The opinion of the court was delivered by: John G. Koeltl, District Judge
In 1998, eight institutional investors, the remaining plaintiffs in this case, purchased asset-backed securities. The securities were backed by consumer installment sales contracts entered into by the now-bankrupt furniture retailer, The Heilig-Meyers Furniture Company ("Heilig-Meyers"). The institutional investors claimed that they purchased the securities in reliance on material misrepresentations and omissions made by a predecessor of the defendant Banc of America Securities LLC (the "defendant" or "BAS"). The plaintiffs lost nearly $120 million. They sued BAS for fraud under both federal and New York state law. After a seven week trial, a jury returned a verdict in favor of the plaintiffs. The defendant now moves for judgment as a matter of law pursuant to Federal Rule of Civil Procedure 50(b) or, in the alternative, for a new trial pursuant to Federal Rule of Civil Procedure 59. For the reasons explained below, the motions are denied.
The remaining plaintiffs are AIG Global Securities Lending Corporation ("AIG Global"); AIG Life Insurance Company ("AIG Life"); Allstate Life Insurance Company ("Allstate Life"); Banc Leumi USA ("Banc Leumi"); Bayerische Landesbank, New York Branch ("Bayerische"); International Finance Corporation ("IFC"); Société Générale, as Manager for Certain Funding Limited ("SocGen"); and The Travelers Insurance Company ("Travelers") (collectively, the "plaintiffs").
In 1998, the plaintiffs purchased asset-backed securities in two private offerings underwritten by a predecessor of the defendant and First Union Securities, Inc. ("First Union"). The securities were backed by consumer installment contracts entered into by Heilig-Meyers, a specialty retailer of home furnishings that earned substantial revenues by selling furniture through fixed-term, fixed-payment installment sales contracts. After Heilig-Meyers declared bankruptcy in August 2000, the current plaintiffs, together with other institutional purchasers, sued the two underwriters. The Amended Complaint alleged four causes of action: (1) violations of Section 10(b) ("Section 10(b)") of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder ("Rule 10b-5"), 17 C.F.R. § 240.10b-5; (2) violations of § 12(a)(2) of the Securities Act of 1933, 15 U.S.C. § 77l(a)(2); (3) common law fraud; and (4) negligent misrepresentation. The Section 10(b) and Rule 10b-5 claims and the common law fraud claims were based upon four sets of misrepresentations and omissions allegedly made by the defendant to the plaintiffs.
After two motions to dismiss and a motion for summary judgment,*fn1 and after various institutional plaintiffs settled their claims and all claims against First Union were settled, the only claims that remained were the Section 10(b) and Rule 10b-5 claims by AIG Global, AIG Life, Allstate, IFC, SocGen, and Travelers against BAS, and the common law fraud claims by all eight remaining plaintiffs against BAS, based upon the allegation that BAS misrepresented the loss and delinquency rates of the contracts in the Trust. In October 2008, the case proceeded to trial on the remaining fraud claims. After seven weeks of trial, the jury returned a verdict in which it found the defendant liable for violating Section 10(b) and Rule 10b-5 with respect to the six remaining plaintiffs who had brought a Section 10(b) and Rule 10b-5 claim, and for common law fraud with respect to all eight remaining plaintiffs.
On January 5, 2009, the Court entered judgment in favor of the plaintiffs. Thereafter, the defendant filed these motions.
It is well-established that a district court should deny a Rule 50 motion unless "viewed in the light most favorable to the nonmoving party, 'the evidence is such that, without weighing the credibility of the witnesses or otherwise considering the weight of the evidence, there can be but one conclusion as to the verdict that reasonable [persons] could have reached.'" Cruz v. Local Union No. 3 of the Int'l Bhd. of Elec. Workers, 34 F.3d 1148, 1154-55 (2d Cir. 1994) (quoting Simblest v. Maynard, 427 F.2d 1, 4 (2d Cir. 1970)) (alteration in original); see also SEC v. Zwick, No. 03 Civ. 2742, 2007 WL 831812, at *2 (S.D.N.Y. Mar. 12, 2007); Fowler v. N.Y. Transit Auth., No. 96 Civ. 6796, 2001 WL 83228, at *1 (S.D.N.Y. Jan. 31, 2001); Dailey v. Société Générale, 915 F. Supp. 1315, 1321 (S.D.N.Y. 1996), aff'd in relevant part, 108 F.3d 451, 457-58 (2d Cir. 1997).
A trial court considering a motion under Rule 50(b) "must view the evidence in a light most favorable to the non-movant and grant that party every reasonable inference that the jury might have drawn in its favor." Samuels v. Air Transp. Local 504, 992 F.2d 12, 16 (2d Cir. 1993). A jury verdict should be set aside only when "there is such a complete absence of evidence supporting the verdict that the jury's findings could only have been the result of sheer surmise and conjecture, or [where there is] such an overwhelming amount of evidence in favor of the movant that reasonable and fair minded [jurors] could not arrive at a verdict against [the movant]." Logan v. Bennington Coll. Corp., 72 F.3d 1017, 1022 (2d Cir. 1996) (alteration in original) (internal quotation marks and citations omitted); see also Zwick, 2007 WL 831812, at *2.
In the alternative, the defendants move for a new trial pursuant to Rule 59. See Fed. R. Civ. P. 59(a). In determining whether a new trial is appropriate under Rule 59(a), a court applies a less stringent standard than on a motion for judgment as a matter of law. See Manley v. Ambase Corp., 337 F.3d 237, 244-45 (2d Cir. 2003); Katara v. D.E. Jones Commodities, Inc., 835 F.2d 966, 970 (2d Cir. 1987). "[F]or a district court to order a new trial under Rule 59(a), it must conclude that the jury has reached a seriously erroneous result or . . . the verdict is a miscarriage of justice, i.e., it must view the jury's verdict as against the weight of the evidence." Manley, 337 F.3d at 245 (internal quotations and citation omitted). With respect to the plaintiffs' common law fraud claims, "the standard is shifted somewhat in favor of [the defendant's] challenge to the verdict, due to the higher standard of proof (clear and convincing evidence . . .) required in fraud cases." Katara, 835 F.2d at 970.
There was sufficient evidence introduced at trial from which the jury could reasonably have found as follows.
In 1998, Heilig-Meyers was the nation's largest publicly held specialty retailer of home furnishings, with over 1,200 stores in 38 states, Washington, D.C., and Puerto Rico. (D509 at ¶ 30; P2 at BAS 670; P4 at BAS 11832.) Heilig-Meyers located its stores primarily in small towns and rural markets, and it made the majority of its sales to customers on credit. (P2 at BAS 672-73; P4 at BAS 11832-33.)
Heilig-Meyers' installment sales program was a key component of its operating strategy. (D509 at ¶ 31.) Heilig-Meyers offered its customers extended payment terms on most merchandise purchases under fixed-term, fixed-payment installment sales contracts. (D509 at ¶ 31.) Each contract required the customer, or under the contract, the obligor, to make a specific total amount of payments, payable in equal monthly installments, which represented the amount financed plus finance charges. (Tr. 398; D509 at ¶ 31.) Each contract was secured by the merchandise that had been financed. (D509 at ¶ 31.) Thus, a customer purchasing a couch from Heilig-Meyers could, with an installment sales contract, pay for the couch over a period of time by making a fixed number of monthly payments. If the customer defaulted, Heilig-Meyers could then repossess the couch. Heilig-Meyers made a substantial portion of its sales to customers on credit through its installment sales program. (D509 at ¶ 31.)
During the mid-1990s, Heilig-Meyers was a banking client of NationsBank, N.A. ("NationsBank"), a national bank affiliated with the defendant, which at that time was known by various names, including NationsBanc Capital Markets and NationsBanc Montgomery Securities (both hereinafter "NationsBanc"). (Tr. 213-15, 220-21.) NationsBank created NationsBanc, a securities company, in 1992. (Tr. 213-14.) Subsequent to the events at issue in this case, NationsBank merged with Bank of America, and NationsBanc became what is now Banc of America Securities. (Tr. 212.)
NationsBank, the bank, established a conduit called the Enterprise Funding Corporation ("EFC") to make loans to its best clients, which included Heilig-Meyers. (Tr. 221-22, 224, 2541-42.) Virtually all of these loans were backed by the client's assets. (Tr. 222.) Through the EFC, NationsBank made hundreds of millions of dollars of loans to Heilig-Meyers, which were backed by income from the installment sales contracts, also referred to as "receivables." (Tr. 230, 282, 286.)
Each time the EFC extended credit to a client, NationsBank issued an internal document called a credit approval report ("CAR"). (Tr. 242.) Each CAR assigned a risk rating on the credit quality of the company to which the loan was being made. (Tr. 243.) The ratings scaled from 1 to 10, with 1 being the best rating possible, 5 or better being investment grade, and 10 being the worst. (Tr. 243.)
In the mid-1990s, Heilig-Meyers' financial condition began to deteriorate. An internal due diligence report drafted by NationsBanc in October 1996 disclosed that Heilig-Meyers' average default and delinquency ratios in its receivables portfolio had steadily increased over the period from March 1993 to August 1996. (Tr. 288; P10 at BOA 10302.) NationsBank, however, continued to extend credit to the company, although the CARs issued with each extension of credit reflected a downward trend in the credit quality of the company. Heilig-Meyers went from being rated a "4" as of July 11, 1995, to a "5" as of December 16, 1996, to a "7" as of February 18, 1998, and finally to an "8" as of June 29, 1998. (Tr. 302, 320, 351-52, 401; P19 at BAS 22014; P32; P38).
In January 1997, to help Heilig-Meyers bridge its funding needs after another bank chose not to participate in a planned lending facility, NationsBank planned to increase temporarily its total corporate exposure to Heilig-Meyers to levels which were a source of concern within the bank. (Tr. 311-15, 2638-39; P14 at BASE 88983; P28.) To reduce its anticipated exposure to Heilig-Meyers, NationsBank planned to raise $300 million for Heilig-Meyers in the term market and to use the proceeds to pay down some of NationsBank's loans to Heilig-Meyers. (Tr. 315-16; P28 at BAS 25773-74.)
In February 1997, the Heilig-Meyers Master Trust ("Trust") was formed for the purpose, among others, of monetizing a substantial portion of Heilig-Meyers' installment contracts through the issuance of a series of asset-backed securities -- fixed income instruments serviced by cash flows from consumers making payments on their installment contracts. (D509 at ¶ 3.) Heilig-Meyers, as the servicer of the Trust, was primarily responsible for servicing and administering the contracts in the Trust, which entailed billing obligors, collecting payments from obligors, and maintaining internal records and databases. (Tr. 2542; D509 at ¶ 33.) First Union, as the trustee, was to act as the back-up servicer in the event that Heilig-Meyers was unable to continue or was removed as servicer. (Tr. 655-56, 714, 867, 896, 2610-11.)
The Trust issued three series of asset-backed securities: one in 1997, and two in 1998. (Tr. 235; D509 at ¶¶ 34-36.) In February 1997, the Trust issued a series of securities called the Variable Funding Certificates, Series 1997-1 (the "1997-1 Certificates"), in which NationsBank invested. (Tr. 414; P2 at BAS 756; P4 at BAS 11917.) In February 1998, the Trust issued several classes of interests as part of Series 1998-1, including Class A Certificates and Class B Certificates (collectively, the "1998-1 Certificates") in the aggregate original principal amount of $368 million (the "1998-1 Offering"). (D509 at ¶ 35.) In August 1998, the Trust issued several classes of interests as part of Series 1998-2, including Class A Certificates and Class B Certificiates (collectively, the "1998-2 Certificates") in the aggregate original principal amount of $280 million (the "1998-2 Offering"). (D509 at ¶ 36.) The classes indicated the seniority of the tranche of Certificates, according to which the Class A Certificate holders would be repaid their principal first, followed by the Class B Certificate holders. (Tr. 977-79.)
The 1998-1 Class A Certificates were backed by contracts in the Trust plus 2% cash collateral that together possessed 31.5% more value than the face value of the Certificates. (Tr. 977-78; P5 at BAS 5550; P208.) This additional value, also called a "credit support" or a "credit enhancement," served as a cushion to protect investors in the event that there was a shortfall in principal to pay back investors. (Tr. 684, 845, 978.) The 1998-1 Class B Certificates had a 17.5% credit enhancement, also including 2% cash collateral. (P5 at BAS 5550; P208.) The 1998-2 Certificates had similar levels of credit support: 35% for the Class A Certificates and 20.25% for the Class B Certificates, both including 3% cash collateral. (P6 at BAS 5599; P218.) In both offerings, the Class A Certificates were rated in the highest rating category by the rating agencies, and the Class B Certificates were rated in one of the three highest rating categories by the rating agencies. (D509 at ¶ 38.)
NationsBanc, as initial purchaser, sold the 1998-1 and the 1998-2 Certificates in Rule 144A offerings to qualified institutional investors, including all eight of the plaintiffs in this case. (D509 at ¶¶ 10, 21, 37.) The proceeds of those two offerings were then used to repay a significant portion of the money NationsBank had invested in purchasing the 1997-1 Certificates. (Tr. 1441-43.)
The plaintiffs sought to prove at trial that NationsBanc made false statements and omitted material facts which led investors to believe that the contracts in the Trust were of a higher credit quality than they actually were. According to the plaintiffs, NationsBanc did this in four ways: (1) by presenting the loss and delinquency statistics for the Trust based on a recency method that materially masked nonpayment by Heilig-Meyers' customers; (2) by omitting the fact that Heiling-Meyers maintained a separate set of aging statistics that would have revealed the poor credit quality of the receivables; (3) by comparing the loss and delinquency statistics for the Trust with those of other retailers, without disclosing the fact that a number of the other retailers used a more conservative aging methodology; and (4) by omitting the ways that Heilig-Meyers materially misapplied the recency method, such as by allowing judgmental overrides and add-ons. Based on the evidence presented at trial, the jury reasonably could have found that NationsBanc misrepresented the credit quality of the receivables in the Trust in all four of the ways alleged by the plaintiffs.
NationsBanc provided a copy of the 1998-1 Preliminary Offering Memorandum to AIG Life, Allstate, Bank Leumi, Bayerische, and Travelers, and a copy of the 1998-2 Preliminary Offering Memorandum to AIG Global, AIG Life, Allstate, SocGen, and Travelers. (D509 at ¶¶ 5-9, 17-20.) The 1998-1 and the 1998-2 Preliminary Offering Memoranda disclosed to investors over 120 pages of information about the Trust Certificates, Heilig-Meyers, and the underlying contracts in the Trust. (P1; P3.) Included in these disclosures were statistics on Heilig-Meyers' loss and delinquency experience which had been prepared using a method called recency accounting. Under recency accounting, a contract is charged-off if the obligor has made no payments over a period of six months. Recency accounting differs from contractual accounting, in which a contract is charged-off if the obligor has not paid in full after a period of six months.
NationsBanc's internal documents describe recency accounting as the "least conservative" method of accounting for losses and delinquencies and as understating losses and delinquencies when compared to the contractual method for calculating loss and delinquency rates. (Tr. 240-41; P8 at BAS 23508; P17 at BAS 22195.) These same documents described contractual accounting as "the industry standard," as the "most conservative" method of accounting for losses and delinquencies, and as representing "a more actual and straightforward snapshot of past due payments." (Tr. 921-22; P8 at BAS 23508, 23511.) The contractual method is also, by law, the required form of reporting for all bank-issued credit cards. (Tr. 223, 2546.) According to internal NationsBanc documents, contractual loss and delinquency rates were much higher than the recency numbers, typically more than twice as great. (P43.) An internal report, for example, indicated that during the period from March 1993 to July 1996 delinquencies reported under the contractual method were 2.34 times greater than delinquencies reported under the recency method. (P10 at BAS 10296.)
The Preliminary Offering Memoranda did not refer to the use of recency accounting by name, but rather included the following explanation of Heilig-Meyers' charge-off policy:
Amounts due under a Contract will generally be considered charged-off for purposes of the Agreement if one of the following circumstances occurs: (i) 180 days have elapsed since the last full payment on such Contract; (ii) the goods securing repayment of such Contract are repossessed; (iii) such Contract is transferred from a Retail Store to the Credit Center after notification that the related obligor has declared bankruptcy; or (iv) such amounts are deemed by the Servicer to be not collectible and are subsequently charged-off. (Tr. 323; P1 at BAS 2740; P3 at BAS 11959) (emphasis added).
The Preliminary Offering Memoranda did not otherwise mention recency accounting, contractual accounting, or the fact that recency accounting tended to understate the actual loss experience of the contracts in the Trust. (Tr. 603-05, 1590-91; P1; P3.)
The jury also heard evidence that Heilig-Meyers maintained credit statistics internally on a contractual and on a recency basis, and that it shared these statistics with NationsBanc on a regular basis. In Heilig-Meyers' own records, the contractual statistics were labeled "Primary Delinquency %," and the recency statistics were labeled "Secondary Delinquency %." (P42.) However, the Preliminary Offering Memoranda did not make any mention of the fact that separate contractual numbers existed, (Tr. 324, 356-57, 382-83, 605), and NationsBanc never indicated to the plaintiffs that contractual numbers existed (Tr. 1119).
In its communications with investors, NationsBanc also made misleading comparisons between Heilig-Meyers and other retailers. NationsBanc held two conference calls with investors, one before the 1998-1 Offering and the second before the 1998-2 Offering, in which Heilig-Meyers' charge-off experience was compared with other retailers, including Neiman Marcus, JC Penney, Dayton Hudson, The Limited, and Federated Department Stores, and in which investors were told that Heilig-Meyers had lower loss rates than all of the other retailers except for Neiman Marcus. (Tr. 562-71, 591-94, 632-34; P208; P218.) However, the loss rates of some of the other retailers, including both Dayton Hudson and Federated, were based on contractual numbers and were therefore not comparable to Heilig-Meyers' loss rates, which were based on recency numbers. (Tr. 276; P9 at BOA 10342.)
NationsBanc also disseminated sales memoranda to some of the plaintiffs, which were short documents that summarized the most important details of the deal and which were given to potential investors to help them decide whether to purchase the Certificates. (Tr. 383-84, 955.) A one-page sales memorandum faxed to both Bank Leumi and Bayerische in connection with the 1998-1 Offering described Heilig-Meyers as having a "[s]uperior credit experience" and "loss rates substantially lower than most retail." (Tr. 1667; P403; P501.) The memorandum listed HeiligMeyer's loss rate as 7.1%, which was the lowest loss rate among a group of eight other retailers. (Tr. 988-89, 1665-68; P403; P501.) The memorandum also included the description "Conservative Accounting treatment." (Tr. 993, 1669; P403; P501.) An eleven-page sales memorandum emailed to SocGen in connection with the 1998-2 Offering (the "1998-2 Sales Memorandum") listed Heilig-Meyers' loss rate as 7.2%, excluding the effect of a one-time write-off, and included comparisons which portrayed Heilig-Meyers as having lower loss rates than most other retailers listed in the Memorandum. (P704A.) The page in the 1998-2 Sales Memorandum which included Heilig-Meyers' loss rates and comparisons to the loss rates of other retailers was also faxed to IFC. (P604.) That page of the 1998-2 Sales Memorandum also stated that "[l]oss rates have shown a great deal of stability since 1994," and that "[l]oss rates are lower than for most retailers." (P604; P704A.)
The plaintiffs also presented evidence based on which a reasonable jury could have found that the loss and delinquency numbers provided to investors by NationsBanc materially misrepresented Heilig-Meyers' actual loss and delinquency experience even on a recency basis. First, Heilig-Meyers had a "judgmental override" policy, under which store managers could charge off accounts later than it would otherwise charge them off under recency accounting if the store manager had reason to believe that payment was imminent. (Tr. 287-88; P10 at BAS 10297-98.) Second, Heilig-Meyers also had a policy under which delinquent obligors could be reclassified as current if they made another purchase on credit from Heilig-Meyers -- what Heilig-Meyers termed an "add-on" purchase. A due diligence report prepared by NationsBanc after a visit to Heilig-Meyers' corporate headquarters in October 1996 described Heilig-Meyers' use of "add-ons":
If the customer, who has an existing installment contract, decides to buy something else from Heilig and finance it as well, new merchandise will be added on his/her existing contract. Monthly payments, finance charges and term of the contract will be recalculated. The amended contract will retain its number. Even if the existing contract was delinquent, after an add-on it will be considered current. (Tr. 291; P10 at BOA 10295.) In a section entitled "Substituted Contracts," the Offering Memoranda explained how the Trust treated such add-on contracts:
If an obligor with respect to an existing Contract desires to purchase additional goods or services on credit from an Originator . . . , such existing Contract and the related Trust Property will be automatically transferred to the applicable Originator, a new Contract will be automatically originated in substitution for such existing Contract and such new Contract and the related Trust Property will be automatically transferred to the Trust. (P2 at 693; P4 at BAS 11853.) The plaintiffs stipulated that these add-on purchases "constituted at least 30% of total Contract Receivables growth." (D510 at ¶ 39 (emphasis in original).)
Relying on these communications, the plaintiffs, in aggregate, purchased $226.75 million original principal amount of the 1998-1 and 1998-2 Certificates, $220.5 million from the defendant and $6.25 million from First Union.*fn2 (P940-50; D509.) On behalf of AIG Global, the Bank of New York purchased $54.25 million original principal amount of the 1998-2 Certificates.*fn3
(D509 at ¶¶ 46-47.) AIG Life purchased $7 million original principal amount of the 1998-1 Certificates (D509 at ¶¶ 11, 57), and $7.5 million original principal amount of the 1998-2 Certificates from the defendant (D509 at ¶¶ 22, 58-59). Allstate purchased $20 million original principal amount of the 1998-2 Certificates from the defendant. (D509 at ¶¶ 23, 79.) IFC purchased $20 million original principal amount of the 1998-2 Certificates from the defendant. (D509 at ¶¶ 24, 124.) Bank Leumi purchased $5 million original principal amount of the 1998-1 Certificates from the defendant. (D509 at ¶¶ 12, 97.) Bayerische purchased $50 million original principal amount of the 1998-1 Certificates from the defendant. (D509 at ¶ 13.) Travelers purchased $26 million original principal amount of the 1998-1 Certificates (D509 at ¶¶ 15-16, 148-49), and $15 million original principal amount of the 1998-2 Certificates from the defendant (D509 at ¶¶ 28, 150).
SocGen purchased $32 million original principal amount of the 1998-2 Certificates in August 1998.*fn4 (D509 at ¶¶ 26-27, 132.) After SocGen purchased the 1998-2 Certificates, it made a separate decision to sell the Certificates to Certain Funding, an arbitrage conduit sponsored by SocGen. (D509 at ¶¶ 136, 138.) In October 1998, a member of SocGen's securitization team prepared a credit application for the sale of the 1998-2 Certificates to Certain Funding. (D509 at ¶¶ 135, 139.) In November 1998, SocGen sold the Certificates to Certain Funding. (D509 at ¶ 143.)
On August 16, 2000, Heilig-Meyers filed for bankruptcy. (D509 at ¶ 29.) At that time, Heilig-Meyers also stopped servicing the contracts in the Trust. (Tr. 2610.) First Union, however, did not step in to take over servicing of the contracts in the Trust. (Tr. 897, 2611.) For several months after the bankruptcy, until a new servicer was brought in, collection rates on the contracts deteriorated. (Tr. 2111, 2216, 2616-17.) Ultimately, only $578 million in both principal and finance charges was actually collected by the Trust, compared ...