Federal Housing Finance Agency v. Nomura Holding America, Inc. et al

Filing 1195

OPINION & ORDER...Defendants' motion to exclude Hunter's testimony on owner occupancy is denied. The Prospectus Supplements' statistics on owner occupancy refer to occupancy status as of the Cut-Off Date, not simply to borrowers' intentions at origination. Hunter's opinion regarding owner occupancy are admissible, but only to the extend he opines on falsity or misrepresentation as of the Cut-Off Date. (Signed by Judge Denise L. Cote on 1/29/2015) (gr)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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:
FEDERAL HOUSING FINANCE AGENCY,
:
:
Plaintiff,
:
:
-v:
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:
NOMURA HOLDING AMERICA, INC., et al.,
:
:
Defendants.
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:
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11cv6201 (DLC)
OPINION & ORDER

APPEARANCES:

For plaintiff Federal Housing Finance Agency:
Philippe Z. Selendy
Manisha M. Sheth
Deborah K. Brown
Jeffrey C. Miller
J. Matthew Hamann
QUINN EMANUEL URQUHART & SULLIVAN, LLP
51 Madison Ave., 22nd Fl.
New York, NY 10010
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 N.
Dante LaRocca:
David B. Tulchin
Steven L. Holley
Bruce E. Clark
Bradley A. Harsch
Katherine J. Stoller
SULLIVAN & CROMWELL LLP
125 Broad St.
New York, NY 10004

Amanda F. Davidoff
Elizabeth A. Cassady
SULLIVAN & CROMWELL LLP
1700 New York Avenue NW, Suite 700
Washington, DC 20006
For defendant RBS Securities Inc.:
Thomas C. Rice
David J. Woll
Andrew T. Frankel
Alan Turner
Craig S. Waldman
SIMPSON THACHER & BARTLETT LLP
425 Lexington Ave.
New York, NY 10017
DENISE COTE, District Judge:
This Opinion addresses defendants’ 1 motion to exclude,
pursuant to Federal Rule of Evidence 702 and Daubert v. Merrill
Dow Pharms., Inc., 509 U.S. 579 (1993), certain trial testimony
of plaintiff Federal Housing Finance Agency’s (“FHFA”) expert
witness Robert W. Hunter (“Hunter”) regarding the “owner
occupancy” statistics in the offering documents (“Offering
Documents”) at issue in this case.

For the following reasons,

the motion to exclude his testimony in its entirety is denied.
Hunter may testify to owner occupancy issues to the extent
described below.

Defendants are 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 N.
Dante LaRocca (“Nomura”); and RBS Securities Inc. (“RBS”)
(collectively, “defendants”).
1

2

BACKGROUND
FHFA, acting as conservator for Fannie Mae and Freddie Mac
(together, the “Government Sponsored Enterprises” or “GSEs”),
filed suit on September 2, 2011 against defendants alleging that
the Offering Documents used to market and sell seven
certificates (“Certificates”) to the GSEs associated with
residential mortgage-backed securities (“RMBS” or
“Securitizations”) contained material misstatements or
omissions.

RMBS are securities entitling the holder to income

payments from pools of residential mortgage loans (“Supporting
Loan Groups” or “SLGs”) held by a trust.
FHFA brought these claims pursuant to Sections 11 and
12(a)(2) of the Securities Act of 1933 (the “Securities Act”),
as well as Virginia’s and the District of Columbia’s Blue Sky
laws.

This lawsuit is the sole remaining action in a series of

similar, coordinated actions litigated in this district by FHFA
against banks and related individuals and entities to recover
losses experienced by the GSEs from their purchases of RMBS.

A

description of the litigation and the types of
misrepresentations at issue in each of these coordinated
actions, including the instant case, can be found in FHFA v.
Nomura Holding Am., Inc., --- F. Supp. 3d ---, 11cv6201 (DLC),
2014 WL 6462239, at *3-6, *16-17 (S.D.N.Y. Nov. 18, 2014)
(“Nomura”), as well as FHFA v. UBS Americas, Inc., 858 F. Supp.
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2d 306, 323-33 (S.D.N.Y. 2012) (DLC), aff'd, 712 F.3d 136 (2d
Cir. 2013) (“UBS”).
In its Amended Complaint, FHFA alleges that the “owneroccupancy statistics reported in the Prospectus Supplements were
materially false and inflated.”

Nomura’s Prospectus Supplements

for each Certificate included collateral tables displaying the
percentage of loans within an SLG corresponding to three
occupancy-status categories.

For example, the Prospectus

Supplement for Nomura Securitization 2006-FM2 records in two
places that the mortgage loans in the relevant SLG were 93.05%
“owner-occupied,” 6.37% “investment,” and 0.57% “second home.” 2
None of the Prospectus Supplements defines the term “owner
occupied” or “occupancy status.”
Each Prospectus Supplement states that the owner-occupancy
status statistics are current as of the Securitization’s Cut-Off
Date.

For example, Nomura’s Securitization 2006-FM2 provides

that “on the Cut-off Date, the Mortgage Loans [underlying the
Securitization] will have the characteristics as set forth in
the table[s]” containing the owner-occupancy percentages.

The

Cut-Off Dates for each Securitization were within a month of the
Prospectus Supplement’s dates.

The dates of the corresponding

Prospectus Supplements and their Cut-Off Dates are as follows:
These percentages are provided “by aggregate remaining
principal balance.”
2

4

Securitization
2005-AR6
2006-FM1
2006-HE3
2006-FM2
2007-1
2007-2
2007-3

Cut-Off Date
11/1/2005
1/1/2006
8/1/2006
10/1/2006
1/1/2007
1/1/2007
4/1/2007

Prospectus Supplement Date
11/29/2005
1/27/2006
8/29/2006
10/30/2006
1/29/2007
1/30/2007
4/27/2007

The table below, supplied by FHFA, illustrates that roughly a
quarter (23%) of the loans in a sample drawn from SLGs were
originated within 90 days of the Cut-Off Date; the other 77%
were originated 90 or more days before the Cut-Off Date.

On December 24, 2014, defendants moved to exclude Hunter’s
expert testimony on the issue of owner-occupancy status,
attaching his May 15, 2014 expert report addressed to “the
underwriting of mortgage loans underlying the Nomura
Securitizations” (“Report”).

Hunter was retained to, among

other things, “opine on whether, based on the sample mortgage
loans [he] reviewed, the data contained in the collateral tables

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found in the Offering Documents and the pre-closing loan tapes
were accurate.”
In the Report, Hunter opines that the references in a
Prospectus Supplement to owner occupancy refer to “the
borrower’s intended use of the property.”

According to Hunter,

the stated intent of a borrower to reside in a home or to use
the property instead for investment purposes or as a second home
could affect which underwriting guidelines were used by the
loan’s originator and the evaluation of the credit risk
associated with the loan.

“[M]ortgages for owner-occupied

properties generally presented less credit risk than those for
non-owner-occupied properties.”
In order to assess the accuracy of the statistics in the
Prospectus Supplements regarding owner occupancy, Hunter relied
on three sources of data in his review of 567 mortgaged
properties contained in FHFA’s sample 3: (1) the original mortgage
loan file, which he re-examined for “red flags indicating that
the borrower did not occupy the subject property” (“Loan File
Red Flags”); (2) “loan servicing records, where available, for
FHFA is litigating the accuracy of the representations in the
Offering Documents regarding the more than 15,000 loans in the
Certificates’ SLGs based on a sample of 796 loans, of which only
723 had sufficient data for Hunter’s re-underwriting. 567 of
these 723 were initially disclosed as owner-occupied on preclosing loan tapes. The parties do not dispute that the
statistics in the Offering Documents were taken from the preclosing loan tapes.
3

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evidence that the borrower did not occupy the subject property
after closing” (“Servicer Records”); and (3) “borrower and
property records, including public records, bankruptcy filings,
and consumer credit reports, to see whether the borrower claimed
a different primary residence than that of the subject property,
or if there was a change of address within 12 months after
origination of the mortgage loan” (“Public Records”).

The

Report explains that “[t]welve months was chosen as the
benchmark[] because most of the Mortgage Loan files contained
agreements certifying that the borrower would occupy the
mortgaged property for at least one year.”
Hunter concludes that the collateral tables in Nomura’s
Prospectus Supplements “overstated the owner-occupancy status of
the underlying mortgage loans.”

Specifically, he concludes that

Nomura’s Prospectus Supplements incorrectly reported 7.41% of
the mortgaged properties as “owner-occupied.” 4

Hunter identifies

occupancy defects for 42 of the 567 properties in FHFA’s sample
that were disclosed as owner-occupied on the pre-closing loan
tapes.
This motion was fully submitted on January 20.

Because

FHFA has withdrawn its Section 11 Securities Act claims, the
remaining claims in this case will be resolved in a bench trial
Hunter reported the percentage as 18.69% in his initial report,
but subsequently corrected the figure in his rebuttal report.
4

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due to begin on March 16, 2015.

The Pretrial Order, which will

be accompanied by the direct testimony of the trial witnesses
submitted through affidavit, is due February 20.

DISCUSSION
The applicable rules of law pertaining to exclusion of
expert testimony under Federal Rule of Evidence 702 and Daubert
are set out in this Court’s January 28, 2015 Opinion regarding
defendants’ motion to exclude the testimony of FHFA’s expert Dr.
John A. Kilpatrick, and that discussion is incorporated by
reference here.

FHFA v. Nomura Holding Am., Inc., 11cv6201

(DLC), 2015 WL --- (S.D.N.Y. Jan. 28, 2014).
Defendants argue that Hunter’s opinions concerning owneroccupancy status should be excluded under Rule 702 and Daubert
as irrelevant to the extent that they rely on Public Records. 5
According to the defendants, because the Offering Documents do
not represent that borrowers will actually occupy their
properties for the twelve months required by their loan
agreements, Hunter’s analysis based on borrowers’ actual
occupancy rates over a twelve-month period is irrelevant.

They

also argue that Hunter’s opinions are irrelevant because they

The defendants do not premise their motion on Hunter’s reliance
on Loan File Red Flags. It is unclear whether they seek to
encompass his reliance on Servicer Records in this motion.
5

8

are based on data and evidence that postdate any “relevant
date,” including the Offering Documents’ Cut-Off Dates.
I. Meaning of “Owner Occupancy”
This motion hinges on the meaning of the phrases “owner
occupied” and “owner occupancy” in the Prospectus Supplements.
None of the Prospectus Supplements provides a definition for
either term.

In evaluating a prospectus for material

misrepresentations, courts read it “as a whole.”

See, e.g.,

DeMaria v. Andersen, 318 F.3d 170, 180 (2d Cir. 2003).

Read in

context, the terms “owner occupancy” and “owner occupied” in the
Offering Documents are representations of fact.
Supp. 3d at 329-30.

See UBS, 585 F.

They describe the percentage of the

properties occupied by owners as of the Cut-Off Date for the
Supplement.

Each Prospectus Supplement asserts that the “owner

occupancy status” is correct as of the Cut-Off Date.
The defendants’ contention that the Offering Documents do
no more than reflect information about borrowers’ intentions at
the time they apply for their mortgages can be swiftly rejected. 6
Nothing in the Prospectus Supplements supports that reading, and
that argument has already been rejected by this Court.

Id. at

Defendants cite deposition testimony of GSE employees to
demonstrate that the “owner occupancy” representation was
understood to reflect the borrower’s intent. Most of those
examples reflect as well that the employees expected any
representation by borrowers to be verified by Originators and
underwriters.
6

9

330.

While a borrower’s stated intention may affect the

underwriting process and the selection of underwriting criteria
for a particular loan application, one of the purposes of
underwriting is to verify material assertions.

At the time of

securitization, a purchaser of a Certificate is entitled to
understand that the owner-occupancy statistics are statements of
fact by those issuing and underwriting the securitization, and
not mere statements of intention by borrowers at some earlier
point in time.

And by its plain terms, that is what each

Prospectus Supplement describes.
II. Relevant Time Period
Defendants also argue that Hunter’s opinions are
irrelevant because they rely on data and evidence obtained after
the Certificates’ respective Cut-Off Dates.

Because at least

some of this data was unknowable at the time the Prospective
Supplements were issued, they argue, Hunter’s opinions relying
on it cannot bear on the falsity of the stated owner-occupancy
percentages.

The defendants point out that there are apparently

seventeen loans, of the forty-two at issue here, in which Hunter
has relied on evidence that the borrowers defaulted on their
mortgage notes after the relevant Cut-Off Date.
As a general matter, evidence gathered from Public Records
may be properly received at trial to the extent it sheds light
on the accuracy of the representations in the Offering Documents
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regarding owner occupancy, including information that appears in
those records for the first time after the Cut-Off Dates for the
Prospectus Supplements.

After all, post-Cut-Off-Date data may

provide strong direct or circumstantial evidence that the
borrower never occupied the property.

But, what is at stake

here is not whether a borrower fulfilled a contractual
commitment to remain in a property for twelve months, but
whether the Prospectus Supplements accurately described the
occupancy status of the property as of the Cut-Off Date.

CONCLUSION
Defendants’ motion to exclude Hunter’s testimony on owner
occupancy is denied.

The Prospectus Supplements’ statistics on

owner occupancy refer to occupancy status as of the Cut-Off
Date, not simply to borrowers’ intentions at origination.
Hunter’s opinions regarding owner occupancy are admissible, but
only to the extent he opines on falsity or misrepresentation as
of the Cut-Off Date.
SO ORDERED:
Dated:

New York, New York
January 29, 2015
__________________________________
DENISE COTE
United States District Judge

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