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

Filing 1272

MEMORANDUM OPINION & ORDER: FHFAs December 19 motion to exclude in part the expert testimony of Timothy J. Riddiough is granted. (Signed by Judge Denise Cote on 2-16-15) (tg)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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:
FEDERAL HOUSING FINANCE AGENCY,
:
:
Plaintiff,
:
:
-v:
:
:
NOMURA HOLDING AMERICA, INC., et al., :
:
Defendants.
:
:
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APPEARANCES:
For plaintiff:
Philippe Z. Selendy
Manisha M. Sheth
Nicholas F. Joseph
Calli Ray
QUINN EMANUEL URQUHART & SULLIVAN, LLP
51 Madison Ave., 22nd Fl.
New York, NY 10010
For defendants:
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. Cassacy
SULLIVAN & CROMWELL LLP
1700 New York Avenue NW, Suite 700
Washington, DC 20006

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11cv6201 (DLC)
MEMORANDUM
OPINION & ORDER

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:
Plaintiff Federal Housing Finance Agency (“FHFA”) moved on
December 19, 2014, pursuant to Fed. R. Evid. 702 and Daubert v.
Merrill Dow Pharms., Inc., 509 U.S. 729 (1993), to exclude in
part expert testimony by Timothy J. Riddiough (“Riddiough”).
Defendants intend Riddiough to testify regarding damages, and to
rebut the testimony of FHFA’s damages expert James K. Finkel
(“Finkel”).

Most of the issues in this motion have either

already been decided or are otherwise moot. 1

The only remaining

dispute involves the proper interpretation of the damages
provision in Section 12(a)(2) of the Securities Act.

For the

following reasons, FHFA’s motion is granted.
Section 12(a)(2) of the Securities Act provides in
pertinent part that a successful plaintiff may “recover the
Briefly, FHFA has withdrawn its Section 11 claims, mooting the
dispute over calculating Section 11 damages; defendants have
conceded that Riddiough’s failure to add accrued interest to the
amount of consideration paid was “an oversight;” and this Court
has excluded Riddiough’s testimony to the extent it relies on
loss causation testimony by another of defendants’ experts,
Kerry Vandell, see FHFA v. Nomura Holding Am., Inc., No.
11cv6201 (DLC), 2015 WL 539489, at *11 (S.D.N.Y. Feb. 10, 2015).
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consideration paid for [a] security with interest thereon, less
the amount of any income received thereon.”

15 U.S.C. § 77l(a);

accord Commercial Union Assur. Co., plc v. Milken, 17 F.3d 608,
615 (2d Cir. 1994).

“The Virginia and District of Columbia Blue

Sky laws both adopt [12(a)(2)’s] measure of damages.”

FHFA v.

Nomura Holding Am. Inc., No. 11cv6201 (DLC), 2014 WL 7232590, at
*9 (S.D.N.Y. Dec. 18, 2014).

The formulae differ only in the

applicable interest rate.
Both experts built their calculations from the following
facts.

To purchase each of the seven Certificates, a GSE paid

the purchase price of the Certificate, and for two of the
Certificates, some accrued interest.

In an RMBS, investors’

original investment is repaid in regular increments, not a lump
sum at a fixed future date.

Accordingly, each month, the GSE

was to be paid a return of principal and a coupon reflecting an
interest payment.
To calculate Section 12(a)(2) damages, FHFA’s expert Finkel
begins with the “consideration paid,” which he defined as the
actual purchase price of the RMBS plus approximately $360,000 2 in
additional accrued interest that was paid up-front for two of
the seven Certificates.

From this amount, Finkel deducts

Specifically, the GSEs paid $316,245 of accrued interest on NAA
2005-AR6 and $41,187 of accrued interest on NHELI 2006-FM1.
2

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principal payments on a month-to-month basis to arrive at a new
“proceeds balance” for each month.

Finkel multiplies the

proceeds balance for each month by an interest rate in order to
obtain the amount of pre-judgment interest due on the
consideration paid.

The proceeds balance at the time of

judgment plus the accumulated prejudgment interest together make
up the statute’s “consideration paid for [a] security with
interest thereon.”

Finally, to arrive at a damages figure,

Finkel adds all the coupon interest payments received by the
GSEs and subtracts that amount from the consideration paid plus
prejudgment interest.
Defendants’ expert Riddiough uses a slightly different
methodology to calculate damages. 3

Riddiough calculates

prejudgment interest not only on the proceeds balance but also
on the coupon interest payments the GSEs received.

Thus, at the

final stage of the calculation, when the statute requires the
damages amount to be reduced by “the amount of any income
received thereon,” Riddiough subtracts the coupon interest as
increased by prejudgment interest.

Riddiough’s original calculations differed from Finkel’s in two
ways; the first was in the calculation of “consideration paid.”
The defendants have conceded that Riddiough erred in failing to
account for the accrued interest the GSEs paid on two of the
seven Certificates.
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Using his methodology, Finkel calculates that Nomura’s
Section 12(a)(2) damages would be $721,773,003 at a 3% interest
rate, $669,836,269 at the actual coupon rate received by the
GSEs, and $1,015,895,860 at the IRS penalty rate.

In all three

cases Finkel estimates cumulative Blue Sky law damages to be
$557,854,144.

By contrast, Riddiough’s method estimates that

Nomura’s Section 12(a)(2) damages would be $694,291,737 (using a
3% interest rate), $660,153,917 (using the coupon rate), and
$610,632,372 (using a risk-free rate).

In all three cases

Riddiough estimates cumulative Blue Sky law damages to be
$527,284,177.
As the foregoing makes clear, the parties disagree over
whether, under Section 12(a)(2), interest may be calculated on
“income received,” as it is with “consideration paid.”

When

interpreting a statute, courts “begin by analyzing the statutory
language, assuming that the ordinary meaning of that language
accurately expresses the legislative purpose.”

Hardt v.

Reliance Standard Life Ins. Co., 560 U.S. 242, 251 (2010).
Section 12(a)(2) makes no express provision for calculating
interest on income.

As the Supreme Court recently explained,

“when Congress includes particular language in one section of a
statute but omits it in another -- let alone in the very next
provision -- [it is] presume[d] that Congress intended a
difference in meaning.”

Loughrin v. United States, 134 S. Ct.
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2384, 2390 (2014); see also Dep't of Homeland Sec. v. MacLean,
135 S. Ct. 913, 919 (2015) (“Congress generally acts
intentionally when it uses particular language in one section of
a statute but omits it in another.”).

The presence of “interest

thereon” in the clause concerning consideration and its absence
in the clause concerning income is dispositive.

Interest is to

be considered in one part of the calculation, but not the other.
Defendants contend that calculating prejudgment interest
for “income received” is consistent with Finkel’s methodology.
They argue that because Finkel starts with the consideration
paid and then deducts “cumulative principal payments, applies
prejudgment interest to the remaining balance and then deducts
cumulative interest received,” his “approach is equivalent to
including prejudgment interest on the principal payments . . .
but not on the interest payments.”

Defendants appear to be

referring to Finkel’s practice of calculating prejudgment
interest for each month on the declining principal balance.
There is no inconsistency.

The statute demands that prejudgment

interest be awarded, and that it be awarded on the compensation
paid.

With the return of principal each month, the

consideration paid declined in a corresponding amount.

FHFA has

applied the prejudgment interest to the declining balance.
Defendants further argue that only by accounting for
interest on both principal and interest payments can the
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“rescissionary remedy” of Section 12(a)(2) be vindicated.

As

this Court has held, FHFA’s Section 12(a)(2) claim “is most
analogous to an equitable action for rescission of contract.”
Nomura, 2014 WL 7232590, at *9.

As explained above, the

relevant text of the Securities Act is more than sufficiently
clear: interest on income is not included in the amount of
“income received.”

While defendants would prefer that the

amount deducted at the end of the calculation be as large as
possible, the statute provides otherwise.

The defendants’

argument “fall[s] far short of the showing required to overcome
the plain language of § 12(2).”

Randall v. Loftsgaarden, 478

U.S. 647, 658 (1986).
The question remains whether Rule 702 and Daubert require
that Riddiough’s testimony on these issues be excluded because
of his error.

It does.

Defendants’ interpretation of Section

12(a)(2) is incorrect as a matter of law, and conclusions drawn
therefrom cannot “help the trier of fact . . . to determine a
fact in issue.”

Fed. R. Evid. 702.

Riddiough may still provide

his opinion on the proper measure of interest to use if damages
are ultimately awarded.

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CONCLUSION
FHFA’s December 19 motion to exclude in part the expert
testimony of Timothy J. Riddiough is granted.

SO ORDERED:
Dated:

New York, New York
February 16, 2015
__________________________________
DENISE COTE
United States District Judge

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