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

Filing 1289

MEMORANDUM OPINION & ORDER: FHFAs January 8 motion to exclude evidence regarding Fannie Mae that postdates November 30, 2005 and regarding Freddie Mac that postdates April 30, 2007 is denied. Similarly, FHFAs motion to exclude all lay opinion evidence on the issue of loss causation is denied. (Signed by Judge Denise Cote on 2/18/15) (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:

11cv6201 (DLC)
MEMORANDUM
OPINION & ORDER

For plaintiff:
Philippe Z. Selendy
QUINN EMANUEL URQUHART & SULLIVAN, LLP
51 Madison Ave., 22nd Fl.
New York, NY 10010
For defendants:
David B. Tulchin
SULLIVAN & CROMWELL LLP
125 Broad St.
New York, NY 10004
Thomas C. Rice
SIMPSON THACHER & BARTLETT LLP
425 Lexington Ave.
New York, NY 10017
DENISE COTE, District Judge:
Plaintiff Federal Housing Finance Agency (“FHFA”), the
conservator for Fannie Mae and Freddie Mac (together, the
“Government Sponsored Enterprises” or “GSEs”), moved in limine
on January 8, 2015 to preclude the defendants from offering two
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categories of evidence that the defendants gathered from the
GSEs in the course of discovery.

First, FHFA seeks to exclude

evidence that postdates the final “settlement date” for the
Certificates purchased by each GSE.

For Fannie Mae, that date

is November 30, 2005; for Freddie Mac, it is April 30, 2007.
FHFA also seeks to exclude all evidence from the GSEs that the
defendants seek to offer on the issue of loss causation.

FHFA

contends that any loss causation defense must be proven through
retained experts.

For the following reasons, FHFA’s motions are

denied, with the guidance provided herein.
1. Post-Settlement Evidence
FHFA argues that post-settlement evidence “can neither
prove nor disprove any claim or defense that remains to be
tried,” and therefore that it cannot be relevant.

But evidence

“need not be conclusive in order to be relevant.

An incremental

effect is sufficient.”

United States v. Certified Envtl.

Servs., Inc., 753 F.3d 72, 90 (2d Cir. 2014) (citation omitted).
“It is universally recognized that evidence . . . [need] 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).

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As this Court recently held, “evidence gleaned from any
point in time” could be used “to prove the truth or falsity of a
representation of fact about a past event.”

FHFA v. Nomura

Holding Am., Inc., No. 11cv6201 (DLC), 2015 WL 568788, at *8
(S.D.N.Y. Feb. 11, 2015).

This same standard will be applied to

each of the issues that remain to be decided at trial.

On

principle, there is no reason why information postdating
settlement should be per se irrelevant or inadmissible,
regardless of whether it pertains to loss causation or any other
subject.

If the evidence relates to the relevant period of time

and is otherwise admissible pursuant to Fed. R. Evid. 401 and
403 it will not be excluded solely on the ground that it is
post-settlement evidence.
2. Expert Testimony & Loss Causation
FHFA argues that defendants may not introduce “GSE
documents and lay testimony” on the issue of loss causation
because evidence regarding loss causation must be provided by
experts.

According to FHFA, a GSE employee, or any layperson,

lacks the requisite knowledge and training that would permit the
person to apply a reliable methodology to reach an informed
conclusion.

Moreover, to the extent the person was “unaware” of

the alleged misrepresentations associated with the GSE’s seven
Certificates at issue here, then the person would not be in a
position to form an assessment of loss causation.
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Defendants

respond that “straightforward fact testimony” and “lay opinion
testimony” by employees and former employees of the GSEs is
appropriate to show loss causation because employees are
testifying “about topics squarely within the scope of their
employment.”
Section 12(a)(2) of the Securities Act provides a defendant
with an affirmative defense of loss causation.

This defense,

which is referred to as “negative loss causation,” permits a
defendant to reduce or eliminate the obligation to pay damages
for its violation of Section 12(a)(2) if the defendant proves
“that any portion or all of the amount recoverable . . .
represents other than the depreciation in value of the subject
security resulting from” the misrepresentation or falsehood.

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U.S.C. § 77l(b); see FHFA v. Nomura Holding Am., Inc., No.
11cv6201 (DLC), 2015 WL 629336, at *10 (S.D.N.Y. Feb. 13, 2015).
While Section 10(b) under the Exchange Act requires plaintiffs
to prove loss causation to recover for misrepresentations, see
15 U.S.C. § 78u-4, Section 12 of the Securities Act places the
burden on defendants to prove that something other than the
misrepresentations was responsible for the damages.

Thus, “the

negative causation defense in Section [12] and the loss
causation element in Section 10(b) are mirror images” of one
another.

In re WorldCom, Inc. Sec. Litig., No. 02cv3288 (DLC),

2005 WL 375314, at *6 (S.D.N.Y. Feb. 17, 2005).
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Because of their complementarity, the loss causation
analysis conducted under Section 10 is informative of the
analysis under Section 12.

At its core, each analysis requires

a determination of the proximate cause of a loss.

As described

by the Second Circuit, plaintiffs may plead loss causation by
asserting that “loss was foreseeable and caused by the
materialization of the risk concealed by [a] fraudulent
statement.”

Carpenters Pension Trust Fund of St. Louis v.

Barclays PLC, 750 F.3d 227, 232-33 (2d Cir. 2014). 1

Loss

causation represents “the causal link between the alleged
misconduct and the economic harm ultimately suffered by the
plaintiff,” and is “related to the tort law concept of proximate
cause.”

Lattanzio v. Deloitte & Touche LLP, 476 F.3d 147, 157

(2d Cir. 2007) (citation omitted).

“A misrepresentation is the

‘proximate cause’ of an investment loss if the risk that caused
the loss was within the zone of risk concealed by the
misrepresentations.”

In re Omnicom Grp., Inc. Sec. Litig., 597

F.3d 501, 513 (2d Cir. 2010) (citation omitted).

Therefore, to

prevail on its Section 12 defense a defendant must carry its
burden of showing that the loss in the value of the securities
at issue was proximately caused by events unrelated to the

Section 10(b) also allows a showing of loss causation “on the
ground that the market reacted negatively to a corrective
disclosure of the fraud.” Carpenters, 750 F.3d at 232.
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defendants’ alleged misconduct.

See FHFA v. Nomura Holding Am.

Inc., No. 11cv6201 (DLC), 2014 WL 7232590, at *10 (S.D.N.Y. Dec.
18, 2014).
The admission of testimony regarding the proximate cause of
loss is governed by the Federal Rules of Evidence.

Those Rules

“allow the admission of fact testimony so long as the witness
has personal knowledge.”

United States v. Cuti, 720 F.3d 453,

457 (2d Cir. 2013), cert. denied, 135 S. Ct. 402 (2014).
Defendants contend that the testimony of GSE or other non-expert
witnesses on the issue of loss causation constitutes fact
testimony.

It does not; no witness directly observed or

experienced whatever caused any loss in the value of the
Certificates.

Instead, such testimony is opinion testimony.

Opinion testimony may, in the ordinary case, “be presented by
either a lay or expert witness.”

Id. at 457-58.

The issue here

is whether opinions regarding loss causation may properly be
received as lay opinions or only as expert opinions.
The Federal Rules provide the necessary guidance to resolve
that issue.

Federal Rule of Evidence 701 provides that

[i]f a witness is not testifying as an expert,
testimony in the form of an opinion is limited to one
that is: (a) rationally based on the witness’s
perception; (b) helpful to clearly understanding the
witness's testimony or to determining a fact in issue;
and (c) not based on scientific, technical, or other
specialized knowledge within the scope of Rule 702.

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This rule was amended in 2000, “to eliminate the risk that the
reliability requirements set forth in Rule 702 will be evaded
through the simple expedient of proffering an expert in lay
witness clothing.”

Bank of China, New York Branch v. NBM LLC,

359 F.3d 171, 181 (2d Cir. 2004) (citation omitted).

The

distinctions drawn between Rules 701 and 702 “prevent[] a party
from conflating expert and lay opinion testimony thereby
conferring an aura of expertise on a witness without satisfying
the reliability standard for expert testimony set forth in Rule
702 and the pre-trial disclosure requirements” set forth in the
Rules.

United States v. Haynes, 729 F.3d 178, 195 (2d Cir.

2013).
Accordingly, lay opinion testimony may be received if it
results “from a process of reasoning familiar in everyday life.”
United States v. Rigas, 490 F.3d 208, 224 (2d Cir. 2007)
(citation omitted).

In addition, lay opinion testimony based on

“knowledge and participation in the day-to-day affairs of [a]
business” may be admitted, if it was an opinion formed “not
because of experience, training or specialized knowledge within
the realm of an expert, but because of the particularized
knowledge that the witness has by virtue of his or her position
in the business.”

Fed. R. Evid. 701 advisory committee’s note.

Thus, where a witness used his specialized knowledge in carrying
out an investigation for his employer, the employee may provide
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lay opinion testimony “as long as it [is] based on his
investigation and reflected his investigatory findings and
conclusions and was not rooted exclusively in his expertise.”
Rigas, 729 F.3d at 224 (citation omitted).

See also Folio

Impressions, Inc. v. Byer California, 937 F.2d 759, 764 (2d Cir.
1991).

In contrast, if the witness’s testimony “was not a

product of his investigation, but rather reflected his
specialized knowledge, then it [is] impermissible expert
testimony.”

Rigas, 729 F.3d at 224 (citation omitted).

While Rule 701 governs the receipt at trial of lay opinion
testimony, Rule 702 provides the basis for the admission of
opinions by experts.

In Daubert v. Merrill Dow Pharms., Inc.,

509 U.S. 579 (1993), and its progeny the application of Rule 702
has been addressed at length.

“The law assigns district courts

a ‘gatekeeping’ role in ensuring that expert testimony satisfies
the requirements of Rule 702,” United States v. Farhane, 634
F.3d 127, 158 (2d Cir. 2011), and a court must conduct a
rigorous inquiry to “ensur[e] that an expert's testimony both
rests on a reliable foundation and is relevant to the task at
hand.”

United States v. Williams, 506 F.3d 151, 160 (2d Cir.

2007) (citation omitted).
Applying these principles to the FHFA motion permits the
following conclusions.

The parties may proffer at trial expert

opinions regarding loss causation from witnesses they timely
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disclosed as their experts pursuant to this Court’s Scheduling
Orders.

For instance, the defendants disclosed Vandell as an

expert on loss causation, and FHFA’s motion pursuant to Rule 702
and Daubert addressed to Vandell’s testimony has been decided.
See FHFA v. Nomura Holding Am., Inc., No. 11cv6201 (DLC), 2015
WL 539489, at *11 (S.D.N.Y. Feb. 10, 2015).
The defendants may not seek to offer opinion testimony from
non-expert witnesses on the issue of loss causation without the
following showing.

If the witness performed an investigation

during the course of her employment addressed to the issue of
loss causation, then the witness may be examined about that
investigation and her findings.

If the witness did not perform

any such investigation during the regular course of her business
activities, then she may not be examined regarding her opinion
on what caused any loss to the value of the seven Certificates
at issue here or more broadly about losses sustained by the
GSEs’ PLS holdings or by others who held PLS.

If, however, the

lay opinion testimony may be properly received under these
principles, it will not be excluded because the witness did not
at that time have knowledge of the existence of the
misrepresentations in the Offering Documents which FHFA may
prove at trial existed, or because the investigation and the
opinions that were formed as a result of that investigation

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concerned the cause of loss on PLS securities other than the
seven at issue here.
The parties have not addressed whether any lay opinion
testimony must seek to identify the cause of a loss that has
already been experienced in a PLS portfolio, or whether it may
more broadly include speculation about what might cause the
portfolio to experience a loss.

They will be given an

opportunity to address this distinction and whether the latter
testimony should be excluded under Fed. R. Evid. 401 and 403 as
well as 701.
One further cautionary note is warranted.

It will be

difficult (if not impossible) for the defendants to sustain
their burden of showing loss causation without persuasive expert
testimony.

After all, to make out a successful defense a party

must prove not the mere possibility that some other factor
caused the plaintiff’s loss but rather that all or an identified
portion of plaintiff’s loss was caused by that other factor.
See, e.g., In re Omnicom Grp., Inc. Sec. Litig., 541 F. Supp. 2d
546, 554 (S.D.N.Y. 2008), aff'd, 597 F.3d 501 (2d Cir. 2010)
(Section 10) (where expert report failed to adequately
“disaggrega[te] . . . confounding factors . . . there [was]
simply no way for a juror to determine whether the alleged fraud
caused any portion of Plaintiffs' loss”); Adair v. Kaye Kotts
Associates, Inc., No. 97cv3375, 1998 WL 142353, at *6 (S.D.N.Y.
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Mar. 27, 1998) (Sotomayor, J.) (Section 11) (where “no expert
analysis of the price issue [was] provided,” court could draw no
conclusion on loss causation).

CONCLUSION
FHFA’s January 8 motion to exclude evidence regarding
Fannie Mae that postdates November 30, 2005 and regarding
Freddie Mac that postdates April 30, 2007 is denied.

Similarly,

FHFA’s motion to exclude all lay opinion evidence on the issue
of loss causation is denied.

For such lay opinion evidence to

be admissible, however, the defendants will have to show that
the witness rendered an opinion on the cause of loss in a PLS
portfolio pursuant to an investigation undertaken in the normal
course of her duties for her employer.

SO ORDERED:
Dated:

New York, New York
February 18, 2015
__________________________________
DENISE COTE
United States District Judge

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