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Federal Housing Finance Agency v. Nomura Holding Am., Inc.

United States District Court, S.D. New York

November 18, 2014

NOMURA HOLDING AMERICA, INC., et al., Defendants

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[Copyrighted Material Omitted]

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For Federal Housing Finance Agency, plaintiff: Philippe Z. Selendy, Jon Corey, Adam M. Abensohn, Andrew R. Dunlap, David B. Schwartz, QUINN EMANUEL URQUHART & SULLIVAN, LLP, New York, NY.

For Nomura Holding America Inc., Nomura Asset Acceptance Corp., Nomura Home Equity Loan, Inc., Nomura Credit & Capital, Inc., Nomura Securities International, Inc., David Findlay, John McCarthy, John P. Graham, Nathan Gorin, and N. Dante LaRocca, defendants: David B. Tulchin, Steven L. Holley, Bruce E. Clark, Bradley A. Harsch, Katherine Stoller, SULLIVAN & CROMWELL LLP, New York, NY; Amanda F. Davidoff, Elizabeth A. Cassady, SULLIVAN & CROMWELL LLP, Washington, DC.

For RBS Securities Inc., defendant: Thomas C. Rice, David J. Woll, Andrew T. Frankel, Alan Turner, Craig S. Waldman, SIMPSON THACHER & BARTLETT LLP, New York, NY.

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DENISE COTE, United States District Judge.

Plaintiff Federal Housing Finance Agency (" FHFA" ), as conservator for the Federal National Mortgage Association (" Fannie Mae" ) and the Federal Home Loan Mortgage Corporation (" Freddie Mac" ) (together, the Government-Sponsored Enterprises or " GSEs" ), brought this action against financial institutions involved in the packaging, marketing, and sale of residential mortgage-backed securities (" RMBS" ) purchased by the GSEs between 2005 and 2007, alleging among other things that defendants[1] made materially false statements in offering documents for the RMBS (the " Offering Documents" ). FHFA has moved for partial summary judgment on the Defendants' statute of limitations defense under Section 13 of the Securities Act of 1933 (the " Securities Act" ), 15 U.S.C. § 77m, and the D.C. Securities Act (" D.C. Blue Sky Law" ), D.C. Code § 31-5606.05(f)(2)(B).

On July 25, 2014, the Court granted FHFA's motion for partial summary judgment on the element and affirmative defense concerning the GSEs' knowledge in this and two related actions, holding that no reasonable jury could find that the GSEs knew of the alleged misrepresentations at issue at the times the securities were purchased, between late 2005 and mid-2007.[2] FHFA v. HSBC N. Am. Holdings Inc., 11cv6189 (DLC), __ F.Supp.2d __, 33 F.Supp.3d 455, 2014 WL 3702587 (S.D.N.Y. July 25, 2014) (" HSBC" ). As the Court explained, " Defendants have found no evidence that the GSEs even mistrusted the Defendants' representations about the Mortgage Loans, let alone any evidence that the GSEs actually knew that any particular representation was false and were content nonetheless to make their purchases blind." Id. at *24.

The instant motion turns on whether a reasonably diligent investor in the GSEs' position would have investigated and discovered the alleged misrepresentations at issue on or before September 7, 2007, which is roughly four months after their last purchase.[3] The parties agree that if the relevant statutes of limitations had not begun to run by September 7, 2007, FHFA's claims are timely.[4] For the reasons

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that follow, FHFA's motion is granted.

As an initial matter, Defendants' continued insistence that the GSEs should have discovered these claims on or before September 7, 2007 is remarkable. At this late date in the litigation -- nearly one year after fact discovery closed on December 6, 2013, and just days before the close of expert discovery, on November 26, 2014 -- Defendants maintain that no misrepresentations were made in the Offering Documents. Today, Defendants have the benefit of a great deal of information that post-dates September 7, 2007, including the downgrading of these securities' credit ratings in 2008 through 2011, the delinquency or default of more than half of the loans in some of these securities, the results of a bevy of governmental investigations into mortgage-loan originator and aggregators' practices, and the parties' experts' reunderwriting of statistically valid samples of the loan files at issue. Yet, Defendants insist that far less information, far less suggestive (if at all) of misrepresentations, should have alerted the GSEs to a probability of misrepresentations, caused them to investigate and discover the alleged (but non-existent) misrepresentations, and then brought suit.

In opposing this motion, Defendants contend that the GSEs should have brought this action on or before September 7, 2007 to obtain damages from their purchase of AAA-rated securities. But, at that time, the securities were still rated AAA, were not under a negative credit watch, and the GSEs did not believe they would suffer any losses. Moreover, Defendants strenuously argued, in support of their motion to dismiss FHFA's Complaint filed in September 2011, that a great deal more information than the GSEs possessed in 2007 -- including the credit rating downgrades of the GSEs' securities in subsequent years, the substantially degraded performance of those securities, and the many governmental investigations referenced above -- was insufficient to plausibly allege the misrepresentations pleaded in this action. Despite their argument that FHFA had failed to state a claim in 2011, Defendants now urge that the GSEs had, back in September 2007, more than enough information with which to plausibly allege misrepresentations that Defendants insist do not exist. Defendants' position is audacious, to say the least.

Defendants also attempt to avoid summary judgment by arguing that there are " hot disputes" as to whether the information available to the GSEs would have caused " a reasonably diligent plaintiff in their position to investigate its potential claims." In fact, the parties raise only minor, and ultimately immaterial, factual disputes concerning what information the GSEs had. Accordingly, summary judgment is appropriate. Cf. Staehr v. Hartford Fin. Servs. Grp., Inc., 547 F.3d 406, 427 (2d Cir. 2008) ( The existence of inquiry notice is an " objective determination [that] can be resolved as a matter of law -- it need not be made by a trier of fact." ).

On this record, viewed in the light most favorable to Defendants, a reasonably diligent investor would not have believed it probable on or before September 7, 2007 that the Defendants' Offering Documents contained the categories of misrepresentations that underlie this action and would not have undertaken an investigation that uncovered the alleged misrepresentations in time to plead them before that date.

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The RMBS purchased by the GSEs from the Defendants provided a stream of payments from subprime and Alt-A mortgages.[5] The record shows that, as the appreciation of housing prices stalled and then reversed in late 2006 and 2007, the performance of subprime and Alt-A loans originated in 2006 and 2007 suffered. Originators of mortgages closed and declared bankruptcy; one was ordered to stop operations by the Federal Deposit Insurance Corporation (" FDIC" ) after a finding of, among other things, inadequate underwriting practices. Indicators of loose underwriting by originators and borrower fraud abounded. Yet, even after the closure and bankruptcy of two originators, Ownit and Residential Mortgage Assurance Enterprise, LLC (" ResMAE" ), the Defendants offered securities that included their loans and the GSEs agreed to purchase private-label securitizations (" PLS" ) from Nomura backed chiefly by mortgages originated by Ownit and ResMAE, citing the strength of Nomura's due diligence process and its willingness to make its own representations and warranties concerning the quality of the underlying loans. Defendants have cited no news reports or other information from the relevant period calling into question Defendants' own diligence practices.

By the summer of 2007, monthly reports sent to the GSEs showed rising delinquencies and early payment defaults in the loans backing the seven Nomura securities at issue (the " Nomura Certificates" or " Certificates," purchased in the seven " Nomura Securitizations" or " Securitizations" ) -- performance consistent with declining housing prices. The GSEs had sophisticated processes for detecting and analyzing underperforming PLS. One of the seven Nomura Certificates appeared on a Fannie Mae " PLS Watch List" in the spring of 2007, but after subsequent investigation Fannie Mae determined the risk of loss was remote. Otherwise, Defendants have cited no evidence that the GSEs were concerned about the Nomura Securitizations, in particular, on or before September 7, 2007.

In mid-July and August 2007, credit rating agencies downgraded hundreds of RMBS, including tranches of four of the Nomura Securitizations that were junior to those in which the GSEs participated. After a thorough examination of these Securitizations, the rating agencies did not downgrade the senior tranches supporting the Nomura Certificates, or even place them on a negative rating watch. It was not until 2008 -- and in some cases, 2009 or 2011 -- that the rating agencies downgraded the Certificates at issue here.

Throughout this period, the GSEs acted to protect their rights concerning the Nomura Certificates. The GSEs monitored their PLS, including the Nomura Certificates, investigated when they found it necessary, and uncovered no reason to believe that Defendants' diligence was inadequate or that the Nomura Certificates' performance indicated that misrepresentations in the Offering Documents concerning the underlying loans' quality were probable. A reasonably diligent investor in the GSEs' position would have done no more.


Sixteen related actions brought by FHFA alleging misstatements in the Offering Documents for certain RMBS certificates purchased by the GSEs between 2005 and 2007 have been litigated before this Court. All but one of these actions have settled. The remaining action concerns

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the seven Certificates that were part of the seven residential mortgage-backed Securitizations created by Nomura,[6] some of which were underwritten by RBS.[7] The GSEs purchased the Nomura Certificates for more than $2 billion.

The statute of limitations that governs the federal securities claims in these actions is contained in the Securities Act and in a statute extending the period in which FHFA may file suit. Section 13 of the Securities Act contains a one-year statute of limitations that governs FHFA's claims brought under Sections 11 and 12. See 15 U.S.C. § 77m. A one-year statute of limitations also applies to FHFA's claim under the D.C. Blue Sky Law. See D.C. Code § 31-5606.05(f)(2)(B).

In 2008, in the aftermath of the financial crisis, Congress created the FHFA, authorized it to act as conservator for the GSEs, and passed a statute extending FHFA's time to bring any action on their behalf. The Housing and Economic Recovery Act of 2008 (" HERA" ) creates a new " statute of limitations with regard to any action brought by the [FHFA] as conservator or receiver." 12 U.S.C. § 4617(b)(12)(A). In the case of any " tort claim," " the applicable statute of limitations" is the longer of (1) the three-year period beginning on the date FHFA is appointed as conservator or receiver; (2) the three-year period beginning on the date on which the cause of action accrues; and (3) the period applicable under state law. Id. at § 4617(b)(12). In addition, HERA provides for the revival of tort claims " for which the statute of limitations applicable under State law . . . has expired not more than 5 years before the appointment of the [FHFA]." Id. at § 4617(b)(13)(A). HERA defines " tort claim" to mean " a claim arising from fraud, intentional misconduct resulting in unjust enrichment, or intentional misconduct resulting in substantial loss to the regulated entity." Id. at § 4617(b)(13)(B).[8]

The GSEs were placed into conservatorship by FHFA on September 6, 2008, and FHFA filed this action within three years of that date. Accordingly, FHFA's claims are timely if the relevant one-year statutes of limitations had not yet begun to run one year prior to the conservatorship, that is, on September 7, 2007.[9]

The Defendants raise arguments based on the GSEs' knowledge prior to September 7, 2007 of turmoil in the RMBS market, the closure and bankruptcy of mortgage originators, rising delinquencies and early payment defaults in the loan groups supporting the Nomura Certificates, and

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credit rating downgrades of hundreds of RMBS, including junior tranches of four Nomura Securitizations. Below are the principal facts cited in Defendants' major arguments, as well as needed context for those facts. All factual disputes are resolved in Defendants' favor, and all reasonable inferences are drawn in Defendants' favor, as non-movants. Where Defendants offered a litany of similar examples, the Court has attempted to select the strongest or most illustrative.[10]

I. RMBS, in Brief

RMBS are securities entitling the holder to income payments from pools of residential mortgage loans (" Supporting Loan Groups" or " SLGs" ) held by a trust. Each of the mortgage loans underlying the Securities at issue (the " Mortgage Loans" ) began as a loan application approved by a financial institution, known as the loan's originator (the " Originator" ).[11] Nomura acted as an " aggregator" here, purchasing Alt-A and subprime mortgage loans and then pooling them together, on the basis of credit or other characteristics. The loans selected for a given Securitization were transferred to a trust created specifically for that private-label securitization, or PLS.

Within a given Securitization, the loans were placed into one or more Supporting Loan Groups. For example, Nomura's NHELI 2006-FM1 Securitization, offered through a Prospectus Supplement of October 31, 2006, was composed of fourteen classes of certificates, or " tranches," and two supporting loan groups with an aggregated stated principal balance of over $1.1 billion. Nomura represented that the original principal balances of the loans in Group I " conform[ed] to Freddie Mac loan limits," and made no such guarantee about the loans in Group II.

The trust then issued certificates and underwriters sold the certificates to investors like Freddie Mac. These certificates entitled the holder to a stream of income from borrowers' payments on the loans in a particular SLG. Thus, a certificate's value depended on the ability of mortgagors to repay the loan principal and interest and the adequacy of the collateral in the event of default.

The certificates were linked to tranches of varying seniority. Generally, holders of the most senior certificates for a given SLG were paid first, after which holders of the next-most-senior certificates received payment, and so on. Thus, should some borrowers in an SLG default on their loans, certificates in the junior-most tranche would absorb all or most of the shortfall before payments to more senior certificates were affected. Accordingly, the most senior certificates were subject to less risk than were more junior certificates. By apportioning risk in this way, Defendants were able to create ...

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