Chau v. Lewis

• Citation: 935 F.Supp.2d 644
• Decision Date: 29 March 2013
• Docket Number: No. 11–CV–1333 (GBD).,11–CV–1333 (GBD).
• Parties: Wing F. CHAU and Harding Advisory LLC, Plaintiffs, v. Michael LEWIS, Steven Eisman, and W.W. Norton & Company, Inc., Defendants.
• Court: U.S. District Court — Southern District of New York

935 F.Supp.2d 644

Wing F. CHAU and Harding Advisory LLC, Plaintiffs,

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

No. 11–CV–1333 (GBD).

United States District Court,

S.D. New York.

March 29, 2013.

Steven Francis Molo, Robert Kelsey Kry, MoloLamken, LLP, New York, NY, for Plaintiffs.

Celia Goldwag Barenholtz, Gabriel Virgil Rauterberg, Cooley Godward Kronish LLP, David A. Schulz, Levine, Sullivan, Koch & Schulz, LLP, New York, NY, Michael D. Sullivan, Levine Sullivan Koch & Schulz, L.L.P., Washington, DC, for Defendants.

MEMORANDUM DECISION AND ORDER

GEORGE B. DANIELS, District Judge.

Plaintiffs Wing F. Chau and Harding Advisory LLC commenced this action against Defendants Michael Lewis, Steven Eisman, and W.W. Norton & Company, alleging that Defendants committed libel by publishing twenty-six defamatory statements about Plaintiffs in Lewis's 2010 book, The Big Short: Inside the Doomsday Machine. Plaintiffs seek compensatory and punitive damages for the alleged defamation. Defendants each move for summary judgment pursuant to Federal Rule of Civil Procedure (“Fed. R. Civ. P.”) 56.

Defendants' summary judgment motions are GRANTED.

BACKGROUND

Defendant Lewis is an award-winning author who has written or edited fourteen non-fiction books. Defendants' Consolidated Statement of Undisputed Facts (“SUF”) ¶¶ 14, 18 (filed under seal). He has also written numerous articles and opinion pieces on business and financial topics for publications such as The New York Times, The Wall Street Journal, Forbes, and Vanity Fair. SUF ¶ 17. Defendant Norton is a New–York based publishing house that has published eleven of Lewis's books. SUF ¶ 32. In October 2009, Lewis entered into a contract with Norton for publication of The Big Short. SUF ¶ 34. The Big Short was a product of sixteen months of extensive research and investigation, during which Lewis interviewed over one hundred sources and collected thousands of pages of hardcopy materials. SUF ¶¶ 60–62.

Written as a non-fiction book meant for a general audience, The Big Short purports to be an exploration of “the causes of the recent financial crisis by looking 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’).” Lewis Decl. ¶¶ 15–16. One of the “iconoclasts” whom Lewis profiles is Defendant Eisman, who managed a hedge fund called FrontPoint Partners LLC, and served as one of the sources Lewis interviewed in researching The Big Short. Compl. ¶ 8.

The gravamen of Plaintiffs' complaint stems from Chapter 6 of The Big Short, entitled Spider–Man at the Venetian. Of the 270–page, ten-chapter book, Chapter 6 consists of twenty-four pages and revolves around a dinner conversation that took place on January 28, 2007 at the Okada Restaurant in the Wynn Las Vegas Hotel during the 2007 American Securitization Forum. SUF ¶ 1. The dinner was hosted by Greg Lippmann, head of Deutsche Bank's Asset–Backed Securities Trading Department, with the purpose of introducing the “shorts” to the “longs”. SUF ¶ 6. Participants of the dinner included Eisman, FrontPoint's chief trader, Daniel Moses, and FrontPoint's senior analyst Vincent Daniel. SUF ¶¶ 3–5.

Also present at the dinner was Plaintiff Chau, a financial professional and founder, president, and 99% owner of Plaintiff Harding, an asset management firm that specialized in the management of CDOs. SUF ¶¶ 2, 82, 83, 86. After having had an annual salary of approximately $190,000 as an employee of New York Life insurance company, Chau collected approximately $25 million in fees in 2007 as a CDO manager. SUF ¶¶ 90–91. At the height of the CDO market, Harding ranked among the top CDO managers. SUF ¶ 117. During the period between January 2007 and September of 2007, Harding issued more asset-backed CDOs by volume than any other CDO manager. SUF ¶ 122. As of October 2007, Harding had over $23 billion in assets under management, over half of which consisted of non-prime residential mortgage-backed securities (“RMBS”) and CDOs invested in non-prime RMBS. SUF ¶ 99–101.¹ By January 2009, the majority of the collateral in Harding's CDOs was rated below BBB, a rating which carried the highest level of risk for investment-grade loans. SUF ¶ 104. From as far back as January 2007, Chau personally had minimal equity interest in any of these CDOs. SUF ¶¶ 107–113.

At the dinner, Eisman and Chau were seated next to each other and discussed how for every “long” investor who believed the asset would perform, there must be also be a “short investor” on the other side of the trade who believed that the asset would default. SUF ¶ 8. Following the dinner, Eisman intended to “short” Chau's CDOs, and contacted a trader at Deutsche Bank to do so upon his return to New York. SUF ¶¶ 10. While Eisman did not ultimately short Chau's CDOs specifically, he increased his short position on other CDOs as a result of the dinner. SUF ¶ 13.

Chapter 6 criticizes and presents a negative portrayal of Plaintiffs and CDO managers in general. Plaintiffs assert that: Defendant Lewis is liable for writing, Defendant Norton for publishing, and Defendant Eisman for communicating to Lewis the following twenty-six allegedly defamatory statements published in Chapter 6 of The Big Short:²Compl. ¶ 89.

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, when ever 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 bond. “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.

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. (...