February 1, 2017 | News

Plaintiff National Credit Union Administration Board (“NCUA”) brought suits in their role as conservator and liquidating agent of credit unions that purchased certain residential mortgage-backed securities (“RMBS”).  Plaintiff asserted 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 the certificates.

Vega expert Dr. Ethan Cohen-Cole conducted a materiality analysis in which he compared the maximum potential default rate disclosed in the offering documents against the expected default rate for the loans underlying the certificates using certain re-underwriting findings by plaintiff’s experts.

Plaintiff argued that Dr. Cohen-Cole’s testimony should be excluded because he failed to apply the correct standard for materiality. Plaintiff further argued that Dr. Cohen-Cole improperly assumed the very fact (what an investor would find material) that he tested in his analysis.

The court found that Dr. Cohen-Cole is an expert with experience in this field, and he may offer his opinion concerning what a reasonable investor would have considered or found significant in deciding whether to purchase these securities.

Moreover, the Court noted Dr. Cohen-Cole was not conducting a quantitative analysis to determine which facts a reasonable investor would find material, but instead opining that such an investor would rely on this type of modeling, and his analysis was intended to show the results of the modeling that the investor would have performed. 

 Materiality Analysis of RMBS Misrepresentations