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United States Securities and Exchange Commission v. ITT Educational Services, Inc.

United States District Court, S.D. Indiana, Indianapolis Division

June 15, 2018

United States Securities and Exchange Commission, Plaintiff,
v.
ITT Educational Services, Inc., Kevin M. Modany, and Daniel M. Fitzpatrick, Defendants.

          ORDER

          Hon. Jane Magnus-Stinson, Chief Judge

         Plaintiff United States Securities and Exchange Commission (the “SEC”) has sued Defendants Kevin Modany, the former Chief Executive Officer of ITT Educational Services, Inc. (“ITT”), and Daniel Fitzpatrick, the former Chief Financial Officer of ITT, alleging that they violated federal securities laws in connection with two student loan programs created by ITT for ITT students. The SEC and Defendants have filed Motions in Limine in advance of the July 9, 2018 trial in this matter, and those motions are now ripe for the Court's consideration. [Filing No. 280; Filing No. 282.]

         I.

         Standard of Review

         Given the evidentiary vacuum in which denials of motions in limine are made, such a denial is not final. Hawthorne Partners v. AT&T Technologies, Inc., 831 F.Supp. 1398, 1400 (N.D. Ill. 1993). A court's ruling on a motion in limine is subject to reconsideration “as events at trial unfold.” Moore v. General Motors Corp., Delco Remy Div., 684 F.Supp. 220, 220 (S.D. Ind. 1988). Accordingly, none of the Court's rulings here precludes counsel from objecting to offers of evidence at the time of trial or from offering excluded evidence outside the presence of the jury as part of an offer of proof.

         II.

         The SEC's Motion in Limine

         The SEC moves in limine to exclude five categories of evidence, which the Court will consider in turn.

         A. Evidence Concerning the Investigation Conducted by Cravath at the Direction of ITT's Audit Committee

         First, the SEC seeks to exclude evidence related to an investigation conducted by Cravath, Swaine & Moore, LLP (“Cravath”) at the request of ITTs auditor, PriceWaterhouseCoopers (“PWC”), including: (1) evidence of the conclusions of the Cravath investigation; (2) evidence of PWC's response to the Cravath investigation; and (3) PWC's workpapers summarizing Cravath's investigation.

         1. Conclusions of the Cravath Investigation

         The SEC argues that conclusions of the Cravath investigation - specifically, a report by PWC about what Cravath told PWC regarding Cravath's conclusions - should be excluded as hearsay. [Filing No. 280 at 9.] It also argues that evidence about the Cravath investigation has been withheld from the SEC as privileged information. [Filing No. 280 at 9.] The SEC contends that the conclusions of the Cravath investigation are of limited probative value, would cause jury confusion, would be unfairly prejudicial, and would waste time.

         Defendants respond that PWC documents regarding the Cravath investigation are probative and are not hearsay because Defendants intend to question the Cravath partner who led the investigation and who delivered Cravath's findings to ITT's Audit Committee. [Filing No. 289 at 4.] Defendants then dispute the SEC's contention that PWC documents regarding the Cravath investigation have been withheld from the SEC, stating that the SEC knew ITT had waived any claim of privilege as to the documents, and that the SEC has not called Cravath witnesses involved in the investigation, moved to compel production of Cravath's underlying documents, or “otherwise availed itself of abundant opportunities to obtain the material it once again claims is being unfairly withheld.” [Filing No. 289 at 5.] As for any jury confusion, Defendants argue that the Court can instruct the jury “that Cravath's conclusions are not a substitute for the jury's own independent determination of Defendants' liability….” [Filing No. 289 at 6.]

         The Court finds that PWC documents regarding the Cravath investigation are relevant, and relate directly to the SEC's allegations that ITT withheld certain information from PWC. [See, e.g., Filing No. 306 at 41 (the SEC alleging in the Amended Complaint that Defendants misled PWC by, among other things, withholding that ITT had received a legal opinion that POBOB payments were likely not permitted under the terms of the PEAKS agreements, and failing to disclose that ITT was projecting more than $100 million in CUSO payments if it continued using the minimum monthly payment method).] The documents are not hearsay, as they will be discussed in connection with the Cravath partner who led the investigation and delivered the findings to ITT. Additionally, the SEC has not shown that Defendants failed to produce the documents based on a claim of privilege. To the contrary, it appears that Defendants maintained that the documents were not privileged. [Filing No. 288-2 at 1-2 (letter from counsel for ITT to the SEC's counsel stating “there was never any privilege covering [the documents] - [Cravath] did not have an attorney-client relationship with PwC, and as such, the communications between Cravath and PwC have never been privileged”) (emphasis omitted).] And the Court agrees that any confusion the documents may cause can easily be cured by instructing the jury to not substitute Cravath's conclusions for its own judgment.

         2. PWC's Response to the Cravath Investigation

         The SEC seeks to exclude testimony that, after Cravath's investigation, “PWC performed the audit of ITT's financials for 2013 and accepted management representation letters from defendants.” [Filing No. 280 at 12.] The SEC argues that the evidence would be of limited probative value, would be unfairly prejudicial and confusing, and would waste time. [Filing No. 280 at 13-14.]

         Defendants argue that this evidence is relevant to the issue of whether PWC believes it had been deceived. [Filing No. 289 at 7.] They also argue that the evidence is not hearsay, and that any jury confusion can be alleviated through jury instructions. [Filing No. 289 at 7-8.]

         The Court finds that evidence of PWC's response to Cravath's investigation is relevant to the issue of whether PWC thought it had been deceived by Defendants based on the results of the investigation. Again, this information is not hearsay given that Defendants will use PWC witnesses to testify regarding PWC's response to Cravath's investigation. [See Filing No. 289 at 4 (Defendants noting that they intend to cross-examine PWC witnesses “concerning Cravath's findings and their role in PwC's evaluation of those findings”).]

         3. PWC's Workpapers Summarizing Cravath's Investigation

         The SEC asserts that Cravath interviewed individuals during its investigation, that a Cra-vath Associate relayed to PWC employees a summary of the interviews, that “PWC's recollection of [the Associate's] summary was then reduced to a memo from a PWC Senior Associate and that memo was included in PWC's workpapers, ” and that the memo was not intended to be a verbatim recitation of Cravath's summary. [Filing No. 280 at 14.] The SEC argues that any memos of this nature relating to Cravath's investigation should be excluded because they are inadmissible hearsay, would be unfairly prejudicial, and would cause confusion. [Filing No. 280 at 15-17.]

         Defendants argue that the memos are not hearsay because they are not admitted for their truth, but to show PWC's response to the investigation. [Filing No. 289 at 8.] They note that if they impeach a witness with the memos, they either will not be used as prior inconsistent statements but rather to show how PWC reacted to the interviews, or will be with interviewees who reviewed and/or approved their interview memos before the workpapers were finalized, rendering the memos admissible for impeachment. [Filing No. 289 at 8-9.] Defendants also assert that they have named several Cravath witnesses to testify about their interviews. [Filing No. 289 at 9.]

         The Court finds the Cravath witness interview memos to be admissible to the extent that they show PWC's response to the Cravath investigation. This evidence is directly relevant to what PWC knew and, consequently, what ITT had told PWC. And because the evidence is not being offered for its truth, it is not hearsay.

         The SEC's Motion in Limine #1, relating to evidence concerning the investigation conducted by Cravath at the direction of the ITT Audit Committee, is DENIED as discussed above.

         B. PWC Documents Not ...


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