Fairholme Funds, Inc. v. Fed. Hous. Fin. Agency

636 F.Supp.3d 144

FAIRHOLME FUNDS, INC., et al., Plaintiffs, v. FEDERAL HOUSING FINANCE AGENCY, et al., Defendants.

In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations

This Memorandum Opinion relates to: All Cases

Case No. 1:13-cv-1053-RCL

Case No. 1:13-mc-1288-RCL

United States District Court, District of Columbia

Filed October 21, 2022

Signed October 13, 2022

Peter A. Patterson, Brian W. Barnes, Pro Hac Vice, David Henry Thompson, Vincent John Colatriano, Charles Justin Cooper, Cooper & Kirk, PLLC, Washington, DC, for Plaintiffs Fairholme Funds, Inc., Fairholme Fund, Acadia Insurance Company, Admiral Indemnity Company, Admiral Insurance Company, Carolina Casualty Insurance Company, Midwest Employers Casualty Insurance Company, Nautil U.S. Insurance Company, Preferred Employers Insurance Company.

Peter A. Patterson, Brian W. Barnes, Pro Hac Vice, David Henry Thompson, Michael Weitzner, Vincent John Colatriano, Charles Justin Cooper, Cooper & Kirk, PLLC, Washington, DC, for Plaintiffs Berkley Insurance Company, Berkley Regional Insurance Company.

Asim Varma, David Block Bergman, Howard Neil Cayne, Ian S. Hoffman, Robert Stanton Jones, Jonathan Louis Stern, Arnold & Porter Kaye Scholer LLP, Washington, DC, for Defendant Federal Housing Finance Agency.

Asim Varma, David Block Bergman, Howard Neil Cayne, Ian S. Hoffman, Arnold & Porter Kaye Scholer LLP, Washington, DC, for Defendant Edward Demarco.

Caroline J. Anderson, U.S. Department of Justice, Washington, DC, Thomas Zimpleman, Natural Resources Defense Council, Washington, DC, R. Charlie Merritt, U.S. Department of Justice - Richmond, Civil Division, Richmond, VA, for Defendant Department of the Treasury.

Howard Neil Cayne, Arnold & Porter Kaye Scholer LLP, Washington, DC, for Defendant Melvin L. Watt.

Meaghan McLaine VerGow, O'Melveny & Myers LLP, Washington, DC, for Defendant

Federal National Mortgage Association.

Graciela Maria Rodriguez, Taylor T. Lankford, Michael Joseph Ciatti, King & Spalding, LLP, Washington, DC, for Defendant Federal Home Loan Mortgage Corporation.

CLASS ACTION

MEMORANDUM OPINION

Royce C. Lamberth, United States District Judge

Ten different motions in limine are now pending before the Court, all of which were discussed to some extent in the recent pretrial conference. This Memorandum Opinion sets forth the Court's reasoning for its disposition of those motions in the accompanying Order. Many of the motions in limine raise closely related issues, but in the interest of clarity, the Court will consider them one by one, beginning with plaintiffs' motions, followed by defendants' motions.

I. Plaintiffs' Motions

A. Plaintiffs' Motion in Limine to Exclude Certain Opinions and Testimony of Defendants' Expert Mukarram Attari (Fairholme ECF No. 161, Class ECF No. 156)

Defendants plan to call their expert Dr. Mukarram Attari to testify that it was reasonable for FHFA to agree to the Third Amendment and that it did not harm plaintiffs. Plaintiffs move to exclude two of Dr. Attari's opinions: (1) that, based on an "event study" he conducted of bond yields following the announcement of the Third Amendment, that announcement caused a tightening of the difference in yield between GSE bonds and Treasury bonds ("Treasury spread"); and (2) that if the periodic commitment fee ("PCF") to which Treasury was entitled prior to the Third Amendment were assessed, it would have been set at the GSEs' net profits. For the reasons that follow, this motion will be GRANTED in part and DENIED in part.

1. The Event Study and Bond Yields

Plaintiffs argue that Dr. Attari's opinion that the Third Amendment caused the decline in the GSE bonds' Treasury spread should be excluded as unreliable under Federal Rule of Evidence 702 because it fails to account for a potentially confounding variable, namely another part of the Third Amendment, separate from the Net Worth Sweep, that required the GSEs to accelerate the wind down of their retained mortgage portfolios. But Dr. Attari never claims that his event study alone isolates the impact of the Net Worth Sweep from the impact of other aspects of the Third Amendment on bond yields. See Attari Rep. ¶¶ 80-87, Ex. A to Pls.' Mot, Fairholme ECF No. 161-2, Class ECF No. 156-2 (referring only to "the Third Amendment" and not the Net Worth Sweep). Plaintiffs cite a number of cases for the proposition that "[a]n event study that fails to disaggregate the effects of confounding factors must be excluded because it misleadingly suggests to the jury that a sophisticated statistical analysis proves the impact of" the event being studied, Bricklayers and Trowel Trades Intern. Pension Fund v. Credit Suisse First Boston, 853 F. Supp. 2d 181, 190 (D. Mass. 2012); see Pls.' Reply at 4-5, Fairholme ECF No. 174, Class ECF No. 167, but those cases deal with an expert's failure to account for variables that might confound their actual conclusions.

The real dispute is thus over whether Dr. Attari's opinion about the entire Third Amendment "will help the trier of fact . . . to determine a fact in issue." Fed. R. Evid. 702(a). And understanding the effect of the entire package of changes included in the Third Amendment—the Net Worth Sweep and everything else—could conceivably help the jury determine whether shareholders could reasonably have expected FHFA, under the circumstances, to agree to a major part of that package in its role as conservator. Moreover, plaintiffs can always cross-examine Dr. Attari regarding the weight that the jury should give to the market's reaction to the entire package, which also alleviates plaintiffs' concern that his use of the phrase "Third Amendment," which other witnesses will use to refer to the Net Worth Sweep in particular, will be substantially prejudicial.

For these reasons, plaintiffs' motion in limine to preclude Dr. Attari's testimony will be DENIED insofar as it seeks to exclude Dr. Attari's testimony about his event study and bond yields.

2. The Amount of the PCF

Plaintiffs argue that Dr. Attari's opinion that the PCF would have been set at the GSEs' net profits should be excluded as unreliable under Rule 702 because it relies on essentially no methodology at all. Specifically, Dr. Attari reasons as follows: (1) "The [agreements between FHFA and Treasury] provided that the PCF be set based on the market-determined value of the [Treasury] Commitment," (2) "[a] market participant would typically set the PCF based on the role of the Commitment," (3) "in this case, the role of the Commitment was to provide the GSEs with equity capital," (4) [p]roviders of equity capital typically receive the firm's profits," and therefore (5) "as an initial estimate, a market-determined PCF would be set at the level of the GSEs' profits." Attari Rep. ¶ 105, Ex. A to Pls.' Mot., Fairholme ECF No. 161-2, Class ECF No. 156-2.

As plaintiffs note, Dr. Attari so reasons without citation to anything, or any explanation that he is relying on his experience in the field of financial economics. Defendants argue that no citation is necessary, because he is relying on basic financial-economic concepts, and "Rule 702 imposes no minimum citation requirement." In re Fluidmaster, Inc., Water Connector Components Prod. Liab. Litig., No. 14-cv-5696, 2017 WL 1196990, at *7 (N.D. Ill. Mar. 31, 2017). But while there may be no need to cite evidence for basic financial concepts like the principle that providers of equity capital usually receive a firm's profits, the Court is troubled by the lack of citation or explanation for the proposition that "[a] market participant would typically set the PCF based on the role of the Commitment," Attari Rep. ¶ 105, Ex. A to Pls.' Mot., Fairholme ECF No. 161-2, Class ECF No. 156-2, and the leap from that proposition to the assumption that the market value of the Commitment would be 100 percent of what is due to providers of equity capital. In their opposition to this motion, defendants do not explain where that proposition came from, except perhaps to suggest that the entire passage from the expert report draws on Dr. Attari's experience as a financial economist and an analogy to bankruptcy financing. See Defs.' Opp'n at 16-19, Fairholme ECF No. 168, Class ECF No. 161. But Dr. Attari did not claim to be relying on his expertise or experience when he stated, as if it were obvious, how a market participant would typically set the PCF or anything like it. This portion of Dr. Attari's testimony thus does not appear to be supported by reliable methodology, as Rule 702 requires.

For these reasons, plaintiffs' motion in limine to exclude Dr. Attari's testimony will be GRANTED insofar as it seeks to exclude under Rule 702 Dr. Attari's testimony that the PCF would have been set at 100 percent of the GSEs' net profits.

B. Plaintiffs' Motion in Limine to Exclude Opinions of Defendants' Expert S.P. Kothari (Fairholme ECF No. 162, Class ECF No. 157)

Defendants plan to call their expert Professor S.P. Kothari to testify that it was reasonable for FHFA to run the GSEs in a manner that did not benefit shareholders and that given the circumstances, shareholders did not reasonably expect to be paid dividends before the Third Amendment took effect. Plaintiffs move to exclude Professor Kothari's testimony on grounds that it is (1) irrelevant, because it is premised on an incorrect legal standard; (2) partially just a summary of evidence rather than expert opinion; and (3) unreliable and unduly confusing to the extent that it is expert opinion.

Plaintiffs argue that Professor Kothari's testimony regarding shareholders' reasonable expectations is irrelevant because defendants instructed him to consider only publicly available information, and under the correct standard, even nonpublic information is relevant to the implied covenant claim. That argument is unpersuasive. To be sure, plaintiffs are correct to a certain extent about the relevant standard. Defendants cite no authority for the proposition that...