Nomura Holdings Inc. and Royal Bank of Scotland Group's fight against a billion-dollar government lawsuit over mortgage-backed securities is ending where it started: with the banks blaming the housing crash.
Nomura and RBS are focusing on the lead-up to the 2008 financial crisis in a bid to fend off claims they sold defective securities to Fannie Mae and Freddie Mac. The banks are the first to go to trial against the Federal Housing Finance Agency after 16 others settled out of court.
With closing arguments slated for Thursday, the banks have more than $1 billion at stake in a case marked by rulings that went against them. The courtroom colloquy included at least one contentious exchange with the judge who will decide the trial without a jury.
"The judge has also appeared more impatient with the banks' experts than with FHFA's experts, which may also presage an FHFA victory," said Elliott Stein, a Bloomberg Intelligence litigation analyst.
The FHFA, suing on behalf of the two government-owned lenders, claims Tokyo-based Nomura sold Fannie Mae and Freddie Mac $2 billion of bonds backed by faulty mortgages. RBS underwrote three of the seven securitizations at issue.
The regulator claims Nomura and RBS cheated Fannie Mae and Freddie Mac and helped fuel the global credit crunch triggered by the blow-up of toxic mortgage bonds. The banks claim they were victims of the crisis and did nothing wrong. U.S. District Judge Denise Cote's ruling may help chart the course for other lawsuits against banks tied to failed mortgages.
The trial began with opening statements March 16 and featured evidence including Nomura executives' emails, one describing some mortgages as "crap" and another warning "Danger Batman!" Most of the testimony was from experts reviewing the level of Nomura's diligence in packaging mortgages into securities and the disclosures it made to Fannie Mae and Freddie Mac in selling them from 2005 to 2007.
FHFA reached $17.9 billion in settlements with banks including Bank of America Corp., JPMorgan Chase & Co. and Goldman Sachs & Co.
Edinburgh-based RBS was sued separately by FHFA in federal court in Connecticut for selling $32 billion of its own mortgage-backed securities to Fannie Mae and Freddie Mac. That case is scheduled for trial next year.
The Manhattan trial featured testimony from experts in mortgage-securitization, the causes of defaults, underwriting standards, economics, loan appraisals and other matters touching on the mortgage-backed securities market.
Nomura and RBS argued that the documents issued in connection with bond sales adequately disclosed the risks and weren’t misleading.
Nomura and RBS also say that any alleged misstatements didn't factor into decisions by Fannie Mae and Freddie Mac to buy the securities. The banks claim in court documents that some or all of the losses incurred by the companies were caused by the housing market’s crash.
Cote's pretrial rulings against the defendants included rejecting their attempt to have a jury hear the case instead of her.
The judge also barred Nomura from presenting some evidence, including limiting the bank’s ability to prove its claim that Fannie Mae and Freddie Mac didn't suffer damages from buying the mortgage-backed bonds. The judge also ruled that FHFA didn't have to prove Fannie Mae and Freddie Mac knew of Nomura's alleged false statements.
If Nomura and RBS lose the trial, those rulings will probably be revisited during an appeal.
Cote also ordered that witnesses' testimony be submitted in writing and then undergo cross-examination live in court. Almost all the witnesses were questioned about their written testimony before it was made public.
During the trial, a Nomura lawyer said the judge seemed to be helping the FHFA in her questioning of an expert witness.
"We don't believe it's appropriate for the court to try to fix any insufficient proof in the plaintiffs' case through questioning of a witness, particularly an expert," David Tulchin, a Nomura lawyer said.
Tulchin told Cote that the FHFA has the burden of proving its case and that he objected to any attempt by her to bring evidence the agency may have overlooked.
"So are you or aren't you accusing me of doing something improper?" Cote asked.
"No," Tulchin answered. "There is no accusation. I just wanted it clear that we don't think there should be a second trial or a second opportunity for the plaintiff to fix a hole in the plaintiffs' proof."
Cote said she was trying to make sure she understood the testimony.
