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

United States District Court, S.D. New York

February 10, 2015

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

Philippe Z. Selendy, Sascha N. Rand, Wing F. (Alex) Ng, QUINN EMANUEL URQUHART & SULLIVAN, LLP, New York, NY, Ror plaintiff Federal Housing Finance Agency.

David B. Tulchin, Steven L. Holley, Bruce E. Clark, Bradley A. Harsch, Katherine J. Stoller, SULLIVAN & CROMWELL LLP, New York, NY, Amanda F. Davidoff, Elizabeth A. Cassady, SULLIVAN & CROMWELL LLP, Washington, DC, 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 addresses two motions. One is plaintiff Federal Housing Finance Agency's ("FHFA") motion to exclude the expert testimony of defendants'[1] expert witness Kerry Vandell ("Vandell"), whom defendants retained to provide expert testimony on the loss causation defense under Section 12 of the Securities Act, and those aspects of defendants' expert witness Timothy Riddiough's ("Riddiough") loss causation damages calculation that rely on Vandell's analysis. Vandell's loss causation analysis made use of three "benchmark" groups of loans. Because defendants have failed to show that those benchmarks provide a reliable basis for the comparisons that Vandell makes, FHFA's motion to exclude the expert testimony of Vandell, and those aspects of Riddiough's calculation that rely on Vandell's testimony, is granted. Because FHFA's motion to exclude Vandell's testimony is granted, defendants' motion to exclude the expert testimony of Anthony Saunders ("Saunders"), offered by FHFA to rebut Vandell, is denied as moot.


FHFA, acting as conservator for Fannie Mae and Freddie Mac (together, the "Government Sponsored Enterprises" or "GSEs"), filed suit on September 2, 2011 against defendants alleging that the Offering Documents used to market and sell seven certificates ("Certificates") to the GSEs associated with residential mortgage-backed securities ("RMBS" or "Securitizations") 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), aff'd, 712 F.3d 136 (2d Cir. 2013).

Broadly speaking, FHFA alleges three categories of misstatements: (i) the Offering Documents misstated the extent to which the loans in the SLGs for the seven Certificates complied with relevant underwriting guidelines; (ii) the loan-to-value ("LTV") ratios disclosed in the Offering Documents were too low because of inflated appraisals of the properties; and (iii) the Offering Documents misrepresented the number of borrowers who occupied the properties that secured the mortgage loans. FHFA alleged as well that credit rating agencies gave inflated ratings to the Certificates as a result of defendants' providing these agencies with incorrect data concerning the attributes of the loans.

On January 15, 2015, FHFA was granted leave to withdraw its claims under Section 11 of the Securities Act. Although neither Virginia's nor the District of Columbia's Blue Sky law provides a loss causation defense to the claims at issue, Section 12 of the Securities Act, as amended by the Private Securities Litigation Reform Act of 1995, Pub. L. No. 104-67, 109 Stat. 737, does. See FHFA v. HSBC N. Am. Holdings Inc., 988 F.Supp.2d 363, 367, 369 (S.D.N.Y. 2013). Pursuant to the defense,

if the person who offered or sold [the] security proves that any portion or all of the amount recoverable... represents other than the depreciation in value of the subject security resulting from such part of the prospectus or oral communication, with respect to which the liability of that person is asserted..., then such portion or amount, as the case may be, shall not be recoverable.

15 U.S.C. ยง 77l(b).

Defendants retained Vandell to provide expert testimony on loss causation. Vandell is a real estate and financial economist whose areas of research specialization include housing economics and policy, international real estate markets, real estate market dynamics, and mortgage finance, especially mortgage-backed securitization, structured finance, and the pricing of default and prepayment risk. As set forth in his July 9, 2014 expert report, to assess whether the categories of alleged defects in the Offering Documents - as opposed to other factors, such as market-wide economic changes that affected mortgage loans generally - caused losses to the GSEs as holders of the seven Certificates, Vandell conducted regression analyses that compared the performance of the loans backing the Certificates to the performance of three benchmark groups of loans. The idea is to create groups of benchmark loans that lack the problems - such as noncompliance with underwriting guidelines and inflated appraisals - that allegedly plagued the loans comprising the SLGs at issue here.

Vandell's first benchmark (the "Industry Benchmark") consists of loans from other private label securitizations ("PLS")[2] issued during the relevant period, 2005 to 2007, that are comparable to the loans in the SLGs for the seven Certificates.[3] To ensure that the Industry Benchmark was truly a "benchmark, " Vandell excluded all loans that were part of any securitizations at issue in any of the cases brought by FHFA against other banks and their related entities and individuals.[4]

Vandell's second benchmark (the "GSE Benchmark") consists of loans - comparable to those in the SLGs for the seven Certificates - that were purchased by the GSEs from originators.[5] The data for Vandell's GSE Benchmark come from CoreLogic's Loan-Level Market Analytics database, which does not contain loan files or identify the originator or servicer of the loans; all that is identified is the initial investor (i.e., Freddie Mac or Fannie Mae). Both Freddie Mac and Fannie Mae had quality control and originator approval processes.

Vandell's third benchmark (the "Reunderwriting Benchmark") consists of loans that were reunderwritten by FHFA's experts in other cases, excluding those that were identified by those experts as materially defective. Again, the idea is to test whether the alleged defects caused the GSEs' losses by comparing the loans that formed the SLGs at issue in this action with loans that lack those same alleged defects.

Vandell used a regression analysis to estimate a model of loan performance using the loans in each benchmark. These models include dozens of explanatory variables (depending on the benchmark) and estimate the extent to which each explanatory variable predicts the performance (measured by events of default or delinquency) of the loans in the benchmarks. An "event of default or delinquency" refers to a loan that was delinquent for at least ninety days; was in bankruptcy, liquidation, or foreclosure; or was real-estate-owned[6] or charged-off in the last month of loan tracking. Vandell then applied the results of each model to the actual loans in the SLGs for the seven Certificates to estimate how those loans would have performed had they performed the same way as the comparable benchmark loans. Vandell opines that, if the actual default and delinquency rates of the loans underlying a particular Certificate were not statistically significantly different than the expected rates predicted by a specific benchmark, then any difference between the disclosed characteristics and actual characteristics - the alleged misstatements in the Offering Documents - did not cause the GSEs' losses.

Vandell found that the loans in the SLGs underlying six of the seven Certificates, comprising ninety-eight percent of the loans at issue in this case, performed the same as, or better than, the performance predicted by both the Industry and Reunderwriting Benchmarks. Moreover, loans in the SLGs underlying all seven of the Certificates performed the same as, or better than, the performance predicted by the GSE Benchmark. Vandell used the results from the GSE Benchmark to corroborate his conclusions based on the Industry and Reunderwriting Benchmarks, ...

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