Federal Housing Finance Agency v. Nomura Holding America, Inc. et al
OPINION & ORDER....FHFA's October 6, 2014 motion in limine to prohibit defendants from presenting evidence to the jury concerning the Post-Filing Payments in connection with FHFA's Section 11 claims is granted. (Signed by Judge Denise L. Cote on 12/18/2014) (gr)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
FEDERAL HOUSING FINANCE AGENCY,
NOMURA HOLDING AMERICA, INC., et al., :
OPINION & ORDER
For plaintiff Federal Housing Finance Agency:
Philippe Z. Selendy
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.
David B. Tulchin
SULLIVAN & CROMWELL LLP
125 Broad St.
New York, NY 10004
For defendant RBS Securities Inc.:
Thomas C. Rice
SIMPSON THACHER & BARTLETT LLP
425 Lexington Ave.
New York, NY 10017
DENISE COTE, District Judge:
This Opinion addresses a motion in limine brought by
plaintiff Federal Housing Finance Agency (“FHFA”) to prohibit
defendants 1 from presenting, in connection with its Section 11
claims, evidence to the jury of principal and interest payments
made on the certificates at issue in this action (the
“Certificates”) after September 2, 2011, which is the date on
which this lawsuit was filed (the “Post-Filing Payments”). 2
the following reasons, the motion is granted.
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 (“Offering Documents”) used to market and
sell seven Certificates to the GSEs associated with residential
mortgage-backed securities (“RMBS”) contained material
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”)
FHFA requests that defendants be barred from presenting
evidence of the Post-Filing Payments to the jury, and argues
that the Section 12(a)(2) and the Blue Sky law claims may be
tried to the Court. The Court construes this as a request to
bar presentation of this evidence in connection with FHFA’s
Section 11 claims, and separately addresses whether a right to a
jury trial attaches to the remaining claims.
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
This lawsuit is the sole remaining action in a series of
similar, coordinated actions litigated in this district by FHFA
against banks and related individuals and entities to recover
losses experienced by the GSEs from their purchases of RMBS.
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)
The GSEs purchased the seven Certificates between November
30, 2005 and April 30, 2007.
The Certificates had an original
unpaid principal balance of approximately $2.05 billion, and the
GSEs paid slightly more than the amount of the unpaid principal
balance when purchasing them.
Six were purchased by Freddie
Mac; one was purchased by Fannie Mae.
The GSEs have retained
Nomura acted as sponsor and depositor for all seven of the
Certificates, and as the sole lead underwriter and seller for
two of them.
RBS was the sole lead underwriter for three of the
Certificates and a co-lead underwriter for a fourth.
explanation of the RMBS securitization process, including the
roles of mortgage loan originators, sponsors, and underwriters,
see Nomura, 2014 WL 6462239, at *4-6.
Section 11 and Section 12(a)(2), as described below, use
different measures of damages.
The Blue Sky laws adopt the
Section 12(a)(2) measurement of damages.
As a result, FHFA’s
expert Dr. James K. Finkel (“Finkel”) has used two different
methodologies in calculating damages, and has also applied three
different interest rates to his calculations.
calculated damages as high as roughly $1 billion for the claims
against Nomura, and roughly $750 million against RBS.
Dr. Timothy Riddiough (“Riddiough”), one of defendants’
experts, submitted a report on November 10, 2014 (the “Riddiough
Report”) in which he critiqued Finkel’s valuation of the
Certificates at the time of suit and offered his own valuation
As explained below, where a plaintiff holds a security
through judgment, Section 11 damages are equal to the difference
between the purchase price (or the offering price, if lower) and
the security’s value at the time the suit is filed.
Each Certificate entitled its holder to the receipt of
certain monthly payments, which were based on the principal
balance for that Certificate. 3
The monthly payments to the
Certificate holder were equal to a coupon payment -- effectively
interest, at a predetermined rate, on the remaining principal
balance -- plus some additional amount that paid down the
Certificates were linked to tranches of varying seniority.
Generally, holders of the most senior certificates for a given
Supporting Loan Group were paid first, after which holders of
the next-most-senior certificates received payment, and so on.
Thus, should some borrowers in an SLG default on their loans,
certificates in the junior-most tranche would absorb all or most
of the shortfall before payments to more senior certificates
Accordingly, the most senior certificates were
subject to less risk than were more junior certificates.
apportioning risk in this way, defendants were able to create
AAA-rated securities from Alt-A and subprime loans.
purchased senior certificates -- often only the most senior -with the highest credit ratings.
For instance, in Nomura Securitization 2006-FM1, Freddie
Mac purchased a Certificate linked to the senior-most tranche,
If a Certificate were purchased at par, its initial principal
balance would be equal to the purchase price.
class I-A-1, which was supported by Group I loans.
had an initial principal balance of approximately $525 million;
the nine subordinated (“mezzanine”) tranches below had a total
principal balance of approximately $223 million.
losses on Group I loans were to be allocated to the nine
mezzanine tranches, until their $223 million principal balance
was reduced to zero. 4
This subordination, in addition to certain
other credit enhancements, 5 protected Freddie Mac’s senior
Certificate from loss, even in the face of substantial defaults
(and limited recovery through foreclosure).
A certificate’s value in the market is determined, in large
part, by the expected future flow of payments to the certificate
Because payments to the certificate holder depend upon
borrowers’ payments pursuant to the underlying mortgage loans,
the expected rate of borrower defaults is a key determinant of
the certificate’s value.
The average expected loss severity --
which measures the shortfall between the unpaid principal
balance of a loan and the amount recovered through foreclosure
(less costs incurred in foreclosure) -- is another key factor.
The mezzanine tranches were also subordinate to the senior
tranches backed by Group II loans, and would absorb realized
losses from those loans as well.
Other credit enhancements noted in the Offering Documents
include overcollateralization, a basis risk cap agreement, an
interest rate cap agreement, and an interest rate swap
agreement, which served to hedge basis and interest-rate risk.
In the years following September 2, 2011, all but one of the
Certificates never missed a payment.
In his valuation analysis, Riddiough considered the
performance of the Certificates after the date this suit was
filed, September 2, 2011, for two purposes.
compared actual post-filing rates of default within the relevant
Supporting Loan Groups against his and Finkel’s predicted
default rates, finding that his “forecasts . . . are much closer
to what actually happened.”
Second, Riddiough looked at actual
post-filing market prices for the Certificates as “an ex-post
check” of his conclusion, based on trading volume, that the RMBS
market was illiquid at the time of filing.
that, by one measure, the Certificates’ prices in the market
have increased by 28 to 81 percent.
Riddiough relies on the conclusions of Dr. Kerry D. Vandell
(“Vandell”), a second expert for defendants, as to loss
Vandell’s analysis considers the performance of
loans, including the loans underlying the Certificates, through
According to FHFA, Vandell notes (in an exhibit
to his report that no party has submitted to the Court in
connection with this motion) the “expected dollar losses” to one
of the Certificates as of December 2013.
FHFA filed the instant motion in limine on October 6, 2014
to prohibit defendants from presenting evidence to the jury of
the Post-Filing Payments in connection with the Section 11
This motion was fully submitted on October 24.
This motion in limine requires application of the damages
provisions for Section 11 of the Securities Act, 15 U.S.C.
§ 77k, as well as the affirmative defense of negative causation
available under that section.
Those provisions are set forth
below, following the governing Federal Rule of Evidence.
Application of this law is followed by a discussion of Section
12(a)(2) of the Securities Act.
Pursuant to Rule 403, Fed. R. Evid., “[t]he court may
exclude relevant evidence if its probative value is
substantially outweighed by a danger of . . . unfair prejudice,
confusing the issues, misleading the jury, undue delay, wasting
time, or needlessly presenting cumulative evidence.”
United States v. Dupree, 706 F.3d 131, 138 (2d Cir. 2013).
court must “conscientiously balance the proffered evidence’s
probative value with the risk for prejudice.”
United States v.
Massino, 546 F.3d 123, 132 (2d Cir. 2008) (citation omitted).
“‘[U]nfair prejudice’ speaks to the capacity of some concededly
relevant evidence to lure the factfinder into [rendering its
verdict] on a ground different from proof specific to the
Id. (citation omitted).
For instance, the
proffered evidence may have a “tendency . . . to prove some
adverse fact not properly in issue or unfairly excite emotions
against the [opposing party].”
Id. at 133 (citation omitted).
When conducting this balancing, a court “should consider the
possible effectiveness of a jury instruction and the
availability of other means of proof in making a Rule 403
Dupree, 706 F.3d at 138.
Section 11 Damages
A Section 11 claimant is entitled to recover, pursuant to
such damages as shall represent the difference between
the amount paid for the security (not exceeding the
price at which the security was offered to the public)
the value thereof as of the time such suit was
the price at which such security shall have been
disposed of in the market before suit, or
the price at which such security shall have been
disposed of after suit but before judgment if
such damages shall be less than the damages
representing the difference between the amount
paid for the security (not exceeding the price at
which the security was offered to the public) and
the value thereof as of the time such suit was
15 U.S.C. § 77k(e)(emphasis supplied). 6
Section 11 imposes, in certain conditions, a cap on an
underwriter’s liability at the price of the securities
Because the GSEs have retained their Certificates, their
damages under Section 11(e) are measured as their “value . . .
as of the time such suit was brought.”
Id. § 77k(e)(1).
filing changes to the security’s value are irrelevant.
defendants are not liable for subsequent decreases, defendants
cannot benefit from any subsequent increases in value.
where a Section 11 plaintiff has held the security through the
date of suit, the plaintiff bears all risk of loss, and will
capture any gain, that occurs after the filing date.
The term “value” in Section 11(e) “was intended to mean the
security’s true value after the alleged misrepresentations are
McMahan & Co. v. Wherehouse Entm’t, Inc., 65 F.3d
1044, 1048 (2d Cir. 1995).
Where a market value “is available
and reliable,” the “instances where the market price of a
security will be different from its value are unusual and rare.”
underwritten. It provides that: “In no event shall any
underwriter (unless such underwriter shall have knowingly
received from the issuer for acting as an underwriter some
benefit, directly or indirectly, in which all other underwriters
similarly situated did not share in proportion to their
respective interests in the underwriting) be liable in any suit
or as a consequence of suits authorized under subsection (a) of
this section for damages in excess of the total price at which
the securities underwritten by him and distributed to the public
were offered to the public.” 15 U.S.C. § 77k(e). How this
limitation affects lead or co-lead underwriters is not raised by
this motion in limine. See In re WorldCom, Inc. Sec. Litig.,
02cv3288 (DLC), 2005 WL 613107, at *3 n.8 (S.D.N.Y. Mar. 15,
Id. at 1049 (citation omitted).
But, even in those instances
where a market price “is not completely reliable, it serves as a
good starting point in determining value.”
not, however, “exceed the price at which the security was
offered to the public.”
15 U.S.C. § 77k(g).
As explained above, a certificate’s value depends, in large
part, upon the expected principal and interest payments to be
made to the certificate holder, which are in turn based on
mortgage payments by the relevant borrowers.
is based on certain risk assessments.
Thus, a valuation
The parties agree that
the value of a Certificate at the time of filing is to be based
on the appropriate valuation as of that date, using only
information then available.
Accordingly, Finkel’s and
Riddiough’s assessments of the relevant risks, including the
risk of defaults, must look only to information available as of
September 2, 2011.
Like any forecast, the proper valuation’s
underlying risk assessments may prove more or less accurate; the
fact that a risk is or is not realized does not establish how
great or small that risk was, before the fact.
Section 11 Loss Causation Defense
Section 11 provides for an affirmative defense of negative
if the defendant proves that any portion or all of
such damages represents other than the depreciation in
value of such security resulting from such part of the
registration statement, with respect to which his
liability is asserted, not being true or omitting to
state a material fact required to be stated therein or
necessary to make the statements therein not
misleading, such portion of or all such damages shall
not be recoverable.
Id. § 77k(e)(emphasis supplied).
This defense “allocate[s] the
risk of uncertainty to the defendants” and imposes upon them a
Akerman v. Oryx Commc’ns, Inc., 810 F.2d 336,
341 (2d Cir. 1987).
A decline in the price of securities before
the disclosure of the truth regarding the representations at
issue in a case “may not be charged to defendants.”
Id. at 342.
In Akerman, the defendants succeeded in carrying their burden of
showing negative causation where the misstatement was “barely
material,” and where “the public failed to react adversely to
Id. at 343.
The concept of loss causation has been analogized to the
concept of proximate cause.
In re Omnicom Grp., Inc. Sec.
Litig., 597 F.3d 501, 510 (2d Cir. 2010).
recognizes that a security’s loss of value may be attributed to
disclosures of the truth behind misstatements or they may be
attributed to other factors, such as “changed economic
circumstances, changed investor expectations, [or] new industryspecific or firm-specific facts, [or] conditions.”
v. China N.E. Petro. Holdings Ltd., 692 F.3d 34, 40 (2d Cir.
2012) (citation omitted).
Application to Section 11 Damages
Evidence concerning the Post-Filing Payments on the
Certificates are inadmissible under Rule 403 with respect to
defendants’ Section 11 damages.
As explained below, the Post-
Filing Payments have very limited if any relevance to the
calculation of those damages.
Such post-hoc performance would
have been unavailable to anyone assessing the value of the
Certificates on the date the lawsuit was filed and is not,
therefore, admissible to establish the appropriate valuation.
Far outweighing any possible relevance is the great potential of
such evidence to create unfair prejudice to FHFA.
It is quite
likely that even a properly instructed jury, told that all but
one of the Certificates never missed a payment, would find it
nigh impossible to calculate the Certificates’ value as of
September 2, 2011 without regard to their performance in the
years that followed and that it would be improperly moved to
disregard the statutory damages calculation and determine that
the GSEs were not truly injured.
Accordingly, any probative
value of evidence of the Post-Filing Payments is substantially
outweighed by the danger of unfair prejudice, confusing the
issues, and misleading the jury.
Defendants argue that post-filing performance is relevant
in four ways: (1) actual default rates provide a benchmark
against which to compare the accuracy of the predicted default
rates in Finkel’s and Riddiough’s models; (2) the illiquidity of
the RMBS market at the date of filing is confirmed by the
increase in the Certificates’ market price since that time;
(3) Post-Filing Payments should offset Section 11 damages; and
(4) loss causation is undermined, as Post-Filing Payments show
that any loss in value as of September 2, 2011 was unrelated to
the alleged misrepresentations in the Offering Documents.
arguments are addressed in turn.
Post-filing default rates have limited relevance to the
accuracy of Finkel’s and Riddiough’s models.
recognizes that valuation may be based only on information
available as of September 2, 2011.
The fact that Riddiough’s
model better fits actual default rates in the years following
September 2, 2011 than Finkel’s does little to indicate that
Riddiough’s model better captures the information available as
of that date.
The fact that, in a single instance, a given
result occurred, gives little information about the likelihood
of that result before the fact: it could be overwhelmingly
likely, or it could be a freak occurrence.
shows that the performance of the RMBS market as a whole
improved during these years.
Using these future performance
gains as a “check” of valuation as of September 2, 2011 invites
jury-rigging a model that backs into those rosier figures,
whether or not they would have been reliably forecast at the
time of filing; it does little to validate Riddiough’s model or
to undermine Finkel’s.
As noted above, the risk of unfair
prejudice is great if Riddiough is permitted to tell the jury
that post-filing default rates for the Certificates were lower
than expected as of September 2, 2011.
While defendants contend that evidence of the Post-Filing
Payments is also relevant to their expert’s analysis of market
liquidity as of September 2011, an examination of the expert’s
report does not bear that out.
Riddiough makes a very limited
use of the post-filing performance of the Certificates in
connection with his examination of the liquidity of the market
for RMBS sold by financial institutions like defendants
(“Private Label Securities” or “PLS”) in September 2011. 7
Riddiough opines that the PLS market “remained quite
illiquid and dislocated” at the time of filing, based on an
analysis of PLS issuance and trading volume both before and
after that date, as well as the opinions of investors and
But, in his principal discussion of market liquidity,
Riddiough makes no mention of the Certificates’ post-filing
performance, much less the record of Post-Filing Payments.
The term “PLS” distinguishes private label RMBS from those RMBS
sold by federal agencies like the GSEs.
does he cite their post-filing performance in the principal
passage of the Riddiough Report critiquing Finkel for finding
the PLS market was liquid as of September 2, 2011.
Rather, the Certificates’ post-filing performance,
specifically their pricing, is cited only in a subsequent
passage, to support the finding of a February 2011 industry
publication that concluded that PLS were undervalued by 15%-20%
as of that date, due to market illiquidity.
“As an ex-post
check” of this conclusion, Riddiough “compare[s] the average
price of the seven At-Issue Certificates in September 2011 and
March 2014 to see if there is a price increase over this period
that would be consistent with a partial market liquidity
recovery over time.”
In this context, Riddiough notes that,
according to one pricing source, the Certificates’ prices
increased by 28 to 81 percent.
Accordingly, defendants have not shown that the
Certificates’ post-filing performance has much if any relevance
to an analysis of market liquidity as of the filing date.
FHFA’s motion does not seek to generally exclude post-filing
economic data, which may incorporate data concerning the
Certificates within a larger data set.
The Court reserves
judgment on the admissibility of more general information used
to measure market liquidity that incorporates data concerning
the Certificates or their underlying loans.
Third, defendants contend that the Certificates’ PostFiling Payments are relevant because they should offset any
award of Section 11 damages by the jury.
The statutory formula for recovery provides no basis to
reduce a damages award by offsetting payments on the
“The plain language of section 11(e) prescribes
the method of calculating damages, and the court must apply that
method in every case.”
McMahan, 65 F.3d at 1048.
bars defendants’ offset argument.
Moreover, an offset would be entirely inappropriate given
the fact that Section 11 damages, unlike Section 12 damages, do
not seek to undo the purchase of the security, but rather to
restore plaintiff to the approximate position plaintiff would
have occupied had the representations in the Offering Documents
been accurate and complete.
A Section 11 plaintiff who holds a
security is not entitled to a refund of the purchase price, but
only to damages that approximate the drop in value between
purchase and suit resulting from the misrepresented or omitted
As plaintiff here would have received the principal and
interest payments if the Offering Documents were accurate, there
is no reason to believe plaintiff should have to effectively
give them up by offsetting them against damages for the drop in
It is true that the Certificates’ valuation as of the
filing date is based, in part, on the performance of the
Certificates expected as of that date.
It may well be that the
Certificates performed better than expected, just as they might
have done worse.
This is irrelevant to a calculation of Section
11 damages, and it does not constitute a windfall.
the risk of loss when it decided not to sell the Certificates
Having taken that risk, it is entitled to recover
the statutory damages and to keep any revenue received on the
Certificates, just as it would be forced to absorb any postfiling losses.
Section 11 Loss Causation
Fourth, defendants argue, in their opposition of October
16, 2014, that Riddiough “would rely on actual cash flows from
the Certificates after September 2011 to illustrate that the
alleged misrepresentations did not, and could not have, caused
the reduction in value that Mr. Finkel estimates.”
Riddiough does not cite to post-filing cash flows from the
Certificates in his discussion of loss causation as it relates
to Section 11 damages.
Riddiough relies on the loss causation
analysis conducted by Vandell, a second expert for defendants.
Vandell’s report does not mention the Post-Filing Payments. 8
But his analysis includes a benchmarking model that considers
the performance of loans in SLGs, including the SLGs underlying
the Certificates, through December 2013.
A single SLG may
support dozens of certificates in any single securitization.
noted above, the Court reserves judgment as to defendants’ use
of aggregated post-filing performance data that incorporates
data concerning the Certificates.
Vandell’s reliance on such
data does not support the admissibility of evidence that
specifically identifies the Certificates’ post-filing
performance, including the existence and extent of the PostFiling Payments.
Defendants’ only argument on this point is that “postinjury evidence can be relevant to show the proximate cause of
Here, the last of the seven Certificates was
purchased on April 30, 2007; defendants thus have more than four
years of “post-injury evidence” prior to the date of filing on
which to rely.
Defendants do not explain why the three years
after the filing date are necessary; indeed, many civil cases
would have concluded years ago and such evidence would not
The parties have only provided the Court with a short excerpt
of Vandell’s report in connection with this motion. The Court
has received the full report and some of its supporting exhibits
in connection with other applications from the parties.
Defendants cite two district court cases in support of
their loss causation argument; neither is on point.
first, Zerega Ave. Realty Corp. v. Hanover Insurance Co.,
04cv9651 (KNF), 2006 WL 1343643 (S.D.N.Y. May 17, 2006), a barge
collided with a dock, which subsequently collapsed.
Id. at *2.
The magistrate judge permitted an engineer who had inspected the
structural integrity of the dock before and after the collision
to testify concerning causation.
Id. at *4.
post-collision inspection was not at issue.
Inspection of the
scene of an accident bears little relevance to the use of
performance data between four and seven years after alleged
misrepresentations were made, where the first four years of
performance data is readily available.
The second case, Trzeciak v. Apple Computers, Inc.,
94cv1251 (LAK) (MHD), 1995 WL 20329 (S.D.N.Y. Jan. 19, 1995),
concerned a design defect claim by a plaintiff who alleged her
use of an Apple keyboard and mouse caused her to suffer from
repetitive stress injuries.
Id. at *1.
In a footnote, the
magistrate judge noted that post-injury remedial measures taken
by defendant “are potentially probative of the feasibility of
corrective measure[s] prior to plaintiff’s injury” and
defendant’s post-injury documents “are likely to contain other
information that will be probative on such issues as causation
Id. at *2 n.1.
Defendants here have not
explained how a defendant’s post-injury documents concerning its
response to a claimed design defect are relevant to post-filing
performance of the Certificates.
Because the Section 11 loss causation analysis concerns
loss in value as of the date of filing, and this value is
determined solely by information available as of that date,
post-filing performance is not directly relevant.
Court reserves judgment as to the admissibility, for purposes of
calculating Section 11 damages, of aggregated post-filing data
that includes -- but does not break out -- data concerning the
Certificates or their underlying mortgage loans.
III. Section 12(a)(2) & Right to a Jury Trial
As explained below, there is no right to a trial by jury on
FHFA’s Section 12(a)(2) claims.
Accordingly, although the Post-
Filing Payments are relevant to Section 12(a)(2) damages, this
does not require such evidence in the Section 11 case to be put
before the jury.
Section 12(a)(2) Damages
Section 12(a)(2) has a different measure of damages than
Section 12(a)(2) provides for “recover[y] [of]
the consideration paid for [the] security [at issue] with
interest thereon, less the amount of any income received
thereon, upon the tender of such security, or for damages if he
no longer owns the security.”
15 U.S.C. 77l(a).
and District of Columbia Blue Sky laws both adopt this measure
See FHFA v. Merrill Lynch & Co., 903 F. Supp. 2d
274, 280 (S.D.N.Y. 2012).
Where a plaintiff still owns the security, its remedy is
Commercial Union Assur. Co., PLC v. Milken, 17 F.3d
608, 615 (2d Cir. 1994) (construing the identical language in
predecessor Section 12(2)).
“Under the rescissory measure of
damages appellants would be entitled to a return of the
consideration paid for the . . . interests plus prejudgment
interest, less any income received on the interests.”
rate of prejudgment interest rests in the discretion of the
No Right to a Jury Trial on Section 12(a)(2) Claim.
The Seventh Amendment guarantees the right to a trial by
jury “in Suits at common law.”
U.S. Const. amend. VII.
phrase ‘Suits at common law’ refers to suits in which legal
rights were to be ascertained and determined, in
contradistinction to those where equitable rights alone were
recognized, and equitable remedies were administered.”
v. Marcu, 530 F.3d 122, 135 (2d Cir. 2008) (citation omitted).
A two-step inquiry determines whether an action is a suit at
Id. (citing Granfinanciera, S.A. v. Nordberg, 492 U.S. 33,
First, courts look to whether the action or its
analog “would have been deemed legal or equitable in 18th
Id. (citation omitted); Pollara v. Seymour,
344 F.3d 265, 268 (2d Cir. 2003).
“[T]he second, more important
step, requires a determination as to whether the remedy sought
is legal or equitable in nature.”
Eberhard, 530 F.3d at 135
Where a case “present[s] both legal and equitable issues,
it is for the jury to decide the legal issues and for the court
to decide the equitable issues.”
Wright & Miller, Fed. Practice
& Pro. § 2305 (3d ed. 2014); see also Heyman v. Kline, 456 F.2d
123, 130 (2d Cir. 1972).
Where there are “common factual issues
necessary to the resolution of each claim,” the legal claims
should be tried to a jury first.
Robinson v. Metro-N. Commuter
R.R. Co., 267 F.3d 147, 170 (2d Cir. 2001), abrogated in
unrelated part by Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct.
FHFA’s Section 12(a)(2) claim is most analogous to an
equitable action for rescission of contract, known in 18thcentury England.
See 2 Hazen, Law of Sec. Reg. § 7.9 (6th ed.
2009) (“[S]ection 12 closely resembles a traditional equity
action for rescission.”); Joseph Story, Commentaries on Equity
Jurisprudence, as Administered in England and America § 200
(10th ed. 1870) (“[I]f a vendor, on a treaty for the sale of
property, should make representations which he knows to be
false, the falsehood of which, however, the purchaser has no
means of knowing, but he relies on them, a court of equity will
rescind the contract entered into upon such treaty . . . .”);
id. § 692 (“Another head of equity jurisdiction . . . embraces
that large class of cases, where the RESCISSION, CANCELLATION,
or DELIVERY UP of agreements, securities, or deeds is
sought . . . .”) (citing Bromley v. Holland,  7 Ves. Jun.
3 (Ch.) at 18 (Eng.) (discussing equity jurisdiction in such
Likewise, the relief requested is, in effect,
See Ballow Brasted O’Brien & Rusin P.C.
v. Logan, 435 F.3d 235, 240 (2d Cir. 2006) (rescission is an
equitable remedy); Standard Chlorine of Del., Inc. v. Leonard,
384 F.2d 304, 308 (2d Cir. 1967) (“[I]t is clear that requests
for . . . rescission have traditionally been considered
equitable in nature.”); Mallory v. Citizens Util. Co., 342 F.2d
796, 797 (2d Cir. 1965) (action for rescission is “triable by
the court,” not the jury); see also Deckert v. Independence
While rescission could be effected at law by tendering the
property received to defendant and suing him at law to recover
plaintiff’s consideration, see Black’s Law Dictionary (9th ed.
2009) (“rescission”), common law “had no action for rescission”
and “common law courts had no jurisdiction to order the setting
aside of contracts.” Janet O’Sullivan, Rescission as a SelfHelp Remedy: A Critical Analysis, 3 Cambridge L.J. 509, 517
(2000). And equity had “exclusive jurisdiction” of rescission
of “transactions induced by non-fraudulent
misrepresentation, . . . certain non-fundamental mistakes, [or]
those made in breach of fiduciary duty,” like the alleged
misrepresentations at issue here. Id.
Shares Corp., 311 U.S. 282, 284 (1940) (holding that the
Securities Act “authorizes purchasers to maintain a suit in
equity to rescind a fraudulent sale and secure restitution of
the consideration paid”).
Indeed, the Second Circuit has noted that a “district court
did not err in deciding the section 12(2) issues on its own”
because Section 12(a)(2) entitles a plaintiff “to rescission but
not damages” and “[a]n equitable claim such as rescission is for
the court, not the jury, to decide.”
Royal Am. Managers, Inc.
v. IRC Holding Corp., 885 F.2d 1011, 1019 n.4 (2d Cir. 1989);
cf. Randall v. Loftsgaarden, 478 U.S. 647, 651 (1986) (noting
without comment, in Section 12(2) case, that trial court had
accepted an advisory jury opinion with respect to the Section
Accordingly, there is no right to a jury trial of
FHFA’s Section 12(a)(2) claim.
Defendants do not offer an alternative 18th-century analog
for a Section 12(a)(2) claim.
Instead, they argue that relief
under Section 12(a)(2) is not rescission, but rather is a legal
remedy, pointing to Section 12(a)(2)’s loss causation defense. 10
Because the loss causation defense was added in a 1995
amendment, see Pub. L. 104-67, 109 Stat. 737 (Dec. 22, 1996),
defendants argue that the Second Circuit’s 1989 guidance in
Royal American Managers is inapposite. Defendants are wrong,
for the reasons that follow.
Defendants are mistaken.
In fact, the loss causation defense
renders Section 12(a)(2) relief more, not less, like rescission.
Rescission of a contract “repudiate[s] the transaction and
seek[s] [to] place [the parties] in [the] status quo.”
435 F.3d at 238.
“Inherent in the remedy of rescission is the
return of the parties to their pre-contract positions.
result, a party seeking rescission must restore the other party
to that party’s position at the time the contract was made.”
re APA Assessment Fee Litig., 766 F.3d 39, 56 (D.C. Cir. 2014).
Section 12(a)(2)’s loss causation defense does precisely this:
if the securities being tendered by FHFA are less valuable than
the securities FHFA received at the time of the purchase
agreements for reasons unrelated to defendants’ alleged
misconduct, then the return of the GSEs’ consideration is
When a defendant receives plaintiff’s
securities in exchange for the return of plaintiff’s
consideration paid, offset by any unrelated depreciation in
value, the parties are placed in the status quo ante.
fully in keeping with Section 12(a)(2)’s longstanding offset of
the purchase price by “the amount of any income received
15 U.S.C. § 77l(a)(2).
Thus, Section 12(a)(2)’s loss
causation defense renders its relief even more like equitable
rescission, reaffirming the Second Circuit’s conclusion in Royal
American Managers that Section 12(a)(2) claims are not
encompassed by the Seventh Amendment right to a trial by jury.
Defendants also argue that the Section 11 and Section 12
loss causation defenses are “interconnected, and thus they must
both be determined by the jury.”
Defendants are incorrect.
is for the jury to determine, pursuant to Section 11, whether
defendants have proven that all or any of the diminution in
value of the securities between the dates of purchase and the
time of suit was not the result of defendants’ alleged
It is for the Court to determine, pursuant
to Section 12(b), whether defendants have proven that all or any
of the amount recoverable under Section 12(a)(2) was
depreciation in the value of the securities that was not the
result of defendants’ alleged misrepresentations.
In making the
latter finding, the Court will, of course, accept as true any
facts with respect to loss causation found by the jury.
LeBlanc-Sternberg v. Fletcher, 67 F.3d 412, 432 (2d Cir. 1995)
(holding it an abuse of discretion for the district court to
deny equitable relief by “relying on its own findings that were
inconsistent with the jury’s findings”); Wade v. Orange Cnty.
Sheriff’s Office, 844 F.2d 951, 954-55 (2d Cir. 1988).
The factual questions at issue in the Section 11 and
Section 12 loss causation defenses may overlap, but they are
Indeed, it is precisely because the post27
claim payments are relevant to the Section 12 defense but not to
the Section 11 defense that defendants wish to try the two
Defendants’ right to a jury trial of legal
claims will be fully respected; the Seventh Amendment does not
entitle defendants to have a jury try related equitable claims,
and in that way sneak before the jury evidence irrelevant to the
Pursuant to Rule 42(b), Fed. R. Civ. Pro., a court may,
“[f]or convenience, to avoid prejudice, or to expedite and
economize [litigation], . . . order a separate trial of one or
more separate issues . . . [or] claims.”
As the parties have
not yet addressed the issue of bifurcation, for present purposes
it suffices to note that it is within the Court’s discretion to
bifurcate the determination of damages under Section 12(a)(2)
and the Blue Sky laws.
Accordingly, the relevance of the Post-
Filing Payments to those damage calculations does not establish
their admissibility in connection with Section 11.
FHFA’s October 6, 2014 motion in limine to prohibit
defendants from presenting evidence to the jury concerning the
Post-Filing Payments in connection with FHFA’s Section 11 claims
New York, New York
December 18, 2014
United States District Judge
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