ninth Circuit’s treatment and eventual exclusion of the opinion testimony of a former colleague of the defendants, finding the testimony beyond the permitted scope of Rule 701 of the Federal Rules of Evidence. Because the error in admitting the opinion was not harmless, the Ninth Circuit reversed the conviction in part.

Lloyd  illustrates a common dilemma faced by litigants, where the underlying facts involve technical or complex subjects. The question becomes at what point does opinion testimony of a lay witness become expert testimony, subject to the attendant disclosure requirements mandated by the Federal Rules. Lloyand other recent decisions illustrate the mostly gray dividing line between the two and counsels a conservative approach in high-tech, or otherwise complex, criminal and civil litigation settings.

Defendants’ Investment Schemes
Defendants were telemarketers charged with wire fraud, mail fraud, and the sale of unregistered securities. Working out of call centers—so-called “boiler rooms”—in Florida and California, they sold what they described as no risk, quick return investments in movie productions. The alleged investments were in “B” movies, including Forbidden Warrior, From Mexico with Love, and Red Water, all produced by Cinamour Entertainment. According to the opinion, while Cinamour did hire telemarketers to raise money for these projects, most of what the defendants collected from  investors merely lined the pockets of boiler room employees. To  solicit investments, “fronters” would cold call potential investors, and, reading from a script, describe the investment in glowing terms. If they received any interest, the call would be transferred to a “closer,” whose job was to get signed investment documents. One  of the defendants, Nelson, worked first as a fronter, and later as a closer, in one of these boiler rooms located in California. Like other employees, he followed a script, convincing targets to part with their money by guaranteeing quick, profitable returns on their investments.

In 2011, Nelson, along with ten others, were indicted on charges of mail fraud, wire fraud, and securities fraud. Nelson’s defense centered around the contention that he actually believed the investments were going to the movie productions, and—despite evidence to the contrary—that the investments would eventually pay returns to his clients. These claims, if true, would negate the knowledge element of fraud.

Nelson’s  claims, however, were undercut by the testimony of a former boiler room employee turned government witness, Allen Bruce Agler. Agler was no disinterested third party.  Agler had worked with Nelson and his cohorts in related boiler rooms before. At trial, Agler testified to  his opinions about the information and knowledge telemarketers have when they cold-call potential investors and when they close a deal.  Among other topics, Agler testified that “[e] verybody that I’ve ever worked with will always stretch the truth and make out—outright lies especially in certain techniques” and the investors relied on what telemarketers told them. Lloyd at 1154. Under cross-examination, Agler admitted that his opinions were based on statements from unidentified telemarketers and investor-victims—that is, opinions beyond his own personal experience. The prosecutor seized on Agler’s seemingly persuasive testimony, telling the jury in closing arguments: “Remember, all the closers knew that no investor makes money from an independent movie where the money is raised by cold call telemarketing.” Lloyd at 1156. After hearing Agler’s testimony, the jury convicted Nelson and the other defendants.

The Bounds of Lay Opinion Under Rule 701
On  appeal, Defendant Nelson argued that Agler’s testimony violated Rule 701’s personal knowledge requirement for lay opinion, and could not be admitted as expert testimony because the government had not given the required advanced notice under Rule 16 of the Federal Rules of Criminal Procedure. The Ninth Circuit agreed and reversed Nelson’s conviction.

Under Rule 701, a lay witness may testify in the form of an opinion only if it is “(a) rationally based on the perception of the witness; (b) helpful to a clear understanding of the witness’s testimony or the determination of a fact in issue; and (c) not based on scientific, technical, or other specialized knowledge.” Lloyd, 807 F.3d at 1154 (quoting Fed. R. Evid. 701).

Unlike expert opinion, the personal knowledge requirement for lay opinion is met only if the witness demonstrates “firsthand knowledge or observation.” According to the Lloyd  Court, Agler went beyond these confines when he  testified to  the  thoughts and opinions of unidentified people who invested in boiler room schemes and to the knowledge of all telemarketers when making these kinds of pitches— including the defendants themselves.

After finding it improper lay opinion testimony, the Ninth Circuit did not allow the testimony to be admitted as belatedly-disclosed expert testimony. Because Agler was never disclosed as an expert, the record did not establish that Agler qualified as an expert, that his opinions were reliable, or that what telemarketers “know” is a common subject for Rule 702 expert testimony.

Lloyd demonstrates both the power of strong lay opinion testimony as well as its potential pitfalls. The prosecutor did not hesitate to rely on Agler’s testimony. He invoked it repeatedly during closing arguments to demonstrate defendants were aware of the fraud they were perpetrating on investors. Amongst other evidence, this testimony lead to defendants’ convictions by the jury. By the same token, the shaky foundation of Agler’s opinions lead to the Ninth Circuit reversing the conviction entirely.

Other Recent Views on Lay Versus Expert Opinion 
In contrast to Lloyd, Judge Richard A. Posner recently found opinion testimony of police officers that their fellow officer used excessive and unreasonable force admissible. United States v. Smith, 811 F.3d 907, 909 (7th Cir. Jan. 28, 2016). Rejecting the argument that the opinions were undisclosed expert testimony under Rule 702, Judge Posner stated the “evidence was not based on ‘scientific, technical, or other specialized knowledge’ of the sort that only a witness whom the judge had qualified to be an expert witness would be allowed to testify to.”  Id. “Anyone who saw what the police saw [the defendant] Smith doing to [the victims] would have been able to offer an opinion on whether the force was reasonable and would have characterized [the defendant’s] conduct the same way the officers did.” Id. In contrast to Lloyd, even though police officers are specially trained on what constitutes excessive force and applied that knowledge in forming their opinions, Judge Posner found their testimony admissible as lay opinion under Rule 701.  Id.

In the civil context, recent cases demonstrate the same fine line between permissible lay opinion and expert testimony. In Open Text S.A. v., Inc., 2015 WL 393858, at *7 (N.D. Cal. Jan. 29, 2015), a patent infringement case, the court permitted testimony from the “Architect and Co-Owner” of an alleged non-infringing  software design. The court reasoned that Rule 701 allows testimony based on “particularized knowledge that the witness has by virtue of his or her position in the business.”  Id. Solely because the testimony involves knowledge that the average person would have to consult an expert to gain does not render the testimony based on “scientific, technical, or other specialized knowledge” under Rule 702.  Id.

By contrast, in another recent patent case, Munchkin, Inc. v. Luv N' Care, Ltd., 2015 WL 774046 (C.D. Cal. Feb. 24, 2015), Judge Otis D. Wright III charted a different course. The offered testimony was purportedly based on the witness’s  “nearly 50 years of experience in the field,” and, according to the offering party, “personal knowledge of the topics he plans on testifying about.” Id. Despite this, the court excluded the testimony as undisclosed expert opinion. In contrast to Open Box, the court stated that “[l] ay opinion testimony is ‘not to provide specialized explanations or  interpretations that an untrained layman could not make if perceiving the same acts or events.’” Id. (quoting Fresenius Med. Care Holdings, Inc. v. Baxter Int'l, Inc., No. 597, 2006 WL 1330002, at *3 (N.D. Cal. May 15, 2006)).

Where technical or complex opinion testimony is presented, one must evaluate carefully whether the opinions must be disclosed as expert testimony, or, whether they can be admitted as lay opinion. While some courts allow lay opinions based on “particularized knowledge” gained through one’s profession and experience, others exclude such testimony as beyond the bounds of permissible lay opinion.