Tuesday, November 30, 2010

Changes in Federal Expert Disclosure Rules Shed Light on Corresponding Illinois Rules

On December 1, 2010, changes to Federal Civil Rule 26 become effective that will affect the use of expert witnesses in federal courts. This amendment adds new subparagraphs 26(b)(4)(B) and (C):

(B) Trial-Preparation Protection for Draft Reports or Disclosures. Rules 26(b)(3)(A) and (B) protect drafts of any report or disclosure required under Rule 26(a)(2), regardless of the form in which the draft is recorded.

(C) Trial-Preparation Protection for Communications Between a Party's Attorney and Expert Witnesses. Rules 26(b)(3)(A) and (B) protect communications between the party's attorney and any witness required to provide a report under Rule 26(a)(2)(B), regardless of the form of the communications, except to the extent that the communications:

(i) relate to compensation for the expert's study or testimony;

(ii) identify facts or data that the party's attorney provided and that the expert considered in forming the opinions to be expressed; or

(iii) identify assumptions that the party's attorney provided and that the expert relied on in forming the opinions to be expressed.

The amendments essentially extend the work-product protection to draft reports by testifying expert witnesses and protect most communications between attorneys and experts.

Prior to the change, Rule 26 had been interpreted by most federal courts to allow discovery of all materials considered by testifying experts, all communications between counsel and testifying experts, and all draft reports of testifying experts. See In re Pioneer Hi-Bred Int'l, Inc., 238 F.3d 1370, 1375 (Fed. Cir. 2001) (“[T]he 1993 amendments to Rule 26 . . . make clear that documents and information disclosed to a testifying expert in connection with his testimony are discoverable by the opposing party, whether or not the expert relies on the documents and information in preparing his report,” including an attorney’s “core work product.”); see also Manufacturing Admin. & Mgmt. Sys. Inc. v. ICT Group, Inc., 212 F.R.D. 110, 113-14 (E.D.N.Y. 2002) (same); see also Krisa v. Equitable Life Assur. Soc., 196 F.R.D. 254, 256 (M.D.Pa. 2000) (holding that documents prepared by expert witnesses, including draft expert reports, are not protected by the work product doctrine); Ladd Furniture, Inc. v. Ernst & Young, Case No. 95-00403, 1998 WL 1093901, at *11 (M.D.N.C. Aug. 27, 1998) (noting other courts have found draft expert reports are discoverable).

As a result, lawyers and experts operating under Federal Rule 26 took steps to avoid creating a trail of discoverable information. Judge Lee Rosenthal, chair of the Judicial Conference Committee on Rules of Practice and Procedure, noted that this frequently resulted in lawyers hiring two sets of experts—one for consultation, to do the work and develop the opinions, and one to provide the testimony—to avoid creating a discoverable record of the collaborative interaction with the experts. The reason for the use of two experts is that under former Federal Rule 26(b)(4)(B) (now Federal Rule 26(b)(4)(D)) the facts known or opinions held by a consulting expert who was not expected to be called as a witness at trial were only discoverable as provided in Rule 35(b) [Physical and Mental Examinations]; or “on showing exceptional circumstances under which it is impracticable for the party to obtain facts or opinions on the same subject by other means.” The rule change is designed to eliminate this inefficient practice.

How does Illinois treat the disclosure of information with regard to experts? Illinois Rule 213(f)(3) states: “A ‘controlled expert witness’ is a person giving expert testimony who is the party, the party’s current employee, or the party’s retained expert. For each controlled expert witness, the party must identify: (i) the subject matter on which the witness will testify; (ii) the conclusions and opinions of the witness and the bases therefor; (iii) the qualifications of the witness; and (iv) any reports prepared by the witness about the case.”

The rule regarding consulting experts, Rule 201(b)(3), provides that the identity, opinions, and work product of a consultant are discoverable only upon a showing of “exceptional circumstances under which it is impracticable for the party seeking discovery to obtain facts or opinions on the same subject matter by other means.” For purposes of Rule 201(b)(3), a “consultant” is a person who has been retained or specially employed in anticipation of litigation or preparation for trial but who is not to be called at trial.

The consequences of the Illinois expert disclosure rules as contained in Rules 201 and 213 would seem to boil down to an interpretation of the term “bases” as used in Illinois Rule 213(f)(ii). If "bases" means only the information relied upon by the expert in forming his or her opinion, then counsel would arguably not be required to turn over anything considered by an expert but not used by him or her in forming an opinion. There are both reported and unreported cases which are useful on this issue.

In McGrew v. Pearlman, 710 N.E.2d 125, 131 (Ill. App. 1 Dist. 1999) the defendant’s accident reconstruction expert was furnished with a recorded statement of the defendant taken just days after the accident at issue. The defendant did not disclose to the plaintiff that the defendant’s expert reviewed the statement prior to trial. The court found no violation of Illinois Rule 213 because 1) the plaintiff had obtained the recorded statement as a part discovery; 2) the court allowed great leeway in plaintiff's cross-examination of defendant’s expert along with the offer for plaintiff to recall his expert to testify based upon the recorded statement; and 3) it was clear that the report did not form the “bases” of the defendant’s expert’s opinion. Id. Although this case did not address the discoverability of any information reviewed by a testifying expert, the court’s interpretation of “bases” could support an argument that information is not discoverable unless it is relied upon by the expert in forming his or her opinion.

However, the court in Coleman v. Abella, 752 N.E.2d 1150 (Ill. App. 1 Dist. 2001) seemed to reach a different result. In Coleman, the plaintiff’s expert reviewed the deposition testimony of other lay and expert witnesses in the case after her deposition took place but prior to trial. Id. at 1155. The defendant moved to strike the testimony of the expert because the plaintiff failed to supplement the expert's deposition with the information that the expert had reviewed these additional depositions. This argument was based on Rule 213's requirement that a party supplement new or different “bases” of any opinion to be offered by an expert. The court agreed with the defendant, stating that even when the “bases” for the expert’s opinion are not broadened by the supplementary material and the opinion itself remains unchanged from that expressed at the deposition, an obligation remains on counsel to update answers to Rule 213 interrogatories so the new material supplied to the expert is disclosed to the opposing side. Id. This case would arguably support the contention that any information conveyed to an expert is discoverable, regardless of whether the information forms the "bases" for the expert's opinion.

At least one Illinois Circuit Court has found that the application of Illinois Rule 213 mirrors exactly the consequences of pre-amendment Rule 26. In Andrade v. General Motors Corp., No. 98 L 585, 2000 WL 35486903 at *1 (Ill. Circuit Court February 28, 2000), the plaintiff moved to compel the defendant’s Litigation Study, a 3,400 page document began at the request of corporate counsel with a view toward then pending and future litigation. In opposition, the defendant represented that its expert would not rely upon the study for his opinions. Id. at *3. The court held: “While there is no Illinois authority on point, this Court holds that the materials, having been considered by the expert, are discoverable and should be provided despite the privilege claims.” Id. at *3 (citing Karn v. Rand, et al., 168 F.R.D. 633 (N.D. Ind. 1996)).

In sum, under the current expert disclosure rules in Illinois, out of an abundance of caution attorneys may be inclined to follow a procedure which emulates Judge Rosenthal’s observed practice. That is, attorneys may work with two experts - one testifying and one consulting - to avoid the creation of a discoverable record. As a matter of practice, until Illinois changes its expert discovery rules counsel and client should proceed with the assumption that a court will compel production of all information received by a testifying expert - whether relied upon or not - and all draft expert reports. On the other hand, counsel should seek discovery of all information received by an opposing party’s testifying expert and all draft expert reports.

Thursday, November 18, 2010

The Future of OTC Retail Precious Metals Transactions


The Dodd-Frank Wall Street Reform Act (“Act”) amends the Commodity Exchange Act (“CEA”) by adding multiple provisions that place additional restrictions on commodity transactions. Section 742(a)(2)(D) within Title VII of the Act specifically addresses margined or leveraged retail commodity transactions. The new provisions

“shall apply to any agreement, contract, or transaction in any commodity that is—entered into with, or offered to, a person that is not an eligible contract participant or eligible commercial entity; and entered into, or offered, on a leveraged or margined basis, or financed by the offeror, the counterparty, or a person acting in concert with the offeror or counterparty on a similar basis.” [emphasis added]

However, this Section contains an exception for contracts of sale that either “result in actual delivery within 28 days...” or “create an enforceable obligation to deliver between a seller and a buyer that have the ability to deliver and accept delivery, respectively, in connection with the line of business of the seller and the buyer.”

Arguably, this means that the Act prohibits most people from entering into, or offering to enter into, a transaction in any commodity with a person that is not an eligible party on a leveraged or margined basis in the absence of actual delivery within 28 days. This expands the “Zelener fix” in the 2008 Farm Bill, that authorizes the CFTC to pursue anti-fraud enforcement actions for transactions conducted on margin or leverage basis. Notably, there is nothing in the Act, the CEA, nor legislative history that defines the terms “seller”, “buyer”, or “actual delivery” within the meaning of this provision. As such, a look the Model State Commodity Code (“Model Code”) may be shed some light onto these new restrictions.


The Model Code was originally drafted to provide a guide for state jurisdiction over generic commodities-themed transactions and contains language similar to that found in the Act. Similar language specific to the prohibition of margin and leverage account transactions appears in Section 1.02 as follows:

“no person shall sell or purchase or offer to sell or purchase any commodity under any commodity contract or under any commodity option or offer to enter into as seller or purchaser any commodity contract or any commodity option.”

Under the Model Code, the definition of a “commodity contract” includes margin contracts and leverage contracts.

Like the Act, the Model Code creates an exemption for margin and leverage contract commodity transactions, but the exemption only specifically applies to precious metals transactions. The exemption is available if the purchaser receives physical delivery of the precious metals within seven days from payment of any portion of the purchase price. Only the amount paid for, not the entire purchase amount, is required to be delivered within seven days. Additionally, “physical delivery” is satisfied when the precious metals have been delivered for storage to a financial institution or an approved depository that issues a confirmation and is not also the seller.


The new federal regulations will become effective in July 2011. They will likely pre-empt the state requirements of margin and leverage contract commodities transactions. Unfortunately, many of the key terms in the federal exemption are left undefined. It is unknown how the courts or the CFTC, if at all, will define “seller”, “buyer”, or “actual delivery”. Additionally, because the new provision does not include any language regarding storage requirements for margin and leverage contracts, it is possible that the new legislation will prohibit individual consumers from purchasing precious metals on margin and then storing their precious metals with an approved depository or financial institution.

However, the legislature’s primary concern in enacting Title VII was to deal with unregulated swaps and foreign currency transactions. Therefore, because OTC precious metals transactions were not the key target of this legislation, it is conceivable that an exemption similar to that found in the Model Code, which is specific to precious metals purchases and prescribes “actual delivery” requirements, could result as opposed to the broad exemption that currently applies to all margin and leverage commodity contracts.

The bottom line (for now): the retail commodity market for over-the-counter precious metals transactions sold on margin or through leverage is uncertain. Those who participate in this market should understand the existence of two concurrent, but conflicting, standards for these types of transactions.

Friday, November 12, 2010

SEC Proposes Rules for Tipster Program

On November 3, 2010, the Securities and Exchange Commission voted unanimously to propose a whistleblower program pursuant to Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Dodd-Frank substantially expands the SEC’s authority to compensate individuals who provide information that results in a successful action for violations of securities laws.

Cosgrove Law, LLC has previously written about the specific provisions in Section 922, which an in-depth discussion of this Section can be found here. The SEC’s rule proposals maintain the original language and definitions provided by Dodd-Frank; however, the proposed rules go a bit further to address concerns about the beefed-up tip program. According to an SEC press release, the primary concern was that companies feared the program would undermine existing anonymous hotlines and other internal whistleblower programs put into place after Sarbanes-Oxley in 2002.

To address those fears, the SEC proposal includes a protection that will not disqualify tipsters if they first report internally provided they report to the SEC within 90 days and to give them extra bounty for first reporting wrongdoing through the proper company channels.

Additionally, the SEC’s proposed rules set out a list of ineligible informants. Generally, compliance staff, outside accountants, attorneys who attempt to use information gathered from internal investigations, people within a company who are in positions of responsibility, and people who have a pre-existing duty to report their information are all barred from the award system.

Despite these exclusions, the bounty program is very broad. It allows tips on any securities law violation by an individual or company, public or private. The program also awards people that have no insider knowledge, but provide an analysis to help uncover or detect fraud. Further, even tipsters who were complicit in the fraud can get an award if they are not convicted of any wrongdoing.

The promise of potentially multi-million dollar payouts for tipsters could provide the agency with more information from insiders with knowledge of big frauds than in the past.

The rule comment period will be open until December 17, 2010.

Monday, November 1, 2010


On October 21, 2010, in an effort to further protect employee benefit plan participants and beneficiaries, the U.S. Department of Labor’s Employee Benefits Security Administration announced a proposed rule to expand the definition of “fiduciary” under ERISA. Specifically, the proposed rule would more broadly define the circumstances under which a person is considered to be a “fiduciary” by reason of giving investment advice to an employee benefit plan or a plan’s participants.

ERISA Section 504 imposes a number of duties on plan fiduciaries, including a duty of undivided loyalty, a duty to act for the exclusive purposes of providing plan benefits and defraying reasonable expenses of administering the plan, and a duty of care grounded in the prudent man standard. Despite the care taken to protect plan participants from poor fiduciary conduct, the definition of “fiduciary” has been left unchanged since ERISA’s enactment in 1975. And given the significant changes to employee benefit plans, the financial industry and the expectations of plan participants, the Department of Labor recognizes that the current definition of “fiduciary” may inappropriately limit the types of investment advisory relationships that give rise to fiduciary duties on the part of the investment advisor. Indeed, the Department of Labor noted in the new proposed rule that since 1975:

the retirement plan community has changed significantly, with a shift from defined benefit (DB) plans to defined contribution (DC) plans. The financial marketplace also has changed significantly, and the types and complexity of investment products and services available to plans have increased. With the resulting changes in plan investment practices, and relationships between advisers and their plan clients, the Department [of Labor] believes there is a need to re-examine the types of advisory relationships that should give rise to fiduciary duties on the part of those providing advisory services.

The proposed rule was published in the Federal Register on October 22, 2010, and written comments on the proposed regulations must be submitted to the Department of Labor on or before January 20, 2011.

A complete copy of the proposed rule can be found here.