Fed. Hous. Fin. Agency v. Nomura Holding Am., Inc.

• Decision Date: 11 May 2015
• Docket Number: No. 11cv6201 (DLC).,11cv6201 (DLC).
• Parties: FEDERAL HOUSING FINANCE AGENCY, Plaintiff, v. NOMURA HOLDING AMERICA, INC., et al., Defendants.
• Court: U.S. District Court — Southern District of New York

104 F.Supp.3d 441

FEDERAL HOUSING FINANCE AGENCY, Plaintiff,
v.
NOMURA HOLDING AMERICA, INC., et al., Defendants.

No. 11cv6201 (DLC).

United States District Court,S.D. New York.

Signed May 11, 2015.

104 F.Supp.3d 449

Philippe Z. Selendy, Richard I. Werder, Jr., Jonathan B. Oblak, Sascha N. Rand, Manisha M. Sheth, Andrew R. Dunlap, Quinn Emanuel Urquhart & Sullivan, LLP, New York, NY, Richard A. Schirtzer, Quinn Emanuel Urquhart & Sullivan, LLP, Los Angeles, CA, Jon Corey, Quinn Emanuel Urquhart & Sullivan, LLP, Washington, D.C., for 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, Sullivan & Cromwell LLP, Washington, D.C., 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 Dante LaRocca.

Thomas C. Rice, Andrew T. Frankel, Alan Turner, Craig S. Waldman, Minta Nester, John Robinson, Simpson Thacher & Bartlett LLP, New York, NY, for defendant RBS Securities Inc. (f/k/a Greenwich Capital Markets, Inc.).

OPINION & ORDER

DENISE COTE, District Judge:

Table of Contents

PROCEDURAL HISTORY	453
BACKGROUND	458

I. RMBS 458

A. Originating a Residential Mortgage Loan 458

1.	Credit and Capacity	458
2.	Collateral	460

B. Overview of the Securitization Process 462

1.	The Sponsor	463
2.	The Depositor	463
3.	The Underwriter	463
4.	The Servicer	463

C. Structure of an RMBS Instrument and Credit Enhancement 464

1.	Subordination	464
2.	Overcollateralization	464

D.	Securing a Credit Rating	464
E.	“Scratch–and–Dent” Loans	465
F.	RMBS Market Dynamics	466

II. The Seven At–Issue Securitizations 466

A.	Principal and Interest Payments	468
B.	Age of Supporting Loans	468
C.	The Certificates' Credit Enhancements	469

III. Due Diligence 469

A. Nomura's Due Diligence 470

1.	Bidding Process	471
2.	The Diligence Group	471
3.	Credit & Compliance Due Diligence	472

a.	Sampling	473
b.	Instructions to Vendors	473
c.	Credit and Compliance Vendor Procedures	474
d.	Nomura's Review of Vendors' Results	475
e.	Ignored Warning Signs	477

4. Valuation Due Diligence 478

a.	Valuation Due Diligence Vendors	478
b.	Nomura Reviews Results; Broker Price Opinions	479

5.	Reviews	479
6.	Purchasing the Loans	480
7.	Selecting Loans for a Securitization	480
8.	Data Integrity Due Diligence	481
9.	Obtaining the Credit Ratings	481

B. RBS's Due Diligence 482

1.	NEHLI 2006–HE3 and NHELI 2006–FM2	482
2.	NHELI 2007–1 and NHELI 2007–2	483

a.	Sample Selection	483
b.	Due Diligence	483

3. Fraud Review 484

C. The Loan Pools for the Seven Securitizations 485

IV. The Offering Documents 488

A.	The Supplements' “Summary” Section	488
B.	Collateral Tables	488
C.	Loans “Were Originated” Generally in Accordance with Guidelines.	490
D.	Risk Advisories	493

V.	Sample Selection	494
VI.	Appraisals	497

A. Kilpatrick 499

1. Greenfield AVM 500

a.	The Mechanics of the Greenfield AVM	500
b.	Confirming the Accuracy of the Greenfield AVM	501
c.	Defendants' Criticisms of the GAVM	502

i.	Daubert Challenge	502
ii.	Variable Omission	503
iii.	Negative Coefficients	504
iv.	Inclusion of TAV as a Variable	504
v.	CV Filter	505
vi.	GAVM's Performance Vis-à-vis Four Commercial AVMs	505
vii.	Attacks on AVMs Generally	506
viii.	Statistical Errors	507

2. The CAM 508

a.	USPAP	508
b.	The CAM Questions	509
c.	Gathering CAM Answers	510
d.	CAM Scoring	510
e.	Kilpatrick's Conclusions from the CAM Study	510
f.	Defendants' Critiques of the CAM and its Results	511

i.	The Failure of Hedden's Project	511
ii.	Field and Desk Reviews Are Preferable.	514
iii.	The CAM Is Not Derived from USPAP.	514
iv.	The CAM Weightings Are Flawed and the Threshold of Twenty is “Frivolous.”	515
v.	Errors in Application	516

3. Futile Attempts to Discredit Kilpatrick 516

B.	Petition	517
C.	Appraisers Used Sales Amounts for Subject Properties as Predetermined Values for Establishing the Appraisal Value.	517
D.	Defendants' Four Appraiser Witnesses	518
E.	Defendants' Due Diligence	520

VII. Underwriting Guidelines 520

A.	Hunter's Re–Underwriting Review	522
B.	Forester's Audit of Hunter's Work	523
C.	Defendants' Objections to Hunter's Re-underwriting	525

1.	Hunter Applied the Originator's Guidelines Too Strictly.	525
2.	Minimum Standards	525
3.	Using BLS Data to Assess Reasonableness of Income	527
4.	Owner Occupancy	528
5.	Post–Origination Documents	529
6.	Originator Deposition Testimony	530

D. The Court's Review 531

VIII.	Credit Ratings	533
IX.	Materiality	534

A.	LTV Ratios	535
B.	Compliance with Underwriting Guidelines	536
C.	Credit Ratings	536

X. Rise and Fall of the Home Mortgage Market and Its Effect on Losses in the GSEs' RMBS Portfolios 536

A.	Growth in the U.S. Housing Market: Late 1990s Through Early 2006	537
B.	The Bubble Bursts	538
C.	Causes of Contraction in Housing Market	539
D.	Vandell's Study of the Hunter Loans	540
E.	GSE Witnesses	543

XI. Corporate Entities and Individual Defendants 544

A. The Nomura Family 544

1.	NCCI	544
2.	NAAC & NHELI	544
3.	Nomura Securities	545
4.	NHA	545

B.	RBS	546
C.	Individual Defendants	546

1.	Findlay	547
2.	Graham	549
3.	LaRocca	550
4.	Gorin	551
5.	McCarthy	551

DISCUSSION 552

I. Legal Standards 552

A.	Law Surrounding RMBS	552
B.	Background and Purpose of the Securities Act	552
C.	Securities Act Section 12(a)(2)	553

1.	Statutory Seller	554
2.	Material Misrepresentation	555

a.	Falsity	555
b.	Materiality	557

3. Damages 559

II. Falsity 559

A. Underwritten in Accordance with Guidelines 559

1.	General Adherence to Process	561
2.	Whose Guidelines?	561
3.	The Meaning of “Generally”	563
4.	Context	563
5.	ResMAE Bankruptcy Advisory	564
6.	Representations of “Belief”	565
7.	Due Diligence Confirmation	566

B. LTV Ratios and Appraisals 566

1.	BPO Statistics	567
2.	Text of the Offering Documents	567

C.	Owner Occupancy Collateral Tables	568
D.	Credit Ratings	568
E.	Excluded Evidence	568

1.	Retention of Residuals	569
2.	GSEs' Single–Family Due Diligence	569

III.	Materiality	570
IV.	Control Person Liability	573

A. Section 15 573

1. Control 574

a.	Nature of the Controlled Entity	575
b.	Status of Controlling Entity	575
c.	Actions Taken on Behalf of Controlled Entity	576

2. Defense 578

B. Application 579

1.	NHA	579
2.	NCCI	580
3.	Individual Defendants	580
4.	Unsuccessful Affirmative Defense	581

V. Damages 583

A.	Date of Tender	583
B.	Interest Rate	584

VI. Loss Causation 585

A.	Second Circuit Caselaw	587
B.	Zone of Risk	588
C.	The Seven Securitizations Were Comparatively Small.	588
D.	The Government's Contribution to the Bubble and Recession	589
E.	Admissions by FHFA and the GSEs	589
F.	Excluded Evidence	592

1.	Testimony from Niculescu and Cook	592
2.	Housing Goals and GSE Selection of Loans in Securitizations	593

VII. Blue Sky Laws 593

A. Legal Standards 594

1.	Damages	595
2.	Loss Causation	595
3.	Control Person Liability	595
4.	Jurisdictional Elements	595

B. Applying the Blue Sky Laws 596

1. Place of Sale 596

a.	Three Freddie Mac Transactions	597
b.	Fannie Mae Transaction	597

2. The Dormant Commerce Clause 597

CONCLUSION 598

104 F.Supp.3d 453

This case is complex from almost any angle, but at its core there is a single, simple question. Did defendants accurately describe the home mortgages in the Offering Documents for the securities they sold that were backed by those mortgages? Following trial, the answer to that question is clear. The Offering Documents did not correctly describe the mortgage loans. The magnitude of falsity, conservatively measured, is enormous.

Given the magnitude of the falsity, it is perhaps not surprising that in defending this lawsuit defendants did not opt to prove that the statements in the Offering Documents were truthful. Instead, defendants relied, as they are entitled to do, on a multifaceted attack on plaintiff's evidence. That attack failed, as did defendants' sole surviving affirmative defense of loss causation. Accordingly, judgment will be entered in favor of plaintiff.

PROCEDURAL HISTORY

In September 2011, the Federal Housing Finance Agency (“FHFA”) brought sixteen lawsuits against banks and related entities and individuals to recover damages on behalf of two Government–Sponsored Enterprises, the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) (collectively “GSEs”) arising out of the GSEs' investments in residential mortgage-backed securities (“RMBS”), specifically their investment in so-called private-label RMBS (“PLS”).¹ FHFA had been created in the midst of the financial crisis, on July 30, 2008, pursuant to the Housing and Economic Recovery Act of 2008, Pub.L. No. 110–289, 122 Stat. 2654 (codified at 12 U.S.C. § 4617), to oversee the GSEs as well as the Federal Home Loan Banks. It became conservator of the GSEs on September 6, 2008.

104 F.Supp.3d 454

The discovery, motion practice, and trials of the sixteen actions were coordinated before this Court, as described in FHFA v. UBS Americas Inc., No. 11cv5201 (DLC), 2013 WL 3284118, at *1–9 (S.D.N.Y. June 28, 2013), reconsideration denied sub nom. FHFA v. JPMorgan Chase & Co., No. 11cv6188 (DLC), 2013 WL 5354212 (S.D.N.Y. Sept. 25, 2013). Fact discovery in the actions largely concluded on December 6, 2013. The trials of the sixteen cases were separated into four tranches, with the earliest tranche scheduled for trial in January 2014, and the fourth tranche set for trial in early 2015. Expert discovery concluded in waves, with the final wave ending on November 26, 2014.

Ultimately, only this lawsuit, one of the sixteen actions, proceeded to trial. This case is referred to as the “Nomura Action.”² The Nomura corporate defendants are Nomura Holding America, Inc. (“NHA”), Nomura Securities...