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

Filing 1255

OPINION & ORDER #105225 denying 977 Defendants' November 25, 2014 motion in limine addressed to the choice of relevant underwriting guidelines; denying 1008 FHFAs December 22, 2014 motion to exclude the expert testimony of Michael Forester; and denying 1170 defendants' January 5 motion to exclude the testimony of Robert Hunter based on information not available at origination. (Signed by Judge Denise Cote on 2-11-2015) (tg) Modified on 2/11/2015 (gr). Modified on 2/11/2015 (soh).

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
--------------------------------------- X
:
FEDERAL HOUSING FINANCE AGENCY,
:
:
Plaintiff,
:
:
-v:
:
:
NOMURA HOLDING AMERICA, INC., et al., :
:
Defendants.
:
:
--------------------------------------- X

11cv6201 (DLC)
OPINION & ORDER

APPEARANCES:

For plaintiff Federal Housing Finance Agency:
Philippe Z. Selendy
Manisha M. Sheth
Deborah K. Brown
Tyler G. Whitmer
Jeffrey C. Miller
Zachary Williams
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 cross motions to exclude expert
testimony and a related motion in limine.

Defendants 1 have moved

to exclude trial testimony of plaintiff Federal Housing Finance
Agency’s (“FHFA”) expert witness Robert W. Hunter (“Hunter”) to
the extent that it is based on information that was not
available “at the origination” of the loans underlying the seven
certificates (“Certificates”) at issue here.

The defendants

have also moved in limine to exclude Hunter’s testimony that
some of the originators of the loans (“Originators”) failed to
adhere to their own underwriting guidelines when issuing the
loans.

FHFA has moved to exclude the trial testimony of

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

defendants’ expert witness Michael Forester (“Forester”) that is
offered to rebut Hunter’s opinions since he does not consider
information that became available after the origination of the
loans.
Through these motions, the parties essentially dispute
three issues.

They contest (1) whether the Originators’

guidelines may serve as the basis for FHFA’s claims in this
action, (2) what evidence FHFA may use to show that the offering
documents for the Certificates (“Offering Documents”) contained
false statements, including false statements about the
underwriting process, and (3) the relevant period of time for
testing the accuracy of any representation in the Offering
Documents.

As explained below, in making representations about

compliance at origination with underwriting guidelines, the
Offering Documents are referring to the Originators’ guidelines,
and FHFA may rely on any relevant evidence, including evidence
not available to either the Originators or the defendants at the
time of the securitization, to prove that these representations
or any other representations in the Offering Documents were
false.

FHFA must demonstrate in some instances that

representations were false as of the date the loan was

3

originated, and in others that they were false as of the “CutOff Date” 2 for the relevant Offering Document.

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 sell the GSEs seven Certificates
associated with residential mortgage-backed securities (“RMBS”
or “Securitizations”) 3 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

The Cut-Off Date refers to the “date for establishing the
composition of the asset pool” in a Securitization. 17 C.F.R. §
1103(a)(2). As discussed below, each Supplement states that the
loans will have certain characteristics as of that date.
2

Fannie Mae purchased one Certificate in a senior tranche of
Nomura Securitization NAA 2005-AR6. Freddie Mac purchased
Certificates in senior tranches of the six other Nomura
Securitizations: NHELI 2006-FM1, NHELI 2006-FM2, NHELI 2006-HE3,
NHELI 2007-1, NHELI 2007-2, and NHELI 2007-3. The Certificates
were each guaranteed to be awarded the highest credit rating
from each of four prominent credit rating agencies.
3

4

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.
2d 306, 323-33 (S.D.N.Y. 2012), aff'd, 712 F.3d 136 (2d Cir.
2013) (“UBS”).
The alleged misstatements in the Prospectus Supplements at
issue in this case include representations about underwriting
standards and certain characteristics of the mortgage loans,
specifically data concerning owner occupancy 4 and loan-to-value
(“LTV”) 5 ratios.

Each of these representations in the

Supplements is described below.

According to Hunter, mortgages for owner-occupied properties
generally present less credit risk than those for non-owneroccupied properties.
4

For any given mortgage, the LTV ratio is determined by
computing the balance of the loan as a percentage of the value
of the property that secures it, often determined on the basis
of an appraisal. The higher the ratio, the less equity the
homeowner has in the property. Mortgages with an LTV ratio in
excess of 100% are “underwater.”
5

5

A. Loans “Were Originated” Generally in Accordance with
Guidelines.
The Prospectus Supplements contained representations that
the loans within the RMBS “were originated generally” in
compliance with their applicable underwriting guidelines.

For

example, the Prospectus Supplement for NAA 2005-AR6 states that
“[t]he Mortgage Loans . . . were originated generally in
accordance with the underwriting criteria described in this
section.” 6

Those Originators contributing more than 10% of the

mortgage loans in an RMBS are identified by name, along with the
percentage of the mortgage loans that they contributed.

For

example, the Supplement for NAA 2005-AR6 identifies Alliance
Bancorp, Silver State Mortgage and Aegis Mortgage as the
Originators of approximately 21%, 12%, and 11%, respectively, of
the loans within the Securitization by aggregate principal
balance as of the Cut-Off Date for the Prospectus Supplement.
The sections of each Prospectus Supplement addressed to
underwriting describe both the process by which a borrower
applies for a mortgage loan and the process through which the
application is reviewed and approved.

For example, the

Prospectus Supplement for NAA 2005-AR6 describes the
This language or its equivalent appears in six of the seven
Prospectus Supplements. The seventh, NHELI 2006-FM1, includes
only a detailed description of the underwriting guidelines used
by the sole Originator for that RMBS.
6

6

information the borrower must supply to the loan’s Originator
as follows:
Generally, each borrower will have been required to
complete an application designed to provide to the
original lender pertinent credit information
concerning the borrower. As part of the description
of the borrower’s financial condition, the borrower
generally will have furnished certain information with
respect to its assets, liabilities, income . . .,
credit history, employment history and personal
information, and furnished an authorization to apply
for a credit report which summarizes the borrower's
credit history with local merchants and lenders and
any record of bankruptcy.
Having received an application with the pertinent data and
authorizations, the Originator proceeds to review the
application.

This analysis includes a determination that the

borrower’s income will be sufficient to carry the increased debt
from the mortgage loan.

The Prospectus Supplement for NAA 2005-

AR6 explains in pertinent part:
Based on the data provided in the application and
certain verifications (if required), a determination
is made by the original lender that the borrower's
monthly income (if required to be stated) will be
sufficient to enable the borrower to meet their
monthly obligations on the mortgage loan and other
expenses related to the property such as property
taxes, utility costs, standard hazard insurance and
other fixed obligations other than housing expenses.
Generally, scheduled payments on a mortgage loan
during the first year of its term plus taxes and
insurance and all scheduled payments on obligations
that extend beyond ten months equal no more than a
specified percentage not in excess of 60% of the
prospective borrower's gross income.

7

The section of the Supplements addressed to the
underwriting process used by loan Originators also explains the
process used to ensure that there is security for the issued
loans, for instance by requiring some borrowers to obtain
mortgage insurance or because an appraisal has shown that the
mortgaged property itself provides adequate security.

For

instance, the Supplement for NAA 2005-AR6 states:
The adequacy of the Mortgaged Property as security for
repayment of the related Mortgage Loan will generally
have been determined by an appraisal in accordance
with pre-established appraisal procedure standards for
appraisals established by or acceptable to the
originator. All appraisals conform to the Uniform
Standards of Professional Appraisal Practice [“USPAP”]
adopted by the Appraisal Standards Board of the
Appraisal Foundation . . . .
Six of seven of the Supplements also note that the
underwriting standards for the loans were less stringent than
those applied by the GSEs.

For instance, the Supplement for NAA

2005-AR6 explains that the underwriting standards applicable to
the loans
typically differ from, and are, with respect to a
substantial number of Mortgage Loans, generally less
stringent than, the underwriting standards established
by Fannie Mae or Freddie Mac primarily with respect to
original principal balances, loan-to-value rations,
borrower income, credit score, required documentation,
interest rates, borrower occupancy of the mortgaged
property, and/or property types. 7
While the Supplement for NHELI 2006-FM1 did not contain this
language, it, like all six others, warned that “[t]he
underwriting standards applicable to the Mortgage Loans, which
7

8

Six of the seven Prospectus Supplements represented that
all loans in the RMBS “were originated generally” as just
described. 8

In addition, if specific Originators contributed

more than 20% of the loans in any RMBS, the Prospectus
Supplements also described in considerable detail the
underwriting guidelines of those Originators.

For example, the

Prospectus Supplement for NHELI 2006-HE3 devoted approximately
seven pages to a description of the guidelines used at People’s
Choice Home Loan, Inc., which had contributed 38.19% of loans to
the Securitization by aggregate principal balance as of the CutOff Date.
B. Collateral Tables
Each Prospectus Supplement also contains sets of tables
with statistics (“Collateral Tables”) that disclose the
“Characteristics of the Mortgage Loans” in each of the SLGs.
The Collateral Tables provide data on more than a score of
features of the loans within an SLG.

These features include LTV

ratios and the owner-occupancy status for the loans within the
SLG.

are described in this prospectus supplement . . . may or may not
conform to Fannie Mae or Freddie Mac guidelines.”
The seventh, NHELI 2006-FM1, represented that loans “were
originated” in accordance with the underwriting guidelines used
by the sole Originator for that RMBS.
8

9

For example, the NHELI 2006-FM2 Supplement disclosed that
57.5% of the loans (or 68.4% of the loans by principal balance)
in the relevant SLG had an LTV ratio of 80% or lower, and that
the mortgage loans in the relevant SLG were 93.05% “owneroccupied,” 6.37% “investment,” and 0.57% “second home.” 9

The NAA

2005-AR6 Supplement disclosed that 99% of the loans (also 99% of
the loans by principal balance) in the relevant SLG had an LTV
ratio of 80% or lower, and that the mortgage loans in the
relevant SLG were 56.59% “owner-occupied,” 34.72% “investor,”
and 8.68% “second home.”
The Supplements explicitly provide that the characteristics
of the loans listed in the Collateral Tables, including LTV
ratios and owner-occupancy status statistics, are correct as of
each Supplement’s “Cut-Off Date.”

The NHELI 2006-FM2

Supplement, for instance, states that “[a]s of the Cut-off Date,
the Mortgage Loans will have the characteristics as set forth”
in the Collateral Tables.

Those Tables list not just the

percentage of loans with these characteristics as of the “Cutoff Date,” but also the “Cut-off Date Principal Balances”
related to the characteristic.

In this example and the next, owner-occupancy status
percentages are provided “by aggregate remaining principal
balance.”
9

10

The Cut-Off Date is, in each instance here, roughly a month
before the Effective Date for the RMBS.

Each Securitization

along with its corresponding Cut-Off Date and Effective Date, as
defined in this Opinion, is listed below.
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

Effective Date
11/30/2005
1/30/2006
8/31/2006
10/31/2006
1/31/2007
1/31/2007
4/30/2007

Most of the loans were originated months before their
securitization.

The table below, supplied by FHFA, illustrates

that roughly a quarter (23%) of the loans (in the sample drawn
from the relevant SLGs upon which FHFA is litigating its claims)
were originated within 90 days of the Cut-Off Date; the other
77% were originated 90 or more days before the Cut-Off Date.

The LTV ratio in the Collateral Tables is defined as the
“Original Loan-to-Value Ratio.”

Again, with respect to each
11

line of listed ratios, the Collateral Tables report not just the
“Percentage by Aggregate Cut-off Date Principal Balances” for
the LTV ratio at issue but also “Cut-off Date Principal
Balance.”

Thus, all but four of the 376 loans within the

relevant SLG in NAA 2005-AR6 had an original LTV ratio of 80% or
less.

This meant that 99% of the aggregate Cut-Off Date

principal balances had an original LTV ratio of 80% or less, and
less than $740,000 of the nearly $80 million in mortgages, as
measured by their Cut-Off Date principal balance, had an LTV
ratio as of the Cut-Off Date of over 80%.
The Prospectus for each Securitization explains that for
purposes of determining the LTV ratio, “[t]he ‘Value’ of a
Mortgaged Property, other than for Refinance Loans, is generally
the lesser of (a) the appraised value determined in an appraisal
obtained by the originator at origination of that loan and (b)
the sales price for that property.”

The Prospectus adds that

“[u]nless otherwise specified in the prospectus supplement, the
Value of the Mortgaged Property securing a Refinance Loan is the
appraised value of the Mortgaged Property determined in an
appraisal obtained at the time of origination of the Refinance
Loan.”

Finally, according to the Prospectus, “[t]he value of a

Mortgaged Property as of the date of initial issuance of the
related series may be less than the Value at origination and

12

will fluctuate from time to time based upon changes in economic
conditions and the real estate market.”
Each Prospectus Supplement also states that no substantial
changes to any SLG are expected after the Cut-Off Date, and that
notice will be given if any “material characteristic”
meaningfully changes:
If, as of the Closing Date, any material pool
characteristic differs by 5% or more from the
description in this prospectus supplement, revised
disclosure will be provided either in a supplement or
in a Current Report on Form 8-K.
II. The Hunter Report
FHFA retained Hunter “to provide an expert opinion on
whether samples of loans from each of the seven [SLGs] complied
with statements relating to the underwriting and credit quality
of such loans in the Offering Documents for each
Securitization,” and whether “the data contained in the
collateral tables found in the Offering Documents and the preclosing loan tapes were accurate.”

To do so, Hunter re-

underwrote 723 of the 796 loans that form the sample upon which
FHFA is litigating its claims in this lawsuit. 10
In order to determine whether the representations in the
Prospectus Supplements that Originators had adhered to their own
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.
10

13

underwriting guidelines in issuing the loans within an SLG were
accurate, FHFA represents that Hunter re-underwrote the sample
loans using information either already contained in the loan
file or that was otherwise available to the Originators at the
time of origination.

For example, Hunter identifies an instance

where information in the loan file suggests that a borrower’s
debt may have been higher than represented by the borrower, the
Originator did not undertake a further investigation, and the
borrower had taken on additional debt.
Hunter also used information that would not have been
available to Originators.

Hunter relied on post-origination

documents in making his findings for 314 of the 723 sample
loans.

Roughly one-quarter of his findings regarding these

sample loans rely on post-origination documents. 11

For example,

he used post-origination information to recalculate
characteristics of a loan such as a borrower’s debt-to-income
(“DTI”) 12 ratio, a property’s LTV ratio, and a borrower’s credit
(or “FICO” 13) score.

The post-origination information came from

Of the 2,083 findings Hunter made regarding the sample loans,
571 are based on post-origination documents.
11

Debt-to-income ratios compare a borrower’s monthly debt
obligations to a borrower’s monthly income.
12

FICO refers to a consumer credit score issued by the Fair
Isaac Corporation.
13

14

various sources, including employment re-verifications; MERS, 14
which is a private database that tracks mortgage ownership and
servicing rights; servicing records; bankruptcy filings; public
records databases such as DataVerify; and audit credit reports
provided by CBCInnovis and LexisNexis’s Accurint.

Some of these

reports include disclaimers as to the accuracy of their data;
for example, LexisNexis Accurint credit reports state that they
“should not be relied upon as definitively accurate” unless the
data therein was “independently verified.”
Hunter assessed whether Originators followed underwriting
guidelines in calculating LTV ratios and whether loans actually
had the LTV ratios required by the applicable guidelines and as
reported in the Collateral Tables.

To do so, he relied on the

analysis of another of FHFA’s experts, John A. Kilpatrick, who
used a retrospective “automated valuation model” (“Greenfield
AVM”) to recalculate LTV ratios. 15

Kilpatrick’s model, in turn,

relied upon data not available at the time of origination,
including tax assessments dating from 2009 to 2014.

Thus,

Hunter recalculated LTV ratios using both information contained
in the loan files as well as the new values generated by the
“MERS” is an acronym for Mortgage Electronic Registration
Systems, Inc., the owner of the database.
14

Defendants’ separate motion to exclude Kilpatrick’s expert
testimony has been denied. FHFA v. Nomura Holding Am., Inc.,
No. 11cv6201 (DLC), 2015 WL 353929 (S.D.N.Y. Jan. 28, 2015).
15

15

Greenfield AVM, and he considered both recalculations when
assessing whether the guidelines were followed.

To assess the

accuracy of the statistics in the Collateral Tables, he
substituted the new AVM values for the original appraised values
and, where those values were lower than the original appraised
value or the sales price, recalculated the LTV.
In order to assess the accuracy of the owner-occupancy
status statistics in the Collateral Tables, Hunter reviewed
“borrower and property records, including public records,
bankruptcy filings, and consumer credit reports.”

The

defendants’ motion to exclude Hunter’s testimony with respect to
the owner-occupancy statistics disclosed in the Collateral
Tables has recently been denied.

FHFA v. Nomura Holding Am.,

Inc., No. 11cv6201 (DLC), 2015 WL 394072, at *3-4 (S.D.N.Y. Jan.
29, 2015).

The January 29 Opinion held that Hunter’s opinions

regarding the accuracy of owner-occupancy statistics as of the
Cut-Off Dates may include reliance on evidence taken from
documents created after the Cut-Off Date.

Id. at *4.

Hunter concluded that, of the 723 loans he reviewed, 625
had at least one underwriting defect, and 482 (66.67%) had
serious underwriting defects that “substantially increased
credit risk.”

Almost 80% (79.94%) of the loans were not

originated in accordance with the requirements of the
Originator’s underwriting guidelines; 7.41% were inaccurately
16

disclosed as being owner-occupied; and 21.02% had an LTV ratio
and/or combined loan-to-value (“CLTV”) 16 ratio that was not
accurately disclosed.
II. The Forester Report
Defendants retained Forester to evaluate Hunter’s findings
of underwriting defects in the sample loans he re-underwrote.
To prepare his report, Forester undertook a re-underwriting of
his own, evaluating the 665 loans in the FHFA sample that Hunter
originally found to have underwriting defects.

Forester opined

that, of these 665, there were only forty loans where he could
not confirm that a “reasonable underwriter at the time of
origination could have found that the loans satisfied” that
Originator’s underwriting guidelines.
Like Hunter, Forester’s review began with the loan files
and the Originator’s guidelines.

Unlike Hunter, however,

Forester “only used information that would have been available
to the original underwriter.”

This included information from

outside the loan file if “applicable underwriting guidelines
required the underwriter to consider” it and “the underwriter
. . . could have had [it] at the relevant time.”

Indeed, one of

Forester’s central criticisms of Hunter’s report is that it
The combined loan-to-value ratio applies to properties
securing more than one loan. It is the ratio of the sum of all
loans secured by the property to the appraised value of the
property.
16

17

“improperly used documents and information that [were] not
available until after the loan closing -- information that was
not and could not have been available to the original
underwriter.”

DISCUSSION
Both FHFA and the defendants move to exclude the expert
testimony pursuant to Federal Rules of Evidence 401, 402, 403,
702, and Daubert v. Merrill Dow Pharms., Inc., 509 U.S. 579
(1993).

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., No. 11cv6201

(DLC), 2015 WL 353929, at *3-4 (S.D.N.Y. Jan. 28, 2015).
On December 22, FHFA moved pursuant to Daubert to exclude
the Forester opinions.

FHFA argued that Forester’s failure to

determine the accuracy of the representations in the Offering
Documents as of the Effective Date or the Cut-Off Date renders
his opinions irrelevant and unreliable.
In response, the defendants moved on January 5 pursuant to
Daubert to exclude Hunter’s opinions to the extent that he
relies in any way on information that did not exist when
18

Originators were reviewing and approving the loans.

They

emphasize that the Prospectus Supplements represent that loans
“were originated” in adherence to the Originators’ guidelines. 17
The defendants had also moved in limine on November 25 to
exclude Hunter’s testimony to the extent it evaluates loans
against “underwriting standards never disclosed in the Offering
Documents.”

They argued in that motion that Hunter should not

have re-underwritten the loans using Originator’s guidelines
unless the Originator was actually identified by name in a
Prospectus Supplement.

This motion affects five of the seven

Prospectus Supplements: two of the seven Securitizations are
backed by loans that come from a single Originator; that
Originator’s guidelines are described in detail in the Offering
Documents.

According to the defendants, when an Originator is

not identified by name, the only relevant guidelines are the
general standards outlined in the Prospectus Supplement. 18

The defendants’ motion largely ignores Hunter’s opinions
regarding the accuracy of the data recited in the Collateral
Tables.
17

In making the motion in limine, the defendants take a position
that is at odds with their motion to exclude Hunter’s testimony
to the extent it is not based on an analysis of the Originators’
guidelines and information which would have been available to
Originators during the origination process. They also take a
position that, as described below, is entirely at odds with the
representations they have made to this Court and FHFA throughout
this litigation.
18

19

The parties’ cross-motions raise the following issues: the
extent to which post-origination evidence may be used in proving
that the Offering Documents contained misrepresentations
regarding the origination process; the date as of which a
statement of fact is being made; and the time period to which
the statement of fact refers.

The answers to each of these

questions lies in the requirements of the Securities Act and
precedent addressed to the interpretation of Offering Documents.
Securities Act Section 12(a)(2) establishes civil liability
for any person who “offers or sells a security . . . by means of
a prospectus or oral communication, which 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.” 15
U.S.C. § 77l(a)(2) (emphasis added).
scienter requirement.

Section 12(a)(2) has no

See Fait v. Regions Fin. Corp., 655 F.3d

105, 109 (2d Cir. 2011); UBS, 858 F. Supp. 2d at 323.

In this

regard, Section 12(a)(2) mirrors Section 11, under which
“[l]iability against the issuer of a security is virtually
absolute, even for innocent misstatements.”

Herman & MacLean v.

Huddleston, 459 U.S. 375, 382 (1983); see Kronfeld v. Trans
World Airlines, Inc., 832 F.2d 726, 730 n.8 (2d Cir. 1987).
The sales of the seven Certificates at issue here were made
“by means of” the seven Prospectus Supplements filed with the
20

SEC.

FHFA v. Nomura Holding Am., Inc., No. 11cv6201 (DLC), 2014

WL 7229446, at *8 (S.D.N.Y. Dec. 18, 2014); see FHFA v. Bank of
Am. Corp., No. 11cv6195 (DLC), 2012 WL 6592251, at *5 (S.D.N.Y.
Dec. 18, 2012).

Their issuance dates range from November 30,

2005 to April 30, 2007.

For purposes of this Opinion, these

dates shall be referred to as the Effective Dates of each
Supplement. 19
Asset-backed securities are subject to an elaborate
regulatory regime.

See Regulation S–K, 17 C.F.R. § 229.10 et

seq.; Regulation AB, 17 C.F.R. § 229.1100 et seq.; UBS II, 2012
WL 2400263, at *2.

Of particular relevance here, Regulation AB

requires detailed disclosures in asset-backed securities’
prospectus supplements.

Those disclosures include “any

originator or group of affiliated originators, apart from the
sponsor or its affiliates, that originated, or is expected to
originate, 10% or more of the pool assets,” and, “[t]o the
The RMBS in this case were issued pursuant to “shelf
registrations,” which are pre-approved registration statements
that allow new securities to be issued upon filing of a
prospectus supplement. See 17 C.F.R. §§ 230.409, 230.415; FHFA
v. UBS Americas, Inc., No. 11cv5201 (DLC), 2012 WL 2400263, at
*2 (S.D.N.Y. June 26, 2012). “[T]he date the prospectus
supplement is first used (or the date the securities to which it
relates are first sold) becomes the new ‘effective date’ of the
registration statement for purposes of Section 11 liability” for
issuers and underwriters. FHFA v. HSBC N. Am. Holdings Inc.,
987 F. Supp. 2d 369, 374 (S.D.N.Y. 2013) (“UBS II”); 17 C.F.R.
§ 230.430B(f)(2). Each Prospectus Supplement was filed with the
SEC on its Effective Date, as defined above, or within one day
of the Effective Date.
19

21

extent material, a description of the originator’s origination
program” for “any originator . . . that originated, or is
expected to originate, 20% or more of the pool assets.”
C.F.R. § 229.1110.

17

Also required is a “description of the

. . . underwriting criteria used to originate or purchase the
pool assets, including, to the extent known, any changes in such
criteria and the extent to which such policies and criteria are
or could be overridden.”

Id. § 229.1111(a)(3).

In addition, it

requires a prospectus to state the “cut-off date or similar date
for establishing the composition of the asset pool.”

Id. §

229.1111(a)(5).
Courts assess the truth or falsity of facts or assertions
in a prospectus or prospectus supplement by “read[ing] it as a
whole.”

In re ProShares Trust Sec. Litig., 728 F.3d 96, 103 (2d

Cir. 2013) (citation omitted).

Courts look to whether the

“disclosures and representations, taken together and in
context,” would mislead a reasonable investor.

Id. (citation

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

What is at stake is the Offering Documents’

“ability to accurately inform rather than mislead prospective
buyers.”

Operating Local 649 Annuity Trust Fund v. Smith Barney

Fund Mgmt. LLC, 595 F.3d 86, 92 (2d Cir. 2010); see also I.
Meyer Pincus & Assocs., P.C. v. Oppenheimer & Co., 936 F.2d 759,
761 (2d Cir. 1991); McMahan & Co. v. Wherehouse Entm't, Inc.,
22

900 F.2d 576, 579 (2d Cir. 1990).

To avoid being false or

misleading, where there is a “disclosure about a particular
topic, whether voluntary or required, the representation must be
complete and accurate.”

In re Morgan Stanley Info. Fund Sec.

Litig., 592 F.3d 347, 366 (2d Cir. 2010) (citation omitted).
“Even a statement which is literally true, if susceptible to
quite another interpretation by the reasonable investor[,] may
properly be considered a material misrepresentation.”

McMahan &

Co., 900 F.2d at 579 (citation omitted).
Federal Rules of Evidence 401 and 402 establish a liberal
standard of relevance.

“It is universally recognized that

evidence, to be relevant to an inquiry, need not conclusively
prove the ultimate fact in issue, but only have ‘any tendency to
make the existence of any fact that is of consequence to the
determination of the action more probable or less probable than
it would be without the evidence.’” McKoy v. N. Carolina, 494
U.S. 433, 440 (1990) (quoting Fed. R. Evid. 401).

Relevance is

“not an inherent characteristic,” but rather “a relation between
an item of evidence and a matter properly provable in the case,”
Huddleston v. United States, 485 U.S. 681, 689 (1988) (citation
omitted), and it is to be “determined in the context of the
facts and arguments in a particular case.”
Co. v. Mendelsohn, 552 U.S. 379, 387 (2008).

Sprint/United Mgmt.

be conclusive in order to be relevant.
23

Evidence “need not

An incremental effect is

sufficient.”

United States v. Certified Envtl. Servs., Inc.,

753 F.3d 72, 90 (2d Cir. 2014) (citation omitted).

As the

Second Circuit has held in the context of subsequent act
evidence, “[r]elevancy cannot be reduced to a mere chronology;
whether . . . evidence occurred prior or subsequent . . . is not
necessarily determinative to its admissibility and therefore its
probative value.”

United States v. Goffer, 721 F.3d 113, 124

(2d Cir. 2013) (citation omitted).
The law as described above resolves the issues in these
motions.

In brief, a party may rely on evidence gleaned from

any point in time to prove the truth or falsity of a
representation of fact about a past event.

For instance, it

would be hard to quarrel with the proposition that evidence
given by a borrower, appraiser, or Originator during the trial
would be relevant to show the truth or falsity of a fact
contained in a Prospectus Supplement issued in 2005, 2006, or
2007.

In litigating the accuracy of a factual representation,

no party will be restricted to evidence that was reduced to
writing as of either the date of origination of a particular
loan or even as of the Effective Date of the Prospectus
Supplement containing the representation.
As for the specific representations at issue in this motion
practice, there are two dates of particular relevance to the
inquiry regarding falsity.

Generally, the representations of
24

fact were true or not as of the date the loan was originated or
as of the Cut-Off Date of the Prospective Supplement.

The

representations concerning underwriting guidelines were
generally true or not as of the dates of loan origination.

The

representations in the Collateral Tables were generally true or
not as of the Cut-Off Dates for the Prospectus Supplements. 20
These motions principally address the representations
regarding underwriting guidelines.

Those representations

describe a process followed by each borrower in applying for
loans and by each Originator in reviewing and approving loan
applications to ensure that the loan qualified under the
Originators’ guidelines and assert that the loans that are
contained in the SLGs conformed to those guidelines.

This is

true whether or not an Originator is named in the Supplement or
its particular guidelines are described in detail.

The Offering

Documents warn that the standards in the Originators’ guidelines
were generally less stringent than those established by the
GSEs, but they assure investors that the Originators used those
guidelines to perform a pertinent credit analysis, to examine a
borrower’s DTI ratio, and to obtain appraisals that conformed to

The Effective Date of the Prospective Supplement would have
been relevant to the assertion of a due diligence defense, but
that defense is no longer at issue here. See FHFA v. Nomura
Holding Am. Inc., No. 11cv6201 (DLC), 2014 WL 7232443, at *30-40
(S.D.N.Y. Dec. 18, 2014).
20

25

USPAP, among other things. 21

To the extent that an Originator

failed to follow its own guidelines or to respond appropriately
to red flags that appeared in the application and review
process, or to the extent that the loans did not actually
conform to the standards set out in the Originator’s
guidelines, 22 then FHFA may be able to show that the Prospectus
Supplement representation regarding the use of Originators’
guidelines to originate the loans was false.
Accordingly, the generic descriptions of the underwriting
standards contained in the Prospectus Supplements are, when read
in context, only high-level descriptions of a far more complex
underwriting process undertaken by all Originators prior to the
securitization of the loans or the preparation of the Offering

The Supplements use the present tense to describe the quality
of the appraisals but also make clear, when read in conjunction
with the Prospectus, that the appraisals are those performed
during origination. The assertion that those appraisals conform
to USPAP is a statement made as of the Effective Date of the
Supplement about those originating appraisals.
21

If the Originator’s underwriting guidelines allowed for
exceptions to the application of certain substantive standards,
then evidence that an exception was given and justified within
the framework established by an Originator is also relevant to
this analysis. As the Prospectus Supplement for NHELI 2005-AR6
recognizes, “certain exceptions to the underwriting standards
described in this prospectus supplement are made in the event
that compensating factors are demonstrated by a prospective
borrower.” Six of the seven Supplements contain this language;
the seventh, NHELI 2006-FM1, makes a substantially similar
statement in specific reference to the sole Originator for that
RMBS.
22

26

Documents for the Securitization. 23

The Originators who

contributed over 10% of the loans are named in the Supplements,
and the guidelines of those who contributed over 20% are recited
in considerable detail.

But, as the Supplements make clear, it

is the guidelines for each of the individual Originators that
dictated whether the Originators would issue the loans that were
later selected by the defendants (and their affiliates) for
placement in the SLGs and securitized.
The representations in the Collateral Tables concerning the
characteristics of the loans within each SLG are made as of the
Cut-Off Date for the Prospectus Supplement, which is
approximately a month prior to its Effective Date.

In these

motions, the parties principally address two of the loan
characteristics described in the Collateral Tables: the owneroccupancy statistics and LTV ratios.

The owner-occupancy

statistics in the Collateral Tables are representations of fact
as of the Cut-Off Date.

As already explained in an Opinion of

January 29, 2015, evidence that first became available after the
Cut-Off Date may be used to demonstrate that the owner did not
occupy the property as of the Cut-off Date.

See Nomura, 2015 WL

394072, at *3.

As the chart above demonstrates, in most instances -- 77% -the loans within the SLG were underwritten four or more months
before the Effective Date of each Securitization.
23

27

The relevant date for the LTV ratios in the Collateral
Tables, however, is not only the Cut-Off Date but also the date
the ratio was first determined by the loan’s Originator based on
the approved loan amount and the appraisal obtained by the
Originator.

The Supplement and its Prospectus, read together,

explain that the original loan amount and the original appraisal
number are being used to construct the ratio for an individual
loan.

The aggregate statistics regarding the characteristics

for loans within an SLG, as described in the Collateral Tables,
are therefore built upon the LTV ratios reported by the
Originators.
There does not appear to be any dispute over the accuracy
of the figures for the original loan amounts.
the appraisal figures is hotly contested.

The accuracy of

Whether an appraisal

was “credible,” as that term is defined by USPAP, see FHFA v.
Nomura Holding Am., Inc., 2015 U.S. Dist. LEXIS 10458 (S.D.N.Y.
Jan. 29, 2015), is a fact to be determined based on evidence
that becomes available at any time.

That evidence, however,

must relate to the original appraisal and the period of
origination.

These determinations guide the disposition of the

parties’ three motions.
I.

Post-origination Evidence
Defendants argue that Hunter’s testimony must be excluded

to the extent it relies on evidence derived from the period
28

following the origination of the loan.

They assert that, since

the Prospectus Supplements represent that the loans “were”
originated generally in accordance with guidelines, only
information that was actually available to Originators at that
historical moment is relevant to the determination of whether
Originators complied with their guidelines.
wrong.

The defendants are

Direct or circumstantial evidence, regardless of when

that evidence first became available, would be relevant if it
helped to demonstrate that an Originator did or did not follow
its own underwriting guidelines or that the loan did or did not
qualify under the Originator’s guidelines.
In 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.
That is a representation of fact.

It provided assurance to

investors that the loans were of a certain quality.

In making

this representation in the Offering Documents, the defendants
assured investors that they had conducted a sufficient
examination to confirm its accuracy and understood that they
would be held strictly liable if the representation were false,
absent recourse to an applicable statutory defense.

Hunter may,

therefore, rely on post-origination evidence so long as it is

29

probative of a relevant characteristic of the loan at the period
of time at issue here.
To provide an example, defendants complain that Hunter
relies on a 2009 bankruptcy filing to show that a borrower
misrepresented his income in 2006.

There is no dispute that the

2009 filing was unavailable either to the Originator or to the
defendants as underwriters.

But its unavailability is

irrelevant to the issue of whether the Prospectus Supplement
contained a false statement.

The ability of the defendants to

discover the misrepresentation would be relevant to any due
diligence defense, but it is irrelevant to an examination of
whether the quality and characteristics of the loans were
accurately described in the Offering Documents.
For similar reasons, the reliance by FHFA experts on tax
records from 2013 and 2014 in their assessment of property
valuations during the period 2005 to 2007 may be entirely
appropriate.

Post-origination evidence is admissible if it

tends to show the existence or non-existence of a fact during
the relevant period of time.

Thus, the defendants’ complaint

about the use of an AVM which relied on recent tax assessed
values misses the mark.

It may be that the more recent property

valuations have no probative value.

But if they do have

probative value, the fact that they stem from the postorigination period does not preclude their use at trial.
30

The suggestion by the defendants that colloquy at the
November 15, 2012 conference in this coordinated litigation is
in tension with this ruling is mistaken.

That colloquy was

addressed to FHFA’s disclosure to the defendants of its initial
factual findings based solely on a comparison of the loan files
to each Originator’s guidelines.

As described below, a November

26, 2012 Order that emerged from that conference explicitly
reserved for FHFA its right to rely on other evidence, and FHFA
repeatedly advised the defendants at the November 15 conference
of its intention to do so.

Nor does this Court’s Opinion in

FHFA v. SG Americas, Inc., No. 11cv6203 (DLC), 2012 WL 5931878
(S.D.N.Y. Nov. 27, 2012), suggest that post-origination evidence
is irrelevant.

That Opinion rejected the defendants’ argument

that the representations regarding an Originator’s compliance
with its underwriting guidelines was a statement of belief
rather than a statement of fact.

Id. at *2-3.

II. Matching Loans to Each Originator’s Guidelines
Defendants advance the novel argument in their motion in
limine that Hunter may not testify about the extent to which a
loan was issued in compliance with any Originators’ underwriting
guidelines unless those guidelines were reproduced at length in
the Supplements. 24

They claim that, unless an Originator’s

The defendants’ motion complains as well that Hunter has
relied on Originators’ guidelines when those Originators were
24

31

guidelines were reproduced in the Supplements, the Supplements
should be read as only representing that the loans complied with
the general underwriting standards summarized in the
Supplements.

That reading is at odds with the plain meaning of

the Supplements and does not make sense as a matter of
chronology.
The representations in the Prospectus Supplements regarding
compliance with underwriting “criteria” and “standards” refer
explicitly to a process that occurred prior to the
securitization of the loans.

In language that the defendants

repeatedly emphasize for other purposes, these representations
provide assurance that the “loans . . . were originated
generally” according to the criteria described in the
Supplement.

(Emphasis added.)

of that origination process.

The Supplements give an overview
They describe the presentation of

information by a borrower “to the original lender” and
determinations “made by the original lender” about the
borrower’s ability to make the required loan payments, among
other things.

They refer as well to the appraisal obtained by

the Originator.

not named in the Supplements. It will be assumed for purposes
of this Opinion that the defendants are not conceding that the
identification of an Originator by name would be sufficient to
allow Hunter to rely on the Originator’s guidelines.
32

As significantly, the only standards and criteria to which
the Supplements could be referring are those that were in the
hands of the original lenders.

After all, the Originators would

not even have had access to any language contained in the
Supplements since the Originators would not have known into
which, if any, Securitization the loan might be placed and the
Supplement for the Securitization could not have been available
to the Originator at the time of loan origination.
Finally, the general descriptive language about standards
and criteria was included in the Supplements to comply with
regulatory requirements, see 17 C.F.R. § 229.1111(a)(3), but
could hardly have been expected by anyone to give, by itself,
comfort to investors that the loans in the SLGs had passed
scrutiny.

The language in the Supplements regarding the

criteria is simply too vague to provide a complete description
of the origination process.

It omits the specific benchmarks

and criteria that are part of the customary underwriting process
at origination.

In essence, these passages are a statement by

the defendants that they have reviewed the Originators’
processes and guidelines and confirmed that the loans within the
Securitization were all originated in compliance with their
Originators’ standards and processes, and that those standards
and processes all contained the central elements summarized in
the Supplement.
33

It is also far too late for the defendants to be presenting
this strained reading of their Offering Documents.

Despite the

fact that this litigation has been pending since September 2,
2011, the defendants never asserted this position until they
filed their motion in limine on November 25, 2014. 25

Years of

litigation at vast expense have been premised on the
understanding that FHFA would have the burden at trial of
demonstrating that the loans within the SLGs for their
Certificates did not meet the criteria established by the
individual guidelines adopted by each of the loans’ Originators.
Indeed, the defendants took the position at the beginning of
this litigation that it would be necessary to collect every loan
file and Originator guideline for every loan within each of the
SLGs supporting FHFA’s Certificates.

In this coordinated

litigation, that amounted to over 1.1 million loan files and
hundreds if not thousands of guidelines from scores of
Originators.

When FHFA chose to proceed with its claims based

upon a sample of the loans within each SLG, that merely reduced

Searching for some evidence that their argument is not newly
minted, defendants refer to their answer and motion to dismiss.
Neither provides them any comfort. The answer only denies in
conclusory fashion the allegations regarding underwriting
guidelines in FHFA’s Amended Complaint. The motion to dismiss
argues that FHFA failed to plead that it had conducted a
“forensic review” of the Securitizations at issue here. It made
no argument about whether the proper comparator is “general
standards” or the Originators’ guidelines.
25

34

the size of the undertaking; it did not change its nature.

See

FHFA v. UBS Americas, Inc., No. 11cv5201 (DLC), 2013 WL 1234947,
at *1-3 (S.D.N.Y. Mar. 26, 2013).

The parties still undertook

the collection of every loan file and their associated
underwriting guidelines for every loan within the sample.
Scheduling Orders set dates by which the parties were to
identify the loan files and applicable Originator guidelines for
every sample loan and to work together in good faith to
stipulate that that search was complete. 26

The parties provided

monthly reports to the Court on their progress in that vast
collection and stipulation effort.

This effort, of course,

consumed the resources of not just the parties and the Court but
also third parties.
As significantly, at the defendants’ request and over
FHFA’s objection, the Court required FHFA to provide the
preliminary results of its re-underwriting of the sample to any
defendant who wished.

The Order of November 26, 2012 described

the detailed exchange of information that would take place
between the parties as they assessed deficiencies in
underwriting based solely on a comparison of the contents of a

The parties were required to “endeavor to reach agreement by
stipulation” that the collected loan file and its applicable
guideline were “the best representation of the Loan File and
Guideline existing at the time of the loan’s origination that
the parties have been able to recreate.”
26

35

loan file and the Originator’s guidelines. 27

And, of course, all

of the parties (including the defendants) retained reunderwriting experts and produced expert reports that examined
the extent to which loans complied with Originators’
underwriting criteria.

It is simply too late in the day for the

defendants to argue that this extraordinary expenditure of
effort and money was unnecessary.
limine is denied.

The defendants’ motion in

See Crawford v. Franklin Credit Mgmt. Corp.,

758 F.3d 473, 485-86 (2d Cir. 2014); Adelphia Recovery Trust v.
Goldman, Sachs & Co., 748 F.3d 110, 116 (2d Cir. 2014).
III. Compliance with the Criteria in Originators’ Guidelines
Defendants appear to acknowledge that the Collateral Tables
describe specific characteristics of the loans included within
the SLGs.

They argue, however, that the sections of the

Supplements that describe the underwriting standards and
criteria used by Originators in approving those loans should be
understood as a representation regarding the origination process
only.

They contend that this section of the Supplements does

not also include a representation that the loans actually did
meet each of the criteria within an Originator’s underwriting

This exchange of information expressly preserved for the
parties the right to litigate compliance with underwriting
criteria based upon additional information and criteria.
27

36

guidelines.

As already explained, the Supplements included both

representations, which are interlocking.
The Supplements assure investors that the loans actually
did qualify under their Originators’ criteria.

For example,

they represented that “the original lender” determined for
certain loans that the borrower’s monthly income “will be
sufficient to enable the borrower to meet their monthly
obligations.”

This is a statement about the origination process

and a statement that the DTI ratio for the borrower met the
specific level defined in the Originator’s guidelines.

If FHFA

demonstrates that the actual income of the borrower was
materially different than that used by the Originator in
calculating DTI, such that the loan failed to meet the DTI
threshold specified in the Originator’s guidelines, then FHFA
may rely on that showing in arguing that a material false
statement exists.

After all, a representation about process

without a concomitant representation about the quality of the
loans would be an empty one.

A Securities Act defendant cannot

simply claim that it blindly reported information given to it by
third parties and thereby avoid liability for inaccuracies that
found their way into Offering Documents.

See UBS, 858 F. Supp.

2d at 329-30. 28
Most of the characteristics found by Originators that the
parties discuss in these motions (LTV ratio, FICO score, and
28

37

IV. Forester’s Testimony
In light of the rulings above, Forester has severely
cabined his opinions.

Nonetheless, FHFA’s motion to exclude

Forester’s testimony is denied.
Forester apparently limited his re-underwriting exercise to
the universe of evidence that “would have been available” to the
Originator.

As a result, he considered no post-origination

information. 29

By proceeding in this fashion, the defendants may

have sought to import a scienter requirement into this strict
liability lawsuit.

While the unavailability of information that

could have been discovered through the exercise of diligence
would have been relevant to any due diligence defense in this
case, 30 the issues that remain concern the truth or falsity of
the factual representations about the nature of the loans.

As a

result, Forester’s opinions have only limited relevance here.
His opinions speak only tangentially to the determinations that

owner-occupancy status) are also presented as representations of
fact in the Collateral Tables. Accordingly, it is not clear
that any loan characteristic other than DTI is affected by this
aspect of the parties’ dispute.
It appears that Forester may also have chosen at least in some
instances to disregard evidence that would have been available
to Originators, but the impact of that choice on his opinions
will go to their weight and not their admissibility.
29

The due diligence defense would have inquired as to the
availability as of the Effective Date of information about the
falsity of representations contained in the Supplements.
30

38

must be made as to whether the loans themselves met their
origination standards or whether the data in the Collateral
Tables were accurate.

For example, he did not examine whether

the appraisals of the property were substantively accurate or
whether borrowers actually occupied the properties, as opposed
to stating their intention to do so.

But because Originators’

compliance with the origination process is also a fact in
dispute, Forester’s opinions regarding that process are relevant
and will be received.
For example, Forester reports finding in many cases that
Hunter misread, misinterpreted, or improperly applied available
underwriting guidelines.

He also identifies purported

inconsistencies and errors in Hunter’s analysis and argues that
Hunter improperly ignored “compensating factors and exceptions”
which might have excused noncompliance.

These opinions and

others like them are relevant to the issue of whether the
Prospectus Supplements contained a material misstatement when
they represented that Originators had followed their guidelines
in approving the loans and may be used to challenge any of
Hunter’s opinions on that score.
V.

Reliance on Reports with Disclaimers
Defendants challenge Hunter’s opinion to the extent he

relies on LexisNexis Accurint credit reports, CBCInnovis credit
reports, or DataVerify reports, two of which contain express
39

disclaimers. 31

Hunter relies on these and other sources of

information not challenged here in rendering his findings.

FHFA

has shown that these databases are among the sources of
information on which originators, underwriters and experts
regularly rely in the underwriting and re-underwriting process.
The disclaimers in question do not render the information so
irretrievably unreliable that any opinions based thereupon must
be excluded wholesale. 32

Rather, the actual presence or

LexisNexis Accurint reports state, “This system should not be
relied upon as definitively accurate. Before relying on any
data this system supplies, it should be independently verified.”
DataVerify reports state,
31

This report uses public data collected during the
mortgage recording process and while deemed reliable,
DataVerify and its third party business partners do
not guarantee the accuracy of this data nor does it
guarantee that common data elements will appear for
all properties identified on the report. The property
data information (including assessments of value and
equity) provided by DataVerify are delivered to the
subscriber "as is" and "as available" and all uses of
this data are at the subscriber's sole risk.
Defendants also cite deposition testimony of Kenneth Viviano of
CBCInnovis, who stated that CBCInnovis reports were “not making
any representation” as to “whether or not any of these addresses
are the primary residence of that consumer.”
In support of their claim that Hunter’s testimony should be
excluded for unreliability, defendants cite this Court’s
discussion of RBS’s failure to follow up on disclaimer language
on a “one-page summary of Nomura’s pre-acquisition review.” See
Nomura, 2014 WL 7232443 at *36. The observation in Nomura is
inapposite. As the Nomura opinion explains, RBS did no due
diligence with respect to Securitization 2006-HE3, and possessed
only a one-page statement from Nomura summarizing its preacquisition review of loans. Id. Possession of that document
32

40

likelihood of errors in this data goes to the testimony’s
weight, not its admissibility.

See, e.g., Raskin v. Wyatt Co.,

125 F.3d 55, 66 (2d Cir. 1997) (“[D]isputes as to the validity
of . . . underlying data go to the weight of the evidence.”)
Defendants may identify errors or likely errors in the documents
in question at trial, and may argue that Hunter failed to
corroborate a particular finding with more reliable information.
VI. Effective Date
FHFA argues that it is the Effective Date and not the time
of origination that is relevant to any determination of whether
there was a misrepresentation that the loans actually met the
underwriting criteria contained in the guidelines of the loans’
Originators.

Because the section of the Supplements addressed

to underwriting standards speaks in the past tense, and assures
investors that the “Mortgage Loans . . . were originated” in
compliance with their underwriting criteria, FHFA’s argument is
rejected.
FHFA argues that the choice of the time of origination
would be “incompatible” with the strict liability standard that
applies here since the question is whether the representations
in the Offering Documents were true as of the Effective Date (or
the Cut-Off Date when the asserted fact is in the Collateral
was insufficient as a matter of law to constitute due diligence
by RBS.
41

Tables).

It is true that the Effective Date ordinarily provides

the date as of which a Securities Act plaintiff must show that a
representation is false.

But in this section of the Prospectus

Supplements, the documents are describing past events.

Thus,

the loans either did or did not -– at the time of origination -meet the underwriting criteria contained in Originators’
guidelines.
FHFA points out that the defendants and other underwriters
examined post-origination evidence during the securitization
process and did not confine themselves to an examination of only
that information that would have been available to Originators.
This practice, which may have been convenient and costeffective, does not mandate a different conclusion about the
relevant time-frame for measuring the accuracy of the Offering
Documents’ representation about the extent to which the loans
conformed to their Originators’ guidelines.

It is the language

of the representation itself that must govern the choice of the
relevant time-frame.

Moreover, any defendant hoping to take

advantage of a due diligence defense would want to examine all
information available as of the Effective Date.

Therefore, the

defendants’ practice of gathering and examining post-origination
data does not dictate that the representation about compliance
with Originators’ underwriting criteria must have been true not
only at the time of origination but also at the Effective Date.
42

CONCLUSION
The following three motions are denied:

FHFA’s December

22, 2014 motion to exclude the expert testimony of Michael
Forester; the defendants’ January 5 motion to exclude the
testimony of Robert Hunter based on information not available at
origination; and the defendants’ November 25, 2014 motion in
limine addressed to the choice of relevant underwriting
guidelines.
SO ORDERED:
Dated:

New York, New York
February 11, 2015
__________________________________
DENISE COTE
United States District Judge

43