What happens when a party retains an expert witness who has worked for the opposing party in the past? Does the expert have a conflict of interest that precludes the expert from testifying against a former employer? The answer depends on the circumstances, as a fraud prosecution in Utah illustrates.
Wendell and Allen Jacobson operated a business known as Management Solutions, Inc. in Fountain Green, Utah. In 2011, the Securities and Exchange Commission (SEC) alleged in a civil proceeding that the father and son had engaged in a $220 million Ponzi scheme.
The Jacobsons allegedly offered investors, many of whom were drawn from the Jacobsons’ contacts in the Mormon community, the opportunity to invest in limited liability companies that owned apartment buildings in eight states. The Jacobsons represented that the companies purchased low-occupancy buildings, renovated them, and resold the buildings for a profit.
According to the SEC, the companies were actually losing money. The SEC contended that the Jacobsons used the investments to pay their own expenses while paying returns to early investors from the investment capital they received from new investors. The Jacobsons settled the case, although the proceeding against Management Solutions continued.
In 2013, a federal judge ruled that Management Solutions did not engage in a Ponzi scheme, although its individual transactions included “many Ponzi characteristics.” Rather than pursuing the business for operating an overarching illegal scheme, the judge said that fraud would have to be proved as to each individual transaction.
In 2015, the Utah Attorney General’s Office charged the Jacobsons with multiple counts of securities fraud under state law. The criminal charge alleged that the Jacobsons made false statements and failed to disclose important facts to prospective investors.
Gil Miller’s Relationship with the Jacobsons
While the SEC was conducting its 2011 investigation but before it filed a complaint in court, Management Solutions hired Gil Miller’s accounting firm to provide consulting services. Miller is a forensic accounting expert.
At some point after the SEC filed its lawsuit, the federal court appointed Miller to act as a receiver for the Jacobsons’ business. A receiver essentially takes over the business and assures that the business owners do not dispose of income and assets that could be used to pay creditors.
Court documents noted that Miller was the premier expert in receivership in Utah. When he was appointed as receiver, Miller’s firm terminated its consulting relationship with Management Solutions.
Miller continued acting as a receiver after the SEC complaint was settled. His duties included liquidating companies that were used as part of the alleged fraudulent scheme and using proceeds from the sale of assets to repay investors.
Allegations of Conflict
When criminal charges were filed, Utah prosecutors wanted to use Miller as an expert witness. The Jacobsons objected that Miller had a conflict of interest since his accounting firm had been employed as a consultant for the Jacobsons regarding the SEC investigation.
The Jacobsons’ attorneys argued that Miller’s firm had access to confidential information, including legal theories and strategies developed by the Jacobsons’ defense team. Legal strategies are usually privileged information that a party is entitled to keep secret.
Miller denied that he had a conflict because his accounting firm had been hired by Management Solutions, not by the Jacobsons. The fraud charges were filed against the Jacobsons personally, not against Management Solutions.
Miller’s attorney complained that the defense was making it appear that Miller had “switched sides.” He contended that Miller’s involvement in the case as a receiver involved different subject matter than the consulting services his firm provided to Management Services.
The trial judge agreed that Miller had a confidential relationship with Management Solutions and therefore could not disclose information he acquired during that relationship. The judge also disqualified Miller from testifying as an expert witness, but agreed that he could testify as a fact witness about facts that he did not learn in confidence as a result of his work for Management Services.
Motion to Dismiss
In response to the judge’s ruling that Miller could not testify as an expert, the defense filed a motion to disqualify the Attorney General’s office on the ground that it learned confidential information about the Jacobsons from Miller. The defense wanted the court to build a wall between the prosecutors and any prosecutors who replaced them so that the new prosecution team would not learn of any confidential facts upon which the prosecution was based.
Two more years drifted by before the court decided the motion. Noting the lack of evidence that Miller disclosed any confidential facts to the Attorney General’s office, the court denied the request to remove the prosecutors.
Undaunted by that ruling, the defense recently filed a motion to dismiss the prosecution, claiming it was tainted by the prosecution’s decision to hire Miller as an expert witness. Given the trial court’s earlier rulings, the motion seems unlikely to succeed. Given the snail’s pace at which the case is proceeding, however, it might serve to further delay the trial.