09- 2233- cv ( L)

Jay D ees I nc. v. D ef

ens e T ech nol ogy Sy s t ems I nc.

U N IT E D S T A T E S C O U R T O F A P P E A LS F O R T H E S E C O N D C IR C U IT 

### S UM M ARY ORDER
R U L I N G S B Y S U M M A R Y OR D E R D O N OT HA V E PRE CE DE N T I A L E F F E C T . C I T A T I ON T O A S UM M ARY ORDE R FI L E D ON OR AF T E R J ANUARY 1 , 2 0 0 7 , I S PE RM I T T E D AND I S GOVE RNE D BY FED ERA L RU LE O F AP PELLA TE P R O C EDU R E 32. 1 A N D TH I S C O U R T’ S LO C A L R U LE 32. 1. 1. W H EN C I TI N G A S U M M A R Y O R D E R IN A D O C U M ENT FI LED W I TH TH I S C O U R T, A PA R TY M U ST C I TE E I T HE R T HE F E D E R A L A P P E N D I X OR A N E L E C T R ON I C D A T A B A S E ( W I T H T HE NOTA T I ON “ S UM M ARY ORDE R” ) . A PA RT Y CI T I NG A S UM M ARY O RDE R M US T S E RVE A COP Y OF I T ON ANY PA R TY N O T REPR ESENTED BY CO U N SEL. At a stated te rm of the United States Court of A ppeals for the Second Circuit, held at the Daniel Patric k Moy

nihan Courthouse, 500 Pear l Street, in the City of Ne w York, on the 2 day nd of De cembe r, two thousand ten. Pr e se nt: RA L PH K . WI NT ER, G U ID O C A LA B R E S I, ROBERT A. K

ATZ MANN, Circuit Judges
.

________________________________________________ J OHN SCOTTO,

Plaintif f-Appellant-Cross-Appellee , J AY DEES, I

NC., STEPHEN KEVEL SON, PHI L L I P MA RK S,

Plaintif fs-Cross-Appellees , v. Nos. 09-2233-c v(L ), 09-2300- cv(XAP), 09 -2 46 8- c v( XA P) J OHN B RADY, DAN I ELMcPHEE,

De fe nd an ts- Ap pe lle es- Cro ss-

Ap pe lla nts , DEF ENSE TECHNOL OGY SYSTEMS I NC.,The Clerk of the Court is directed to amend the ca ption as set forth above
. * 2 EDWARD McPHEE, PHI L L I P RAUSC H,

Defendants-A

ppellees
. *

________________________________________________ F or Pla int if f- Ap pe lla nt- Cr os s- Ap pe lle e : R I C HAR D S. C I A CCI , RosenbergFe ldman Smit h, L L P, New Yor

k, NY F or Pla int if fs -C ro ss- Ap pe lle e s: S TEVE N G. L EG UM , Ca rl uc c i & L e gum, Mineola, NY F or De fe nd ant- Ap pe lle e -C ro ssAp p e l l an tJ o h nB r a dy: RAL PH P. F ERRA RA , Ober mayer Rebma

nn Maxwell & Hippel L L P, Cherry Hill, NJ F or De fe nd ant- Ap pe lle e -C ro ssAppellant Da

niel McPhee: Daniel Mc Phee, pro s e , Dix Hills, NY
Appea l from a judg ment of the United States District Court for the Southern District of New Y ork (Hon. T homas S. Zilly , J. , sitti ngby desig nation). ON CO NSI DE RA TIO N W HEREOF , i ti s h e r e b y OR DE RE D , AD JU DG ED , and DE CREED that th e jud g me nt o f t he dis tr ic t c ourt

is AF F IRMED in part and VA CA TED and REMAND ED in part. Def endant- Appellee -Cross-Appe llant J ohn Br ady appea ls from a judg ment of the district court (H on. Thomas S. Z illy , J. , sitti ngby desig nation) ente red on A pril 30, 2009 and re aff

irmed on August 7, 2009, following a jury verdic t holding def

endants B rady , Daniel Mc Phee, and De fe ns e Te c hn olo g y

Sy ste ms Inc . ( “ De fe ns e Te c h, ” fo rm e rl y kn own a s D ataWor ld S olutio ns , Inc.) jointly

and seve rally

liable on claims for

secur ities fraud in violation of the Sec uritiesAlthough D efe ndant-Appe llee-Cross-A ppellant Danie l McPhee filed a pro s enotice of 1 appea l, he has submitted nothing f urther in support of

his appea l. FollowingJ udg e Scheindlin’s orde r re solving the de fenda nts’ summary

judgme nt 2 motion, the case w as re assig ned to J udg e Z illy , visiti ngfrom the Western D istrict of Washington. 3 Ex chang e Ac t of 1934 (the “ Ex chang e Ac t”) a nd Rule 10b-5 promulg ated ther eunder and for New Y ork common law f raud. In his cross-a

ppeal, Plaintiff-A

ppellant-Cross-Appe llee John 1 Scotto challeng es an e arlier order of the district cour

t (Scheindlin, J. ) that grante d in part defe ndants’ motion for summary judgme nt and dismissed Scotto’s feder al sec urities fra ud and common-law f

raud c laims on the g round that Scotto failed to ra ise a g enuine issue of materia l fac t that he suffe red a

net loss on his investment in Defense T ech’ s stock. We assume the 2 parties’ familiarity

with the underly

ing f acts a nd the proc edura l history

of this case , as we ll as the iss ue s o n a

pp e a l. B ra dy c onte nd s f

ir st that th e dis tr ic t c ourt

e rr e d b y de nyinghis mot ion s f

or jud g me nt a s a matter of la

w and his alter

native motion for a ne w trial. We revie w de novo a district cour t’s denial of a

motion for judgme nt as a matter of law, “ applying the same standa rds as the district court.” Advanc e Pharm., I nc. v. U nited States , 391 F.3d 377, 390 ( 2d Cir. 2004). A district court may

enter judgme nt as a matter

of law a g ainst a par

ty only if “ther e is no leg ally sufficie nt evidentiary

basis for a

rea sonable jury

to find for that pa

rty on that iss ue .”
. . . In a sse ssi ngthe su ff ic ie nc y of e vid e nc e to s up po rt

a jur y ve rd ic t, w e mus t vie w the re c or d in

the light m os t f

avo ra ble to t he op po sin gpa

rt y , a ssumin ga ll r e a so na

ble infere nces w ere drawn and all cr edibility disputes resolved in its favor . We will not s et aside a judgme nt unless “(1) the re is such a complete a

bsence of evide nce suppor ting the verdic t that the jury ’s finding s could only have be en the r esult of shee r surmise and conjec ture, or ( 2) there is such an over whelmingamount of evide nce in f avor of the mov ant t hat r e a so na

ble and fa ir min de d [pe rs on s] c ou ld n ot a rr ive at a ve rd ic t a g a ins t [i t] .” Id. (c i t at i o n s o m i tt ed ) ( al t er at i o n s i no ri gi n al ). T h e r ev i ew o f ad i s tri ctco urt ’s o rd er d en yi n g a4

new tria l motion i s for a

buse of discr etion. Tesser v. Bd. of Educ

. , 370 F.3d 314, 320 ( 2d Cir. 20 04 ). “ A m oti on

fo r a ne w tri a l or din ari ly

sh ou ld n ot b e g ra

nte d unle ss t

he tr ia l c ourt

is
c onvin c e d th at th e jur

y ha s r e a c he d a

se ri ou sly e rr on e ou s r e su lt o r t

hat th e ve rd ic t is a miscarr iag e of justice.” Medforms, Inc . v. He althcare Mgmt. Solutions, Inc. , 290 F.3d 98, 106 (2d Cir. 2002) (inter

nal quotation marks omitted). Br ady asser ts that the jury ’s ver dict lacke d a basis in evidenc e with re spect to ea ch of the three claims asser

ted by Plaintiffs-Cross-Appellee s J ay Dee s, Inc. (“ J ay

Dee s”), Stephen Keve lson, and Phill ip Marks ag ainst Br ady at trial, which w ere , respe ctively , that Br ady (1) violated Section 10(b) of

the Exchang e Ac t, (2) violated Sec tion 20(a) of the Exchang e Ac t, and (3) c ommitt ed fr aud under New Y ork common law. In evaluating B rady ’s cha lleng e to the jury ’s
ve rd ic t f ind inghim

lia ble on a ll c la ims , w e have c are fu lly re vie we d th e tr ia l r e c or d to e va luate the suffic iency

of the e vidence as to ea ch disputed ele ment of ea ch cla im. This record inc ludes testimony and docume ntary

evidenc e that, whe n viewed in the light most sy mpathetic to the pla int if fs and re so lvi ngc re dib ili ty

dis pute s in

pla int if fs ’ f avo r, su pp or ts t he fi nd ing s th at:

• B ra dy ind uc e d John Sc ott o to inv e st i n th e De fe ns e Te c h b y kn ow ing ly misrepre sentingto him that, inte r a lia , the company could design and manuf

actur e ballistic gla ss, when it in fac t lacked the infrastruc ture a nd expertise to do so;

• B ra dy , in

a dd iti on to t e lli ngSc ott o th at he c ontr oll e d th e c omp any , w a s invo lve d w ith rec ruiting me mbers to sit on the company ’s advisory board a nd with prepa

ringthe c omp any ’s pr e ss r e le a se s;

• B ra dy a sk e d Sc ott o to sp re a d th e wo rd to S c ott o’ s r e lativ e s a

nd fr ie nd s th at D e fe ns e Tec h was a

g ood stock;

• Jay De e s ( thr ou g h it s p ri nc ipa l and so le sh are ho lde r) , K e ve lso n ( thr ou g h h is a du lt son, whom he authorized to make inve stment decisions on his behalf), a nd Marks purcha sed their stock ba sed at lea st in part on Scotto’s communication to them of B ra dy ’s mis re pr e se ntatio ns ;5

• in the months that followed, Br ady and the other

defe ndants arr ang ed mee tings, he ld a product de monstration, distributed a company brochur e, and issued pr ess re lease s that reinfor ced the ir prior misrepr esentations as to the company ’s ca pabilities and introduced a dditional false and mislea ding statements relating to the c ompany ’s fi na nc ia l si tuatio n, bu sin e ss r e latio ns hip s, inf ra str uc tur e , a nd pe rs onne l;

• Br ady sold his st ock for

a lar g e prof

it and did not disclose this fact to Scotto, but rathe r cla imed that he wa s a long -term investor in the c ompany ; and

• the de c lin e in D e fe ns e Te c h’ s st oc k p ri c e in Jul y and Au gus t 20 04 wa s attr ibuta ble to the mark e t’ s a

bs or pti on of the tr uth that th e c omp any

ha d n o me anin g fu l pr od

uc t, infrastruc ture, e x pertise, or business relationships. Ba sed on these a

nd other a spects of the trial rec ord, we conclude that, except to the limit ed extent de sc ri be d b e low , th e dis tr ic t c ourt did no t e rr in d e nyingB ra dy ’s mot ion s f or jud g me nt a s a matter of la

w or, a lternatively , for a

new tria l. For the followingrea sons, however , we va cate so much of the f inal judgme nt as awa

rded Keve lson $300,000 in compensatory damag es and r emand to the district cour t for the f urther proce eding s descr ibed below. We conc lude that the jury ’s awa rd of $300,000 in compe nsatory damag es to Keve lson must be vacate d beca use it cannot be rec onciled with the cour t’s ins tr uc tio ns of law o n h owsu c h d ama g e s mu st b e c a lc ulate d, wh ic h n e ith e r p art y ob je c te d to be low or c ha lle ng e s o n a

pp e a l. T he dis tr ic t c ourt

ins tr uc te d th at c omp e ns ator

y dama g e s w e re to be dete rmined base d on the “a ctual dama g es sustained,” which in turn ar e der ived by calc ulating
e ith e r: (1) the diffe renc e betwe en the a ctual purc hase pr ice a nd the true va lue at the time of purcha se of the se curities at issue; or (2) the diffe renc e betwe en the a ctual purc hase pr ice a nd either ( i) the sale pr ice of the secur ities at issue, or (ii) the va lue of a ny unsold securities at issue, r educe d by any amount by

which dama g es should have be en mitigated . . . .Th e dis tr ic t c ourt a lso ins tr uc te d th e jur

y that w ithre sp e c t to the pla int if fs ’ f ir st c la im 3 for violations of Section 10(b) of the Exchang e Ac t, compensatory damag es must be limited pursuant to the Private Sec urities L itigation Refor m Act of 1995 (“ PSL RA”) ba sed on the mea n tradingprice of De fense Tec h stock duringthe 90-da y period followingthe date on which information cor

rec ting the unde rlying misre prese ntations was disclosed. See15 U.S.C. § 78u4(e) (1). As note d above, w e believe the evidenc e supports the jury ’s implicit finding that complete c orre ctive disclosure did not take place until August 2004. This statutory limit ation, howeve r, is not material to the ultimate dete rmination of Keve lson’s compensator y damag es g iven our a ffirma

nce of his liabili ty

on the common law f

raud c laim, which is not subject to the PSL RA’s damag es limitation. 6 A. 56 . A c c or din gto t

he un dis pute d tr ia l e vid e nc e of Ke ve lso n’ s p ur c ha se s a

nd sa le s o f D e fe ns e Te c h s toc k, Ke ve lso n’ s o ut- of -p oc ke t inve stm e nt w a s $ 30 6, 15 2. 44 , a nd he so ld a ll o f h is holdings in Oc tober 2006 for $7,387.47, thus resulting in a net loss of only

$298,764.97. There was no ba sis for the jury

to awar d Keve lson compensatory damag es on either

his feder al or statelaw cla ims in ex cess of

his net loss on the investment. W e thus vac ate the f inal judgme nt insofar
a s it awa rd e d K e ve lso n $ 30 0, 00 0 in c omp e ns ator

y dama g e s a

nd re mand fo r t he dis tr ic t c ourt

to set an a ppropriate remittitur amount. This amount should be consistent with the undisputed evidenc e of K evelson’s pur chase s and sales of Def ense Te ch stock noted a

bove and the court’s instructions of law re g ardingthe ca lculation of ac tual damag es and a ny applicable reduc tions or limit ations thereto. I f Ke velson does not agree to remit the portion of the ve rdict that is deeme d 3 excessive, he is entitled to a ne w trial on the issue of c ompensatory damag es. See Smith v. Lightni ng Bolt Prods., Inc. , 861 F.2d 363, 375 ( 2d Cir. 1988). We tu r nn e xt t o B r a dy ’ s c h a ll e n g e s to th e d is tr ic t c o urt’ s e v id e n ti ar y r u li n g s at t r ia l. We revie w such ruling s for a

buse of discr etion and note that “ a new trial should be g rante d only if a substantial rig ht of a pa

rty is affe cted[,] as when a jury ’s judg ment would be swa y ed in a mate rial fashion by

the er ror.” Ar lio v . Li v e ly , 474 F.3d 46, 51 ( 2d Cir. 2007).7

B ra dy ’s pr inc ipa l c la im o f e rr or in t his re g ard is t hat th e dis tr ic t c ourt

a bu se d it s discretion in re fusingto admit proof of Scotto’s prior Califor nia fe lony convictions for possession of a for g ed instrument and br ibing a state liquor offic ial, which we re ove r ten year s old at th e tim e of

tr ia l. T he a dmi ssi bil ity

of the se c onvic tio ns fo r p ur po se s o f i mpe a c hme nt i s g overne d by

Fe dera l Rule of Evidence 609(b), whic h provides in re levant par t that evidence of such a c onviction is not admiss ible “unless the c ourt deter mines, in the interests of justice, that the pr ob ativ e va lue of

the c onvic tio n s up po rt e d b y sp e c if ic fa c ts a nd c ir c ums tanc e s su

bs tanti a lly outweig hs its prejudicial eff ect.” We have on se vera l previous occ asions “re cognized that Con g re ss i nte nd e d th at c onvic tio ns ov e r t e n ye ars old be a dmi tte d v e ry

ra re ly and on ly in exceptional circ umstances,” Zinman v. Black &Dec ker ( U.S.) , Inc. , 983 F.2d 431, 434 ( 2d Cir. 1993) (inter

nal quotation marks omitted), and he re, w e find no e rror in the district court’s
a sse ssm e nt t

hat th e pr ob ativ e va lue of Sc ott o’ s c onvic tio ns did

no t su bs tanti a lly

outw e igh th e ir prejudicia l effe ct. To the e x tent that the district court de nied B rady ’s re quest to introduce evidenc e of the se convic tions for non-impeac hment purposes, we think this rulingwas a proper exercise of

the cour t’s residual discr etion, pursuant to Fe dera l Rule of Evidence 403, to exclude evidenc e that is substantially less probative tha

n prejudicia l or confusing
. Independe ntly , we c an disce rn no indication that these r ulings a ffe cted B rady ’s substantial rig hts. Evidence of

the convictions would have been c umulative at best in light of the int ro du c tio n at tr ia l of

the fa c t th at Sc ott o w a s d isb arr e d in se ve ra l st ate s, wh e re the se disbarments ar ose fr om the same c onvictions that Bra dy soug ht to introduce. In a dd iti on , B ra dy

c onte nd s th at th e dis tr ic t c ourt , b y a dmi tti ngat tr ia l do c ume nts purportingto show that Scotto had suffer ed a ne t loss on his investments, abused its discretion8

g ive n th e c ourt ’s pr ior

ru lin g , in c onne c tio n w ithB ra dy ’s summa ry jud g me nt m oti on , th at th e se documents we re ina dmissibl e. We find no re versible e rror in this reg ard. To the extent that the introduction of these doc uments at trial was e rrone ous, this error w as har mless give n the fa ct that by the tim e of

tr ia l, S c ott o h a d a lr e a dy

be e n d ism iss e d a s a

pla int if f, so e vid e nc e re latin gto h is los se s w a s o f e xtre me ly

lim ite d r e le va

nc e to t he re ma ini ngc la ims and

de fe ns e s. This leads us to considera tion of Scotto’s cross-a

ppeal, whic h challeng es the district court’s dismissal of Scotto’s claims followingdefe ndants’ motion for summary judgme nt on the basis that Scotto suffere d no net ec onomic loss on his i nvestment. We review the district court’s g ra nt o f s umm ary

jud g me nt de novo
. Okin v. V ill. of Cornwall-on-Hudson Police De p’t , 577 F.3d 415, 427 ( 2d Cir. 2009). Summary judgme nt is warra

nted only wher e “the re is no g enuine issue as to any

materia l fac t and . . . the movant is entitled to judgme nt as a matter of law.” Fe d. R
. C i v . P
. 5 6 (c )( 2 ). T o th e e x t en tth atS co tt o ch al l en ges th e d i s tri ctco urt ’s ev i d en t i ary ru l i n gs made in conne ction with its gra nt of summary

judgme nt, we obser

ve that “a district court de c idi nga

summa ry jud g me nt m oti on

ha s b ro a d d isc re tio n in

c ho os ingwh e the r t o a dmi t evidenc e,” a

nd that “[t] he princ iples g overningadmissibili ty of evide nce do not c hang e on a motion for summary

judgme nt.” Presbyte rian Church of Sudan v. Talisman Energy , Inc ., 582 F.3d 244, 264 ( 2d Cir. 2009) (interna l quotation marks omitted). Scotto first argues that the district cour t erre d by excluding as ina

uthentic a doc ument purportingto be a tra ding summar y for Scotto’s L H Ross brokera g e ac count, which indicated that he incur red a n ag g reg ate loss on his Defe nse Tec h stock holdings. “ The trial c ourt has broa d discretion in deter

mining whe ther a

n item of evidenc e has be en prope rly authenticated, and we revie w its ruling only

for a buse of discr etion.” Un ite d S tates v . D hin sa , 243 F.3d 635, 658 ( 2d9

Cir. 2001). Under

Fe dera l Rule of Evidence 901(a) , “[t] he re quirement of a uthentication or ide nti fi c atio n a s a

c on dit ion

pr e c e de nt t o a dmi ssi bil ity is s atis fi e d b y

e vid e nc e su ff

ic ie nt t o support a findingthat the matter in que stion is what its proponent c laims.” We have he ld that this rule is satisfied “if suff icient proof ha s been introduc ed so that a r easona ble juror c ould find in favor of

authenticity .” Un ite d S

tates v . P lut

a , 176 F.3d 43, 49 ( 2d Cir. 1999) (interna l quotation marks omitted). In its well-rea soned Opinion and Or der r esolvingthe summary judgme nt motion, t he dis tr ic t c ourt

se t f or th i ts b a se s f

or c on c lud ingthat, a s a

matte r o f l aw, Sc ott o f

a ile d to e sta

bli sh the authenticity

of the L H Ross tradingsummary . Jay D ees I nc. v. D ef. Tech. Sy

s., Inc. , 2008 WL4501652, at *6-7 (S.D.N.Y . Sept. 30, 2008). We find no abuse of discretion in that de te rm inatio n. We a lso a g re e wi th t he dis tr ic t c ourt ’s c on c lus ion that Sc ott o c ou ld n ot m e e t hi s burd e n o f e sta

bli sh inge c on omi c los s me re ly thr ou g h h is o wn

te sti mony

that he los t mo ne y

on his Def ense Te ch investments. Id. at *7 . T he on ly oth e r e vid e nc e of

fe re d b y Sc ott o in su pp or t of his los s w a s an ame nd e d 2 00 4 ta x re tur n, wh ic h r e po rt e d th e same los se s in dic ate d in the L H R os s tr a din gsumma

ry . T he dis tr ic t c ourt

did no t e xplic itl y

a dd re ss t he a dmi ssi bil ity

or we ight o f t

his return in its summary

judgme nt opinion, and Scotto claims on appeal that this evidenc e cr eate d a fac t issue sufficient to satisfy his summary

judgme nt burden. We disagree and instead c onclude that the tax return, which Scotto offe red f or the proof

of the losses re ported ther ein, was inadmissible hearsa

y and thus could not suffice to establish his loss
. See, e .g. , Zeeman v . United States , 275 F. Supp. 235, 256 n.8 (S.D.N.Y. 1967) . Thus, beca use Scotto came forwa

rd with no
a dmi ssi ble e vid e nc e to p ro ve thi s e sse nti a l e le me nt o f h is c la ims , th e dis tr ic t c ourt c or re c tly g ra nte d s umm ary

jud g me nt o n th at ba sis
.10

Finally , we r eac h Br ady ’s ar gument that the district court e rre d in failingto make the finding s mandated by

the Private Sec urities L itigation Refor m Act of 1995 (“ PSL RA”) f ollowing its dism issal of Scotto’s claim and the e ntry of final judg ment. The PSL RA provides in rele vant part that “ upon final adjudication of the [securities fra ud] action, the court shall include in the
rec ord spec ific finding s reg ardingcompliance by eac h party

and ea ch attorne y

repr esentingany party with eac h require ment of Rule 11(b) of the Fe dera l Rules of Civil Procedur e as to a ny complaint, responsive ple ading , or dispositive moti on,” and the n impose sanctions if it finds that Rule 11 has bee n violated. 15 U.S.C. § 78u-4(c) (1)- (2). He re, it is undisputed that the district court ha s made no such f

indings. Scotto’s only

response to this claim of error is to assert that he
wa s n o ts erv edwi tha c o p y o f B ra dy ’s n o t i ce o f ap p ea l
. As s um i n g arguendo that this noti ce w as not properly

serve d, we f

ind any technica l failure in this reg ard to be immaterial, as ther e ca n be
no dis pute that Sc ott o h a d a c tua l no tic e of the argume nts a dv anc e d b y B ra dy on a pp e a l, a nd in any event,“ [a] n appellant’ s failure to take any step other than the timely filing of a notice of appea l does not aff

ect the va lidity

of the a ppeal,” Fe d. R. App. P. 3(a)(2) . We thus remand to the district court for

the purpose of

enter ing the specific finding s reg ardingRule 11 compliance that
are require d by

the PSL RA. We have c onsidered the parties’ rema ining a rguments and find them to be without merit. Ac c or din g ly , f

or the fo re g oin gre a so ns , th e jud g me nt o f t he dis tr ic t c ourt

is AF F IRM ED in p art , VA CA TED in part, and RE M AN DE D for f urther pr ocee dings c onsistent with thi s order
. FOR THE COURT: CA TH ERI

NE O’ HA GA

N WO L F E, CL ERK