good morning your honor just my name is michael perlis and i'm here on behalf of the federal insurance company i would also like to reserve five minutes and will keep your honour's at michoud mind to mind the clock i'd like to start by really describing what this case is not about before i get to what it is about it is not about whether there was a fraud or that there was it is not about whether someone deserved to go to prison he did mr miller was sentenced for his fraud it is not about whether s t m was a profitable corporation it was not it lost money what this case is about is whether under this crime policy if t m or pacific enterprises in this case had the ability and was able to prove the kind of direct loss that drugs collins determined had to be proved in order to tap into the limits of that insurance policy and we suggest that they failed and they failed for a number of reasons the first issue i'd like to address is the expert testimony so they get a prize was faced with a problem and not problem was a result of the fact that virtually everyone who had taken a look at what it occurred after yeah the special committee of pacific enterprises formed to investigate f t m that was assisted by this boat check the head of internal audit by major accounting firm by the law firm of scott narcs and that report was specifically tasked to eight million but one million of that was an authorized repayment of debt which even mr freeman testified appeared to have been authorized by the board but nevertheless was awarded as damages to the civic enterprise as the issue here is not whether or not pacific enterprises might drop with a different expert in a different theory been able to prove something the question is whether or not they should have been permitted to use these experts and these theories to prove anything in any of that if it was one point eight million with half a million dollar retention the amount of the award would have been one point three million or less that he was in the one million was authorized director of internal audit ms boat trip testified in her deposition that the money path was circular although later she may have changed her testimony but she was repeatedly examined on that the experts hired by federal insurance during the initial focus of the claims mark hands and mr martins alone prepared that supplemental declaration and he described the work as being his work with some of his associates and he indicated what he had looked at before mr freeman was not a co author of that opinion the court allowed mr mark tends to be deposed he was and his methodology was largely invalidated through the course of cross examination so much so that when the motion for summary judgment was considered by  air had eliminated inventory which pacific enterprises had conceded was on the books and she had said basically that in her function as a gatekeeper under doubt that this particular expert's report was not sufficiently credible to go to a jury and she granted summary judgment she rejected it finding her role as gatekeeper for clue to the jury consideration of the mark times report her decision was appealed this court reversed but on at least sufficient evidence to demonstrate that the last was in excess of five hundred thousand dollars which was the minimum deductible required and it was specifically based upon judge collins determination not to allow a martins report based upon the law of the case and she said no no the court of appeals did not rule on this issue and i think that was correct and that has not been appealed by the city enterprises but this time while finding the same deficiencies with the marchand's report she found earlier which precluded her in her role as gatekeeper from allowing the report to be presented to the jury at all she determined that she would allow it to be presented to the jury finding it the fish and the same as she had before and allowing for a vigorous cross examination and the reason that she allowed it was because he had tried to comply with the water even though he had which was the same argument that had been made previously and been rejected by judge collins reliability where a vigorous cross examination may suffice but the case law that addresses the question of whether or not where any an opinion loses all connection to the facts which wh and is simply unreliable the nebraska plastic's a circuit case is one example of how can i make sure i understand your argument you're saying she was right the first time and in fact she was right the second time but she didn't follow her own decision another way if you didn't say on reflection i found it a little more reliable what she did was found the same thing she found the first time except applied to different remedy without explanation moreover i would think even if she had changed her mind it would still be an abus discretion for her to have done so under com home and under dauber because it was an opinion wholly disconnected from the fact but it gets worse and it gets worse in this context when the time comes for  respects mr freeman got up on the witness stand and testified basically and asked you to separate opinions one of which utilized a number that mr martins had previously utilized on the bottom line which was a loss of thirty one for thirty five three sixty seven but the way he got to it was by taking that thirty one and then working the numbers backwards so that they always didn't point side either with mr martins numbers or reality and let me give you a prime example of that if you look at the exhibit which is in the pacific enterprises excerpt of record by going to a tab thirty five you will see that in the opinion provided on the paper which are blocked but your paper mr freeman has a calculation which is keep it was damage analysis of expenses of twenty eight million dollars and change mr martins number was about fifty six million then he does the profit margin of thirty percent which was again disconnected from reality and if you took those two numbers and added them up you should have the revenue for f t s those two numbers added up were thirty nine million dollars the agreed upon revenue for f n during this period was thirty five million dollars not thirty nine million dollars so again we have a disconnect from the facts in that was on the books list and previously did from consideration  terms of trying to figure out operating expenses he subtracted the profit margin to thirty percent from these altered expenses which is nowhere recognized in accounting literature is being any kind of realistic approach to this type of calculation and then he reached the same bottom line number mr mark ames did well not is presented in the context of the jury trial in the first instance you can imagine the disadvantage of cross examining counsel in trying to address this new type of testimony second be then presented a holding number using a gross profit margin of nine point six six percent which had never been used by anybody before in any expert report but in fact was an accurate number and then use that number to assault the expert for pacific enterprises by saying he couldn't even calculate the real number and come up with a different conclusion using the same in firm numbers to reach his twenty three million dollar number which is the number of the jury expected minus a certain deduction to reach a result if this testimony had been excluded there would have been no proof of loss that this is the enterprise's had put forward and the matter one would have calculation was wrong because of the elimination of inventory because of the methodology in which he used to get to there which in essence implied sales higher than the sales reflected on the books and records of the  by the jury correct the inventory was backed up by the experts part of it was put back by the joint but but at least some inventory was backed down and you agreed that the nine point six six number is correct correct so it's the number to which the nine point six six is applied that's wrong that is the profit margin for your rather that what you're now complaining no they just report your honor excluded the the report which was also presented to the jury incidentally at thirty percent for a variety of reasons  included which i will discuss next those were among other things that i think convinced the trial judge to exclude it completely but notwithstanding that fact she still allowed the thirty percent to be presented to the jury mr freeman's principle the only case that this is going to prizes were lies on your honor as hurley and hurley really stands for the proposition that it is possible that a witness can come up with something different if there is adequate notice in this case they were given  of nine point six six versus thirty it is a question of the math which was deliberately we construe from the martins report on how to get there it's one thing if you look at a particular marchand's report and seen the methodology and then for someone else to then come off and applying a part of the different methodology using different numbers that result in different scenarios we would suggest this contrary to the letter and spirit of rule twenty six i want to mention a few other things and save some time for a bottle first we were deprived of credits from the last form various other operating expenses for example six million dollars that federal insurance was required to pay was money advanced to su some of it was reduction of debt or increase in overall i feel that he so they use the money to decrease their liabilities and then we have to reimburse them for the decrease in their liabilities plus interest on that that was plenty there was no substantial basis on policy but this was a policy that expired by its own terms in one thousand nine hundred three the rescission was in one nine hundred ninety eight i think that was cosmetic only i think the record will demonstrate that was cosmetic only they suggest that under california law we should have gone million dollars we paid one hundred percent of pacific enterprises last what would it be that moyes would contribute to lloyds that already paid what they'd agreed to pay we had already paid one hundred percent it seems to me the only one who got the extra cash was specific contribution by us to the other carrier but that only would apply were the other carrier has some obligation to contribute the other carrier has already contributed and therefore since there's already been a settlement with the other carrier it's not clear what th contribute to why i'm curious as to what legal authority you are urging that would compel the district court to rule in your favor i don't think there's anything that would no other than we think the standard concept that the plaintiff should not be and which by the judgment should have a single recovery and finally your honor it's the issue of interest we understand that's a discretionary issue but under these circumstances we do not think that interest should have been awarded we were compelled to pay interest on the lloyd's recovery we were compelled to pay interest on all of those other expenses that we don't even believe should have been concluded including the last i'd like to reserve my twenty five seconds that afternoon your honour's may please the court kirk passage for pacific enterprises i would like to start with one of the points that mr probus ended with which is the notion of an offset textron which is the case we cited in our answer in brief which they an insurance broker that is what we did here settlement with the broker and insurance company of a whole range of claims including a cell back of the policy he even if they had some argument for offset which they do not they discretion they made a big deal out of when the settlement discussions took place that isn't even one of the multitude of factors the primary factor being to compensate the plaintiff covers for the late between the time of filing the complaint there is no abuse of discretion now i am mystified and i remain mystified by the notion that mr freeman did something different at trial mr pearl was asked him cross examination verify that the numbers were the same numbers that martins the work that he did on the declaration and let's go back to the start here this was a joint report prepared by mr freeman and mr maher tents in a separate proceeding on summary judgment we were given the school did we doesn't need it two experts they work together that are less needed two experts who work together and your honor i think it's important to keep in mind that we're not the ones who asked for permission to substitute experts right before trial it was federal who made the attempt to on things like the basis for the original opinion which was the first half of the subsequent marchand's declaration now that our tends to operation and again they didn't bring it up and i think it's important to note that at one point in the testimony mr pearl's did say that the judge your honor if these numbers differ i may have to take it up with you and she said ok she was alone in the era and it didn't happen  is the chart and it was used during the trial that was submitted and if you compare that chart with mr freeman switch your block chart the math that's walk through is the same math mr freeman confirmed in trial that his opinion wasn't new he was asked about it and he confirmed it and he walked them through not it's true than the original joint report there was a big fat appendix attached to it and that wasn't part of what mr although he was cross examined on and it was what mr martins used either in the supplemental declaration which was to address the concern expressed by the court now the court's concern at the time she was concerned about the operating expense issue important yes it did because i asked mr freeman to do something i said first of all what's your opinion and he used the thirty percent growth gross profit figure and he testified just in foundation for that figure it was his experience over the years as an accountant it was in the audit report and this bunch checked herself indorsed it in the testimony that was offered of her through deposition so there were three sources for that now he did knowledge because i asked him to the criticism that federal had raised and he did the math that percent and you could use eight point six percent and do that math as well and you can do zero percent and do that math as well and he said yes yes yes i said but what is your opinion is it nine point six six or is it thirty and he said frankly didn't need mr freeman to do it i could have asked mr fox to do it he verified the number as the most accurate number but second the decisions out there say that i can have an expert do additional calculations in response to r or things that have happened in the case not a different theory not a different methodology but i could have asked him what if you assume fifty percent which had nothing to do with anything mask fall i thought i'd heard mr perla say and i asked  this question is it did did mr freeman just change the percentage of profit or he changed x to change the other variable the variable upon which the to which the profit margin was applied and i thought his answer was he changed  in the in his trial opinion he used a different methodology to determine the number which to which the proc percentages were then applied in it like here your response to that i don't think that's right he said that mr freeman sort of started to want to work backwards that's why i said if you look at the hand written but you're blocking you compare with the exhibit which is page twenty five on the martins declaration the supplemental declaration and compare and they start at the exact same place for x x days the same  was that starting number he took well he took the number which is a normal profit gross profit margin he took sales and he took expenses and he said normally in a business when you have a certain revenue generation you have a certain profit return on whatever your investment cost is because you can't operate a business without having as he put it thirty percent theory as opposed to a path to elation you've got to walk us through it on a calculation you take one number multiply it by different numbers of trac next number and come to a result but if you have to have all of the explanation for it it sounds like a theory as opposed to a calculation everyone did the math the same way you're on on this point if you know the p s i want the numbers but that's what we're asking for was the was the number that outstanding letter of credit which she did this oh yes you can see that it's listed right there as outstanding project letters of credit for example mr hart chances nineteen million twenty one thousand three hundred two dollars mr freeman it's nineteen million twenty one thousand three hundred two dollars they start with the exact same forty two million dollar number they do the same math additions and subtractions down to the end and they come up with the number now there were the issues of operating expenses and inventory by the way operating expenses has been the term used in this case from inception i know that mr person now wants to complain about it you made reference to it in the reply brief talked about being surprised and hoodwinked by what we did what we did was what was in if you go back to the genesis of the case in the september eleventh one thousand nine hundred one special audit committee report it was in what federals one claims adjustor used to says terminology it was the judge operating expense but the only testimony a trial with the things he's talking about that don't fit in operating expenses are not operating expenses now on this question of gross profit and the question of them in tor mr freeman who was the only fraud examiner to testify in this case he talked about things about what appropriate standards you would have to do if you're looking at a business as books if you're sort of going to sort of fight fraud examination which looks and talks and smells a l audit you know i'm in for a his point was very simple he couldn't verify the presence of a single dollar of inventory at the operative day of march thirty one that was his point mr fox assumed that all mr freeman did he was candid he says he didn't know what the in the jury was whether it was their own or eleven or fourteen million but he did know when you do an examination in your examining books of a company and you're looking to come up with verified numbers you can't put in what you couldn't verify mr fox did the opposite mr fox made assumptions without verification mr freeman had an explanation for the thirty percent is experience that they took the more accurate file which mr fox's knowledge was the most accurate number no one disputed that nine point six six percent was the most accurate number in terms of an actual profit margin mr freeman's point was that number this record when we look at these numbers and we work through the numbers that mr freeman used if you're going to use a gatekeeper function with an expert one of the questions almost every case involved is where the expert comes up with numbers that come out of nowhere mr freeman testified work every one of his numbers came from there was no dispute for example that when he started he started with the reported and verified balance in the intercompany account that was the forty two million dollar number and he explained it number by number where he got them that they came out of the audit report which is the one mr foster unreliable and there were only two numbers that were debatable and only two one was the profit margin number which mr freeman margin there is her finding of unreliability was based solely on the profit margin analysis because counsel took issue with that i don't think you know i think no to mr perkins said it also had to do with some other expenses that we shot that should be included which is why i went back and looked at it because i didn't remember that being in the opinion and having looked at it briefly i still don't remember it being in the opinion she did mention a profit margin but the primary difference here is when it came back down what she said and whatever else we can say happened here this is the judge who at the end the day basically reversed several years and multiple hearings of her thought as to whether or not there was evidence and what she said at the end of the day so i mean we're talking i judge you consider this thoroughly extensive multiple briefing he tried he tried to back out now did he think she think that he necessarily done everything that would be necessary she thought i believe from the opinion from the transcript of the argument from how she approached trial that he tried to back out legitimate operat expenses in the two issues that were lingering there the inventory one not being a big one on summary judgment you she was thirty percent profit margin which was supported by mr brady said that was primarily her routine cancer if there were a fair number of other reasons the problem she had what i think it's clear your honor that certainly the summary judgment here and she had a lot of problems with her i think should resolve some of those problems and i think at the end of the day in the exercise of he concluded that the problems that she thought that remained were not gatekeeper problems they were problems that should be tested because you know articulate that that's the difficulty i'm having with the ruling is that she changed her mind without saying why now i think she did say why your honor because she talked about they should be tested to cross examination and i think what she concluded was that was the appropriate way to resolve these issues and they were tested that that's insane the fact that she said previously that they were so  address the ruling on the expert i agree with that your honor the ruling on as far as the expert was and what the judge was dealing with on summary judgment was the fatality of the evidence for what the ninth circuit said was there were other things and that we didn't have to trace and there was a big debate obviously below about whether we had to trace or not and so i think the question that came back by the way if at the end of the day i certainly think it was within the ninth circuit's province to say at that time the only thing out we did raise the issue on appeal though your honor because we said a ruling was just flat out wrong in all particulars we challenge the we said that what the even marchand's done with sufficient and we also talked about frankly the focal point of the appeal wasn't th the time the trial she looked at marchand there was supplemental decoration submitted to my chance in connection with the pretrial briefing there was another more chance decorations submitted and the motions on the a much shorter one but there was yet one more knock ration that was before her  collins would not hear me at the sidebar and would not rule on my objection we then addressed it in a motion for new trial afterward that's what we chose to do the thirty percent issue where he said oh checking everybody else had sufficient of numbers to the jury as counsel did in closing argument you know starting from the top and working your way down to the extent you can throw out some straw man toward the top it makes the jury to the extent they want to do something for you more inclined to give you a number to the extent there was only a single number presented who knows what the jury would have done mr freeman he said i didn't know whether there was inventory or no inventory so i could make an assumption of course he made an assumption he seemed there was no inventory again maybe they did created the inventory the were they should know they didn't but but they gave us an inventory number and frankly i don't know that i could get any kind of substantial evidence overturn on their choice between fourteen and eleven but they did pick a leavened but mr freeman in terms of being able to give expert testimony misled the jury to say i couldn't assume one way or another in fact he assumed no finally your honor with regard to the issue of the offset federal insurance policy section four point seven has a recovery provision and it says to the extent this difficult apprises recovers any other money with respect to this claim we are entitled to it back less five hundred thousand dollars so that apart from whatever case law there may be there