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National Credit Union Administration Board v. UBS Securities, LLC

United States District Court, D. Kansas

February 8, 2017

NATIONAL CREDIT UNION ADMINISTRATION BOARD, Plaintiff,
v.
UBS SECURITIES, LLC, et al., Defendants. NATIONAL CREDIT UNION ADMINISTRATION BOARD, Plaintiff,
v.
CREDIT SUISSE SECURITIES USA LLC, et al., Defendants.

          MEMORANDUM AND ORDER

          John W. Lungstrum U nited States District Judge.

         Plaintiff National Credit Union Administration Board brings these related suits as conservator and liquidating agent of credit unions. The suits relate to a number of offerings involving different residential mortgage-backed securities (“RMBS” or “certificates”) purchased by the credit unions. Plaintiff asserts claims under federal and state law against sellers, underwriters, and issuers for the certificates, based on alleged untrue statements or omissions of material facts relating to each certificate.[1]

         These two cases (hereinafter referred to as UBS and Credit Suisse) presently come before the Court on various motions by the parties to exclude expert testimony.[2] As more fully set forth herein, the Court rules as follows:

         Defendants' joint motion to exclude certain testimony by George Oldfield, plaintiff's due diligence expert, (Doc. # 438 in UBS, Case No. 12-2591; Doc. # 399 in Credit Suisse, Case No. 12-2648) is granted in part and denied in part, as set forth herein.

         Defendants' joint motion to exclude certain testimony by various experts for plaintiff (Doc. # 430 in UBS, Case No. 12-2591; Doc. # 396 in Credit Suisse, Case No. 12-2648) is granted in part and denied in part, as set forth herein.

         Plaintiff's motion to exclude certain testimony by Arnold Barnett, defendants' sampling expert, (Doc. # 387 in Credit Suisse, Case No. 12-2648) is denied.

         I. Defendants' Motion to Exclude - George Oldfield

         By joint motion filed in both cases, defendants seek to exclude certain opinions by plaintiff's due diligence expert, George Oldfield. As set forth below, the Court grants the motion in part and denies it in part.

         A. Failure Rates Per Securitization

         Defendants seek to exclude any opinion by Dr. Oldfield that any particular securitization had a certain quantified “failure rate” or “sample failure rate.” Defendants' due diligence, performed at the time they acquired the pools of loans from which loans were drawn to support the securitizations at issue in these cases, included sampling of some of the pools, in which only a subset of the loans in each of those pools was reviewed. The sampling was not strictly random; rather, adverse sampling was first conducted, with the sample loans selected based on certain characteristics, which (according to defendants) allowed for the sampling of loans with the highest likelihood of default or defect. As plaintiff concedes, sampled loans that received a final grade of EV3 (meaning a loan that violated underwriting guidelines without compensating factors) were generally removed and thus were not purchased or included in the securitizations.

         Dr. Oldfield calculated a “failure rate” for each pool subjected to such sampling, equal to the percentage of the sampled loans in that pool that received a final grade of EV3. By the present motion, defendants do not seek to exclude Dr. Oldfield's opinions concerning failure rates for particular loan pools. Dr. Oldfield, however, also calculated failure rates for particular securitizations, based on the weighted averages of the failure rates for the pools that contributed loans to those securitizations. Defendants seek to exclude those failure rates for particular securitizations.

         The Court agrees that those securitization failure rates should be excluded. Dr. Oldfield has conceded that the pool failure rates cannot be validly extrapolated to unsampled loans because the samples were not randomly drawn and thus the sampled loans may not be sufficiently representative. Dr. Oldfield further conceded that he did not know whether the sampled loans made their way into the securitizations. In response to this motion, plaintiff argues that Dr. Oldfield's opinions are relevant to its argument that defendants ignored the high percentage of sampled loans that were rejected. Thus, plaintiff insists that Dr. Oldfield has merely identified a red flag and that he does not offer any opinion that the unsampled loans in the pools or in the securitizations would actually have failed due diligence at the calculated failure rates. By calculating particular securitization failure rates, however, Dr. Oldfield has essentially offered just such an opinion, as those rates cannot represent anything other than a failure rate for the unsampled loans. Moreover, the failure rates for the sampled loans cannot be extrapolated to the unsampled loans, as Dr. Oldfield concedes. Therefore, plaintiff has not identified any reliable basis for Dr. Oldfield's securitization failure rates. Such testimony will thus be excluded at trial, and defendants' motion is granted to that extent.

         B. Waiver Opinions

         Defendants seek to exclude any opinions by Dr. Oldfield that they “waived” loans that did not comply with applicable underwriting guidelines and that lacked sufficient compensating factors, as well as any opinions concerning the rate at which loans were waived for any particular loan pool or securitization. The Court agrees, and it grants this portion of the motion to exclude.

         Clayton Holdings (“Clayton”) was a third-party vendor used by defendants to perform acquisition-stage due diligence reviews of some of the loans (either samples of loans from pools or entire loan pools) in the pools from which the loans in the securitizations were drawn. Dr. Oldfield relied on certain Trending Reports for the time period from First Quarter 2006 through Second Quarter 2007, in which Clayton summarized its loan-level reviews for each of the defendants. The reports included figures for the total number of loans “rejected” in each quarter, which loans had received a grade of EV3 from Clayton. The reports also included figures for the total number of “waived” loans each quarter, meaning those with a grade of either EV2W or EV2T. An EV2W grade indicated that Clayton had graded the loan EV3 but that the client (the particular defendant) had determined that the loan was appropriate to acquire. An EV2T grade indicated that the loan was subject to a side letter allowing the loan seller to provide missing loan documentation within a specified time period. The Trending Reports did not indicate how the “waived” loan totals were split between 2W loans and 2T loans. For Credit Suisse, Dr. Oldfield also relied on other Clayton reports showing the number of EV2W loans in five loan pools. Dr. Oldfield calculated the percentages of “waived” loans for each defendant for each quarter from the Trending Reports, and (for Credit Suisse) the percentages of “waived” loans (i.e., EV2W loans) for the five pools. Dr. Oldfield conceded that he could not know whether any of the waived loans ended up in particular loan pools or securitizations. Nonetheless, Dr. Oldfield used the percentages from the Clayton reports to calculate “waiver rates” for particular loan pools and particular securitizations. Dr. Oldfield relied on those calculations in opining that defendants routinely waived in (accepted) loans that violated underwriting guidelines and lacked sufficient compensating factors.

         The Court first addresses Dr. Oldfield's waiver rates for particular pools and securitizations. In his report, Dr. Oldfield stated that the particular waiver rates were not intended to be extrapolated, but that he showed those results to illustrate that defendants knew or should have known that significant numbers of loans in the pools from which the loans in the securitizations were drawn did not meet guidelines and lacked compensating factors. In response to this motion, plaintiff has not argued that extrapolation to other loans is permissible. Instead, plaintiff insists that Dr. Oldfield has not performed any such extrapolation and that he offers no opinion that the pools or securitizations included a certain percentage of “waived” loans. By calculating specific waiver rates for particular pools and securitizations, however, Dr. Oldfield has done just that-like the failure rates, those waiver rates could only suggest an estimate of the percentage of loans in the pool or securitization that did not comply with guidelines and lacked compensating factors. Neither plaintiff nor Dr. Oldfield has provided any reliable basis for the conclusion that the loans in the Clayton reports were representative and could therefore be extrapolated to the pools and securitizations; nor has plaintiff offered any other basis for the specific waiver rates. Therefore, those rates calculated by Dr. Oldfield are hereby excluded.

         The Court next addresses the particular waiver rates from the Trending Reports and the other Clayton reports on which Dr. Oldfield relies. Defendants argue that any opinions based on the Trending Reports should be excluded because Clayton's corporate witness testified that those reports were “beta”, did not represent a finished product, and could not reliably indicate the rate at which loans were accepted that violated guidelines and lacked compensating factors. The Court concludes, however, that Clayton's own opinion of the reliability of its data is not dispositive here, as Clayton's testimony may be self-serving, and an expert might still reasonably rely on such data (assuming a valid basis for doing so).

         Dr. Oldfield relied on the Clayton reports for his opinion that defendants waived in loans that violated guidelines without compensating factors. Defendants point to three reasons why the reports do not support Dr. Oldfield's conclusion. First, as the Clayton representative testified[3], the loans indicated as waived in the Clayton reports would include instances in which an original EV3 grade was based on a failure to satisfy a requirement of the client that was in addition to the other applicable underwriting guidelines (an “overlay”). In those instances, the “waived” loan would not represent an example of a defendant's acceptance of a loan that violated the originator's guidelines without compensating factors (Dr. Oldfield's purpose in relying on the data). Plaintiff argues that Dr. Oldfield accounted for overlays by estimating a maximum overlay rate (approximately 13 percent of EV3 loans). He estimated that rate, however, in the context of his analysis of failure rates (addressed above), stating in his report that “[t]here was no data available to conduct an analysis of overlays with respect to waived loans.” Thus, Dr. Oldfield acknowledged that he did not account for overlays in his waiver rate analysis.

         Second, as the Clayton representative further noted, the Clayton reports did not reveal the percentage of loans accepted by the client that violated guidelines without compensating factors because the waived loans in those reports could include instances in which the client itself determined that sufficient compensating factors were present. Evidence from both defendants and from the Clayton representative indicated that information that might support acceptance of a loan would sometimes go directly to the client, without Clayton's knowledge. In response to this potential flaw, plaintiff argues only that because defendants have not produced records of such instances, it is speculative to believe that it ever happened that way.

         Third, with respect to the Trending Reports only, the reports did not distinguish between waived loans that were graded EV2W and those graded EV2T. Defendants argue that the “waived” loans therefore could include instances in which the loan only lacked some documentation that was later supplied-which would again mean that the reports cannot show how many loans actually violated the guidelines without compensating factors. Plaintiff's (and Dr. Oldfield's) response is again that there is no evidence concerning the number of 2T loans for which the lack of documentation was cured.

         Thus, for multiple reasons, the figures in the Clayton reports for “waived” loans do not necessarily correlate with the number of loans accepted by defendants that violated guidelines without sufficient compensating factors. Plaintiff's only real response is to argue a lack of evidence that the reports' figures for “waived” loans actually included compliant loans. Plaintiff has flipped the applicable burden, however, as it is incumbent on plaintiff and its expert to demonstrate the reliability of the methodology by which the expert formed his opinions. Neither plaintiff nor Dr. Oldfield has set forth a reliable basis for believing that the Clayton reports' figures for “waived loans” represent an accurate estimate of the number of loans accepted by defendants that violated underwriting guidelines without compensating factors. Accordingly, the Court concludes that the data from the Clayton reports is not reliable for the purpose for which Dr. Oldfield used them.

         Finally, neither plaintiff nor Dr. Oldfield has identified any basis other than the Clayton reports and his waiver rates for Dr. Oldfield's opinion that defendants waived in loans that violated the guidelines without sufficient compensating factors. Thus, because those bases are not reliable, the Court also excludes any opinion by Dr. Oldfield concerning ...


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