Fed. Hous. Fin. Agency, Nat'l Mortg. Ass'n & the Fed. Home Loan Mortg. Corp. v. Nomura Holding Am., Inc.

873 F.3d 85

FEDERAL HOUSING FINANCE AGENCY, as Conservator FOR the FEDERAL NATIONAL MORTGAGE ASSOCIATION and the Federal Home Loan Mortgage Corporation, Plaintiff-Appellee,

v.NOMURA HOLDING AMERICA, INC., Nomura Asset Acceptance Corporation, Nomura Home Equity Loan, Inc., Nomura Credit & Capital, Inc., Nomura Securities International, Inc., RBS Securities, Inc., f/k/a Greenwich Capital Markets, Inc., David Findlay, John McCarthy, John P. Graham, Nathan Gorin, N. Dante LaRocca, Defendants-Appellants.^*

Docket Nos. 15-1872-cv(L), 15-1874-cv(CON) August Term 2016.

United States Court of Appeals, Second Circuit.

Argued: November 18, 2016

Decided: September 28, 2017

Kathleen M. Sullivan (Philippe Z. Selendy, Adam M. Abensohn, William B. Adams, Andrew R. Dunlap, Yelena Konanova, on the brief), Quinn Emanuel Urquhart & Sullivan LLP, New York, NY, for plaintiff-appellee.

David B. Tulchin , Sullivan & Cromwell LLP, New York, NY (Amanda F. Davidoff, Sullivan & Cromwell LLP, Washington, D.C.; Bruce E. Clark, Steven L. Holley, Adam R. Brebner, Owen R. Wolfe, Sullivan & Cromwell LLP, New York, NY, on the brief), for defendants-appellants Nomura Holding America, Inc., Nomura Asset Acceptance Corporation, Nomura Home Equity Loan, Inc., Nomura Credit & Capital, Inc., Nomura Securities International, Inc., David Findlay, John McCarthy, John P. Graham, Nathan Gorin, and N. Dante LaRocca.

E. Joshua Rosenkranz , Orrick, Herrington & Sutcliffe LLP, New York, NY (Thomas C. Rice, Andrew T. Frankel, Alan C. Turner, Craig S. Waldman, Simpson Thacher & Bartlett LLP, New York, NY; Paul F. Rugani, Orrick, Herrington & Sutcliffe LLP, Seattle, WA; Daniel A. Rubens, Orrick, Herrington & Sutcliffe LLP, New York, NY; Kelsi Brown Corkran, Orrick, Herrington & Sutcliffe LLP, Washington, D.C., on the brief), for defendant-appellant RBS Securities, Inc.

Michael J. Dell, Kramer Levin Naftalis & Frankel LLP, New York, NY, for amici curiae Securities Industry and Financial Markets Association and The Clearing House Association LLC, in support of defendants-appellants.

Before: Wesley, Livingston, and Droney, Circuit Judges.

Wesley, Circuit Judge:

In the wake of the Great Depression, Congress took measures to protect the U.S. economy from suffering another catastrophic collapse. Congress's first step in that endeavor was the Securities Act of 1933 (the "Securities Act" or "Act"), ch. 38, 48 Stat. 74 (codified as amended at 15 U.S.C. § 77a et seq. ). The Act's chief innovation was to replace the traditional buyer-beware or caveat emptor rule of contract with an affirmative duty on sellers to disclose all material information fully and fairly prior to public offerings of securities. That change marked a paradigm shift in the securities markets. See Ernst & Ernst v. Hochfelder , 425 U.S. 185, 194–95, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976).

This case demonstrates the persistent power of the Securities Act's full-disclosure requirement in the context of the Great Recession. The height of the housing bubble in the mid-2000s saw an explosion in the market for residential mortgage-backed securities ("RMBS"). See Adam J. Levitin & Susan M. Wachter, Explaining the Housing Bubble , 100 GEO . L.J. 1177, 1192–202 (2012). In the midst of that market frenzy, two government-sponsored enterprises, the Federal Home Loan Mortgage Corporation ("Freddie Mac" or "Freddie)" and Federal National Mortgage Association ("Fannie Mae" or "Fannie") (collectively, the "GSEs"), purchased a subset of RMBS known as private-label securitizations ("PLS") from a host of private banks. Defendants-appellants Nomura¹ and RBS² (collectively, "Defendants")³ sold the GSEs seven of these certificates (the "Certificates") in senior tranches of PLS (the "Securitizations") using prospectus supplements (the "ProSupps"). Each ProSupp described the creditworthiness of the loans supporting the Securitization, including an affirmation that the loans "were originated generally in accordance with the underwriting criteria."

The housing market began to collapse in 2007 and the value of PLS declined rapidly. Shortly thereafter, plaintiff-appellee the Federal Housing Finance Agency (the "FHFA"), the statutory conservator of Freddie and Fannie,⁴ brought sixteen actions in the U.S. District Court for the Southern District of New York against financial institutions that sold PLS certificates to the GSEs, alleging that the offering documents used in those transactions overstated the reliability of the loans backing the securitizations, in violation of the Securities Act and analogous provisions of certain "Blue Sky laws,"⁵ the Virginia Securities Act, as amended, VA. CODE ANN. § 13.1–522, and the District of Columbia Securities Act, D.C. CODE § 31–5606.05.⁶ Sixteen of the FHFA's actions were coordinated before District Judge Denise Cote. Fifteen of those cases settled, resulting in more than $20 billion in recovery for the FHFA. The case on appeal was the only one to go to trial.

After issuing multiple pre-trial decisions and conducting a bench trial, the District Court filed a 361-page trial opinion rendering judgment in favor of the FHFA. The court found that Defendants violated Sections 12(a)(2) and 15 of the Securities Act, see 15 U.S.C. §§ 77l (a)(2), 77o , and analogous provisions of the Virginia and D.C. Blue Sky laws, see VA. CODE ANN . § 13.1–522(A)(ii) ; D.C. CODE § 31–5606.05(a)(1)(B), (c), by falsely stating in the ProSupps that, inter alia , the loans supporting the Securitizations were originated generally in accordance with the pertinent underwriting guidelines. As a result, the court awarded the FHFA more than $806 million in recession-like relief. Special App. 362–68.

Defendants appeal multiple aspects of the District Court's trial opinion, as well as many of the court's pretrial decisions. We find no merit in any of Defendants' arguments and AFFIRM the judgment. The ProSupps Defendants used to sell the Certificates to the GSEs contained untrue statements of material fact—that the mortgage loans supporting the PLS were originated generally in accordance with the underwriting criteria—that the GSEs did not know and that Defendants knew or should have known were false. Moreover, the FHFA's claims were timely, the District Court properly conducted a bench trial, Defendants are not entitled to a reduction in the FHFA's award for loss attributable to factors other than the untrue statements at issue, Defendants NAAC and NHELI were statutory sellers, and the FHFA exercised jurisdiction over Blue Sky claims.

BACKGROUND

I. Legal Framework

A. The Securities Act

"Federal regulation of transactions in securities emerged as part of the aftermath of the market crash in 1929." Ernst & Ernst , 425 U.S. at 194–95, 96 S.Ct. 1375. The first set of regulations came in the Securities Act, which was "designed to provide investors with full disclosure of material information concerning public offerings of securities in commerce, to protect investors against fraud and, through the imposition of specified civil liabilities, to promote ethical standards of honesty and fair dealing." Id. at 195, 96 S.Ct. 1375 (citing H.R. REP. NO. 85, at 1–5 (1933)). Shortly thereafter, Congress passed a series of companion statutes, including the Securities Exchange Act of 1934 (the "Exchange Act"), ch. 404, 48 Stat. 881 (codified as amended at 15 U.S.C. § 78a et seq. ), which was intended "to protect investors against manipulation of stock prices through regulation of transactions upon securities exchanges and in over-the-counter markets, and to impose regular reporting requirements on companies whose stock is listed on national securities exchanges." Ernst & Ernst , 425 U.S. at 195, 96 S.Ct. 1375 (citing S. REP. NO. 792, at 1–5 (1934)). Congress's purpose for this regulatory scheme " 'was to substitute a philosophy of full disclosure for the philosophy of caveat emptor ... in the securities industry.' " Basic Inc. v. Levinson , 485 U.S. 224, 234, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988) (quoting SEC v. Capital Gains Research Bureau, Inc. , 375 U.S. 180, 186, 84 S.Ct. 275, 11 L.Ed.2d 237 (1963) ).

The Securities Act regulates the use of prospectuses in securities offerings. A prospectus is "any prospectus, notice, circular, advertisement, letter, or communication, written or by radio or television, which offers any security for sale or confirms the sale of any security," with certain exceptions not applicable here. 15 U.S.C. § 77b(a)(10). Section 5(b)(1) of the Securities Act provides that it is unlawful "to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to carry or transmit any prospectus relating to any security" unless the prospectus meets certain disclosure requirements. 15 U.S.C. § 77e(b)(1) ; see 17 C.F.R. § 230.164. Section 5(b)(2) provides that it is unlawful "to carry or cause to be carried through the mails or in interstate commerce any such security for the purpose of sale or for delivery after sale, unless accompanied or preceded by a prospectus" that meets additional disclosure requirements. 15 U.S.C. § 77e(b)(2).

Section 12(a)(2) of the Act, as amended, 15 U.S.C. § 77l , accords relief to any person (1) who was offered or purchased a security "by means of a prospectus or oral communication"; (2) from a statutory seller; (3) when the prospectus or oral communication "includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading"; and (4) the plaintiff did not "know[ ] of such untruth or omission" at the time of sale (the "absence-of-knowledge element"). 15 U.S.C. § 77l (a)(2) ; see In re Morgan Stanley Info. Fund Sec. Litig. (Morgan Stanley ), 592 F.3d 347, 359 (2d Cir. 2010). Scienter, reliance, and loss causation are not prima facie elements of a Section 12(a)(2) claim. Morgan Stanley , 592 F.3d at 359.

Section 12 authorizes two types...