The U.S. subprime mortgage crisis of 2007-2008 continues to generate extensive litigation. A significant chunk of that litigation relates to investor claims arising out of the issuance of mortgage pass-through certificates that provided holders with an ownership interest in the principal and/or interest payments from various pools of residential real estate loans packaged by investment banks and other financial institutions. A recent decision by the District Court for the Southern District of New York addressed a motion for class certification on behalf of a class of investors that purchased a group of mortgage certificates underwritten by an affiliate of JP Morgan Chase bank in 2007. Fort Worth Employees' Ret. Fund v. J.P. Morgan Chase & Co., 301 F.R.D. 116 (S.D.N.Y. 2014). The class action complaint alleged that the offering documents for the relevant certificates failed to disclose that, among other things, (1) the underwriting standards for the underlying mortgages described in the offering document were not, in fact, followed; (2) that appraisers valuing the properties securing the mortgages falsified appraisal values and failed to follow established appraisal standards; and (3) that loan-to-value ratios set out in the offering documents were false.
An interesting procedural matter in the case arose when, simultaneously with plaintiff’s motion for class certification, defendants moved to exclude the testimony of plaintiff’s expert witness, Dr. Joseph
Mason, under Daubert. The Court noted that while “[t]he Supreme Court has not definitively ruled on the extent to which a district court must undertake a Daubert analysis at the class certification stage,” the [Supreme Court] has “suggest[ed] that a Daubert analysis [be] required in at least some circumstances [at that time].” With that uncertainty in mind, in the Southern District of New York, when a motion to exclude expert testimony is made at the class certification stage, the Daubert standard applies; but the inquiry is “limited to whether or not the [expert reports] are admissible to establish the requirements of Rule 23 [governing the suitability of class action treatment].” Thus, the question confronting the Court was whether Mason’s expert opinions were admissible to establish the class action requirements under Rule 23 of the Federal Rules of Civil Procedure (i.e., common questions of law or fact, typicality, adequate representation, etc.).
Concerning the question of whether, under Federal Rule 23(a)(2), there were “questions of law or fact common to the class,” Dr. Mason opined that the defendants’ allegedly false statements affected class members in similar ways. This opinion was not based on any empirical calculations, but rather on Dr. Mason's expertise in economics and his understanding of mortgage-backed securities and other complex financial instruments. The Court observed that testimony based on practical experience (as opposed to scientific analysis) is acceptable so long as it is not speculative or conjectural. The Court found that Dr. Mason properly applied his economics expertise and knowledge of complex financial instruments to determine how defendants’ allegedly false statements would affect certificate holders.
Defendants also challenged Dr. Mason’s proposed methodology for calculating damages on a class-wide basis by one of three approaches: (1) the market price method, (2) the cash flow method, and (3) third-party pricing using benchmarks. In response, the Court observed that this objection was not really directed at the reliability of Dr. Mason’s methodologies; in fact, defendants did not actually dispute the validity of any of the proposed methodologies. Instead, the nature of this objection was more accurately characterized as whether any of the proposed methodologies could be applied on a class-wide basis. As such, the objection questioned whether questions common to the class predominated over individual issues (as required by Federal Rule 23(b)(3)), and not whether Dr. Mason’s methodologies were admissible under Daubert.
For the reasons above, the Court denied the motion to exclude.
Have you previously dealt with Daubert issues at the class certification stage? If so, what was the outcome?