Chau v. Lewis

• Decision Date: 14 November 2014
• Docket Number: Docket No. 13–1217.
• Parties: Wing F. CHAU, Harding Advisory LLC, Plaintiffs–Appellants, v. Michael LEWIS, Steven Eisman, W.W. Norton & Company, Inc., Defendants–Appellees.
• Court: U.S. Court of Appeals — Second Circuit

771 F.3d 118

Wing F. CHAU, Harding Advisory LLC, Plaintiffs–Appellants

v.Michael LEWIS, Steven Eisman, W.W. Norton & Company, Inc., Defendants–Appellees.

Docket No. 13–1217.

United States Court of Appeals, Second Circuit.

Argued: Feb. 19, 2014.

Decided: Nov. 14, 2014.

Steven F. Molo (Robert K. Kry, Andrew M. Bernie, MoloLamken LLP, Washington, DC, on the brief), MoloLamken LLP, New York, NY, for Plaintiffs–Appellants.

Celia Goldwag Barenholtz (Gabriel Rauterberg, Annika Goldman, on the brief), Cooley LLP, New York, NY, for Defendants–Appellees Michael Lewis and W.W. Norton & Co., Inc.

David A. Schulz (Michael D. Sullivan, Celeste Phillips, Paul Safier, on the brief), Levine Sullivan Koch & Schulz, LLP, New York, NY, for Defendant–Appellee Steven Eisman.

Before: KEARSE, WINTER, and WESLEY, Circuit Judges.

Opinion

WESLEY, Circuit Judge:

Plaintiffs–Appellants Wing F. Chau and Harding Advisory LLC appeal from a March 29, 2013 judgment of the United States District Court for the Southern District of New York (Daniels, J) dismissing their claims of libel against Defendants–Appellees author Michael Lewis, his source, Steven Eisman, and Lewis's publisher, W.W. Norton, for twenty-six allegedly defamatory statements in Lewis's book The Big Short. The district court granted Defendants' motion for summary judgment and dismissed each of Plaintiffs' claims. We AFFIRM the district court's grant of summary judgment.

BACKGROUND ¹

The United States' housing market collapse in 2008–2009 and the ensuing global financial crisis are widely considered the worst financial disasters since the Great Depression; their causes have been hotly debated. One of the many books that explore the genesis of the financial decline is The Big Short: Inside the Doomsday Machine, written by Defendant Michael Lewis and published in 2010 by Defendant W.W. Norton. A work of non-fiction, The Big Short looks at a “small group of iconoclasts who ‘shorted,’ or bet against, the subprime mortgage bond market at a time when most investors thought real estate prices would continue to rise (i.e., were ‘long’).” One of the so-called “iconoclasts” described in The Big Short is Defendant Steve Eisman, who managed a hedge fund and served as one of Lewis's sources for the book. Like many of Lewis's previous books, a great number of which have dealt with business and financial topics, The Big Short met with considerable success and spent 28 weeks on The New York Times best-seller list.

Thankfully, we do not have to weigh in on the root of America's fiscal crisis. The task before us is much more focused: to determine whether one chapter of The Big Short Chapter 6, titled Spider–Man at the Venetian —contains statements that are defamatory to Plaintiffs Wing Chau and his business Harding Advisory.

Chapter 6 comprises twenty-four pages of the 270–page, ten-chapter book, and one-third of that chapter focuses on a dinner conversation that took place in January 2007 at the Wynn Las Vegas Hotel during the 2007 American Securitization Forum. The dinner was notable in its design to introduce people who shorted the market to the people who went long. Eisman was in attendance and was seated next to Chau.

Chau, an “investment professional,” is the founder and owner of Harding Advisory LLC. He received a BA in economics from the University of Rhode Island and an MBA from Babson College. After graduating from Babson, he spent the next twelve years of his career in structured finance. For five years, he worked as an analyst specializing in asset-backed securities at Salomon Smith Barney and Prudential Securities, then spent two years as a portfolio manager at New York Life Investment Management. With the experience he gained in asset-backed securities through his work at those firms, Chau set off on his own in 2006 and founded Harding Advisory. At the time of the January 2007 dinner, Harding was a top-ranked manager of Collateralized Debt Obligations² (commonly known as “CDOs”) and was on its way to issuing more asset-backed CDOs by volume than any other CDO manager.

Spider–Man at the Venetian recounts Eisman's interaction and discussions with Chau at that dinner and paints CDO managers in general, and Plaintiffs in particular, in a negative light. In response to this chapter's representations, Chau sued Lewis for writing, Norton for publishing, and Eisman for communicating to Lewis twenty-six allegedly defamatory statements (reproduced below). The district court granted summary judgment to Defendants, finding that none of the statements were actionable defamation because they either were substantially true, were not “of or concerning” Plaintiffs, were not reasonably susceptible to any defamatory meaning, or were mere opinions rather than assertions of fact. Plaintiffs now appeal, arguing that the court erred in most of its findings. For the following reasons, we affirm.

STATEMENTS AT ISSUE

These statements are as they appear in the book, except that the bolded language in each Statement is the language that was bolded by the district court in its decision.

1. When Eisman asked exactly what Harding Advisory advised, Wing Chau explained that he was a CDO manager. “I had no idea there was such a thing as a CDO manager, ” said Eisman. “I didn't know there was anything to manage. ”

(“Statement 1”), The Big Short at 138.

2. He'd graduated from the University of Rhode Island, earned a business degree at Babson College, and spent most of his career working sleepy jobs at sleepy life insurance companies —but all that was in the past.

(“Statement 2”), Id. at 139.3. Danny didn't know Wing Chau, but when he heard that he was the end buyer of subprime CDOs, he knew exactly who he was: the sucker.

(“Statement 3”), Id. at 139.

4. When they saw that Lippman had seated Eisman right next to the sucker, both Danny and Vinny had the same thought: Oh no. This isn't going to end well. Eisman couldn't contain himself. He'd figure out the guy was a fool, and let him know it, and then where would they be? They needed fools; only fools would take the other side of their trades.

(“Statement 4”), Id. at 139.

5. Later, whenever Eisman set out to explain to others the origins of the financial crisis, he'd start with his dinner with Wing Chau. Only now did he fully appreciate the central importance of the so-called mezzanine CDO—the CDO composed mainly of triple-B-rated subprime mortgage bonds—and its synthetic counterpart: the CDO composed entirely of credit default swaps on a triple-B-rated subprime mortgage bonds. “You have to understand this,” he'd say. “This was the engine of doom. ” He'd draw a picture of several towers of debt. The first tower was the original subprime loans that had been piled together. At the top of this tower was the triple-A tranche, just below it the double-A tranche, and so on down to the riskiest, triple-B tranche—the bonds Eisman had bet against. The Wall Street firms had taken these triple-B tranches—the worst of the worst—to build yet another tower of bonds: a CDO. A collateralized debt obligation. The reason they'd done this is that the rating agencies, presented with the pile of bonds backed by dubious loans, would pronounce 80 percent of the bonds in it triple-A. These bonds could then be sold to investors—pension funds, insurance companies—which were allowed to invest only in highly rated securities. It came as news to Eisman that this ship of doom was piloted by Wing Chau and people like him.

(“Statement 5”), Id. at 140.

6. The guy controlled roughly $15 billion, invested in nothing but CDOs backed by the triple-B tranche of a mortgage bond or, as Eisman put it, “the equivalent of three levels of dog shit lower than the original bonds. ”

(“Statement 6”), Id. at 140.

7. All by himself, Chau generated vast demand for the riskiest slices of subprime mortgage bonds, for which there had previously been essentially no demand. This demand led inexorably to the supply of new home loans, as material for the bonds. The soy sauce in which Eisman double-dipped his edamame was shared by a man who had made it possible for tens of thousands of actual human beings to be handed money they could never afford to repay.

(“Statement 7”), Id. at 140–41.³

8. As it happened, FrontPoint Partners had spent a lot of time digging around in those loans, and knew that the default rates were already sufficient to wipe out Wing Chau's entire portfolio. “God,” Eisman said to him. “You must be having a hard time.” “No,” Wing Chau said. “I've sold everything out. ” (“Statement 8”), Id. at 141.

9. It made no sense. The CDO manager's job was to select the Wall Street firm to supply him with subprime bonds that served as the collateral for CDO investors, and then to vet the bonds themselves. The CDO manager was further charged with monitoring the hundred or so individual subprime bonds inside each CDO, and replacing the bad ones, before they went bad, with better ones. That, however, was mere theory; in practice, the sorts of investors who handed their money to Wing Chau, and thus bought the triple-A-rated tranche of CDOs—German banks, Taiwanese insurance companies, Japanese farmers' unions, European pension funds, and, in general, entities more or less required to invest in triple-A-rated bonds—did so precisely because they were meant to be foolproof, impervious to losses, and unnecessary to monitor or even think about very much. The CDO manager, in practice, didn't do much of anything, which is why all sorts of unlikely people suddenly hoped to become one.

(“Statement 9”), Id. at 141.

10. “Two guys and a Bloomberg terminal in New Jersey” was Wall Street shorthand for the typical CDO manager.

(“Statement 10”), Id. at 141.

10. The less mentally alert the two guys, and the fewer the questions they asked about the triple-B-rated subprime bonds they were absorbing into their CDOs, the more likely they were to be patronized by the big Wall Street firms.

(“Statement 11”), Id. at 141.

12. The whole point of the CDO was to launder a lot of subprime

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