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November 2017: Appellate Victory for FHFA in the Second Circuit

November 2017

The firm’s historic partnership with the Federal Housing Finance Agency (“FHFA”), as Conservator for Fannie Mae and Freddie Mac, has resulted in yet another resounding win for the agency against financial institutions concerning their conduct in the run-up to the 2008 financial crisis. As previously mentioned in these pages, the firm filed fourteen complaints against major investment banks, asserting billions of dollars of damages for federal and state “strict liability” statutory claims, as well as common law fraud claims in certain cases. The complaints alleged that these financial institutions misrepresented the quality of the mortgage loans underlying the residential mortgage-backed securities that the banks sold Fannie Mae and Freddie Mac from 2005 to 2007.

All cases but one settled; the case against Nomura and RBS went to trial. Quinn Emanuel won a number of key pre-trial rulings for FHFA, including partial summary judgment rulings that FHFA did not have knowledge of the banks’ falsity and that the banks did not exercise reasonable care. In May 2015, following a nearly four-week trial in the S.D.N.Y., the firm prevailed against both Nomura and RBS in full. The court awarded FHFA over $800 million.

On appeal, Defendants raised five separate challenges to the pretrial rulings and an additional five challenges to the trial rulings. In September 2017, the Second Circuit unanimously affirmed each one of those rulings in an exhaustive, 147-page opinion authored Judge Wesley and joined by Judges Livingston and Droney. The decision made important precedent out of litigation strategies pursued but not adjudicated by virtue of FHFA’s settlements, and thus helps set important standards for securities markets in the future, recognizing the Securities Act’s imposition of “an affirmative duty on sellers to disclose all material information fully and fairly prior to public offerings of securities.” For example, in a virtually unprecedented affirmance of a summary judgment ruling that the banks failed to exercise reasonable care, the court rejected the banks’ attempt to hide behind industry standards, citing Judge Learned Hand’s 1932 T.J. Hooper decision and stating, “The RMBS industry in the lead up to the financial crisis was a textbook example of a small set of market participants racing to the bottom to set the lowest possible standards for themselves.” The court likewise rejected the banks’ attempt to resuscitate their loss causation defense, holding that “[d]efendants may not hide behind a market downturn that is in part their own making simply because their conduct was a relatively small part of the problem.” Recalling the origins of the 1933 Securities Act in the wake of the Great Depression, Judge Wesley’s opinion emphasized the caveat venditor nature of that Act, and concluded that “defendants failed to discharge their duty under the Securities Act to disclose fully and fairly all of the information necessary for investors to make an informed decision whether to purchase the certificates at issue.” The Court praised the district court’s “exceptional effort in analyzing a huge and complex record and close attention to detailed legal theories ably assisted by counsel for all parties.” The total recovery for the U.S. Treasury from settlements and judgments in these actions is now over $25 billion.