National Credit Union Administration Board v. Credit Suisse Securities (USA) LLC et al

Filing 453

MEMORANDUM AND ORDER - It is ordered that defendants' separate motions for summary judgment with respect to certain alleged misrepresentations and omissions (Doc. # 437 in UBS, Case No. 12-2591; Doc. # 403 in Credit Suisse, Case No. 12-2648) are granted in part and denied in part, as set forth herein. Plaintiff's motion to exclude certain testimony by defendants' reunderwriting rebuttal experts, W. Barefoot Bankhead (UBS) and Peter Kempf (Credit Suisse), (Doc. # 423 in UBS, Cas e No. 12-2591; Doc. # 389 in Credit Suisse, Case No. 12-2648) is denied. Defendants' separate motions to exclude certain testimony by plaintiff's reunderwriting experts, Richard Payne (UBS) and Steven Butler (Credit Suisse), (Doc. # 432 i n UBS, Case No. 12-2591; Doc. # 405 in Credit Suisse, Case No. 12-2648) are granted in part and denied in part, as set forth herein. Defendants' joint motion to exclude certain credit risk opinions by plaintiff's experts (Doc. # 427 in UBS, Case No. 12-2591; Doc. # 394 in Credit Suisse, Case No. 12-2648) is granted in part and denied in part, as set forth herein. Signed by District Judge John W. Lungstrum on 01/19/2017. (ses)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS
)
NATIONAL CREDIT UNION
)
ADMINISTRATION BOARD,
)
)
Plaintiff,
)
v.
)
)
UBS SECURITIES, LLC, et al.,
)
)
Defendants.
)
_______________________________________)
)
NATIONAL CREDIT UNION
)
ADMINISTRATION BOARD,
)
)
Plaintiff,
)
v.
)
)
CREDIT SUISSE SECURITIES (USA) LLC, )
et al.,
)
Defendants.
)
_______________________________________)

Case No. 12-2591-JWL

Case No. 12-2648-JWL

MEMORANDUM AND ORDER
Plaintiff National Credit Union Administration Board brings these related suits
as conservator and liquidating agent of credit unions. The suits relate to a number of
offerings involving different residential mortgage-backed securities (“RMBS” or
“certificates”) purchased by the credit unions. Plaintiff asserts claims under federal and
state law against sellers, underwriters, and issuers for the certificates, based on alleged

untrue statements or omissions of material facts relating to each certificate.1
The cases presently come before the Court on two motions by defendants for
summary judgment with respect to certain misrepresentations and omissions, and on
various related motions by the parties to exclude expert testimony. As more fully set
forth herein, the Court rules as follows:
Defendants’ separate motions for summary judgment with respect to certain
alleged misrepresentations and omissions (Doc. # 437 in UBS, Case No. 12-2591; Doc.
# 403 in Credit Suisse, Case No. 12-2648) are granted in part and denied in part.
Defendants’ motions are granted with respect to any claims under Section 11 based
directly on mortgage loan schedules (MLSs) and with respect to any other claims based
directly on MLSs that were not filed with the SEC. Defendants’ motions are also
granted with respect to claims based on certain representations concerning summary
statistical tables. Credit Suisse’s motion is also granted with respect to claims based on
representations concerning compliance with applicable laws. Defendants are granted
judgment to the extent that plaintiff asserts such claims. The motions are otherwise
denied.
Plaintiff’s motion to exclude certain testimony by defendants’ reunderwriting
rebuttal experts, W. Barefoot Bankhead (UBS) and Peter Kempf (Credit Suisse), (Doc.
# 423 in UBS, Case No. 12-2591; Doc. # 389 in Credit Suisse, Case No. 12-2648) is

1

The Court refers to the defendants in Case No. 12-2591 collectively as “UBS”.
The Court refers to the defendants in Case No. 12-2648 collectively as “Credit Suisse”.
2

denied.
Defendants’ separate motions to exclude certain testimony by plaintiff’s
reunderwriting experts, Richard Payne (UBS) and Steven Butler (Credit Suisse), (Doc.
# 432 in UBS, Case No. 12-2591; Doc. # 405 in Credit Suisse, Case No. 12-2648) are
granted in part and denied in part. The motions are granted with respect to any
testimony regarding stratified statistical summary tables in the offering documents and
any testimony regarding an MLS that is not the subject of a surviving claim. Credit
Suisse’s motion is also granted with respect to any testimony by Mr. Butler concerning
materiality to a reasonable investor in these securities. Such testimony shall be excluded
at trial. The motions are otherwise denied.
Defendants’ joint motion to exclude certain credit risk opinions by plaintiff’s
experts (Doc. # 427 in UBS, Case No. 12-2591; Doc. # 394 in Credit Suisse, Case No.
12-2648) is granted in part and denied in part. The motion is granted with respect to
any testimony by Mr. Butler concerning an increase in credit risk in an absolute sense,
and such testimony shall be excluded. The motion is otherwise denied.

I.

Defendants’ Motions for Summary Judgment
A.

Governing Standards

Summary judgment is appropriate if the moving party demonstrates that there is
“no genuine dispute as to any material fact” and that it is “entitled to a judgment as a
matter of law.” Fed. R. Civ. P. 56(a). In applying this standard, the court views the
3

evidence and all reasonable inferences therefrom in the light most favorable to the
nonmoving party. Burke v. Utah Transit Auth. & Local 382, 462 F.3d 1253, 1258 (10th
Cir. 2006). An issue of fact is “genuine” if “the evidence allows a reasonable jury to
resolve the issue either way.” Haynes v. Level 3 Communications, LLC, 456 F.3d 1215,
1219 (10th Cir. 2006). A fact is “material” when “it is essential to the proper disposition
of the claim.” Id.
The moving party bears the initial burden of demonstrating an absence of a
genuine issue of material fact and entitlement to judgment as a matter of law. Thom v.
Bristol-Myers Squibb Co., 353 F.3d 848, 851 (10th Cir. 2003) (citing Celotex Corp. v.
Catrett, 477 U.S. 317, 322-23 (1986)). In attempting to meet that standard, a movant
that does not bear the ultimate burden of persuasion at trial need not negate the other
party’s claim; rather, the movant need simply point out to the court a lack of evidence
for the other party on an essential element of that party’s claim. Id. (citing Celotex, 477
U.S. at 325).
If the movant carries this initial burden, the nonmovant may not simply rest upon
the pleadings but must “bring forward specific facts showing a genuine issue for trial as
to those dispositive matters for which he or she carries the burden of proof.” Garrison
v. Gambro, Inc., 428 F.3d 933, 935 (10th Cir. 2005). To accomplish this, sufficient
evidence pertinent to the material issue “must be identified by reference to an affidavit,
a deposition transcript, or a specific exhibit incorporated therein.” Diaz v. Paul J.
Kennedy Law Firm, 289 F.3d 671, 675 (10th Cir. 2002).
4

Finally, the court notes that summary judgment is not a “disfavored procedural
shortcut;” rather, it is an important procedure “designed to secure the just, speedy and
inexpensive determination of every action.” Celotex, 477 U.S. at 327 (quoting Fed. R.
Civ. P. 1).
B.

Alleged Misrepresentations After the Trade Dates

Defendants first seek summary judgment with respect to any alleged false or
misleading statement contained in a document (a prospectus supplement, free writing
prospectus (FWP), or mortgage loan schedule (MLS)) that was filed with the SEC after
the trade date for that certificate and thus was not available or conveyed to the credit
union at the time that the credit union made its purchase commitment. As they do with
respect to most of the arguments in these motions for summary judgment, defendants
make only summary arguments and incorporate by reference the arguments made by
defendant RBS in a summary judgment motion filed in a related case in this Court. As
set forth below, the Court denies the motions as they relate to such allegations.
1.

SECTION 11

The Court first addresses this argument as it relates to plaintiff’s claims under
Section 11 of the federal Securities Act, 15 U.S.C. § 77k. Those claims include claims
based on prospectus supplements, but they do not include any claims directly based on
free writing prospectuses (as ruled in a prior order in these cases, see NCUAB v. RBS
Sec., Inc., 2015 WL 789983, at *3 (D. Kan. Feb. 25, 2015) (Lungstrum, J.)) or on MLSs
(see infra Part III.A).
5

In arguing that Section 11 liability may not be based on prospectus supplements
issued after the applicable purchase commitments, defendants rely on APA Excelsior III
L.P. v. Premiere Technologies, Inc., 476 F.3d 1261 (11th Cir. 2007), in which the
Eleventh Circuit held that a Section 11 claim could not be based on a registration
statement issued after the time of the purchase commitment. See id. That case and
others following it are easily distinguished, however, because in the present case there
is no contention that the purchase commitments preceded the issuance of the applicable
registration statements. Rather, the present cases concern prospectus supplements
arguably issued after the purchase commitments. Thus, SEC Rule 430B—a rule not
discussed in the cases on which defendants rely—is applicable here.
Rule 430B was promulgated as a part of 2005 reforms in the SEC’s rules relating
to the offering process. See FHFA v. Bank of America Corp., 2012 WL 6592251
(S.D.N.Y. Dec. 18, 2012) (Cote, J.) (discussing 2005 reforms at length). Prior to 2005,
written offers could be made only through a prospectus meeting all of the requirements
of Section 10(a) of the Securities Act, but the reforms allowed for offers without the
provision of all required disclosures, as long as a final prospectus was eventually issued
within a certain time frame. See id. at *3-4. As a part of that new scheme, Rule 430B
provides that information contained in a required final prospectus “shall be deemed to
be part of and included in the registration statement on the earlier of” (i) the date the
final prospectus is first used and (ii) the date of the first contract of sale for those
securities. See 17 C.F.R. 230.430B(f)(1). Thus, as the court held in Bank of America,
6

the prospectus supplements at issue are deemed to be part of the registration statements
at least as of dates prior to any sale contracts, which fact undermines the premise of
defendants’ argument against Section 11 liability.
Defendants do not argue that Rule 430B does not apply to these prospectus
supplements. Defendants’ sole response to this effect of Rule 430B is to argue that the
rule is actually concerned with timing only for purposes of applying the statute of repose.
The Court rejects that argument, however, as this provision of the rule contains no such
limiting language, see id., and the language that mirrors language in the statute of repose
is actually found in the following separate provision in Rule 430B, see id. §
230.430B(f)(2). See also Bank of America, 2012 WL 6592251, at *4 n.6 (rejecting
similar argument for the same reason).
Finally, the SEC’s 2005 Release in which it explained the new regulations (to
which both sides cite) supports this conclusion that Section 11 liability may be based on
these prospectus supplements, even if the supplements were issued after the relevant
purchase commitments. For instance, the SEC stated: “Information contained in a
prospectus or prospectus supplement that is part of a registration statement that is filed
after the time of the contract of sale will be part of and included in a registration
statement for purposes of liability under Section 11 at the time of effectiveness, which
may be at or before the time of the contract of sale.” See S.E.C. Release No. 75, 85
S.E.C. Docket 2871, 2005 WL 1692642, at *77 (Aug. 3, 2005) (“2005 Release”)
(emphasis added). The SEC further stated:
7

We are adopting provisions in Rule 430B that will make clear that
information contained in a prospectus supplement required to be filed
under Rule 424 . . . will be deemed part of and included in the registration
statement containing the base prospectus to which the prospectus
supplement relates. . . . As a result of Rule 430B . . ., prospectus
supplements required to be filed . . . will, in all cases, be deemed to be part
of and included in registration statements for purposes of Securities Act
Section 11.
See id. at *84 (emphasis added). Defendants have not cited to any authority suggesting
a different interpretation of Rule 430B.
Accordingly, for purposes of liability under Section 11, the prospectus
supplements at issue here are deemed to be part of the corresponding registration
statements at least as of a time prior to any sales. Therefore, there is no basis to conclude
that Section 11 liability may not attach in this case merely because the prospectus
supplements were issued after the trade dates in accordance with the revised 2005
scheme that allowed defendants to issue the supplements when they did. The Court thus
denies summary judgment with respect to these claims under Section 11.
2.

SECTION 12(a)(2) AND STATE LAWS

Defendants make the same argument with respect to claims under Section
12(a)(2) of the Securities Act, California law, and Kansas law, to the extent based on
statements in prospectus supplements, FWPs, and MLSs that were issued after the trade
dates for those certificates.2 The Court begins with the text of Section 12 (on which the

2

Both sides have treated these three statutes as indistinguishable for purposes of
this argument.
8

California and Kansas statutes were modeled), which provides for liability in the event
that a person offers or sells a security “by means of” a prospectus or oral communication
that includes a material misrepresentation or omission. See 15 U.S.C. § 77l(a)(2).
Defendants have not addressed the “by means of” requirement in their arguments.
Although there is no requirement to prove the purchaser’s reliance on the alleged
misrepresentation, see United Food and Commercial Workers Union Local 880 Pension
Fund v. Chesapeake Energy Corp., 774 F.3d 1229, 1233 (10th Cir. 2014) (no reliance
element under Section 11 or Section 12(a)(2)), federal appellate courts have generally
interpreted the “by means of” language of Section 12 to require some causal connection
to the purchase, such that the prospectus was used to effect the sale or was instrumental
in the sale. See, e.g., In re Access Cardiosystems, Inc., 776 F.3d 30, 35-36 (1st Cir.
2015) (citing Sanders v. John Nuveen & Co., 619 F.2d 1222, 1225 (7th Cir. 1980), and
Jackson v. Oppenheim, 533 F.2d 826, 830 & n.8 (2d Cir. 1976)).
In these cases, applying the plain meaning of the statute, the sales were made “by
means of” the documents at issue because those documents were filed to supplement the
information previously disclosed concerning the securities. Indeed, under the 2005
reforms that allowed these securities to be offered before all required disclosures were
made, the lawfulness of any sales depended on the eventual issuance of final
prospectuses, and those prospectuses were thus essential “means” through which the
securities were sold. See Bank of America, 20126592251, at *5; FHFA v. Nomura
Holding Am., Inc., 68 F. Supp. 3d 499, 507 (S.D.N.Y. 2014) (Cote, J.) (quoting Bank of
9

America). In fact, in Jackson, the Second Circuit noted that liability could be based on
a prospectus mailed after the sale, which result “can be understood as an enforcement
mechanism” for the requirement that the prospectus be sent. See Jackson, 533 F.2d at
829 n.10. In the same way, liability for misrepresentations in post-sale offering
documents serves as an enforcement mechanism for the requirement that the additional
disclosures be made. Under defendants’ argument, such disclosures would be required
but need not be truthful. See Feiner v. SS&C Tech., Inc., 47 F. Supp. 2d 250, 253 (D.
Conn. 1999) (rejecting such a result in holding that Section 12(a)(2) liability is
“coextensive with the statutory and regulatory prospectus-delivery requirements”).
Defendants have not cited any authority suggesting that the “by means of”
requirement precludes liability based on a post-purchase prospectus. Instead, defendants
rely on SEC Rule 159(a), another rule promulgated as part of the 2005 reforms. Rule
159(a) provides as follows:
For purposes of section 12(a)(2) of the Act only, and without affecting any
other rights a purchaser may have, for purposes of determining whether a
prospectus or oral statement included an untrue statement of a material
fact or omitted to state a material fact necessary in order to make the
statements, in light of the circumstances under which they were made, not
misleading at the time of sale (including, without limitation, a contract of
sale), any information conveyed to the purchaser only after such time of
sale (including such contract of sale) will not be taken into account.
See 17 C.F.R. § 230.159(a) (emphasis added). Defendants argue that this provision
precludes section 12(a)(2) liability for post-sale misrepresentations.
Defendants cite this Court’s prior opinion in these cases by which the Court

10

rejected defendants’ argument for dismissal based on Rule 159(a). See RBS, 2015 WL
789983, at *4. The Court concluded that the complaints did not necessarily preclude
claims based on post-trade-date FWPs as a matter of law because the dates listed for
FWPs in the complaints did not necessarily coincide with the dates on which the FWPs
may have been conveyed to the purchasers for purposes of Rule 159(a). See id. The
Court further ruled that plaintiff was not required to plead affirmatively facts showing
compliance with Rule 159(a), although “[p]laintiff will eventually need to prove that the
information in the FWPs was conveyed to the purchasers prior to the time of sale.” See
id. Relying on this statement, defendants argue that this Court has already ruled that
Rule 159(a) does require such proof here. At that time, however, the Court was not
asked to decide whether Rule 159(a) actually imposed such a requirement; rather, the
Court assumed (as the parties did) that there was such a requirement, and it proceeded
to rule that a violation of any such requirement could not be determined as a matter of
law at that stage.
The Court is now directly confronted with this issue, and it concludes that Rule
159(a) does not actually require that a prospectus have been conveyed to the purchaser
by the time of sale in order for that prospectus to give rise to liability under Section
12(a)(2). Rule 159(a) does not state that Section 12(a) liability may not be based on a
post-sale prospectus (as the SEC could easily have stated). Rather, for purposes of
determining whether a prospectus included a material misstatement—thus, either for
determining falsity or materiality—“information” (not the prospectus) conveyed after
11

sale will not be considered. Thus, falsity and materiality will be determined based on
information available to the purchaser at the time of sale, and later-conveyed information
cannot “cure” that falsity or materiality. Accordingly, like the court in Nomura, see 68
F. Supp. 3d at 507-08, the Court interprets Rule 159(a) not to preclude liability under
Section 12(a)(2) based on misrepresentations or omissions in post-sale prospectuses.
Indeed, as other courts have noted, reliance need not be proved under Section 12(a)(2),
and requiring the alleged misstatements to have been conveyed to the purchaser before
the sale would effectively introduce a reliance element. See Sanders, 619 F.2d at 122526 & n.4 (quoting Demarco v. Edens, 390 F.2d 836, 841 (2d Cir. 1968)).
Nor does the SEC’s explanatory 2005 Release (on which defendants also rely)
contain any statement indicating that Rule 159(a) precludes liability under Section
12(a)(2) for misrepresentations in post-sale prospectuses. To the contrary, the 2005
Release indicates that FWPs and final prospectuses may provide the bases for Section
12(a)(2) claims. See 2005 Release, 2005WL 1692642, at *45, 62 (liability provisions
of Section 12(a)(2) protect against material misstatements in FWPs; any sale or offer by
means of a FWP “will be subject to disclosure liability under Securities Act Section
12(a)(2)”).

The SEC further noted in the Release that “an investor’s purchase

commitment and the resulting contract of sale of securities to the investor in the offering
generally occur before the final prospectus is required to be delivered under the
Securities Act.” See id. at *100. The SEC elaborated in a footnote as follows:
Professor Louis Loss has noted that “[a] prospectus that comes with the
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security does not tell the investor whether or not he or she should buy; it
tells the investor whether he has acquired a security or a lawsuit.” L. Loss
& J. Seligman, Securities Regulation, § 2-b-3 (3d ed. 2001). See also
Cohen, Truth in Securities Revisited, 79 Harv. L. Rev. 1340, note 20, at
1386 (criticizing the requirement that a final prospectus be delivered after
an investment decision is made and noting that information essential to a
transaction should, to the extent practicable, be required to be provided in
time for use in an investment decision). The final prospectus also can be
a basis for liability claims under Securities Act Section 12(a)(2).
See id. at *100 n.555. This statement that the final prospectus may provide a basis for
Section 12(a)(2) liability, while noting criticism that such disclosure may not precede the
purchase decision, makes clear the SEC’s position Section 12(a)(2) liability may be
based on post-sale prospectuses.3 Moreover, as discussed above, such liability is
consistent with the plain language of the statute. Accordingly, the Court rejects the basis
for defendants’ argument with respect to Section 12(a)(2) and the state statutes, and it
therefore denies the motion for summary judgment with respect to these alleged
misstatements.
C.

Mortgage Loan Schedules (MLSs)

Defendants also seek summary judgment on plaintiff’s claims based on
misrepresentations or omissions in mortgage loan schedules (MLSs). First, defendants

3

In a separate paragraph of the footnote, the SEC noted that Rule 159 “also
provide[s] that liability under Section 12(a)(2) is assessed based on the information
conveyed at the time of the contract of sale.” See id. at *100 n.555. The SEC did not
thereby suggest that Rule 159 limits its preceding statement that Section 12(a)(2) liability
may be based on a final prospectus; rather, it was “also” noting a separate feature of the
new rules as they relate to post-sale prospectuses (that is, the inability of the final
prospectus to cure a prior misrepresentation).
13

argue that plaintiff may not assert Section 11 claims based on MLSs because those
documents were not incorporated into any registration statement, and that plaintiff may
not assert Section 12 or state-law claims based on any MLSs that were not filed with the
SEC. Plaintiff concedes that it is pursuing claims based directly on misrepresentations
and omissions in MLSs only under Section 12 and California and Kansas law for MLSs
publicly filed with the SEC (relating to 6 of 22 certificates in UBS, 11 of 20 certificates
in Credit Suisse). Thus, the Court grants defendants summary judgment on any claims
directly based on MLSs that have been asserted under Section 11, and on any claims
directly based on MLSs under Section 12 or state law relating to the other 16 certificates
in UBS and the other 9 certificates in Credit Suisse (as identified in the parties’ briefs).
Plaintiff notes that it has also asserted claims based on misrepresentations in other
documents to the effect that the MLSs are accurate, and defendants have not addressed
such claims in this argument.
Second, defendants contend that there is no evidence that the MLSs were
conveyed to the credit unions or filed with the SEC before the trade dates for the
certificates. With respect to claims based directly on the MLSs, the Court rejects this
argument for the same reasons set forth above in the preceding section. See supra Part
II.B. Defendants have not explained why such evidence would be required to support
plaintiff’s indirect MLS claims that are based on misrepresentations or omissions in
other documents. Thus, the Court denies this argument for summary judgment.
Third, defendants argue that there is no evidence that plaintiff’s experts based
14

their loan analyses on the same MLSs that are referenced in the offering documents. The
Court rejects this argument. Defendants produced in discovery the MLSs used by
plaintiff’s experts, and they produced them while stating their belief that they were
producing the correct MLSs. Those statements provide sufficient evidence from which
a jury could conclude that the experts used the appropriate MLSs.4
D.

Stratified Summary Statistical Tables

Defendants seek summary judgment on plaintiff’s claims based on certain
representations (identified in Appendix B to each defendant’s brief) to the effect that
certain summary statistical information for the loans’ collateral characteristics (relating
to LTV, CLTV, DTI, and owner-occupancy statistics) was accurate. Defendants argue
that plaintiff has no evidence that any figures in these statistical tables were actually
incorrect. The particular tables did not contain loan-level information; rather, they
provided statistics about the number of loans falling within particular statistical ranges.
Defendants note that plaintiff’s experts, after they completed their loan-by-loan analyses,
did not conduct any further analyses to determine the exact effect on the statistical
summaries of those loans.
In response, plaintiff argues that its experts determined that a significant
percentage of the loans had errors, and that the tables therefore were based on bad data.

4

Credit Suisse further argues that some MLSs actually contain different categories
of information than the categories referenced by plaintiff’s expert Steven Butler. In
response, plaintiff has confirmed that its MLS-based claims do not extend beyond
information actually found in the corresponding MLSs.
15

Plaintiff has provided no evidence, however, that any particular statement in a summary
statistical table was actually false. For example, one table broke down the number of
loans falling into particular ranges of LTV ratios (such as a range of 50 to 54.99 percent).
If a particular loan’s ratio was incorrect but still fell within the same range (for instance,
stated as 54 percent instead of 52 percent), however, the number of loans within that
range would not change, and that summary statistic was not falsely stated. Plaintiff has
not provided any evidence from which a jury could determine that any particular figure
in a summary statistical table was actually incorrect (or that the extent of any errors in
a table was material). Accordingly, the Court grants defendants summary judgment on
claims based on the representations regarding summary statistical evidence that were
identified in defendants’ appendices.5
E.

Representations Concerning Third Parties

In summary fashion, for the same reasons argued by RBS in its summary
judgment motion in the related case, defendants seek summary judgment on plaintiff’s
claims based on alleged misrepresentations concerning contractual representations to be
made by third parties. RBS argued (and thus defendants argue) that the representations
at issue were literally true because the third parties did in fact make such contractual

5

The Court’s ruling applies only to stratified tables listing the number of loans that
fall within specified ranges for certain metrics. The parties have not specifically
addressed any other representations of summary statistics, such as representations of
averages for a particular metric for the loans in a particular pool; thus, the Court has not
considered whether any claims based on such other representations are supported by
sufficient evidence of falsity.
16

warranties and representations. In a prior joint order, issued in RBS and these cases, the
Court addressed the same argument challenging claims based on representations that
third parties had represented or would represent that loans had been made in compliance
with applicable laws and regulations or that no fraud had taken place with respect to the
loans. See RBS, 2015 WL 789983, at *4-5. In opposition to that motion, plaintiff argued
that “such statements, despite being literally true, were misleading, in that they, coupled
with the alleged statements that underwriting guidelines would be followed, gave
purchasers the impression that there would in fact be compliance with the applicable
laws.” See id. at *5. The Court agreed with plaintiff that such claims were not ripe for
dismissal, as follows:
[T]he Court cannot say at this stage as a matter of law that these
statements by defendants could not be found to have been misleading.
Such a conclusion would require a much more thorough analysis of the
general and specific contexts of these statements than the parties have
undertaken here. Moreover, plaintiff reasonably argues that defendants
must have intended such statements—especially when considered together
with defendants’ statements about compliance with underwriting
guidelines—to reassure purchasers about compliance with the applicable
laws and regulations.
See id. (footnote omitted).
Plaintiff argues that defendants have still not undertaken the necessary detailed
analysis sought by the Court in its prior order. With respect to the context of the
statements, plaintiff not only points to defendants’ statements about compliance with
underwriting guidelines, it also notes that defendants undertook due diligence analyses
presumably to make sure that only compliant loans were selected for inclusion within the
17

certificates. Thus, plaintiff argues, a jury could reasonably infer that defendants had a
reasonable basis to know whether the third-party representations were true and that
defendants would have disclosed any belief that such representations were false. Finally,
plaintiff notes that defendants have not provided any evidence or argument concerning
how a reasonable investor would have reacted to these representations.
In the argument adopted by defendants, RBS argued that it was providing the
context requested by the Court, but RBS failed to provide any meaningful analysis.
Rather, RBS merely cited disclosures that suggested that loan-level breaches could
occur. The possibility that there may be bad loans, however, does not mean that a
purchaser would not believe that the third-party representations were substantially true,
particularly in light of the other considerations cited by plaintiff. In its reply brief
(incorporated by defendants), RBS argued that it did not intend any reassurance about
third-party representations; the cases cited by RBS in support of that argument, however,
are not helpful, as they turned on particular language not present here. RBS also argued
that the intent in these transactions was to allocate risk to the third parties, and that
purchasers could pursue contract claims against the third parties if the contractual
representations proved false.
Such questions are for the jury, however, and the Court therefore rejects this
argument for summary judgment. Viewing the evidence in the light most favorable to
plaintiff, a reasonable jury could conclude that defendants’ statements about third-party
representations were misleading as argued by plaintiff. Defendants have still not
18

undertaken an analysis of the general and specific contexts of these representations
sufficient to persuade the Court as a matter of law that these representations could not
be found to have been misleading, particularly in light of the considerations cited by
plaintiff and previously noted by the Court. Again, the disclosure by defendants that
individual breaches were possible does not necessarily equate with a disclosure that the
third-party representations should not be believed. Moreover, defendants have not
provided any authority suggesting that the availability of a contract claim against other
parties precludes the claims against defendants in these cases. Accordingly, the Court
denies the motion for summary judgment with respect to claims based on representations
concerning third-party statements.
F.

Compliance with Applicable Laws

Credit Suisse asserts an additional basis for summary judgment not argued by
UBS or RBS. Credit Suisse seeks summary judgment with respect to claims based on
representations in the offering documents regarding compliance with applicable laws.
Credit Suisse notes that Mr. Butler, plaintiff’s expert, did not offer any opinion or
perform any analysis concerning any loan’s compliance with applicable laws or
regulations. Thus, Credit Suisse argues that plaintiff has no evidence that the statements
regarding compliance with applicable laws were false.
In response, plaintiff has cited only evidence regarding Credit Suisse’s own due
diligence and quality control analyses. Plaintiff argues that such evidence creates a
question of fact for the jury, but it has not identified any particular law or regulation
19

violated by any loan.
The Court concludes that summary judgment is warranted here. Plaintiff relies
on the due diligence report by Credit Suisse’s expert, but the portion cited by plaintiff
notes only that certain loans were classified as “Event 3”. The expert elsewhere in his
report made clear that classification as Event 3 did not necessarily mean that loans did
not comply with applicable laws or regulations. Similarly, in the portions cited by
plaintiff, Credit Suisse’s quality control reports only identify loans with critical issues
or ineligible loans, but they do not state that any loans violated laws or regulations.
Plaintiff has not explained how any such loans would violate particular laws or
regulations, and thus plaintiff has not met its burden to submit evidence from which a
jury could determine that the statements at issue were actually false. Accordingly, the
Court grants summary judgment in favor of Credit Suisse on these claims by plaintiff.

II.

Plaintiff’s Motion to Exclude – Bankhead and Kempf

Plaintiff retained experts—Richard Payne (in UBS) and Steven Butler (in Credit
Suisse)—to reunderwrite various sample loans underlying the certificates at issue in
these cases. In rebuttal to those experts’ opinions, defendants offer opinions by their
own experts, W. Barefoot Bankhead (in UBS) and Peter Kempf (in Credit Suisse).
Plaintiff seeks to exclude expert testimony by Messrs. Bankhead and Kempf on the basis
that those experts improperly opined whether the loans were reasonably underwritten at

20

the time of origination. The Court denies the motion to exclude.6
Plaintiff asserts claims based on representations in the offering documents that
the loans underlying the certificates had certain characteristics (for instance, with respect
to certain metrics). Plaintiff also asserts claims based on the representations in the
certificates’ prospectus supplements (as described by plaintiff in its brief) that “the
underlying mortgages were originated in compliance with underwriting guidelines.”
Plaintiff argues that the guideline-compliance representations would have been
understood by reasonable investors to mean both that the originators of the loans
followed certain processes and that the loans actually complied with substantive metrical
standards set forth in the originators’ underwriting guidelines. Consistent with that
interpretation, plaintiff’s experts, in reunderwriting loans, considered information not
available at the time of the loans’ origination, and they attempted to determine whether
the loans’ actual characteristics (for instance, the borrower’s debt-to-income (DTI) ratio)
satisfied the underwriting guidelines’ standards for those characteristics. Defendants’
experts then criticized plaintiff’s experts for relying on post-origination evidence and for
failing to determine whether the originator acted reasonably or properly in compliance
with the applicable guidelines in light of the information that the originator knew or
should have known at the time of the origination. Plaintiff argues, based on its

6

The standards governing the Court’s consideration of the motions to exclude
expert testimony are stated in the Court’s prior opinions in these cases by which it ruled
on other motions to exclude.
21

interpretation of the representation that the loans were originated in compliance with
guidelines, that the reasonable belief of an originator at origination is irrelevant. Plaintiff
thus seeks to exclude the opinions of Messrs. Bankhead and Kempf.
Exclusion of the expert testimony as argued by plaintiff would thus require a
ruling as a matter of law that a reasonable investor would interpret the guidelinecompliance representation as plaintiff does. The Court cannot make such a ruling at this
time, however, especially because plaintiff has not sought summary judgment on that
issue. The jury in this case will decide whether the guideline-compliance representation
was materially false or misleading, based on its determination of how a reasonable
investor would have understood the representation in the context of the offering
documents—and the Court concludes that a reasonable jury could decide this issue in
favor of defendants. In that regard, the Court notes that the offering documents did not
state that the loans would comply with the applicable guidelines, but instead represented
that the loans would be originated in compliance with the guidelines. Based on that
distinction and on other language indicating that some loans could be non-compliant or
that borrowers could makes misrepresentations, a reasonable jury could find that a
reasonable investor would have understood that representation to mean that the
originators would properly apply the guidelines in light of information available to the
originators, and not to provide a guarantee that the loans would actually satisfy all

22

substantive guidelines.7 Accordingly, because the reasonableness of the originators,
given the information that they knew or should have known at the time, could be relevant
to the jury’s determination of that issue, the challenged testimony by Messrs. Bankhead
and Kempf may also be relevant, and the Court denies the motion to exclude that
testimony.
Moreover, the originators’ judgment and belief at the time of origination are
distinct from defendants’ own belief or intent in making the representations in the
offering documents; thus, the Court rejects plaintiff’s argument that defendants’
interpretation of the guideline-compliance representation would improperly introduce
a scienter element. The Court also rejects plaintiff’s argument (asserted in its reply brief)
based on the Court’s previous conclusion that defendants could not avoid liability on the
basis that the misrepresented information was provided by a third party (the borrower).

7

The variety of possible reasonable findings is demonstrated by the cases on
which the parties rely most heavily. In FHFA v. Nomura Holding America, Inc., 74 F.
Supp. 3d 639 (S.D.N.Y. 2015), on which plaintiff relies, the court concluded, in ruling
on a motion in limine in advance of a bench trial, that “[i]n representing that the loans
were originated in accordance with their Originators’ guidelines, the Prospectus
Supplements represent that the loans within each SLG did in fact meet the criteria set
forth in their Originators’ guidelines.” See id. at 653. On the other hand, in U.S. Bank,
National Ass’n v. UBS Real Estate Securities Inc., __ F. Supp. 3d __, 2016 WL 4690410
(S.D.N.Y. Sept. 6, 2016), the court concluded after a bench trial that, with respect to a
warranty that each mortgage loan was underwritten in accordance with applicable
guidelines, any breach analysis had to be based on information available to the
underwriters. See id. at *56-57. The question of how a reasonable investor would
interpret the offering documents would ordinarily provide a question of fact for the jury,
and the parties have not suggested otherwise. The Court declines to follow Nomura to
the extent that the court in that case concluded that the interpretation of the offering
documents could be decided as a matter of law before trial.
23

That previous ruling is not implicated here. If defendants represented that a loan would
have certain characteristics and that representation proved false because of a borrower
misrepresentation, defendants may still be liable. Here, however, the issue is what
defendants actually represented.
Plaintiff points out that the challenged testimony (relating to how reasonable
originators would have acted) would not be relevant to rebut plaintiff’s experts’ opinions
to the extent that they relate to the falsity of other representations, such as those
contained in MLSs or other statements of the loans’ characteristics. Any such potential
confusion, however, may be addressed at trial with a limiting instruction as appropriate.
Moreover, general criticisms by Messrs. Bankhead and Kempf of plaintiff’s experts’ use
of post-origination evidence (for instance, relating to the reliability of such evidence)
could be relevant to the falsity of representations that the loans had certain
characteristics. Accordingly, the Court denies plaintiff’s motion in its entirety.

III.

Defendants’ Motions to Exclude – Payne and Butler

In separate but related motions, UBS and Credit Suisse seek to exclude all expert
testimony by plaintiff’s respective reunderwriting experts, Richard Payne and Steven
Butler. With respect to some arguments, defendants have adopted arguments made by
RBS and Nomura in a related case in this Court (in motions not ruled before that case
was resolved).
A.

Use of Post-Origination Information
24

Defendants argue that the experts’ testimony should be excluded because they
relied on post-origination evidence in reunderwriting some loans. Based on their
interpretation of the guideline-compliance representation, defendants argue that such
evidence is irrelevant because it was not available to the original underwriters. As the
Court concluded in the preceding section, see supra Part II, the interpretation presents
a question for the jury and cannot be decided as a matter of law. Thus, the jury could
find such evidence helpful in determining the falsity of the guideline-compliance
representation. Moreover, there is no reason why later evidence cannot be probative
with respect to a prior fact (a subsequent-year tax return might contain evidence of
income in a prior year, for example). Thus, post-origination evidence could also be
relevant with respect to claims based on representations that the loans actually contained
certain characteristics (such as claims based on the MLSs).8
By reference to RBS’s briefs, defendants also argue that the experts did not
reliably consider post-origination evidence, but the Court concludes that any such
criticisms go to the weight of the testimony and not to its admissibility. The Court also
rejects any argument for exclusion under Fed. R. Evid. 403. Accordingly, the Court
denies the motions to exclude on this basis.

8

Although these defendants did not make the argument, RBS argued that
representations concerning loan characteristics would be understood by investors to
mean that the characteristics were accurately stated only in light of information available
as of the specified cut-off dates. Any such question of interpretation is for the jury,
however, and thus testimony based on post-cut-off information could be relevant.
25

B.

MLSs and Stratified Summary Statistical Tables

Defendants next challenge the experts’ testimony with respect to stratified
summary statistical tables in the offering documents and discrepancies in the MLSs,
primarily for the same reasons set forth in defendants’ summary judgment motions. As
set forth above, the Court grants summary judgment in favor of defendants on plaintiff’s
claims based on the stratified tables. See supra Part I.D. Accordingly, any expert
testimony concerning the falsity those tables would be irrelevant to any surviving claim,
and the Court grants the motion to exclude any such testimony.
The Court also grants summary judgment with respect to some claims based on
the MLSs, but the following claims survive: (a) claims under Section 12 or state law
based on MLSs that were filed with the SEC and (b) claims based on other
representations that turn on the accuracy of MLSs. See supra Part I.C. Thus, the motion
to exclude MLS-based expert testimony is granted only with respect to MLSs for which
no claim (direct or indirect) survives.
The Court also rejects UBS’s argument that the mere comparison of data from the
MLS against data from other sources does not require expert testimony. Plaintiff’s
experts in many cases undertook a reunderwriting analysis to determine the proper figure
to compare against the MLS, and even in other cases, the experts’ experience and
expertise with such metrics could prove helpful in making the comparison. Accordingly,
the Court denies the request to exclude all expert testimony relating to the MLSs, and
plaintiff’s motion is granted only to the extent noted.
26

C.

Missing Documents

Defendants argue that these experts’ opinions are not reliable because, with
respect to many reunderwritten loans, they assumed that any documents missing from
the file were also missing at the time of origination. Defendants argue that the experts
lacked a sufficient basis for that assumption and that the experts often ignored other
evidence suggesting that the missing documents were present at origination.
The Court rejects this argument for exclusion, as the experts’ assumptions were
not without basis. For instance, the experts chose not to reunderwrite loans if the files
were missing key documents or too many documents, which process excluded the files
most likely to have suffered losses since origination. The experts also noted that certain
facts—the digitization of most loan files, the incentives to maintain complete
files—supported their assumption that missing documents were also missing at the time
of origination. With respect to specific loans, defendants are free to argue to the jury that
the experts’ assumptions should have been overcome by other evidence; but there is no
basis for a blanket exclusion of all testimony regarding loans with missing documents.
The Court denies the motion for exclusion on this basis.
D.

Use of Industry Standards

Credit Suisse argues that Mr. Butler improperly relied on industry underwriting
standards in forming his reunderwriting opinions. Credit Suisse argues that because the
offering documents represented that certain underwriting guidelines had been applied,
Mr. Butler should not have used any standards outside those guidelines in reunderwriting
27

the loans. Credit Suisse also argues that Mr. Butler lacked a sufficient basis for the
industry standards that he applied and that those standards sometimes conflicted with the
applicable guideline standards.
The Court rejects these arguments for exclusion.

Plaintiff notes that the

underwriting guidelines require an evaluation of the borrower’s ability and willingness
to repay the loan, and Mr. Butler has relied on industry standards in making such an
evaluation. Credit Suisse has not offered any contrary evidence (from an expert, for
instance) that an underwriting expert would not rely on certain standards within the
industry in exercising his professional judgment to evaluate a borrower’s ability and
willingness to repay. Moreover, the Court concludes that Mr. Butler may base his use
of such standards on his experience and expertise. Accordingly, there is no basis for a
blanket exclusion of all opinions in which Mr. Butler applied industry standards. To the
extent that Credit Suisse believes that Mr. Butler’s use of an industry standard in
reunderwriting a particular loan contravenes an applicable guideline, it may make such
argument at trial to the jury. The same is true with respect to Mr. Butler’s use of Bureau
of Labor Statistics (BLS) data in evaluating a borrower’s income. Plaintiff cites the BLS
Commissioner’s testimony that the data was not intended as a tool to establish prevailing
wages; but Fed. R. Evid. 703 allows an expert to rely on data on which experts in the
field would reasonably rely, and plaintiff has not offered any contrary evidence to
suggest that underwriters would not reasonably use BLS data. Again, any criticism of
the use of such data for a particular loan goes to the weight of Mr. Butler’s testimony and
28

may be addressed by plaintiff at trial.
E.

Legal Conclusions

Mr. Butler offers opinions that various loans were “materially misrepresented”
because of deviations from underwriting guidelines or stated characteristics for the loans.
Credit Suisse seeks to exclude all such opinions. Credit Suisse argues that such opinions
concerning whether the offering documents contained material misrepresentations
represent improper legal conclusions on the ultimate issue for the jury. Credit Suisse
also notes that Mr. Butler has been proffered as an underwriting expert and that he lacks
the necessary expertise and experience to opine about what information would be
material to a purchaser of these certificates.
The Court rejects this argument. It is apparent from Mr. Butler’s report that he
has not undertaken any analysis of how a reasonable investor would react to alleged
misrepresentations in the offering documents. Rather, in conducting his reunderwriting
analysis, Mr. Butler has used “material misrepresentation” to refer to a deviation from
the guidelines or stated loan characteristics that increases the credit risk for the particular
loan in a significant (or “material”) way. Thus, it is clear that Mr. Butler has not used
the term “material” to refer to materiality from the viewpoint of the securities investor
(the “legal conclusion” challenged by Credit Suisse), and plaintiff has disclaimed any
broader opinion by Mr. Butler.
The Court agrees that, in response to deposition questioning, Mr. Butler appears
to have stated that reasonable investors would find his conclusions to be material. Thus,
29

the Court grants this motion with respect to any testimony by Mr. Butler concerning
materiality to a reasonable investor in RMBS. The Court declines to exclude other
testimony by Mr. Butler, however, as the particular meaning of Mr. Butler’s
terms—“material” referring to significance to an underwriter, “misrepresentation”
referring to a deviation—may be explained for the jury at trial.
F.

Particular Certificates

UBS seeks to exclude Mr. Payne’s opinions concerning loans underlying three
particular certificates.9 For those certificates, the prospectus supplements represented
that the loans “were originated generally in accordance with the underwriting criteria
described in this section;” and for originators of a smaller percentage of the loans
underlying the certificate, that section did not list all applicable guidelines, but instead
identified only general procedures that the underwriter had followed. When Mr. Payne
reunderwrote loans from those originators, he applied particular guidelines for those
originators. UBS argues that such analysis by Mr. Payne was improper because there
was no representation in the offering documents that those loans were underwritten in
accordance with those guidelines—rather, the documents represented only that the
general procedures had been followed by those originators.
The Court concludes that UBS has waived this argument that Mr. Payne applied
the wrong set of guidelines in reunderwriting loans underlying these certificates. On

9

MARM 2006-0A2, MARM 2007-1, and NAA 2006-AR4.
30

April 10, 2014, before plaintiff’s experts began their analyses, the Court issued a Loan
File Reunderwriting Protocol (LFRP) to facilitate that discovery process. In that order,
the Court required defendants, in response to a request from plaintiff, either (a) to
stipulate that “a particular Guideline or set of Guidelines applies to a Sampled Loan” or
(b) to state all reasons for disagreeing with the guidelines proposed by plaintiff or
identify other applicable guidelines. In the parties’ subsequent stipulations for loans
under these three certificates, UBS did not make this argument or identify any other
applicable guidelines, including the general procedures discussed in the prospectus
supplements.
UBS argues that it did not waive this argument because while it stipulated that
particular guidelines applied for these originators, it did not stipulate that the offering
documents contained any representation that those guidelines were used in the
origination of those loans. That is a distinction without a difference, however. The
LFRP was intended to facilitate the experts’ reunderwriting process, and by the relevant
provision of the LFRP, the Court plainly intended to require the parties in advance to
state their positions with respect to the guidelines that would apply to each loan for all
purposes relating to the reunderwriting. UBS now argues that, in underwriting certain
loans, Mr. Payne should have applied only the general guidelines set forth in the
prospectus supplements and not the guidelines for those originators to which UBS
stipulated.

UBS was required to state that position in response to the LFRP.

Accordingly, UBS waived this argument that only the more general, non-substantive
31

guidelines should have been applied by Mr. Payne with respect to certain loans, and the
Court thus denies the motion to exclude on this basis.
G.

Compliance with Rule 26

Finally, UBS argues that the Court should exclude any opinions by Mr. Payne
based on alleged misrepresentations other than those identified in Exhibit 7 to his report.
UBS argues that Fed. R. Civ. P. 26 required Mr. Payne to disclose all opinions and bases
in his report. The Court denies this portion of UBS’s motion.
In his report, Mr. Payne noted that UBS’s offering documents contained various
representations regarding the characteristics of the underlying loans, and he proceeded
in the report to discuss “some of the most noteworthy representations regarding the credit
quality of those loans.” In a footnote, Mr. Payne stated: “I understand that a listing of
many of the representations at issue has been provided in appendices to NCUA’s First
Amended Complaint. The portions of the Prospectuses and Prospectus Supplements
referenced in those appendices are excerpted in Exhibit 7.” Mr. Payne did not purport
to identify all representations to which his opinions might relate. Nor did Mr. Payne
offer any opinions that the offering documents contained any misrepresentations.
Rather, Mr. Payne opined that there were deviations from guidelines or stated loan
characteristics for particular sampled loans that he reunderwrote. Rule 26 required
plaintiff to disclose all such deviations to which Mr. Payne intends to testify, and UBS
has not argued that plaintiff’s disclosure is deficient in that regard. Mr. Payne’s
identification and discussion of those deviations necessarily include the identification of
32

the particular guideline or characteristic from which there has been a deviation. Plaintiff
is free at trial to prove through other evidence that relevant representations concerning
those guidelines or characteristics were actually made in the offering documents. The
Court does not agree with UBS that Mr. Payne was required to identify all
misrepresentations alleged by plaintiff.

IV.

Defendants’ Motion to Exclude – Credit Risk Opinions

In a joint motion, defendants seek to exclude certain testimony by the following
experts retained by plaintiff: Steven Butler, Richard Payne, Mark Sunshine, John Wald,
and James Barth. In particular, defendants challenge the experts’ opinions based on the
premise that non-compliance with an originator’s underwriting guideline increases the
credit risk for the loan. Defendants argue that the experts have not identified sufficient
bases for that opinion concerning an increase in credit risk. In this motion, defendants
have adopted the similar arguments made by RBS in its case in this Court.
In considering this motion, the Court first notes a distinction regarding the
meaning and scope of the increased credit risk referenced by the experts—a distinction
that defendants do not appear to acknowledge. First, an expert might opine that credit
risk for a loan (that is, the likelihood of default or delinquency) has been increased in a
relative sense, such that a defect or non-compliance would indicate that the loan’s credit
risk is actually higher than it would be for the loan as represented, or for the other loans
that do comply with the same guidelines. Second, an expert might opine that credit risk
33

for a loan has been increased in an absolute sense, such that the mere fact that a loan is
non-compliant means that the loan has a higher credit risk than it would if the violated
standard did not exist or were more relaxed, all other things being equal.
Plaintiff generally defends its experts’ opinions—particularly those of its
reunderwriters, Messrs. Butler and Payne—as opinions of an increased risk in the
relative sense. Defendants, on the other hand, seem to attack opinions concerning
increased credit risk in the absolute sense.

Defendants rely most heavily on a

hypothetical in which two loans are equal in every way, but one loan complies with its
guidelines while the other is non-complaint because it violates its guidelines’ stricter
standard for one characteristic. Defendant argues that it makes no sense for one loan to
have a higher or increased credit risk in comparison to the other loan simply because of
the particular guidelines that apply. Thus, defendant challenges the idea of an increase
credit risk in the absolute sense.
The Court concludes that there is no basis for the exclusion of any opinions by
plaintiff’s experts based on the idea of an increased credit risk in the relative sense.
Defendants have not explained why such an opinion is not valid. Plaintiff’s experts have
explained—and defendants have not disputed—that underwriting guidelines are intended
to minimize credit risk and the likelihood of default. Thus, it follows naturally that if a
loan does not satisfy an applicable guideline standard, the likelihood of default (and
therefore, the credit risk) is higher than it would be if the loan satisfied that standard, all
else being equal. Plaintiff’s experts have offered that opinion, and defendants have not
34

suggested any reason to doubt that opinion. In the absence of any such basis to question
it, the Court concludes that this opinion is sufficiently supported by the experts’
experience and expertise in this industry.
The Court then turns to the actual opinions challenged by defendants in their
motion. Mr. Butler reunderwrote a sample set of loans and offered opinions concerning
whether those loans failed to comply with guidelines and stated loan characteristics in
a way that increases the credit risk associated with that loan. Defendants have discussed
Mr. Butler’s opinions regarding a few specific loans, but they do not directly challenge
those opinions. In discussing those examples, defendants have attempted to show that
a defect should not necessarily be deemed to increase the credit risk for that loan.
Defendants have not suggested any manner, however, in which Mr. Butler’s method of
applying his professional judgment to that loan was unreliable. If defendants disagree
with Mr. Butler’s evaluation of a particular loan, including his conclusion that the loan’s
credit risk was higher than represented, such disagreement goes to the weight of Mr.
Butler’s evaluation of that loan and may be pursued at trial.
In a direct sense, defendants only challenge certain deposition testimony by Mr.
Butler. It is clear that, in part of that testimony, Mr. Butler was discussing increased
credit risk in a relative sense, such that a loan’s credit risk would be higher than others
under that program with the same guidelines, or that it would be higher than as
represented. As discussed above, there is no basis to exclude that opinion. In another
part of that testimony, however, Mr. Butler did seem to state a belief that non35

compliance may increase a loan’s credit risk in an absolute sense, including when
confronted with the same hypothetical discussed above. Mr. Butler did not provide any
basis to support that opinion, nor has plaintiff provided any such basis in its opposition
to this motion (plaintiff did not address that particular testimony by Mr. Butler). Indeed,
plaintiff has appeared to disclaim any such opinion by Mr. Butler—plaintiff has
defended its underwriters’ opinions as relating to an increased credit risk in the relative
sense, and plaintiff has not explained how any opinion concerning an absolutely
increased credit risk could be relevant to the opinions of its reunderwriters. Accordingly,
the Court grants defendants’ motion with respect to any such testimony by Mr. Butler,
and Mr. Butler will not be permitted at trial to offer any opinion concerning the effect
of non-compliance on the credit risk for a loan in an absolute sense. The motion is
otherwise denied with respect to testimony by Mr. Butler.
Defendants argue that the opinions of Mr. Payne are premised on his opinion that
non-compliance increases credit risk. In the portions of his report and testimony cited
by defendants, however, Mr. Payne did not express any opinion concerning a
relationship between non-compliance and credit risk in an absolute sense. In fact, when
presented with defendants’ hypothetical about two identical loans, Mr. Payne related
either loan’s credit risk to the particular guidelines applied to the loan. As the Court has
concluded with respect to Mr. Butler, any criticisms of Mr. Payne’s loan-specific
evaluations bear only on the weight of those opinions and do not provide a basis for
exclusion, and Mr. Payne is free to discuss the effect of a loan’s non-compliance on its
36

credit risk in a relative sense. Otherwise, defendants have not pointed to any instance
in which Mr. Payne stated the opinion that non-compliance can affect credit risk in an
absolute sense. Accordingly, the Court denies the motion as it relates to testimony by
Mr. Payne.
In the testimony cited by defendants, Mr. Sunshine (plaintiff’s materiality expert)
did not actually state an opinion that non-compliance could increase credit risk in an
absolute sense, as opposed to in a relative sense. In another portion of his report (on
which Dr. Wald relied), Mr. Sunshine stated that non-compliance “is a red flag that
typically indicates the mortgage loan originator has poor internal controls or sloppy
management.” Defendants have not challenged that particular opinion by Mr. Sunshine,
however. The Court denies the motion as it relates to testimony by Mr. Sunshine.
Dr. Wald provided a report in rebuttal to opinions by Ethan Cohen-Cole,
defendants’ materiality expert. In the portion of his report challenged by defendants, Dr.
Wald criticized Dr. Cohen-Cole for presuming that the effect of a misrepresentation is
directly proportional to the size of the misstatement. In doing so, Dr. Wald noted that
a misrepresentation may suggest a higher credit risk, for instance because the borrower
or underwriter has lied or was sloppy. Thus, Dr. Wald appears to have suggested that
non-compliance could affect credit risk in an absolute sense. Dr. Wald cited various
studies (as well as Mr. Sunshine’s report) to support that view. Defendants argue that
the cited literature does not actually contain the opinion that non-compliance increased
credit risk. Any such dispute about the validity of the opinion based on the import of the
37

literature, however, goes to its weight of the opinion and not to its admissibility. Dr.
Wald’s opinion was not unsupported, and the Court therefore denies the motion as it
relates to testimony by Dr. Wald.
Defendants accuse Dr. Barth, plaintiff’s loss causation expert, of improperly
relying on the opinions of other experts. Dr. Barth has not stated that, in relying on the
conclusions of the reunderwriters, he relied on any opinion concerning increased credit
risk in an absolute sense. The Court therefore denies the motion as it relates to testimony
by Dr. Barth.
Finally, the Court rejects defendants “fit” argument. Defendants complain that
plaintiff’s experts have not addressed the relevant question concerning whether noncompliance has affected credit risk relative to what a reasonable investor understood that
credit risk to be. The Court concludes, however, that the testimony by plaintiff’s experts
could be relevant to the jury’s determination concerning the materiality of any
misrepresentations in the offering documents.

IT IS THEREFORE ORDERED BY THE COURT THAT defendants’ separate
motions for summary judgment with respect to certain alleged misrepresentations and
omissions (Doc. # 437 in UBS, Case No. 12-2591; Doc. # 403 in Credit Suisse, Case No.
12-2648) are granted in part and denied in part, as set forth herein.

IT IS FURTHER ORDERED BY THE COURT THAT plaintiff’s motion to
38

exclude certain testimony by defendants’ reunderwriting rebuttal experts, W. Barefoot
Bankhead (UBS) and Peter Kempf (Credit Suisse), (Doc. # 423 in UBS, Case No. 122591; Doc. # 389 in Credit Suisse, Case No. 12-2648) is denied.

IT IS FURTHER ORDERED THAT defendants’ separate motions to exclude
certain testimony by plaintiff’s reunderwriting experts, Richard Payne (UBS) and Steven
Butler (Credit Suisse), (Doc. # 432 in UBS, Case No. 12-2591; Doc. # 405 in Credit
Suisse, Case No. 12-2648) are granted in part and denied in part, as set forth herein.

IT IS FURTHER ORDERED THAT defendants’ joint motion to exclude certain
credit risk opinions by plaintiff’s experts (Doc. # 427 in UBS, Case No. 12-2591; Doc.
# 394 in Credit Suisse, Case No. 12-2648) is granted in part and denied in part, as set
forth herein.

IT IS SO ORDERED.

Dated this 19th day of January, 2017, in Kansas City, Kansas.
_
s/ John W. Lungstrum
John W. Lungstrum
United States District Judge

39