FEDERAL HOUSING FINANCE AGENCY, as Conservator for the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, Plaintiff-Appellee,
NOMURA HOLDING AMERICA, INC., NOMURA ASSET ACCEPTANCE CORPORATION, NOMURA HOME EQUITY LOAN, INC., NOMURA CREDIT& CAPITAL, INC., NOMURA SECURITIES INTERNATIONAL, INC., RBS SECURITIES, INC., f/k/a GREENWICH CAPITAL MARKETS, INC., DAVID FINDLAY, JOHN MCCARTHY, JOHN P. GRAHAM, NATHAN GORIN, N. DANTE LAROCCA, Defendants-Appellants.[*]
Argued: November 18, 2016
from a May 15, 2015 final judgment and earlier orders of the
United States District Court for the Southern District of New
York (Cote, J.).
2005 to 2007, in the midst of the housing bubble,
defendants-appellants, principals, and entities associated
with investment banks Nomura Holding America, Inc. and RBS
Securities, Inc. (collectively, "Defendants"), sold
to two government-sponsored enterprises, the Federal Home
Loan Mortgage Corporation ("Freddie Mac") and the
Federal National Mortgage Association ("Fannie
Mae") (collectively, the "GSEs"), seven
certificates tied to private-label securitizations
("PLLs"), a subset of residential mortgage-backed
securities. The prospectus supplements used in those
transactions represented that the loans supporting the
securitizations were "originated generally in accordance
with the underwriting criteria, " an important
indication of credit risk.
the housing bubble burst in 2007, plaintiff-appellee the
Federal Housing Finance Agency (the "FHFA"), the
conservator for the GSEs, sued Defendants in the U.S.
District Court for the Southern District of New York for
violations of the Securities Act of 1933 (the
"Securities Act") and analogous state "Blue
Sky laws, " the Virginia Securities Act and the D.C.
Securities Act. The FHFA alleged, inter alia, that
the above representation regarding underwriting criteria was
a material misstatement. The FHFA also brought fifteen
similar actions against other financial institutions that
also sold the GSEs private-label securitizations, and all of
the actions were consolidated before Judge Denise Cote.
Fifteen of these actions settled, resulting in more than $20
billion of recovery for the FHFA. Only the case presently on
appeal went to trial. After conducting a bench trial, the
District Court issued a 361-page opinion rendering judgment
in favor of the FHFA under Sections 12(a)(2) and 15 of the
Securities Act, and analogous provisions of the Virginia and
D.C. Blue Sky laws. The court awarded rescission and ordered
Defendants to refund the FHFA a total adjusted purchase price
of approximately $806 million in exchange for the
appeal that final judgment, as well as numerous pretrial
decisions. Finding no merit in any of their arguments, we
conclude 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.
Kathleen M. Sullivan (Philippe Z. Selendy, Adam M. Abensohn,
William B. Adams, Andrew R. Dunlap, Yelena Konanova, on the
brief), Quinn Emanuel Urquhart & Sullivan LLP, New York,
NY, for plaintiff-appellee.
B. Tulchin, Sullivan & Cromwell LLP, New York, NY (Amanda
F. Davidoff, Sullivan & Cromwell LLP, Washington, D.C.;
Bruce E. Clark, Steven L. Holley, Adam R. Brebner, Owen R.
Wolfe, Sullivan & Cromwell LLP, New York, NY, on the
brief), for defendants-appellants Nomura Holding America,
Inc., Nomura Asset Acceptance Corporation, Nomura Home Equity
Loan, Inc., Nomura Credit & Capital, Inc., Nomura
Securities International, Inc., David Findlay, John McCarthy,
John P. Graham, Nathan Gorin, and N. Dante LaRocca.
Joshua Rosenkranz, Orrick, Herrington & Sutcliffe LLP,
New York, NY (Thomas C. Rice, Andrew T. Frankel, Alan C.
Turner, Craig S. Waldman, Simpson Thacher & Bartlett LLP,
New York, NY; Paul F. Rugani, Orrick, Herrington &
Sutcliffe LLP, Seattle, WA; Daniel A. Rubens, Orrick,
Herrington & Sutcliffe LLP, New York, NY; Kelsi Brown
Corkran, Orrick, Herrington & Sutcliffe LLP, Washington,
D.C., on the brief), for defendant-appellant RBS Securities,
Michael J. Dell, Kramer Levin Naftalis & Frankel LLP, New
York, NY, for amici curiae Securities Industry and Financial
Markets Association and The Clearing House Association LLC,
in support of defendants-appellants.
Before: Wesley, Livingston, and Droney, Circuit Judges.
WESLEY, CIRCUIT JUDGE.
wake of the Great Depression, Congress took measures to
protect the U.S economy from suffering another catastrophic
collapse. Congress's first step in that endeavor was the
Securities Act of 1933 (the "Securities Act" or
"Act"), ch. 38, 48 Stat. 74 (codified as amended at
15 U.S.C. § 77a et seq.). The Act's chief
innovation was to replace the traditional buyer-beware or
caveat emptor rule of contract with an affirmative
duty on sellers to disclose all material information fully
and fairly prior to public offerings of securities. That
change marked a paradigm shift in the securities markets.
See Ernst & Ernst v. Hochfelder, 425 U.S. 185,
case demonstrates the persistent power of the Securities
Act's full-disclosure requirement in the context of the
Great Recession. The height of the housing bubble in the
mid-2000s saw an explosion in the market for residential
mortgage-backed securities ("RMBS"). See
Adam J. Levitin & Susan M. Wachter, Explaining the
Housing Bubble, 100 Geo. L.J. 1177, 1192-202 (2012). In
the midst of that market frenzy, two government-sponsored
enterprises, the Federal Home Loan Mortgage Corporation
("Freddie Mac" or "Freddie)" and Federal
National Mortgage Association ("Fannie Mae" or
"Fannie") (collectively, the "GSEs"),
purchased a subset of RMBS known as private-label
securitizations ("PLS") from a host of private
banks. Defendants-appellants Nomura and RBS (collectively,
"Defendants") sold the GSEs seven of these certificates
(the "Certificates") in senior tranches of PLS (the
"Securitizations") using prospectus supplements
(the "ProSupps"). Each ProSupp described the
creditworthiness of the loans supporting the Securitization,
including an affirmation that the loans "were originated
generally in accordance with the underwriting criteria."
housing market began to collapse in 2007 and the value of PLS
declined rapidly. Shortly thereafter, plaintiff-appellee the
Federal Housing Finance Agency (the "FHFA"), the
statutory conservator of Freddie and Fannie,  brought sixteen actions in
the U.S. District Court for the Southern District of New York
against financial institutions that sold PLS certificates to
the GSEs, alleging that the offering documents used in those
transactions overstated the reliability of the loans backing
the securitizations, in violation of the Securities Act and
analogous provisions of certain "Blue Sky laws,
Virginia Securities Act, as amended, Va. Code Ann. §
13.1-522, and the District of Columbia Securities Act, D.C.
Code § 31-5606.05. Sixteen of the FHFA's actions were
coordinated before District Judge Denise Cote. Fifteen of
those cases settled, resulting in more than $20 billion in
recovery for the FHFA. The case on appeal was the only one to
go to trial.
issuing multiple pre-trial decisions and conducting a bench
trial, the District Court filed a 361-page trial opinion
rendering judgment in favor of the FHFA. The court found that
Defendants violated Sections 12(a)(2) and 15 of the
Securities Act, see 15 U.S.C. §§
77l(a)(2), 77o, and analogous provisions of
the Virginia and D.C. Blue Sky laws, see Va. Code
Ann. § 13.1-522(A)(ii); D.C. Code § 31-
5606.05(a)(1)(B), (c), by falsely stating in the ProSupps
that, inter alia, the loans supporting the
Securitizations were originated generally in accordance with
the pertinent underwriting guidelines. As a result, the court
awarded the FHFA more than $806 million in recession-like
relief. Special App. 362-68.
appeal multiple aspects of the District Court's trial
opinion, as well as many of the court's pretrial
decisions. We find no merit in any of Defendants'
arguments and AFFIRM the judgment. The ProSupps Defendants
used to sell the Certificates to the GSEs contained untrue
statements of material fact-that the mortgage loans
supporting the PLS were originated generally in accordance
with the underwriting criteria- that the GSEs did not know
and that Defendants knew or should have known were false.
Moreover, the FHFA's claims were timely, the District
Court properly conducted a bench trial, Defendants are not
entitled to a reduction in the FHFA's award for loss
attributable to factors other than the untrue statements at
issue, Defendants NAAC and NHELI were statutory sellers, and
the FHFA exercised jurisdiction over Blue Sky claims.
The Securities Act
regulation of transactions in securities emerged as part of
the aftermath of the market crash in 1929." Ernst
& Ernst, 425 U.S. at 194-95. The first set of
regulations came in the Securities Act, which was
"designed to provide investors with full disclosure of
material information concerning public offerings of
securities in commerce, to protect investors against fraud
and, through the imposition of specified civil liabilities,
to promote ethical standards of honesty and fair
dealing." Id. at 195 (citing H.R. Rep. No. 85,
at 1-5 (1933)). Shortly thereafter, Congress passed a series
of companion statutes, including the Securities Exchange Act
of 1934 (the "Exchange Act"), ch. 404, 48 Stat. 881
(codified as amended at 15 U.S.C. § 78a et
seq.), which was intended "to protect investors
against manipulation of stock prices through regulation of
transactions upon securities exchanges and in
over-the-counter markets, and to impose regular reporting
requirements on companies whose stock is listed on national
securities exchanges." Ernst & Ernst, 425
U.S. at 195 (citing S. Rep. No. 792, at 1-5 (1934)).
Congress's purpose for this regulatory scheme
"'was to substitute a philosophy of full disclosure
for the philosophy of caveat emptor . . . in the
securities industry.'" Basic Inc. v.
Levinson, 485 U.S. 224, 234 (1988) (quoting SEC v.
Capital Gains Research Bureau, Inc., 375 U.S. 180, 186
Securities Act regulates the use of prospectuses in
securities offerings. A prospectus is "any prospectus,
notice, circular, advertisement, letter, or communication,
written or by radio or television, which offers any security
for sale or confirms the sale of any security, " with
certain exceptions not applicable here. 15 U.S.C. §
77b(a)(10). Section 5(b)(1) of the Securities Act provides
that it is unlawful "to make use of any means or
instruments of transportation or communication in interstate
commerce or of the mails to carry or transmit any prospectus
relating to any security" unless the prospectus meets
certain disclosure requirements. 15 U.S.C. § 77e(b)(1);
see 17 C.F.R. § 230.164. Section 5(b)(2)
provides that it is unlawful "to carry or cause to be
carried through the mails or in interstate commerce any such
security for the purpose of sale or for delivery after sale,
unless accompanied or preceded by a prospectus" that
meets additional disclosure requirements. 15 U.S.C. §
12(a)(2) of the Act, as amended, 15 U.S.C. §
77l, accords relief to any person (1) who was
offered or purchased a security "by means of a
prospectus or oral communication"; (2) from a statutory
seller; (3) when the prospectus or oral communication
"includes an untrue statement of a material fact or
omits to state a material fact necessary in order to make the
statements, in the light of the circumstances under which
they were made, not misleading"; and (4) the plaintiff
did not "know of such untruth or omission" at the
time of sale (the "absence-of- knowledge element").
15 U.S.C. § 77l(a)(2); see In re Morgan
Stanley Info. Fund Sec. Litig. (Morgan
Stanley), 592 F.3d 347, 359 (2d Cir. 2010). Scienter,
reliance, and loss causation are not prima facie
elements of a Section 12(a)(2) claim. Morgan
Stanley, 592 F.3d at 359.
12 authorizes two types of mutually-exclusive recovery.
See 15 U.S.C. § 77l(a); Wigand v.
Flo-Tek, Inc., 609 F.2d 1028, 1035 (2d Cir. 1979). If
the plaintiff owned the security when the complaint was
filed, Section 12 authorizes rescission-the plaintiff returns
the security to the defendant and the defendant refunds the
plaintiff the purchase price with adjustments for interest
and income. See 15 U.S.C. § 77l(a);
Wigand, 609 F.2d at 1035. If the plaintiff no longer
owned the security when the complaint was filed, Section
12(a)(2) permits the plaintiff to recover
"damages." 15 U.S.C. § 77l(a);
see Wigand, 609 F.2d at 1035.
12 contains two affirmative defenses. First, a plaintiff will
not be entitled to relief if the defendant "did not
know, and in the exercise of reasonable care could not have
known, of [the] untruth or omission" at issue. 15 U.S.C.
§ 77l(a)(2). This is known as the
"reasonable care" defense. Morgan Stanley,
592 F.3d at 359 n.7.
a defendant may seek a reduction in the amount recoverable
under Section 12 equal to
any portion . . . [that] represents [an amount] other than
the depreciation in value of the subject security resulting
from such part of the prospectus or oral communication, with
respect to which the liability of that person is asserted,
not being true or omitting to state a material fact required
to be stated therein or necessary to make the statement not
misleading, then such portion or amount, as the case may be.
15 U.S.C. § 77l(b). This is known as the
"loss causation" defense, Iowa Pub. Emps.'
Ret. Sys. v. MF Glob., Ltd., 620 F.3d 137, 145 (2d Cir.
2010), or "negative loss causation, " In re
Smart Techs., Inc. S'holder Litig., 295 F.R.D. 50,
59 (S.D.N.Y. 2013). Unlike the Exchange Act, which generally
requires plaintiffs to prove loss causation as a prima
facie element, see 15 U.S.C. §
78u-4(b)(4), the Securities Act places the burden on
defendants to prove negative loss causation as an affirmative
defense, see McMahan & Co. v. Wherehouse Entm't,
Inc., 65 F.3d 1044, 1048 (2d Cir. 1995).
12 is closely related to Section 11 of the Securities Act, as
amended, 15 U.S.C. § 77k, which "imposes strict
liability on issuers and signatories, and negligence
liability on underwriters, " for material misstatements
or omissions in a registration statement. NECA-IBEW
Health & Welfare Fund v. Goldman Sachs & Co.
(NECA), 693 F.3d 145, 156 (2d Cir. 2012). Both
provisions are limited in scope and create in
liability. See id.; William O. Douglas & George
E. Bates, The Federal Securities Act of 1933, 43
Yale L.J. 171, 173 (1933). The loss causation defense in
Section 12 was adapted from the loss causation defense in
Section 11(e) of the Securities Act. See S. Rep. No.
104-98, at 23 (1995).
Section 15 of the Act, as amended 15 U.S.C. §
77o, provides that "[e]very person who . . .
controls any person liable under . . . [Section 12(a)(2)]
shall also be liable jointly and severally with and to the
same extent as such controlled person." 15 U.S.C. §
77o(a). "To establish [Section] 15 liability, a
plaintiff must show a 'primary violation' of [Section
12] and control of the primary violator by defendants."
See In re Lehman Bros. Mortg.-Backed Sec. Litig.,
650 F.3d 167, 185 (2d Cir. 2011) (quoting ECA, Local 134
IBEW Joint Pension Tr. of Chi. v. JP Morgan Chase Co.,
553 F.3d 187, 206-07 (2d Cir. 2009)).
case, the District Court awarded the FHFA rescission-like
relief against all Defendants under Section 12(a)(2) and
found NHA, NCCI, and the Individual Defendants control
persons under Section 15 for the seven PLS transactions at
issue. FHFA v. Nomura Holding Am., Inc. (Nomura
VII), 104 F.Supp.3d 441, 598 (S.D.N.Y. 2015). Defendants
appeal the District Court's decisions as to each
prima facie element of the Section 12(a)(2) claims
(except that the sales were made by means of a prospectus)
and as to both affirmative defenses.
The Blue Sky Laws
Commonwealth of Virginia and District of Columbia have
enacted Blue Sky laws modeled on the Securities Act as
originally enacted in 1933. Andrews v. Browne, 662
S.E.2d 58, 62 (Va. 2008); see Forrestal Vill., Inc.
v. Graham, 551 F.2d 411, 414 & n.4 (D.C.
Cir. 1977) (observing that the D.C. Blue Sky law was based on
the Uniform Securities Act); see also Gustafson v. Alloyd
Co., Inc., 513 U.S. 561, 602-03 (1995) (Ginsburg,
J., dissenting) (observing that the Uniform
Securities Act was based on the Securities Act of 1933).
These Blue Sky laws contain provisions that are
"substantially identical" to Sections 12(a)(2) and
15. Dunn v. Borta, 369 F.3d 421, 428 (4th Cir.
2004); see Hite v. Leeds Weld Equity Partners, IV,
LP, 429 F.Supp.2d 110, 114 (D.D.C. 2006). As relevant to this
appeal, the Blue Sky laws are distinct only in that each
requires as a jurisdictional element that some portion of the
securities transaction at issue occurred in the State. D.C.
Code § 31-5608.01(a); see Lintz v. Carey Manor
Ltd., 613 F.Supp. 543, 550 (W.D. Va. 1985) (citing
Travelers Health Ass'n v. Commonwealth, 51
S.E.2d 263 (Va. 1949)).
District Court awarded the FHFA relief under the D.C. Blue
Sky law for the sale of one Certificate and relief under the
Virginia Blue Sky law for the sales of three other
Certificates. Nomura VII, 104 F.Supp.3d at 598.
Factual Background 
case centers on the RMBS industry of the late 2000s. RMBS are
asset-backed financial instruments supported by residential
mortgage loans. A buyer of an RMBS certificate pays a lump
sum in exchange for a certificate representing the right to a
future stream of income from the mortgage loans'
principal and income payments. PLS are RMBS sold by private
financial institutions. See Pension Benefit Guar. Corp.
ex rel. St. Vincent Catholic Med. Ctrs. Ret. Plan v. Morgan
Stanley Inv. Mgmt. Inc. (Pension Benefit
Guar.), 712 F.3d 705, 713-14 (2d Cir. 2013).
case touches on nearly every aspect of the PLS securitization
process-from the issuance of mortgage loans through the
purchase of a securitization. Because of the size and
complexity of this case, in addition to the fact that the
final order rule requires us to review a number of the
District Court's pre-trial rulings, see 28
U.S.C. § 1291, there is much to consider. We think it
best to begin with a summary of the securitization process
from 2005 to 2007, the time period relevant to this case, and
then to introduce the parties and the transactions at issue.
Issue-specific facts are addressed in more detail in the
discussion sections below.
The PLS Securitization Process
Originating a Mortgage Loan Using Underwriting
first step in the PLS process was the issuance of residential
mortgage loans. Mortgage loans were issued to borrowers by
entities known as originators. Originators issued loans
according to their loan underwriting guidelines, which listed
the criteria used to approve a loan. See United States ex
rel. O'Donnell v. Countrywide Home Loans, Inc.
(O'Donnell), 822 F.3d 650, 653 n.2 (2d Cir.
2016). These guidelines helped each originator assess the
borrower's ability to repay the loan and the value of the
collateral. Originators balanced those two criteria to
determine a potential loan's credit risk.
the underwriting guidelines, originators required each
prospective borrower to complete a loan application, usually
on the Uniform Residential Loan Application (the
"URLA"). The URLA required borrowers to disclose,
under penalty of civil liability or criminal prosecution,
their income, employment, housing history, assets,
liabilities, intended occupancy status for the property, and
the sources of the funds they intended to use in paying the
costs of closing the loan. Originators used this information
to determine objective factors relevant to the borrower's
credit risk, such as a credit score according to the Fair
Isaac Corporation's model (a "FICO score"),
credit history, and debt-to-income ratio. Once each borrower
submitted the URLA, the originator kept it and other related
documentation in the borrower's loan file.
underwriting guidelines required originators to assess the
reasonableness of the borrower's assertions on the URLA.
This was easiest when borrowers supported their URLA
applications with corroborating documentation. Some
applications required verification of both the borrower's
assets and income, while some required verification only of
the borrower's assets. Other borrowers submitted
stated-income-stated-assets ("SISA") applications,
which did not require verification of income or assets, or
no-income-no-assets ("NINA") applications, which
were complete without the borrower even stating his or her
income or assets. SISA and NINA applications were more
difficult to assess, but not categorically ineligible to
underwriting guidelines generally permitted originators to
accept SISA and NINA applications and to make other
exceptions to the underwriting criteria if there were
compensating factors that indicated the borrower's
ability and willingness to repay the loan. The guidelines set
forth the specific conditions under which exceptions would be
permitted. Originators were required to mark the
borrower's loan file whenever an exception to the
underwriting criteria had been granted and to explain the
basis for that decision.
forming an opinion about a borrower's creditworthiness
based on the URLA and related documentation, originators
assigned the transaction a credit risk designation, which
affected the interest rate for the loan. When an applicant
had good credit, the transaction was labeled
"prime." When an applicant had materially impaired
credit, the transaction was labeled "subprime." And
when an applicant's credit fell between good and
materially impaired, the transaction was labeled
"Alt-A." See Pension Benefit Guar., 712
F.3d at 715.
they had assessed the borrower's credit, originators
balanced that assessment against the value of the collateral
(i.e., the present market value of the residence the
borrower wanted to purchase or refinance), as determined by
an appraiser, to measure the overall credit risk of the loan.
Originators compared the amount of the loan against the value
of the collateral to develop a loan-to- value ratio, a key
indicator of credit risk. It was common in the RMBS industry
to use a loan-to-value ratio of 80% as a benchmark. Relative
to loans at that ratio, a loan worth between 80% and 90% of
the collateral value was 1.5 times more likely to default and
a loan worth between 95% and 100% of the collateral value was
4.5 times more likely to default. A loan-to-value ratio of
more than 100% meant that the loan exceeded the value of the
residence and the borrower was "underwater."
originator was comfortable with the overall credit risk after
reviewing the buyer's creditworthiness, the value of the
collateral, and the loan-to-value ratio, the loan would be
underwriting guidelines and loan files were crucial
throughout and beyond the origination process. Supervisors
employed by the originators could check loan files against
the underwriting guidelines to ensure that loan issuance
decisions met important criteria. For example, the District
Court found that "[c]ompliance with underwriting
guidelines ensure[d] . . . an accurate calculation of the
borrower's [debt-to-income] ratio, which is a critical
data point in the evaluation of a loan's risk
profile." Nomura VII, 104 F.Supp.3d at 536.
After the loan issued, originators used the information in
the loan file to describe the loan characteristics for
financial institutions interested in purchasing it.
Creating a PLS
next step in the PLS process was the aggregation and
securitization of the residential mortgage loans into an
RMBS. Originators compiled their issued loans into
"trade pools" and then solicited bids from PLS
"sponsors" or "aggregators" to purchase
them. The originators provided prospective bidders with a
"loan tape" for each pool-"a spreadsheet that
provided data about the characteristics of each loan in the
trade pool" including "loan type (fixed or
adjustable rate), . . . original and unpaid principal
balance, amortization term, borrower's FICO score, the
mortgaged property's purchase price and/or appraised
value, occupancy status, documentation type and any
prepayment penalty-related information." J.A. 4385.
sponsor that prevailed in the bidding process was given
access to a limited number of loan files to conduct a due
diligence review of the originators' underwriting and
valuation processes before final settlement. The sponsor was
entitled prior to closing to remove from the trade pool any
loans that did not meet its purchasing requirements, such as
those below a minimum FICO score or exceeding a maximum
debt-to-income ratio. Upon closing, the prevailing sponsor
acquired title to the loans in the trade pools and gained
access to the complete set of loan files. The prevailing
sponsor was also given a copy of the underwriting guidelines
the originators used to issue the loans.
sponsor then sold the loans to a "depositor, " a
special purpose vehicle created solely to facilitate PLS
transactions. The true sale from sponsor to depositor was
intended to protect the future PLS certificate-holders'
interests in the loans in the event that the sponsor declared
bankruptcy. It was common in the RMBS industry for the
depositor and sponsor entities to act at the direction of the
same corporate parent.
depositor then grouped the loans into supporting loan groups
("SLGs") and transferred each group of loans to a
trust. In exchange, the trust issued the depositor
certificates that represented the right to receive principal
and interest payments from the SLGs. The trustee managed the
loans for the benefit of the certificate holders, often
hiring a mortgage loan servicing vendor to manage the loans
on a day-to-day basis. The depositor then sold most of the
certificates to a lead underwriter, who would shepherd them
to the public securities markets; a few certificates remained
under the ownership of the depositor. It was also common in
the industry for the lead underwriter to be controlled by the
same corporate parent that controlled the sponsor and
Preparing a PLS for Public Sale
final steps in the PLS process were the preparation and sale
to the public of the certificates. The lead underwriter,
sponsor, and depositor (collectively, "PLS
sellers") worked together to structure the
securitization, to solicit credit ratings for the
certificates principally from three major credit-rating
agencies, Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's
("S&P"), and Fitch Ratings ("Fitch")
(collectively, the "Credit-Rating Agencies" or
"Rating Agencies"), and to draft and confirm the
accuracy of the offering documents. Once those tasks were
completed, the lead underwriter would market the certificates
to potential buyers.
sellers structured securitizations with two credit
enhancements that distributed the risk of the loans unequally
among the certificate holders. The first was subordination.
The PLS certificates were organized into tranches, ranked by
seniority. Each SLG supported one or more tranches of
certificates and distributed payments in a
"waterfall" arrangement. This arrangement
guaranteed senior certificate-holders first claim to all
principal and interest payments. Once all the senior
certificate-holders were satisfied, the SLGs' payments
spilled over to junior certificate-holders, who would receive
the remaining balance of the payments.
second of these credit enhancements was
overcollateralization. The total outstanding balance of all
of the mortgage loans supporting an entire PLS often exceeded
the outstanding balance of the loans supporting the publicly
available PLS certificates. As a result, some loans in the
PLS were tethered to certificates owned by the depositor or
sponsor and were not available for public purchase. These
non-public loans served as a loss-saving measure by making
payments to the public certificate- holders (in order of
seniority) in the event that the loans supporting their
public certificates defaulted.
structuring the PLS, the PLS sellers would solicit a credit
rating for each tranche. Because, as the District Court
explained, PLS "were only as good as their underlying
mortgage loans, " Nomura VII, 104 F.Supp.3d at
465, the Credit-Rating Agencies based their determinations
primarily on the quality of the certificates' supporting
loans. They did this by modeling the credit risk of the SLGs
using information from the loan tape, provided by the PLS
sellers. The Rating Agencies also evaluated the
certificates' credit enhancements.
Rating Agencies' review included examining draft offering
documents for representations that the supporting loans were
originated in accordance with originators' underwriting
criteria. This was standard in the industry, as the Rating
Agencies agreed that compliance with the underwriting
guidelines was an important indicator of a loan's credit
risk. More credit enhancements were required to secure an
investment-grade rating for any certificate backed by loans
that either did not comply with the underwriting guidelines
or were missing documentation from their loan files.
sellers explained these credit enhancements, credit ratings,
and other important features of the PLS to the public
primarily in three offering documents-a shelf registration, a
free writing prospectus, and a prospectus supplement. The
shelf registration was a pre-approved registration statement
filed with the Securities and Exchange Commission (the
"SEC") that contained generally applicable
information about PLS. See 17 C.F.R. §§
230.409, 230.415. The shelf registration enabled the lead PLS
underwriter to make written offers to potential buyers using
a free writing prospectus. See id. §
230.433(b)(1). The free writing prospectus broadly described
the characteristics of the certificate and the supporting
SLGs. If an offeree was interested after reading the
description, it could commit to purchasing the certificate.
Title in the certificate and payment were exchanged within
approximately a month of that commitment. The PLS sellers
sent the buyer a prospectus supplement and filed the same
with the SEC near the date of that exchange.
prospectus supplement contained the most detailed disclosures
of any of the offering documents. This document provided
specific information regarding the certificate, the SLGs, and
the credit quality of the underlying loans. It warranted the
accuracy of its representations regarding loan
characteristics. And, crucially, it affirmed that the loans
in the SLGs were originated in accordance with the applicable
underwriting guidelines. As the District Court noted,
"whether loans were actually underwritten in compliance
with guidelines was extremely significant to investors."
Nomura VII, 104 F.Supp.3d at 536. The prospectus
supplement ordinarily disclosed that some number of loans in
the SLG may deviate substantially from, or violate, the
applicable underwriting guidelines.
The PLS Transactions at Issue
sold the Certificates to the GSEs. Subsidiaries of Defendant
NHA were the Certificates' primary sellers. Defendant
NCCI served as the sponsor for all seven of the transactions
at issue. Defendant NAAC served as the depositor for one
Securitization, and Defendant NHELI served as the depositor
for the remaining six. And Defendant Nomura Securities,
served as the lead or co-lead underwriter for three of the
RBS served as the lead or co-lead underwriter for four of the
The Buyers 
and Freddie purchased the Certificates. Both GSEs are
privately-owned corporations chartered by Congress to provide
stability and liquidity in the mortgage loan market. Fannie
was established in 1938. See National Housing Act
Amendments of 1938, ch. 13, 52 Stat. 8. Freddie was
established in 1970. See Emergency Home Finance Act
of 1970, Pub. L. No. 91-351, 84 Stat. 450. They were at the
time of the transactions at issue, and remain today,
"the dominant force[s]" in the mortgage loan
market. See Town of Babylon v. FHFA, 699 F.3d 221,
225 (2d Cir. 2012).
primary way the GSEs injected liquidity into the mortgage
market was by purchasing mortgage loans from private loan
originators. See O'Donnell, 822 F.3d at 653.
This side of the GSEs' operations was known as the
"Single Family Businesses." By purchasing loans
from originators, the Single Family Businesses replenished
originators' capital, allowing originators to issue new
loans. The Single Family Businesses held the loans purchased
from originators on their books and sometimes securitized
them into agency RMBS, similar to a PLS, to be offered for
public sale. See Pension Benefit Guar., 712 F.3d at
714-15; Levitin & Wachter, supra, at 1187-89.
Single Family Businesses contained due diligence departments.
These departments conducted due diligence of specific loans
prior to purchase. They also periodically reviewed their
originator counterparties' general underwriting
practices, and PLS sellers' due diligence practices,
secondary element of their businesses, the GSEs operated
securities trading desks that purchased PLS. PLS purchases
created liquidity in the mortgage market by funneling cash
back through PLS sponsors and underwriters to loan
originators for use in future loans. The GSEs' PLS
traders generally operated out of Fannie's headquarters
in Washington, D.C. and Freddie's headquarters in McLean,
GSEs played a significant role in the PLS market despite the
relatively minor role it occupied in their businesses. The
GSEs' PLS portfolios reached their heights in 2005, when
they owned approximately $350 billion worth of PLS, with $145
billion backed by subprime loans and $40 billion backed by
Alt-A loans (loans that were rated lower than prime loans but
higher than subprime loans). The GSEs bought approximated 8%
of the $3 trillion dollars' worth of PLS sold from 2005
to 2007. PLS traders working for the GSEs purchased the
Certificates at issue.
2005 and 2007, the GSEs purchased Certificates from
Defendants in seven PLS Securitizations- NAA 2005-AR6, NHELI
2006-FM1, NHELI 2006-HE3, NHELI 2006-FM2, NHELI 2007-1, NHELI
2007-2, and NHELI 2007-3. These transactions were executed
generally in accordance with the standard practices at the
time, as described in the previous sections. The supporting
loans are predominantly Alt-A or subprime. Each Certificate
is in a senior tranche of its respective Securitization.
Combined, the Certificates cost approximately $2.05 billion
and, at times of sale, had expected value of $2.45
sold the Certificates by means of shelf registrations, free
writing prospectuses, and the ProSupps.The ProSupps provided
detailed information regarding the loans in the SLGs. They
described the risks inherent in subprime and Alt-A loan
transactions and provided the credit ratings for each
tranche. They included charts displaying the objective
characteristics for loans in each SLG, such as aggregate
remaining principal balances, FICO scores, and loan-to-value
ratios. Five ProSupps promised that "[i]f . . . any
material pool characteristic differs by 5% or more from the
description in this [ProSupp], revised disclosure will be
provided either in a supplement or in a Current Report on
Form 8-K." E.g., J.A. 9120.
importantly for purposes of this appeal, every ProSupp stated
that "the Mortgage Loans . . . were originated generally
in accordance with the underwriting criteria described in
this section, " (the "underwriting guidelines
statement"). J.A. 9117; see J.A. 6884, 7174,
7527, 7895, 8296, 8718. The ProSupps then described the
underwriting criteria used by originators that contributed
loans to the SLGs and stated that the originators may have
made "certain exceptions to the underwriting standards .
. . in the event that compensating factors are demonstrated
by a prospective borrower." E.g., J.A. 9117.
Six of the ProSupps described the specific underwriting
guidelines for each originator that alone contributed more
than 20% of the loans in the SLGs. For these originators, the
ProSupps typically also stated that the loans were issued
"generally" in accordance with the underwriting
guidelines. E.g., J.A. 7520.
the ProSupps stated that some loans were issued under
"Modified [Underwriting] Standards." E.g.,
J.A. 9118. The ProSupps stated that these modified standards
permitted originators, for example, to issue loans to foreign
nationals, who might lack reliable sources to verify their
credit score or lack a score altogether, or use "less
restrictive parameters" in issuing loans, such as
"higher loan amounts, higher maximum loan-to-value
ratios, . . . the ability to originate mortgage loans with
loan- to-value ratios in excess of 80% without the
requirement to obtain mortgage insurance if such loans are
secured by investment properties." E.g., J.A.
9119. The ProSupps disclosed the number of loans issued under
the modified standards.
The Housing and Financial Crisis 
GSEs purchased the Certificates from Defendants during a
period when the markets for mortgage loans and associated
securities were exploding. A combination of factors including
low interest and unemployment rates, an increased use of
adjustable-rate mortgages and other innovative loan products,
and government policies encouraging home ownership heated the
housing market. Home prices increased, and aggregate mortgage
debt in the U.S. more than doubled between 2000 and 2008.
this period, originators also relaxed underwriting standards.
Subprime lending jumped from 9.5% of all new mortgage loans
in 2000 to 20% of all new mortgage loans in 2005; Alt-A
lending also grew substantially. Originators also began to
approve loans that failed to meet the underwriting guidelines
with an eye towards securitizing these loans quickly, thus
transferring the credit risk of the loans from originators to
PLS certificate-holders. See Levitin & Wachter,
supra, at 1190.
fueled the credit bubble. As described above, securitization
enabled originators to shift credit risk to the financial
markets and turn the prospect of future loan repayment into
instant cash for new loans. In 2000, the PLS market was worth
less than $150 billion. By 2005-2006, the PLS market was
worth more than $1.1 trillion. Once it began, the
securitization frenzy built on itself- securitizations of
subprime mortgages increased the quantity of new subprime
mortgage originations. Those new mortgages were in turn
securitized, and the cycle started over.
housing market began its decline in 2006. Increased mortgage
interest rates led to a spike in prices that made many homes
too expensive for potential buyers, decreasing demand. An
oversupply of housing also put downward pressure on home
prices. U.S. housing prices started to fall in April 2006.
From April 2007 through May 2009, they fell almost 33%.
and delinquency rates increased with the decline in housing
prices. By 2009, 24% of homeowners, many of whom had
purchased homes during the mid-2000s boom, were left with
negative equity: mortgages with outstanding principal
balances greater than the homes' current valuations.
Shoddy underwriting practices, which approved loans for
borrowers who could not afford to repay, and spikes in
adjustable mortgage rates also contributed to an increase in
defaults. With rising interest rates, refinancing was
difficult. Defaulting on mortgage loans became an attractive
option for homeowners. Each default and resulting foreclosure
sale depressed the prices of surrounding homes further,
sending the housing market into a vicious downward cycle.
default rates had an adverse impact on investment products
tied to mortgage loans, and on the entire financial system as
a result. As principal and interest payments slowed over the
course of 2007, the value of these securities declined. One
bank in August 2007 reported that the decrease in mortgage
securitization markets' liquidity made it
"impossible" to value certain RMBS instruments.
J.A. 5419. Banks that had invested heavily in RMBS sold off
their positions (driving down the value of those assets
further) and closed related hedge fund divisions. Credit
tightened, interbank lending ceased, and concerns about
financial institutions' liquidity and solvency led to
runs on financial institutions. Several major financial
institutions, including Lehman Brothers, Bear Sterns, and
Merrill Lynch, experienced significant financial stress.
December 2007, the U.S. entered a one-and-a-half- year
recession, the longest since the Great Depression. U.S. real
gross domestic product contracted by about 4.3% during that
time. Unemployment rose to 10% in 2009, more than double the
aftermath of the financial crisis, Congress passed the
Housing and Economic Recovery Act of 2008 (the
"HERA"), Pub. L. No. 110-289, 122 Stat. 2654, out
of concern for the GSEs' financial condition. See UBS
II, 712 F.3d at 138. The HERA created the FHFA, an
"independent agency of the Federal Government, " 12
U.S.C. § 4511(a), to serve as a conservator for Fannie,
Freddie, and other GSEs in financial straits, see
id. § 4617(a). The HERA empowered the FHFA to
"collect all obligations and money due the [GSEs],
" id. §4617(b)(2)(B)(ii), and take other
actions necessary to return them to solvency. Id.
September 2, 2011, the FHFA initiated sixteen actions that
were eventually litigated together in the Southern District
of New York, including the instant "Nomura action,
" against financial institutions that sold PLS
certificates to Fannie Mae and Freddie Mac. These cases were
consolidated before Judge Cote. They all settled before
trial, with the exception of this case.
FHFA began the Nomura action by bringing claims under
Sections 11, 12(a)(2), and 15 of the Securities Act and
Virginia and D.C. Blue Sky analogs based on alleged
misstatements in the PLS offering documents. The FHFA alleged
that Defendants' offering documents falsely stated (1)
the underwriting guidelines statement, (2) the supporting
loans' loan-to-value ratios, (3) whether mortgaged
properties were occupied by the mortgagors, and (4) that the
Credit-Rating Agencies were provided with accurate
information regarding loan characteristics before issuing
ratings decisions. The FHFA initially demanded a jury trial
for "all issues triable by jury." J.A. 409.
District Court issued numerous pre-trial decisions.
Defendants appeal from the following:
. An opinion holding that the Virginia and D.C. Blue Sky laws
do not provide a loss causation defense, HSBC I, 988
. An opinion granting the FHFA's motion for summary
judgment on the absence-of-knowledge element of a Section
12(a)(2) claim, FHFA v. HSBC N Am. Holdings Inc. (HSBC
II), 33 F.Supp.3d 455 (S.D.N.Y. 2014);
. Two opinions denying Defendants' motion for summary
judgment on the ground that the FHFA's claims are
time-barred, FHFA v. HSBC N. Am. Holdings Inc. (HSBC
III), Nos. 11cv6189, 11cv6201, 2014 WL 4276420 (S.D.N.Y.
August 28, 2014) (statutes of repose); FHFA v. Nomura
Holding Am., Inc. (Nomura I), 60 F.Supp.3d 479 (S.D.N.Y.
2014) (statutes of limitations);
. An opinion granting the FHFA's motion for summary
judgment on Defendants' reasonable care defense, FHFA
v. Nomura Holding Am. Inc. (Nomura II), 68 F.Supp.3d 439
. An opinion granting the FHFA's motion in
limine to exclude evidence related to the GSEs'
housing goals, FHFA v. Nomura Holding Am., Inc. (Nomura
III), No. 11cv6201, 2014 WL 7229361 (S.D.N.Y. Dec. 18,
. An opinion, FHFA v. Nomura Holding Am., Inc. (Nomura
IV), 68 F.Supp.3d 486 (S.D.N.Y. 2014), and a related
bench decision, Special App. 544-49, denying Defendants'
motion for a jury trial on the FHFA's Section 12(a)(2)
. An opinion granting the FHFA's motion in
limine to exclude evidence related to the timing of the
purchases of the Certificates, FHFA v. Nomura Holding
Am., Inc. (Nomura V), 68 F.Supp.3d 499 (S.D.N.Y. 2014);
. An opinion denying in relevant part Defendants'
Daubert challenge to an FHFA expert's testimony,
FHFA v. Nomura Holding Am., Inc. (Nomura VI), No.
11cv6201, 2015 WL 353929 (S.D.N.Y. Jan. 28, 2015);
. Several decisions excluding evidence related to the
GSEs' Single Family Businesses, e.g., J.A.
was originally slated to be held before a jury to decide the
Section 11 claims, while the District Court would decide the
Section 12 claims, with the jury's determination
controlling overlapping factual issues. Roughly a month
before pretrial memoranda were due, the FHFA voluntarily
withdrew its Section 11 claim. As a result, the District
Court, over Defendants' objection, conducted a four-week
bench trial on the Section 12, Section 15, and Blue Sky
month after trial concluded, the District Court issued a
detailed 361-page opinion systematically finding for the FHFA
on each claim. See generally Nomura VII, 104
F.Supp.3d 441. The court held that Defendants violated
Section 12(a)(2) because each ProSupp contained three
categories of false statements of material information: (1)
the underwriting guidelines statements, (2) the loan-to-
value ratio statements, and (3) the credit ratings
statements. See id. at 559-73. Our focus on appeal,
on this point, is devoted solely to the statements regarding
underwriting guidelines, which are sufficient to affirm the
court's judgment. See 15 U.S.C. §
77l(a)(2) (authorizing relief if the offering
documents contain just one untrue statement of material
fact); N.J. Carpenters Health Fund v. Royal Bank of Scot.
Grp., PLC (N.J. Carpenters Health Fund II), 709
F.3d 109, 116, 123 (2d Cir. 2013) (allowing a Section 11
lawsuit to proceed on the allegation that RMBS offering
documents falsely stated that the loans adhered to the
court also rejected Defendants' loss causation defense,
see Nomura VII, 104 F.Supp.3d at 585-93, found that
Defendants violated the analogous provisions of the Virginia
and D.C. Blue Sky laws, see id. at 593-98, and held
that NHA, NCCI, and the Individual Defendants were control
persons under Section 15, see id. at 573-83. The
court awarded the FHFA $806, 023, 457, comprised of roughly
$555 million for violations of the Blue Sky laws and roughly
$250 million for violations of the Securities Act. See
id. at 598.
discussion proceeds in two parts. The first addresses issues
the District Court resolved before trial: (A) whether the
FHFA's claims were timely under the statutes of repose;
(B) whether in light of the GSEs' generalized knowledge
and experience in the mortgage loan market (1) the FHFA's
claims were timely under the statutes of limitations and (2)
the FHFA was entitled to summary judgment holding that the
GSEs did not know the ProSupps' underwriting guidelines
statements were false; (C) whether the FHFA was entitled to
summary judgment holding that Defendants failed to exercise
reasonable care; and (D) whether the Seventh Amendment
entitled Defendants to a jury trial. The second addresses
issues resolved after trial: (A) whether the FHFA is entitled
to relief under Section 12(a)(2) because (1) each Defendant
is a statutory seller, (2) the underwriting guidelines
statements were false, (3) those statements were material,
and (4) Defendants failed to make out an affirmative defense
of loss causation; as well as (B) whether the FHFA is
entitled to relief under the analogous Virginia and D.C. Blue
Pretrial Decisions 
Statutes of Repose
appeal the District Court's denial of their motion for
summary judgment on the ground that the FHFA's claims,
which were filed on September 2, 2011 (more than three years
after the Securitizations were sold), were time-barred by the
Securities Act, Virginia Blue Sky, and D.C. Blue Sky statutes
of repose. See 15 U.S.C. § 77m (three-year
period of repose); Va. Code Ann. § 13.1-522(D) (two-year
period of repose); D.C. Code § 31-5606.05(f)(1)
(three-year period of repose). The District Court held that the
statutes of repose were displaced by an extender provision in
the HERA, codified at 12 U.S.C. § 4617(b)(12), which
permits the FHFA to bring any "tort claim" within
three years and any "contract claim" within six
years of its appointment as the GSEs' conservator on
September 6, 2008. See FHFA v. UBS Ams., Inc.
(UBS I), 858 F.Supp.2d 306, 313-17 (S.D.N.Y. 2012)
(holding all coordinate cases brought by the FHFA before
September 6, 2011 timely under the HERA), aff'd,
UBS II, 712 F.3d 136 (2d Cir. 2013); see also
HSBC III, 2014 WL 4276420, at *1. On appeal, Defendants
argue that while the HERA displaces otherwise applicable
statutes of limitations, it does not affect statutes
UBS II, a 2013 decision in an interlocutory appeal
in one of the FHFA's parallel coordinated actions, a
panel of this Court held that § 4617(b)(12)
"supplants any other [federal or state] time limitations
that otherwise might have applied" to the FHFA's
actions, including the Securities Act and Blue Sky statutes
of repose. 712 F.3d at 143-44. This conclusion was compelled
by the definitive language in § 4617(b)(12), which makes
clear that "the applicable statute of
limitations with regard to any action brought by the
[FHFA] . . . shall be" time periods provided in
the HERA, see UBS II, 712 F.3d at 141-42 (internal
quotation marks omitted) (quoting 12 U.S.C. §
4617(b)(12)), and was corroborated by the purpose of the HERA
to permit the FHFA to "'collect all obligations and
money due' to the GSEs to restore them to a 'sound
and solvent condition, '" id. at 142
(quoting 12 U.S.C. §§ 4617(b)(2)(B)(ii), (D)). We
considered that reading § 4617(b)(12) to preclude and
pre- empt all types of time-limitation statutes, including
statutes of repose, was consistent with Congress's intent
because it allowed the FHFA more "time to investigate
and develop potential claims on behalf of the GSEs."
UBS II would end our inquiry. See Lotes Co.,
Ltd. v. Hon Hai Precision Indus. Co., 753 F.3d 395, 405
(2d Cir. 2014) ("[A] panel of this Court is 'bound
by the decisions of prior panels until such time as they are
overruled either by an en banc panel of our Court or by the
Supreme Court.'" (quoting In re Zarnel, 619
F.3d 156, 168 (2d Cir. 2010))). But one year after UBS
II was decided, the Supreme Court handed down CTS
Corp. v. Waldburger, 134 S.Ct. 2175 (2014), which held
that 42 U.S.C. § 9658,  a provision in the Comprehensive
Environmental Response, Compensation, and Liability Act of
1980 (the "CERCLA") that imposes a federal
commencement date for state statutes of limitations, does not
pre-empt state statutes of repose. See 134 S.Ct. at
2188. Defendants' sole argument in the present appeal is
that CTS abrogated UBS II.
not the first case in this Circuit to consider the impact of
CTS on UBS II. In FDIC v. First Horizon
Asset Sec., Inc. (First Horizon), 821 F.3d 372
(2d Cir. 2016), cert. denied, 137 S.Ct. 628 (2017),
we held that CTS did not disturb the portion of
UBS II's holding that held § 4617(b)(12)
precludes the federal Securities Act's statute of repose.
Id. at 380-81. That forecloses Defendants'
argument insofar as it applies to the FHFA's claims under
the Securities Act.  See Lotes, 753 F.3d at 405.
remains an open question in this Circuit whether CTS
undermined the portion of UBS II's holding that
held § 4617(b)(12) pre-empts the Virginia and D.C. Blue
Sky laws' statutes of repose. Cf. Church & Dwight
Co., Inc. v. SPD Swiss Precision Diagnostics, GmBH, 843
F.3d 48, 64-65 (2d Cir. 2016) (observing that pre-emption
analysis does not control preclusion analysis). "[C]oncerns about
the primacy of federal law and the state-federal
balance" that are unique to the pre-emption context
presented here distinguish it from preclusion context in
First Horizon. Church & Dwight Co., 843
F.3d at 64 (internal quotation mark omitted) (quoting POM
Wonderful LLC v. Coca-Cola Co., 134 S.Ct. 2228, 2236
(2014)). Still, some aspects of our earlier preclusion
analysis aid in deciding the pre-emption issue on this
appeal. Cf. id. ("[P]re[-]emption principles
can be 'instructive' in the . . . preclusion context
. . . ." (quoting POM Wonderful, 134 S.Ct. at
about CTS seriously undermines UBS II. The
Supreme Court's analysis in CTS focused
primarily on four considerations. First, § 9658 provides
that state law will be the default rule for time limitations
and that a federal commencement date will operate as a
limited "exception" to that rule. This suggested to
the Court that Congress intended § 9658 to leave many of
the state time-limitation rules in place. See CTS,
134 S.Ct. at 2185 (majority opinion). Second, § 9658
refers explicitly to a "statute of limitations" but
does not mention a "statute of repose." Although
this was not dispositive of the ultimate issue, the Court
took this as an indication that Congress did not intend
§ 9658 to reach statutes of repose. Id. at
2185-86. Third, Congress, in debating the CERCLA, considered
a report that recommended language providing for explicit
pre-emption of state statutes of repose, but chose not to
include the proposed language in the final statute.
Id. at 2186. Fourth, § 9658 defines the state
provisions it preempts as the "applicable limitations
period[s]" during "which a civil action may be
brought" and provides for equitable tolling in certain
circumstances, two concepts inapplicable to repose analyses.
Id. at 2187-88 (internal quotation marks omitted).
For these reasons, the Supreme Court held § 9658 did not
reflect clear congressional intent to pre-empt overlapping
state statutes of repose. Id. at 2188.
similarity between § 4617(b)(12) and § 9658 is that
both refer to statutes of limitations but neither references
statutes of repose. See First Horizon, 821 F.3d at
376, 379. While this might suggest on first glance that
neither statute reaches repose statutes, we reasoned in
UBS II that an explicit statutory reference to
repose statutes is not a sine qua non of
congressional intent to pre-empt such statutes. See
712 F.3d at 142-43. CTS confirmed-rather than
undermined-that reasoning. See 134 S.Ct. at 2185.
CTS observed that usage of the terms
"limitations" and "repose" "has not
always been precise." Id. at 2186; accord
UBS II, 712 F.3d at 142-43 ("Although statutes of
limitations and statutes of repose are distinct in theory,
the courts . . . have long used the term 'statute of
limitations' to refer to statutes of repose . . .
."). Indeed, although Congress has indisputably created
statutes of repose in the past, it "has never used the
expression 'statute of repose' in a statute codified
in the United States Code." First Horizon, 821
F.3d at 379 (observing that 15 U.S.C. § 77m, titled
"Limitation of actions, " creates a three-year
repose period); see also Cal. Pub. Emps.' Ret. Sys.
v. ANZ Sec., Inc. (CalPERS), 137 S.Ct. 2042,
2049 (2017) (analyzing federal statute to determine whether
it included a statute of limitation or statute of repose). As
a result, CTS cautioned, while the presence of the
term "statute of limitations" in a federal statute
may be "instructive" of Congress's intended
pre-emptive scope, it is not "dispositive."
See 134 S.Ct. at 2185. That reinforces UBS
II's refusal to resolve its pre-emption inquiry
based solely on the bare text of § 4617(b)(12). See
First Horizon, 821 F.3d at 376.
also argue that, under CTS, § 4617(b)(12)'s
repeated use of the words "claim accrues" indicates
that it was meant only to pre-empt statutes of limitations.
In CTS, the Supreme Court noted that § 9658
pre-empts the "commencement date" for any
"applicable limitations period" under state law, 42
U.S.C. § 9658(a)(1), and defines the "applicable
limitations period" as the period when "a civil
action [alleging injury or damage caused by exposure to a
hazardous substance] may be brought, " id.
§ 9658(b)(2). See 134 S.Ct. at 2187. That
indicated to the Court that Congress intended to displace
only the commencement date for statutes of limitations
because a "statute of repose . . . 'is not related
to the accrual of any cause of action.'"
Id. (quoting 54 C.J.S., Limitations of Actions
§ 7, p. 24 (2010)).
4617 uses some similar language. It provides that the new
filing period for claims brought by the FHFA is at least six
years for any "contract" claim and three years for
any "tort" claim, "beginning on the date on
which the claim accrues." 12 U.S.C. §§
4617(b)(12)(A)(i)(I), (ii)(I). It also describes how to
determine "the date on which a claim accrues" for
purposes of the HERA. Id. § 4617(b)(12)(B).
Defendants argue that this language-specifically the words
"claim accrues"-carries the same indication of
congressional intent as § 9658's definition of the
"applicable limitations period."
disagree. CTS does not stand for the proposition
that whenever "accrue" appears in a federal statute
it is a talismanic indication of congressional intent to
pre-empt only statutes of limitations. Context is crucial.
Congress used the phrase "a civil action . . . may be
brought" in § 9658 in defining the class of state
statutes it intended to pre-empt. In contrast, Congress used
the words "claim accrues" in § 4617(b)(12) in
defining the time limitation the HERA newly created for
claims brought by the FHFA. Put another way, the HERA's
use of the word "accrues" "tells us . . . that
[§ 4617(b)(12)] is itself a statute of
limitations" but does not "provide . . . guidance
on the question whether [§ 4617(b)(12)]
displaces otherwise applicable statutes of repose .
. . ." First Horizon, 821 F.3d at 379.
only remaining argument against pre-emption of the state
statutes of repose is that both § 9658 and §
4617(b)(12) pre-empt certain time limitations for state
claims while leaving untouched "other important rules
governing civil actions." CTS, 134 S.Ct. at
2188. "'The case for federal pre-emption is
particularly weak where Congress has indicated its awareness
of the operation of state law in a field of federal interest,
and has nonetheless decided to stand by both concepts and to
tolerate whatever tension there is between them.'"
Id. (brackets omitted) (quoting Wyeth v.
Levine, 555 U.S. 555, 575 (2009)). But § 9658
leaves in place far more of state law than §
4617(b)(12). Section 9658 provides only a federally mandated
accrual date for state limitations periods and leaves
unchanged "States' judgments about causes of action,
the scope of liability, the duration of the period provided
by statutes of limitations, burdens of proof, [and] rules of
evidence." CTS, 134 S.Ct. at 2188.
Section 4617(b)(12), by contrast, provides a comprehensive,
singular time limitation for all actions brought by the FHFA.
See UBS II, 712 F.3d at 141-42. It governs entirely
the rules regarding when the FHFA may bring its claims-from
the moment the filing period commences, see 12
U.S.C. § 4617(b)(12)(B), through the length of the
period for each type of the claim, see id. §
4617(b)(12)(A). Congress has not stood by any state
time-limitation rules when it comes to claims brought by the
FHFA as the GSEs' conservator.
other respects, CTS and UBS II arose in
substantially different contexts. Section 9658's
legislative history reveals that Congress specifically
considered and decided against using language that would
explicitly pre- empt statutes of repose. See CTS,
134 S.Ct. at 2186. There is no similar legislative history
for Section 4617(b)(12). See UBS II, 712 F.3d at
143. Section 9658 "describ[es] the [preempted] period in
the singular, " which "would be an awkward way to
mandate the pre-emption of two different time periods."
CTS, 134 S.Ct. at 2186-87. Section 4617(b)(12)
applies "to any action brought by the [FHFA],
" 12 U.S.C. § 4617(b)(12)(A) (emphasis added),
"'including claims to which a statute of repose
generally attaches.'" UBS II, 712 F.3d at
143 (quoting UBS I, 858 F.Supp.2d at 316-17).
Section 9658 contains a provision for equitable tolling, an
important characteristic of statutes of limitations that
distinguishes them from statutes of repose. See CTS,
134 S.Ct. at 2187-88. There is no similar provision in §
"CTS's holding is firmly rooted in a close
analysis of § 9658's text, structure, and
legislative history." First Horizon, 821 F.3d
at 377. None of those statute-specific considerations
undermines UBS II's close analysis of §
4617(b)(12), which differs significantly from § 9658. We
reaffirm our prior holding that Congress designed §
4617(b)(12) to pre-empt state statutes of
Knowledge Issues - Statutes of Limitations and Knowledge of
the ProSupps' Underwriting Guidelines
next raise two pre-trial issues that turn on the extent to
which the GSEs were or should have been aware that the
ProSupps' underwriting guidelines statements were false.
The first is the statute of limitations. In addition to the
statute of repose discussed above, Section 13 of the
Securities Act contains a statute of limitations that bars
any action not brought within one year after the plaintiff
learned or should have learned of the material misstatement
or omission giving rise to the claim. 15 U.S.C. § 77m;
see CalPERS, 137 S.Ct. at 2049 (2017) (discussing
three-year time bar). The HERA extended the filing period only
for contract claims that were valid on (or became valid
after) September 6, 2008, the date when the FHFA assumed
conservatorship. See 12 U.S.C. §§
4617(b)(12)(A), (12)(B); J.A. 341-42. Thus, any FHFA claim
that was time-barred by Section 13 on that date remained
time-barred under the HERA. On the FHFA's motion for
summary judgment, the District Court held that the FHFA's
claims were timely as a matter of law. The court concluded
that no reasonable jury could find the GSEs knew or should
have known as of September 6, 2007, one year before the HERA
extender became effective, that ProSupps' underwriting
guidelines statements were false, despite widespread PLS
credit downgrades in the summer of 2007 and the Single Family
Businesses' generalized experience with mortgage loan
originators and PLS aggregators. Nomura I, 60
F.Supp.3d at 502-09; see also UBS I, 858 F.Supp.2d
at 321-22. Defendants contest that decision on appeal.
second, related issue is whether the FHFA was entitled to
summary judgment on the purchaser's absence- of-knowledge
element of a Section 12(a)(2) claim. See 15 U.S.C.
§ 77l(a)(2). The District Court granted the FHFA
summary judgment on this element, holding again that the
Single Family Businesses' expertise in the general
mortgage loan market did not provide adequate knowledge of
the specific untruths in the ProSupps. See HSBC II,
33 F.Supp.3d at 480-93. Defendants also contest this decision
address these issues in tandem, as the relevant facts and
legal questions overlap in large part.
Factual Summary 
The Single Family Businesses' Due Diligence
GSEs' Single Family Businesses, in their capacities as
aggregators and sponsors of RMBS instruments, gathered a
significant amount of information about the mortgage loan
market and mortgage loan originators. Fannie's Single
Family due diligence division was the Single Family
Counterparty Risk Management Group (the "SFCPRM");
Freddie's Single Family due diligence division was the
Alternative Market Operations Group (the "AMO").
Through the work of the SFCPRM and AMO, the GSEs amassed
"more knowledge about the mortgage market than probably
anybody else." J.A. 1317.
SFCPRM and AMO conducted counterparty reviews of originators
with whom the GSEs regularly did business. These reviews
involved desk audits and on-site visits to originators'
offices. Often the GSEs hired Clayton Advisory Services, Ltd.
("Clayton"), a third-party mortgage diligence
vendor, to re-underwrite a sample of the originators'
issued loans and assess the originators' compliance with
their underwriting guidelines. The GSEs also analyzed
originators' adherence to appraisal protocols, capability
to detect fraud, and ability to meet repurchase obligations.
If an originator received a positive result from this review,
the GSE placed, or maintained, it on a list of approved
SFCPRM and AMO conducted counterparty reviews for at least
five originators that issued loans backing the Certificates
in this case; we note some pertinent results of those reviews
. First NLC Mortgage Corporation, which issued ~14.5% of the
loans backing NHELI 2006-HE3 and ~11.5% of the loan backing
NHELI 2007-2: The AMO issued a "Poor" rating (the
worst possible) in January 2005, reporting "poor command
of its credit, appraisal and quality control units, "
and a "Marginal" rating in April 2005, J.A. 10409;
. Mandalay Mortgage, which issued ~5.7% of the loans backing
NHELI 2006-HE3: The AMO issued a "Poor" rating in
November 2004 based on its "aggressive"
participation in risky loan product categories, id.
. ResMAE, which issued ~77.6% of the loans backing NHELI
2007-3: The AMO issued a "Marginal" rating in April
2004 and recommended that Freddie Mac components dealing with
ResMAE "Proceed with Caution" given ResMAE's
lack of an internal quality program and relaxed underwriting
procedures, id. at 10411; the AMO placed ResMAE on a
watch list in April 2007 due to a liquidity crisis; ResMAE
later went bankrupt;
. Ownit, which issued ~42.4% of the loans backing NHELI
2007-2: The AMO, in August 2004, found controls
"marginal" due to the originator's instability,
and noted its practice of keeping "very inaccurate"
loan data, id. at 10410; and
. Fremont, which backed entirely NHELI 2006-FM1 and NHELI
2006-FM2: After reviews in February 2004 and August 2005, the
AMO found wide LTV variances, "data integrity issues,
" and a large number of exceptions to the underwriting
guidelines, id. at 10314 (brackets omitted).
GSEs' knowledge about the mortgage loan industry required
a delicate information sharing arrangement between their
Single Family Businesses and their PLS traders.
one hand, the GSEs did not want to purchase loans or
securitizations supported by loans that they knew were
originated or aggregated by companies they did not trust. The
Single Family Businesses' research proved helpful to the
PLS traders in that regard; and indeed each GSE required that
any originator that individually contributed more than a
certain percentage (10% for Fannie, 1% for Freddie) of the
total unpaid principal balance of a PLS be on its list of
other hand, the GSEs were concerned that its PLS traders
would violate federal insider-trading laws if, before
purchasing PLS, they reviewed the certain loan- specific
information the Single Family Businesses considered in making
purchases for their own aggregation practices. The GSEs
accordingly limited their PLS traders' access to only the
Single Family Businesses' reviews of originators'
general practices. Fannie's PLS traders were given the
final lists of approved originators; Freddie's were given
the full counterparty review paperwork. PLS traders were not
given access to any specific loan-level information for the
transactions at issue.
SFCPRM and AMO also evaluated PLS sellers and maintained a
list of approved PLS counterparties. Both Nomura and RBS were
placed on the GSEs' lists of approved PLS sellers. In
August 2004, the AMO rated Nomura's due diligence program
"Satisfactory" based on Nomura's "good due
diligence methodologies, reasonable valuation processes and
sound controls." Id. at 3170. In a November
2006 review, the SFCPRM noted it had access to somewhat
limited information to review RBS's diligence, but
apparently accepted RBS's characterization of its
practices as robust. Nomura I, 60 F.Supp.3d at 491.
ensuring that they purchased loans from approved originators
and PLS sellers, the GSEs knew that there was still a risk
that some defective loans could creep into SLGs for PLS
certificates they purchased. The heads of the GSEs' PLS
portfolios acknowledged in deposition testimony that they
believed that loans in an SLG "would reflect the general
underwriting practices of the originators responsible for
those loans." J.A. 10323. That meant that "if an
originator was not following its own guidelines and was
contributing loans to the collateral for the pool,
" the GSEs "would have expected that loans not
underwritten to the originator's guidelines would then
end up in the" SLGs. Id. at 10325 (emphasis
added; internal quotation marks omitted). To limit that
possibility, the GSEs required "rep[resentation]s and
warrant[ie]s" from the approved PLS sellers for each
certificate they purchased, believing that they could rely on
those institutions to limit the number of the defective loans
to an immaterial level. Id. at 1063; see also
HSBC II, 33 F.Supp.3d at 471 ("[A Fannie employee]
testified that Fannie Mae's 'process basically relied
on the dealers and originators providing it with reps and
warranties as to the validity of how these loans were
underwritten.'" (brackets omitted)).
The GSEs' Awareness of PLS Market Trends
were also familiar with public information about the overall
RMBS market in 2006 and 2007. This information included a
growing number of reports of borrower fraud and lower
underwriting standards among mortgage loan originators.
Beginning in July and August of 2007, it also included
reports that the three primary credit- rating agencies,
Moody's, S&P, and Fitch, began to accelerate their
negative views of RMBS.
10, 2007, Moody's downgraded the junior tranches of many
RMBS-including Securitizations NHELI 2006-FM1 and NHELI
2006-FM2. The credit ratings for the senior tranches in these
Securitizations did not change. Moody's attributed its
downgrades to "a persistent negative trend in severe
delinquencies for first lien subprime mortgage loans
securitized in 2006." Nomura I, 60 F.Supp.3d at
498 (internal quotation marks omitted). Moody's noted
that the supporting loans "were originated in an
environment of aggressive underwriting" and that
increased default rates were caused in part by "certain
misrepresentations . . . like occupancy or stated income and
appraisal inflation." Id. (internal quotation
marks omitted; brackets omitted).
same day, S&P placed on negative rating watch a host of
RMBS-but none of the Securitizations-citing "lower
underwriting standards and misrepresentations in the mortgage
market." Id. (internal quotation mark omitted).
S&P questioned the quality of the data "concerning
some of the borrower and loan characteristics provided during
the rating process." Id. S&P made clear
that, going forward, its ratings for ...