United States District Court, D. Kansas
MEMORANDUM AND ORDER
W. Lungstrum U nited States District Judge.
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
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. As more fully set forth herein, the Court
rules as follows:
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.
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.
motion to exclude certain testimony by Arnold Barnett,
defendants' sampling expert, (Doc. # 387 in Credit
Suisse, Case No. 12-2648) is denied.
Defendants' Motion to Exclude - George
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.
Failure Rates Per Securitization
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.
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
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.
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.
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.
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.
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).
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, 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
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.
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.
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.
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 ...