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

United States District Court, S.D. New York

January 28, 2015

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

Philippe Z. Selendy, Sascha N. Rand, Jonathan C. Eser Michael R. McCray, QUINN EMANUEL URQUHART & SULLIVAN, LLP, New York, NY, for plaintiff Federal Housing Finance Agency.

Amanda F. Davidoff, Elizabeth A. Cassady, David B. Tulchin, Steven L. Holley, Bruce E. Clark, Bradley A. Harsch, Katherine J. Stoller, SULLIVAN & CROMWELL LLP, New York, NY, for defendants 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.

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


DENISE COTE, District Judge.

This Opinion address the defendants'[1] motion to exclude expert testimony to be offered at trial on behalf of plaintiff Federal Housing Finance Agency ("FHFA") by John A. Kilpatrick ("Kilpatrick"). FHFA intends Kilpatrick to testify regarding the falsity of the loan-to-value ("LTV") ratios recited in the defendants' offering documents ("Offering Documents"). For the following reasons, the motion is granted in part.


FHFA, acting as conservator for Fannie Mae and Freddie Mac (together, the "Government Sponsored Enterprises" or "GSEs"), filed suit on September 2, 2011 against the defendants, alleging that the Offering Documents used to market and sell seven certificates ("Certificates") to the GSEs associated with residential mortgage-backed securities ("RMBS") contained material misstatements or omissions. RMBS are securities entitling the holder to income payments from pools of residential mortgage loans ("Supporting Loan Groups" or "SLGs") held by a trust.

FHFA brought these claims pursuant to Sections 11 and 12(a)(2) of the Securities Act of 1933 (the "Securities Act"), as well as Virginia's and the District of Columbia's Blue Sky laws. This lawsuit is the sole remaining action in a series of similar, coordinated actions litigated in this district by FHFA against banks and related individuals and entities to recover losses experienced by the GSEs from their purchases of RMBS. A description of the litigation and the types of misrepresentations at issue in each of these coordinated actions, including the instant case, can be found in FHFA v. Nomura Holding Am., Inc., ___ F.Supp. 3d ___, 11cv6201 (DLC), 2014 WL 6462239, at *3-6, *16-17 (S.D.N.Y. Nov. 18, 2014) ("Nomura"), as well as FHFA v. UBS Americas, Inc., 858 F.Supp.2d 306, 323-33 (S.D.N.Y. 2012) ("UBS"), aff'd, 712 F.3d 136 (2d Cir. 2013).

One category of alleged misrepresentations recited in the Offering Documents is the LTV ratios for the group of loans that supported a Certificate. For any given mortgage, the LTV ratio is determined by computing the balance of the loan as a percentage of the value of the property that secures it, often determined on the basis of an appraisal. The higher the ratio, the less equity the homeowner has in the property. Mortgages with an LTV ratio in excess of 100% are "underwater."

Each Prospectus Supplement that defendants signed in connection with the offering of these Certificates included statistics regarding the distribution of LTV ratios across the underlying loan pool. For example, the Prospectus Supplement for Nomura Securitization 2006-FM2 reported that 57.5% of the loans (or 68.4% of the pool by principal balance) had an LTV ratio of 80% or lower.

FHFA alleged in its Amended Complaint that the LTV ratios in the Prospectus Supplements were "materially false and understated." In opposition to the motions to dismiss made in this coordinated litigation, FHFA agreed that appraisal values were statements of opinion since they depend on appraisers' estimates regarding the values of the underlying properties, which are not matters of objective fact. UBS, 858 F.Supp.2d at 325. It argued, however, that the representations in the prospectus supplements were nonetheless actionable because the LTV ratios were both objectively false and disbelieved by the appraisers. According to FHFA, "appraisers did not actually believe that the homes underlying the LTV ratios were worth as much as the appraisers reported they were worth." Id. at 326. Applying Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083 (1991), and Fait v. Regions Fin. Corp., 655 F.3d 105 (2d Cir. 2011), the Court denied the motion to dismiss the claims premised on the misrepresentations of LTV ratios, and ruled that liability under the Securities Act could be imposed if FHFA demonstrated subjective falsity by the "originator of the opinion, " that is the appraiser, as well as the objective falsity of the LTV representations. UBS, 858 F.Supp.2d at 325.[2]

On December 5, 2014, defendants moved to exclude Kilpatrick's expert testimony regarding LTV ratios, attaching Kilpatrick's May 15, 2014 expert report which identified itself as a report "concerning adherence of appraisals to appraisal standards and practice" ("Report"). The Report explains that FHFA's counsel retained Kilpatrick "to provide an expert opinion as to whether the original appraisals used to value the collateral and generate the LTV ratios associated with a sample of the subject loans underlying the 7 supporting loan groups collateralizing the 7 securitizations at issue... were accurate and credible, as that term is used in the Uniform Standards of Professional Appraisal Practice ("USPAP")."

USPAP constitutes the generally accepted professional appraisal industry standards. The Prospectus Supplement for Nomura Securitization 2006-FM2, for instance, represents that appraisals underlying LTVs "conform to the Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Standards Board of the Appraisal Foundation."

USPAP first went into effect in 1989, and has been revised regularly since that time. The appraisals at issue here were performed between 2003 and 2006, and the Report relies principally on the 2005 USPAP, in particular its Standards 1 and 2, as ...

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