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

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.

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

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.

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 International, Inc. (“Nomura Securities”), Nomura Credit & Capital, Inc. (“NCCI”), Nomura Asset Acceptance Corporation (“NAAC”), and Nomura Home Equity Loan, Inc. (“NHELI”).³ The five individual Nomura defendants-David Findlay (...