A partner at Robins Kaplan LLP, Stacey Slaughter represents businesses, organizations, institutional investors, shareholders, and brokers that face significant commercial disputes, complex business problems, and novel legal issues. She has been involved in several high-profile financial litigation cases. Most recently, she represented investors in a class action suit against private equity firms over an alleged conspiracy to suppress prices in large leverage buyouts. She works out of both the Minneapolis and New York offices for Robins Kaplan. Stacey recently spoke with DS News about the current FHFA/Nomura trial over claims that Nomura misrepresented the quality of mortgage-backed securities sold to Fannie Mae and Freddie Mac.
The trial started on Monday, March 16, in the Southern District of New York on the mortgage-backed securities case that the Federal Housing Finance Agency (FHFA) brought against Nomura Holding America and its various subsidiaries and affiliates. The FHFA, as conservator of Fannie Mae and Freddie Mac, has asserted federal and state securities law claims against the Nomura entities in connection with seven mortgage-backed securities they purchased between 2005 and 2007.
The FHFA alleged that Nomura made a number of materially false and misleading statements in the offering documents about the mortgage loans that backed the securities. The FHFA contends that the Prospectus and Prospectus Supplement for these securities misrepresented that the mortgage loans were originated in accordance with underwriting guidelines designed to ensure that borrowers were able and willing to repay their loans, the loan-to-value ratios of the loans, and the percentage of owner-occupied properties. According to the FHFA, the offering documents also misrepresented that each certificate would be offered only if it received a AAA rating based on an assessment of the mortgage loans. In pre-trial briefing, the FHFA said it plans to prove that the loans had underwriting and valuation defects through a representative sampling method from each loan pool and what it calls “strong evidence” that Nomura knew specific loans in the pool were defective. As a remedy, the FHFA seeks rescission of its purchases—in other words, it wants Nomura to buy back the securities.
Nomura, according to its pre-trial briefing, intends to prove that declining home prices, not representations in the offering documents, caused Fannie and Freddie’s losses. Nomura contends that the offering documents themselves warned investors that a decline in house prices and economic deterioration could adversely affect loan performance and that the underlying loans had risky characteristics. Nomura plans to attack the FHFA’s re-underwriting expert for methodological errors and to show that its contemporaneous due diligence on the loans showed a low defect rate. Nomura also attacks the FHFA’s damages calculation. Nomura intends to argue that while the FHFA paid a little more than $2 billion for the seven certificates, it has received $1.59 billion already in principal and interest payments.
Our firm is known for its exceptional trial skill and expertise in litigating mortgage-backed securities claims on behalf of different types of clients. I have handled mortgage-backed securities cases, along with other attorneys at the firm, and while I cannot comment on any specific case, it should not be a surprise that each case is fact-specific. The outcome truly depends on the facts of a particular case, the securities involved, and the parties to the lawsuit. The Nomura case is notable because they have proceeded to trial, when others have settled. The industry will be watching, because this is the first case of its kind to go to trial. It is also noteworthy because the trial is a "bench trial," which means that it is tried before a judge instead of a jury. Judge Denise Cote will decide all the factual disputes that would normally go to a jury to decide. I think readers continue to be fascinated with the story behind such massive failures in the housing industry coupled with jaw-dropping settlement numbers. It is a saga whose story continues to unfold more than a decade later.