Federal Housing Finance Agency v. Nomura Holding America, Inc. et al
MEMORANDUM OPINION & ORDER.....Defendants' January 30 motion in limine is governed by the standards articulated herein. Where this general guidance is insufficient, the parties will have an opportunity to obtain rulings on particular items of evidence. (Signed by Judge Denise L. Cote on 2/20/2015) (gr)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
FEDERAL HOUSING FINANCE AGENCY,
NOMURA HOLDING AMERICA, INC., et al., :
OPINION & ORDER
Philippe Z. Selendy
QUINN EMANUEL URQUHART & SULLIVAN, LLP
51 Madison Ave., 22nd Fl.
New York, NY 10010
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:
On January 30, 2015, defendants moved in limine to restrict
FHFA from presenting at trial evidence related to their due
This Opinion provides the parties with guidance on
issues raised in this motion.
On December 18, 2014, this Court granted FHFA’s motion for
summary judgment addressed to defendants’ due diligence and
reasonable care defenses. 1
FHFA v. Nomura Holding Am. Inc., ---
F. Supp. 3d ---, No. 11cv6201 (DLC), 2014 WL 7232443, at *40
(S.D.N.Y. Dec. 18, 2014).
Since their due diligence defense can
no longer be litigated at trial, defendants contend that four
categories of evidence that FHFA seeks to offer at trial should
be excluded pursuant to Fed. R. Evid. 401 and 403.
responds that the evidence will assist in determinations of
material falsity and the reliability of the methodology used by
First, defendants contend that testimony of FHFA’s experts
Leonard Blum (“Blum”) and Peter Rubinstein (“Rubinstein”) to the
effect that defendants had a duty to conduct due diligence
should be stricken.
It is the Court’s duty to articulate the
legal standards that will govern the resolution of the issues in
this case, and no expert will be permitted to dictate or opine
on the content of those standards.
See, e.g., United States v.
Stewart, 433 F.3d 273, 311 (2d Cir. 2006) (“[A]n opinion that
purports to explain the law . . . trespasses on the trial
The term “due diligence” is used in this Opinion even though
the only federal claim that remains to be tried here is a
Section 12 claim and its corollary affirmative defense is
reasonable care. See Nomura, --- F. Supp. 3d at ---, 2014 WL
7232443, at *30.
judge’s exclusive territory.”); United States v. Scop, 846 F.2d
135, 140 (2d Cir.), on reh’g, 856 F.2d 5 (2d Cir. 1988) (expert
may not “invade the province of the court to determine the
applicable law” (citation omitted)).
To the extent that Blum,
Rubinstein, or any other expert testifies as to what the
securities laws require, that testimony will be stricken.
stricken testimony would include, for example, the underscored
statements from Blum’s expert report such as, “[a] broker-dealer
acting in the capacity of securities underwriter (as did
[d]efendants in the instant matter) has an obligation, pursuant
to the Securities Act of 1933 as amended (the “33 Act”), to
conduct a reasonable investigation,” and, “[t]o the extent that
defective loans are found during [r]equisite [d]ue [d]iligence,
pursuant to the securities laws, the underwriter must cure,
remove, or disclose such defects.”
Next, defendants move to preclude evidence of their due
diligence practices insofar as they relate to transactions other
that those linked to the seven Securitizations at issue here.
They also seek to exclude evidence regarding reunderwriting
results that related to loans from mortgage lenders that did not
originate any of the loans backing the seven Securitizations,
specifically Option One and IndyMac.
Defendants do not appear
to dispute that evidence about the origination process and due
diligence process associated with the loans that entered the
seven Securitizations is relevant and admissible, or that
evidence regarding those entities that originated the loans that
appear in the SLGs for the seven Certificates (“Originators”),
including defendants’ evaluations and experiences with them, is
also relevant and admissible.
The difficulty with drawing fine lines here stems in part
from the nature of the Nomura due diligence program.
over fifteen thousand loans within the seven SLGs.
drawn from 194 trade pools containing more than fifty thousand
Nomura’s examination of the loans that ended up in the
seven SLGs occurred at the stage that it purchased the loans in
the trade pools.
It did not create a due diligence program to
confirm the accuracy of the representations in the Offering
Documents regarding the loans in the SLGs.
For two of the seven
SLGs, however, RBS conducted a review of the loans in the SLGs.
See Nomura, --- F. Supp. 3d at ---, 2014 WL 7232443, at *3-4.
Another complicating factor in addressing this dispute is
that the parties are hotly contesting the extent to which the
representations in the Offering Documents are false and the
materiality of the representations, and defendants’ due
diligence processes may have yielded evidence relevant to these
To the extent that defendants are contesting the
materiality of representations about owner-occupancy status,
loan-to-value (“LTV”) ratios, FICO scores, or debt-to-income
(“DTI”) ratios, then FHFA wants to point to the ways in which
defendants focused on those criteria when conducting due
In addition, to the extent that the due diligence
program uncovered inaccuracies in figures reported by
Originators, or red flags that such inaccuracies existed, then
FHFA wants to offer that evidence to support its claims of
Finally, to the extent that defendants are critical of
the FHFA expert review processes, FHFA apparently wants to show
that defendants themselves relied on similar sources of evidence
and processes when performing their loan reviews.
FHFA wants to show: what defect categories and numerical
thresholds defendants and their agents used, when they found
that compensating factors were sufficient to offset credit risk
from underwriting defects, and the tools they used to assess
In general, FHFA has described grounds to find that at
least elements of defendants’ review processes are relevant to
issues that remain to be tried.
As noted, defendants do not
seem to contest the relevance or admissibility of reviews of
loans that were ultimately put into the SLGs or of evidence
Where the evidence concerns an
originator whose loans were not incorporated within an SLG, that
evidence will be excluded unless FHFA can point to an
independent reason supporting its admissibility.
evidence offered only to show that defendants’ diligence
practices were inadequate to weed out defective loans is
As a general matter, evidence from defendants’
employees who were not involved in the securitization process
that ultimately created the SLGs and Offering Documents for the
seven Certificates will be presumed to be irrelevant.
these categories of evidence, FHFA must provide a reason to find
that the evidence is relevant and sufficiently probative to
overcome Rule 403 concerns.
See Fed. R. Evid. 403.
One example that the parties discuss may be of assistance
FHFA explains that an email from RBS employee Frank
Camacho describes his process for evaluating diligence results
regarding appraisals, including an acknowledgment of the risk
that the original appraisals were not accurate.
to have this excluded because the discussion occurred in the
context of a review of loans from an originator who did not
contribute to the SLGs.
But the email concerns the risk of
false appraisal values generally, and is not addressed to the
It is relevant to the issues of falsity
and materiality, and is admissible.
Finally, defendants seek to preclude evidence of
compensation of defendants’ employees who “had nothing to do
with” the Securitizations, including in particular Bob McGinnis.
McGinnis left RBS in March 2006, before the Nomura
Securitizations for which RBS acted as an underwriter.
points to testimony from McGinnis which they contend confirms
that RBS employees in his department (in fact, Greenwich Capital
employees) were “financially incentivized to approve as many
loans for securitization as possible without regard to whether
such loans were defective.”
While testimony about compensation
from employees who did not work on the Securitizations is
generally inadmissible, FHFA has shown that this particular
testimony is relevant to the issue of falsity and admissible.
In addition, evidence of the compensation received by any
particular employee who is not testifying will not be received
without a showing of relevance.
Defendants’ January 30 motion in limine is governed by the
standards articulated herein.
Where this general guidance is
insufficient, the parties will have an opportunity to obtain
rulings on particular items of evidence.
New York, New York
February 20, 2015
United States District Judge
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