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Federal Housing Finance Agency v. Ubs Americas Inc.

United States District Court, Second Circuit

June 28, 2013

UBS AMERICAS INC., et al., Defendants. And other FHFA cases.

Philippe Z. Selendy, Richard A. Schirtzer, Adam M. Abensohn, Andrew R. Dunlap, David B. Schwartz, Quinn Emanuel Urquhart & Sullivan, LLP, New York, New York, for the Plaintiff.

Marc E. Kasowitz, Christopher P. Johnson Michael A. Hanin Kanchana Wangkeo Leung Kasowitz, Benson, Torres & Friedman LLP, New York, New York, for Defendants JPMorgan Chase & Co., JPMorgan Chase Bank, N.A., J.P. Morgan Mortgage Acquisition Corporation, J.P. Morgan Securities LLC, J.P. Morgan Acceptance Corporation I, Bear Stearns & Co., Inc., EMC Mortgage LLC, Structured Asset Mortgage Investments II Inc., Bear Stearns Asset Backed Securities I LLC, WaMu Asset Acceptance Corporation, WaMu Capital Corporation, Washington Mutual Mortgage Securities Corporation, Long Beach Securities Corporation and certain of the Individual Defendants.

Penny Shane Sharon L. Nelles Jonathan M. Sedlak Yavar Bathaee Sullivan & Cromwell LLP, New York, New York, for Defendants UBS Americas Inc., UBS Real Estate Securities Inc., UBS Securities LLC, Mortgage Asset Securitization Transactions, Inc., David Martin, Per Dyrvik, Hugh Corcoran and Peter Slagowitz.

Jay B. Kasner Thomas J. Nolan Scott Musoff Robert A. Fumerton Skadden, Arps, Slate, Meagher & Flom LLP New York, NY, for Defendants Barclays Capital Inc., Barclays Bank PLC, Securitized Asset Backed Receivables LLC, Paul Menefee, John Carroll, and Michael Wade.

David H. Braff Brian T. Frawley Jeffrey T. Scott Joshua Fritsch SULLIVAN & CROMWELL LLP, New York, NY, for Defendants Credit Suisse Securities (USA) LLC, Credit Suisse Holdings (USA), Inc., Credit Suisse (USA), Inc., DLJ Mortgage Capital, Inc., Credit Suisse First Boston Mortgage Securities Corporation, Asset Backed Securities Corporation, Credit Suisse First Boston Mortgage Acceptance Corporation, Andrew A. Kimura, Jeffrey A. Altabef, Evelyn Echevarria, Michael A. Marriott, Zev Kindler, Thomas E. Siegler, Thomas Zingalli, Carlos Onis, Steven L. Kantor, Joseph M. Donovan, Juliana Johnson, and Greg Richter.

Richard W. Clary, Richard J. Stark, Michael T. Reynolds, Lauren A. Moskowitz, CRAVATH, SWAINE & MOORE LLP, New York, NY, for Defendants Goldman, Sachs & Co., GS Mortgage Securities Corp., Goldman Sachs Mortgage Company, The Goldman Sachs Group, Inc., Goldman Sachs Real Estate Funding Corp., Peter C. Aberg, Howard S. Altarescu, Robert J. Christie, Kevin Gasvoda, Michelle Gill, David J. Rosenblum, Jonathan S. Sobel, Daniel L. Sparks, and Mark Weiss.

Richard H. Klapper, Theodore Edelman, Michael T. Tomaino, Jr., Tracy Richelle High, SULLIVAN & CROMWELL LLP, New York, NY, for Defendants HSBC North America Holdings Inc., HSBC USA Inc., HSBC Markets (USA) Inc., HSBC Bank USA, NA., HSI Asset Securitization Corporation.

John M. Conlon Mark S. Hanchet Michael O. Ware MAYER BROWN LLP, New York, NY, for Defendants Deutsche Bank AG, Taunus Corporation, Deutsche Bank Securities Inc., DB Structured Products, Inc., Ace Securities Corp., Mortgage IT Securities Corp.

Thomas C. Rice David J. Woll Alan C. Turner SIMPSON THACHER & BARTLETT LLP, New York, NY, for Defendant RBS Securities Inc.

James P. Rouhandeh Brian S. Weinstein Daniel J. Schwartz Nicholas N. George Jane M. Morril DAVIS POLK & WARDWELL LLP New York, New York, for Defendants Morgan Stanley, Morgan Stanley & Co. Incorporated (n/k/a Morgan Stanley & Co. LLC), Morgan Stanley Mortgage Capital Holdings LLC (successor-in-interest to Morgan Stanley Mortgage Capital Inc.), Morgan Stanley ABS Capital I Inc., Morgan Stanley Capital I Inc., Saxon Capital, Inc., Saxon Funding Management LLC, Saxon Asset Securities Company, Gail P. McDonnell, Howard Hubler, David R. Warren, and Steven S. Stern:

Bruce Clark SULLIVAN & CROMWELL LLP, New York, NY, Amanda F. Davidoff SULLIVAN & CROMWELL LLP, Washington, DC, for Defendants First Horizon National Corporation, First Tennessee Bank National Association, FTN Financial Securities Corporation, First Horizon Asset Securities, Inc., Gerald L. Baker, Peter F. Makowiecki, Charles G. Burkett, and Thomas J. Wageman.

Bruce Clark SULLIVAN & CROMWELL LLP, New York, NY, Amanda F. Davidoff SULLIVAN & CROMWELL LLP, Washington, DC, for Defendants Nomura Securities International, Inc., Nomura Holding America Inc., Nomura Asset Acceptance Corporation, Nomura Home Equity Loan, Inc., Nomura Credit & Capital, Inc., David Findlay, John McCarthy, John P. Graham, Nathan Gorin, and N. Dante LaRocca.

Jay B. Kasner Scott Musoff George Zimmerman Robert A. Fumerton SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, New York, NY, for Defendants SG Americas, Inc., SG Americas Securities Holdings, LLC, SG Americas Securities, LLC, SG Mortgage Finance Corp., and SG Mortgage Securities, LLC, Arnaud Denis, Abner Figueroa, Tony Tusi, and Orlando Figueroa.

Reginald R. Goeke Catherine M. Bernard MAYER BROWN LLP Washington, D.C., Michael O. Ware MAYER BROWN LLP, New York, NY, for Defendants Ally Financial Inc. and GMAC Mortgage Group, Inc.

Matthew Solum KIRKLAND & ELLIS LLP, New York, NY,

Robert J. Kopecky Devon M. Largio KIRKLAND & ELLIS LLP, Chicago, IL, Jeffrey S. Powell Patrick M. Bryan KIRKLAND & ELLIS LLP, Washington, DC, for Defendant Ally Securities, LLC.

David Blatt John McNichols WILLIAMS & CONNOLLY LLP, Washington, DC, for Defendants Bank of America Corporation; Bank of America, N.A.; Asset Backed Funding Corp.; Banc of America Funding Corp.; Merrill Lynch & Co., Inc., Merrill Lynch Mortgage Lending, Inc., Merrill Lynch Mortgage Capital Inc., First Franklin Financial Corp., Merrill Lynch Mortgage Investors, Inc., Merrill Lynch Government Securities, Inc., Merrill Lynch, Pierce, Fenner & Smith Inc.

Richard A. Edlin, Ronald D. Lefton Candace Camarata, GREENBERG TRAURIG, LLP, New York, NY, for Defendant Jeffrey Mayer.

Dani R. James Jade A. Burns KRAMER LEVIN NAFTALIS & FRANKEL LLP, New York, New York, for Defendant Jeffrey L. Verschleiser.

Sandra D. Hauser SNR DENTON U.S. LLP, New York, New York, For Defendant Matthew Perkins.

Pamela Rogers Chepiga, Josephine A. Cheatham, ALLEN & OVERY LLP, New York, NY, for Defendant Samuel L. Molinaro, Jr.

Joel C. Haims LaShann M. DeArcy Morrison & Foerster LLP, New York, NY, for Defendants Tom Marano and Michael Nierenberg.

Daniel C. Zinman Matthew M. Riccardi RICHARDS KIBBE & ORBE LLP, New York, NY, for Defendants George C. Carp, Robert Caruso, George E. Ellison, Adam D. Glassner, Daniel B. Goodwin, Juliana Johnson, Michael J. Kula, William L. Maxwell, Mark I. Ryan, and Antoine Schetritt; Matthew Whalen; Brian Sullivan; Michael McGovern; Donald Puglisi; Paul Park, and Donald Han.

David Elbaum, Theresa Trzaskoma, Brune & Richard LLP, New York, NY, for Defendants Keith Johnson, Kim Lutthans and John Robinson.


DENISE COTE, District Judge.

Before the Court are defendants' memoranda of law regarding applicable legal standards and the appropriate standards for discovery in light of the applicable legal standards. The defendants have suggested over the course of this litigation that the Court's discovery rulings have been premised on a faulty definition of the "knowledge" defense that is available to them under Section 11 of the Securities Act of 1933 ("Securities Act"). In this briefing they address the legal standard for their affirmative defense that the plaintiff actually knew of the alleged misrepresentations in the Prospectus Supplements that governed its securities purchases. The defendants have taken this opportunity to address as well the legal standards for several of the elements and other defenses of the Securities Act claims in this litigation and to argue that the application of incorrect legal standards has deprived them of certain discovery from a portion of the plaintiff's business described below: the Single Family business. For the reasons stated below, the Court concludes that its previous discovery rulings have been made under the correct legal standards and need not be revisited.


Plaintiff Federal Housing Finance Agency ("FHFA"), as conservator of the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac") (collectively, the "GSEs"), filed seventeen actions in this district against various financial institutions involved in the packaging, marketing, and sale of residential mortgage-backed securities purchased by the GSEs between 2005 and 2007.[1] The defendants requested that there be "substantial coordination" of this litigation, and the judges to whom the seventeen cases were assigned agreed to assign them to a single judge.[2] Having received this coordinated litigation on November 16, 2011, this Court stayed all discovery pending a decision on a motion to dismiss in the first-filed case, FHFA v. UBS Americas Inc., et al., No. 11 Civ. 5201 (DLC).[3]

Following the issuance of the decision on the UBS motion to dismiss, 858 F.Supp.2d 306 (S.D.N.Y. May 4, 2012), the stay of discovery in each of the sixteen actions remaining before this Court was lifted. After a conference on May 14, 2012, the parties reached agreement on many of the protocols that govern the coordinated discovery in these actions. The Court addressed the remaining disputes in a conference on June 13, and Order of June 14. In these early rulings, the Court divided the cases into four trial tranches and set the close of fact and expert discovery for June 14, 2013 in FHFA v. UBS and for December 6, 2013 in the remaining cases. The close of fact discovery in UBS is currently set for September 6, 2013.

As discovery commenced in earnest, the parties followed the protocol for disputes applied in the Southern District of New York and by this Court. If they had a dispute regarding discovery, they were required to attempt to resolve it by meeting and conferring with their adversary. Disputes that remained unresolved after this process were brought to the Court's attention by a letter no longer than two pages. Conferences were held to address many unresolved disputes. To date, there have been twenty-two conferences to address the schedule and scope of discovery and the parties' disputes.

Almost immediately, the parties indicated that a dispute had arisen with regard to discovery of the "Single Family" side of the GSEs' businesses.[4] In a telephone conference on July 19, 2012, in the context of a dispute regarding a Rule 30(b)(6) notice issued by the defendants, counsel for FHFA explained that the parties had a fundamental disagreement regarding "whether information that was used or possessed on the Single Family side of [the GSEs] that was not provided or considered by people purchasing these securitizations is, nevertheless, relevant." The Court scheduled a conference to discuss the issue further.

On July 30, in anticipation of a July 31 conference, the parties submitted letters with extensive exhibits detailing the dispute regarding Single Family discovery, which had already manifested itself in disagreements over both Rule 30(b)(6) depositions and document custodians. In their joint letter and in oral presentations at the conference, defendants questioned FHFA's representations that information from the Single Family side was walled off from the PLS traders who purchased the securities at issue in these actions, and listed several types of documents they felt were relevant to many of the claims and defenses and that may have been shared widely within the GSEs. These included reviews of Originators[5] and information from "high-level committees" that were "designed to be bridges between the PLS business and the single family business." Defendants ultimately sought an order from the Court compelling FHFA to provide a Rule 30(b)(6) witness in response to an interrogatory that sought, among other things, the identities of "individuals, positions, departments, committees or other groups at [the GSEs]... that had a role in [the GSEs'] purchase of mortgage loans or [the GSEs'] securitizations of mortgage loans."

Counsel for FHFA explained that FHFA had provided a written response in lieu of a witness in the interest of efficiency, and argued that the deposition notice was part of defendants' effort to add numerous additional document custodians to the 86 that had already been designated by FHFA at that point. Reaching the substance of the underlying dispute, FHFA explained that much of the material defendants sought from the Single Family side would be provided: "defendants are going to get everything about originators that made it over to the PLS side and was considered in connection with the decisions to purchase or not purchase these particular securitizations, " regardless of whether the documents were produced by the Single Family side. FHFA also argued that its designation of custodians from high-level risk committees with both Single Family and PLS responsibilities at each GSE - the Private Label Advisory Team at Fannie Mae and the Enterprise Risk Management Committee at Freddie Mac - would capture much of the material defendants sought. FHFA further explained that the true dispute was over whether defendants were entitled to "documents that were considered only on the Single Family side and related only to the Single Family business, " including "custodians who were cabined on the Single Family side." For example, counsel explained, "if Option One [an Originator] is disapproved as a seller servicer, that list goes to the PLS people. Counter-party risk reports on Option One at Countrywide go to PLS and get considered in connection with the purchasers. And they're going to get all of that."

Recognizing that one of the key bases for defendants' stated need for Single Family discovery was to establish their knowledge defense, the Court inquired as to whether the defendants wished to submit briefing on the applicable legal standard. The Court had previously flagged the issue with the parties in a conference of May 14, 2012. Upon being told that UBS intended to raise a knowledge defense in a summary judgment brief, the Court had asked whether "there's any dispute among the parties with respect to the knowledge defense." "[I]f there is, " the Court continued,

you might want to think about teeing that up for a motion... so that everybody's operating under the same legal standard [as to] what kind of knowledge [the GSEs] had to have, how specifically attached to the securitizations that are being sued upon it must be to be a winning argument.

In the context of the Single Family disputes on July 31, the Court again asked whether "the defendants or at least UBS has decided at this point that it would like to brief the substantive law with respect to knowledge." As they had on May 14, defendants again responded that they preferred to wait for a more developed factual record before briefing the issue.

The Court denied defendants' requested Rule 30(b)(6) deposition, and explained that because FHFA had designated document custodians from high level risk committees that included personnel from the Single Family businesses and had agreed to provide information about Originators that was considered by PLS personnel in connection with the purchase of a security, there was no basis to "fear... that the document production that is being undertaken by the plaintiffs will be inadequate to capture information principally about originators that was shared with the PLS side." The Court expressed confidence that FHFA's production would capture any "tying together of the Single Family and PLS function within [the GSEs] and substantial information sharing between the two sides of the businesses" that in fact existed, and instructed defendants to notify it if FHFA's production was not capturing this material. Finally, the Court observed that defendants had not made a pinpointed, concrete request for more custodians, having mentioned in the course of the conference only one person who in their view should have been included as a custodian and was not.

On August 14, the Merrill Lynch defendants wrote to the Court seeking reconsideration of the ruling made at the July 31 conference. Merrill explained that it sought documents "that evidence the GSEs' familiarity with the lending practices of originators at issue in the cases and originators' adherence (or not) to their underwriting guidelines" and attached a proposed memorandum of law in support of its position. The other defendants responded on August 15 that they did not view the Court as having made a final ruling on this subject at the July 31 conference and preferred to address it after receiving the discovery FHFA had agreed to provide. FHFA, in its own letter of August 15, agreed with Merrill Lynch that the Court had made a final ruling. FHFA explained that it was producing three categories of documents from the Single Family side: (1) "documents considered in connection with the purchases at issue, " (2) "documents held by custodians who were required to give the PLS traders such information, " and (3) "documents that went to the GSEs' risk management committees with supervisory responsibility over the PLS trading." FHFA restated its position that "documents that never went from the Single or Multi-Family side to the PLS side do not need to be produced." In response to this set of letters, the Court issued an Order on August 28 observing that Merrill's proposed memorandum of law reiterated arguments made in the defendants' July 30 submissions and at the July 31 conference, and denying Merrill's request for reconsideration.

On November 5 the Court received another round of letters concerning Single Family discovery. Defendants referenced the Court's July 31 statement that FHFA would be producing documents that showed a "tying together" or "information sharing" between the PLS and Single Family sides of the GSEs. Defendants indicated that FHFA's production had thus far confirmed that there had been substantial sharing of information between the two divisions, even including Single Family personnel helping choose loans for the securitizations at issue. Defendants did not, however, argue that FHFA was not producing any of this material. Their point was, rather, that this material supported their need for further discovery of the Single Family side. Defendants attached a memorandum of law in support of a motion to compel in which they sought discovery of "relevant documents from any business unit substantially involved in assessing the originators, the mortgage loans, the securitizations, the potential or actual collateral, or the risks associated with any of them."

FHFA's own November 5 submission repeated its view that defendants were not entitled to discovery of Single Family material outside the three categories it was already providing. FHFA also provided five examples of documents emanating from the Single Family side that were being produced. These included, for example, a report entitled "Counterparty Approval Report, " which listed entities and provided, under columns entitled "PLS Originator Status, " "PLS Issuer Status, " "PLS Servicer Status, " "SF Non-Traditional Seller Status, " and "SF Non-Traditional Servicer Status, " a designation of "approved, " "not approved, " "suspended, " or "caution, " along with the dates of the last review and last status change. As an example of how this type of information might have been shared within the GSEs, FHFA also attached an email indicating that Single Family Counterparty Risk Management had changed the classification of a particular originator from "Approved" to "Caution" for purposes of the "Private Label Securities Policy, " which meant that "incremental purchases" would require special approval. Also attached ...

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