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

Decision Date18 December 2014
Docket NumberNo. 11cv6201 DLC.,11cv6201 DLC.
Citation68 F.Supp.3d 439
PartiesFEDERAL HOUSING FINANCE AGENCY, Plaintiff, v. NOMURA HOLDING AMERICA INC., et al., Defendants.
CourtU.S. District Court — Southern District of New York

Philippe Z. Selendy, Andrew R. Dunlap, David B. Schwartz, Quinn Emanuel Urquhart & Sullivan, LLP, New York, NY, for Plaintiff Federal Housing Finance Agency.

David B. Tulchin, Steven L. Holley, Bruce E. Clark, Bradley A. Harsch, Katherine J. Stoller, Sullivan & Cromwell LLP, Amanda F. Davidoff, Elizabeth A. Cassady, Sullivan & Cromwell LLP, Washington, DC, for Nomura Holding America Inc., Nomura Asset Acceptance Corp., Nomura Home Equity Loan, Inc., Nomura Credit & Capital, Inc., Nomura Securities Int'l, 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 RBS Securities Inc.

OPINION & ORDER

DENISE COTE, District Judge:

Plaintiff Federal Housing Finance Agency (FHFA), as conservator for the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) (together, the Government–Sponsored Enterprises or “GSEs”), brings this action against financial institutions involved in the packaging, marketing, and sale of residential mortgage-backed securities (“RMBS”) purchased by the GSEs between 2005 and 2007, alleging among other things that defendants1 made materially false statements in offering documents for the RMBS (the “Offering Documents”). This is one of sixteen related actions brought by FHFA that have been litigated before this Court. All but this action have settled. This remaining action concerns seven RMBS created by Nomura (the “Securitizations”).

In each of these Securitizations, one of the GSEs purchased a certificate backed by a pool of loans known as a supporting loan group (“SLG”). Those certificates (the “Certificates”) were sold by underwriters, including—for four of the Securitizations—RBS.2 The GSEs purchased the seven Certificates for more than $2 billion.3 Nomura and RBS are strictly liable for any material misrepresentations in the Offering Documents for those Certificates, unless they can avail themselves of one of a limited number of statutory defenses.

On November 10, 2014, FHFA moved for partial summary judgment on the Defendants' due diligence and reasonable care defenses under Section 114 and Section 12(a)(2) of the Securities Act of 1933 (the Securities Act), 15 U.S.C. §§ 77k(b)(3)(A), 77l (a)(2), and similar provisions of the D.C. and Virginia Blue Sky Acts, D.C.Code § 31–5606.05(a)(1)(B) ; Va.Code § 13.1–522(A)(ii) (the “Blue Sky Laws”). This motion was fully submitted on December 12.

The reasonableness of a defendant's due diligence investigation will, in most cases, be a question for the jury. It is a mixed question of law and fact that will often hinge on disputed factual issues. Even when it does not, reasonable minds could often disagree about whether a given investigation would have satisfied a prudent man in the management of his own property. In exceptional cases, where no reasonable, properly instructed jury could find for a defendant, summary judgment is appropriate. For the reasons explained at length below, this is such a case.

Here, the loans within each of the groups that supported the seven Certificates were loans that Nomura itself had previously purchased. There were over 15,000 such loans within the seven SLGs. Nomura never conducted a due diligence program to confirm the accuracy of the representations in the Offering Documents about the 15,000 loans in the SLGs at or near the time of the securitization. Nor did it undertake such a review of the loans at or about the time Nomura selected the loans for and placed them within the SLGs. Instead, to support its reliance on the affirmative defenses of due diligence and reasonable care, Nomura points to its program for reviewing loans before purchasing them. The 15,000 loans in the SLGs at issue here were drawn from close to 200 pools of loans that Nomura had purchased (the “Trade Pools”) from loan originators.

While it is conceivable that a review of loans at purchase—which may occur months before Nomura selects the loans to be placed in a particular SLG—might have been sufficient for a jury to find in Nomura's favor on these affirmative defenses, the pre-purchase review that Nomura conducted here was not adequate for that purpose as a matter of law. Nomura's post hoc attempts in its briefing to piece together the façade of a due diligence program from reviews Nomura undertook before purchasing more than fifty thousand loans in hundreds of trade pools, portions of which would later contribute to the seven relevant SLGs in the Securitizations, simply underscore the lack of evidence that Nomura undertook any reasonable investigation of the accuracy of its representations about the SLGs before issuing the Certificates.

Nomura's pre-acquisition review was not designed to ensure the accuracy of the descriptions in the Offering Documents of the SLGs that backed the Certificates. Nomura tested samples of loans as it purchased them, but then weeks or months later pulled certain kinds of loans (reviewed and unreviewed) to form the SLGs without taking any care to ensure that the findings from its pre-purchase review program could be reliably applied to the SLGs. This broke the link between the results of Nomura's pre-acquisition sampling and the characteristics of particular SLGs as they were described in the Offering Documents. Nomura has offered no evidence that it considered how its selection of particular loans for the SLGs impacted its reliance on the sampling of the trade pools. Indeed, there is no evidence Nomura took any care to structure its processes—its pre-acquisition sampling, its construction of SLGs, or its pre-securitization review of the sampling results—to ensure the accuracy of its representations about the SLGs in the Offering Documents.

Even putting aside this fundamental error, Nomura's pre-acquisition review was poorly designed and not implemented in a way that could give reasonable assurance that the kinds of representations that Nomura included in its Offering Documents were accurate. But, even if one assumed that that review were adequate, Nomura's pre-acquisition review raised red flags Nomura ignored. Despite high “kick-out” rates in the Trade Pools that populated the seven Securitizations, never once did Nomura upsize its sample to test whether it had sufficiently culled loans. Indeed, in at least some cases, Nomura's bid to buy loans from their originators included a stipulation that Nomura would limit its pre-purchase sampling.

Most importantly, there is simply no evidence Nomura ever considered the implications of these kick-out rates for the quality of the loans it would later place in the SLGs and describe in the Offering Documents. No reasonable jury could find that Nomura conducted reasonable investigations or exercised reasonable care with respect to these seven Securitizations.

And RBS, although it agreed to act as sole lead underwriter for three of the Securitizations and co-lead for a fourth, made little real effort to test the accuracy of the representations about the SLGs. Unlike Nomura, to the extent RBS conducted a review of loans, it did so after the composition of the SLGs had been determined. But, for two of the Securitizations, RBS undertook no independent review of the loan files. For one of these two, RBS knew nothing of the results of Nomura's pre-acquisition review of the loan pools from which Nomura selected loans to populate the Securitization beyond a one-page summary that warned the summary might be neither “complete” nor “accurate.” For the other, RBS was the sole lead underwriter, yet it relied entirely on Nomura's pre-acquisition reviews of the Trade Pools.

RBS did review loans in the other two Securitizations for which it served as sole lead underwriter, but these reviews were manifestly inadequate as a matter of law. For one of these two, RBS's Credit Group called the loans “crap” and asked to review one-quarter of them, but was told that RBS did not “own” these loans—RBS ultimately decided to sample less than one-fourth that number. But, even then, when RBS failed to collect all of the files for those small samples, RBS simply proceeded with a review of incomplete sets. To make matters worse, RBS appeared to ignore entirely the results of its valuation reviews in both of these Securitizations, taking no action when a substantial portion of its sampled loans in both groups appeared to have faulty appraisals. Those loans were securitized, and the Offering Documents calculated loan-to-value (“LTV”)5 ratios based on the potentially faulty appraisals. For these and other reasons, no reasonable jury could find that RBS undertook a reasonable investigation or exercised reasonable care as underwriter for any of these four Securitizations.

BACKGROUND

The adequacy of any due diligence program is a fact-intensive inquiry, and therefore, ordinarily a matter addressed at trial. But, based on the record here, summary judgment is appropriate.

Below are the principal facts cited in Defendants' major arguments, as well as needed context for those facts. All factual disputes are resolved in Defendants' favor, and all reasonable inferences are drawn in Defendants' favor, as non-movants. Where Defendants offered a litany of similar examples, the Court has attempted to select the strongest or most illustrative.6

I. RMBS, in Brief

RMBS are securities entitling the holder to income payments from pools of residential mortgage loans held by a trust; these pools are called Supporting Loan Groups or SLGs. Each of the mortgage loans underlying the Securities at issue (the “Mortgage Loans”) began as a loan application approved by a financial institution, known as the loan's originator (the “Originator”).7...

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8 cases
  • Fed. Hous. Fin. Agency, Nat'l Mortg. Ass'n & the Fed. Home Loan Mortg. Corp. v. Nomura Holding Am., Inc.
    • United States
    • U.S. Court of Appeals — Second Circuit
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    ...granting the FHFA's motion in limine to exclude evidence related to the GSEs' housing goals, FHFA v. Nomura Holding Am., Inc. (Nomura III ), No. 11cv6201, 2014 WL 7229361 (S.D.N.Y. Dec. 18, 2014) ;• An opinion, FHFA v. Nomura Holding Am., Inc. (Nomura IV ), 68 F.Supp.3d 486 (S.D.N.Y. 2014),......
  • Fed. Hous. Fin. Agency v. Nomura Holding Am., Inc.
    • United States
    • U.S. District Court — Southern District of New York
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    ...FHFA v. HSBC N. Am. Holdings Inc., 33 F.Supp.3d 455, 493 (S.D.N.Y.2014), FHFA v. Nomura Holding Am. Inc. (“Due Diligence Opinion ”), 68 F.Supp.3d 439, 485–86, 2014 WL 7232443, at *40 (S.D.N.Y. Dec. 18, 2014); decisions excluding evidence of the GSEs' 104 F.Supp.3d 455 affordable housing goa......
  • Fed. Hous. Fin. Agency v. Nomura Holding Am., Inc.
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    • U.S. District Court — Southern District of New York
    • 11 Mayo 2015
    ...care, FHFA v. HSBC N. Am. Holdings Inc.,33 F.Supp.3d 455, 493 (S.D.N.Y.2014), FHFA v. Nomura Holding Am. Inc.(“Due Diligence Opinion”), 68 F.Supp.3d 439, 485–86, 2014 WL 7232443, at *40 (S.D.N.Y. Dec. 18, 2014); decisions excluding evidence of the GSEs' 104 F.Supp.3d 455affordable housing g......
  • Fed. Hous. Fin. Agency v. Nomura Holding Am., Inc.
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    • U.S. District Court — Southern District of New York
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    ...of a due diligence defense, but that defense is no longer at issue here. See FHFA v. Nomura Holding Am. Inc., No. 11cv6201 (DLC), 68 F.Supp.3d 439, 474–85, 2014 WL 7232443, at *30–40 (S.D.N.Y. Dec. 18, 2014).21 The Supplements use the present tense to describe the quality of the appraisals ......
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