Redacted Public Version

IN THE COURT OF COMMON PLEAS OF ALLEGHENY COUNTY, PENNSYLVANIA

FEDERAL HOME LOAN BANK OF PITTSBURGH, Plaintiff,

vs. J.P. MORGAN SECURITIES INC., J.P. MORGAN MORTGAGE ACQUISITION CORP., J.P. MORGAN MORTGAGE ACCEPTANCE CORPORATION I, CHASE HOME FINANCE L.L.C., JPMORGAN CHASE & CO., MOODY’S CORPORATION, MOODY’S INVESTORS SERVICE, INC., THE MCGRAW-HILL COMPANIES, INC., and FITCH, INC., Defendants. FEDERAL HOME LOAN BANK OF PITTSBURGH, Plaintiff,

vs. J.P. MORGAN SECURITIES INC., JPMORGAN CHASE & CO., MOODY’S CORPORATION, MOODY’S INVESTORS SERVICE, INC., and THE MCGRAW-HILL COMPANIES, INC., Defendants. FEDERAL HOME LOAN BANK OF PITTSBURGH, Plaintiff,

vs.

THE MCGRAW-HILL COMPANIES, INC., FITCH, INC., MOODY’S CORPORATION, and MOODY’S INVESTORS SERVICE, INC., Defendants. FEDERAL HOME LOAN BANK OF PITTSBURGH, Plaintiff,

vs. COUNTRYWIDE SECURITIES CORPORATION, COUNTRYWIDE HOME LOANS, INC., CWALT, INC., CWMBS, INC., COUNTRYWIDE FINANCIAL CORPORATION, MOODY’S CORPORATION, MOODY’S INVESTORS SERVICE, INC., THE MCGRAW-HILL COMPANIES, INC., and FITCH, INC., Defendants.

CIVIL DIVISION GD Nos. 09-016892 09-016893 09-017818 09-018482 MCGRAW HILL FINANCIAL, INC.’S NOTICE OF PRESENTATION; MOTION FOR SUMMARY JUDGMENT; PROPOSED ORDER; and BRIEF IN SUPPORT OF MOTION FOR SUMMARY JUDGMENT Counsel of Record for this Party: Walter P. DeForest, PA ID 05009 DEFOREST KOSCELNIK YOKITIS & BERARDINELLI Koppers Building, 30th Floor Pittsburgh, PA 15219 Telephone: (412) 227-3101 Fax: (412) 227-3130 Floyd Abrams Susan Buckley Tammy L. Roy David R. Owen (all admitted pro hac vice) CAHILL GORDON & REINDEL LLP 80 Pine Street New York, NY 10005 Redacted Public Version

IN THE COURT OF COMMON PLEAS OF ALLEGHENY COUNTY, PENNSYLVANIA

FEDERAL HOME LOAN BANK OF PITTSBURGH,

Plaintiff,

vs.

J.P. MORGAN SECURITIES INC., J.P. MORGAN

MORTGAGE ACQUISITION CORP., J.P. MORGAN

MORTGAGE ACCEPTANCE CORPORATION I, CHASE

HOME FINANCE L.L.C., JPMORGAN CHASE & CO.,

MOODY’S CORPORATION, MOODY’S INVESTORS

SERVICE, INC., THE MCGRAW-HILL COMPANIES, INC.,

and FITCH, INC.,

Defendants.

CIVIL DIVISION

GD Nos.

09-016892

09-016893

09-017818

09-018482

MCGRAW HILL FINANCIAL, INC.’S

BRIEF IN SUPPORT OF MOTION

FOR SUMMARY JUDGMENT

Counsel of Record for this Party:

Walter P. DeForest, PA ID 05009

DEFOREST KOSCELNIK YOKITIS &

BERARDINELLI

Koppers Building, 30th Floor

Pittsburgh, PA 15219

Telephone: (412) 227-3101

Fax: (412) 227-3130

Floyd Abrams

Susan Buckley

Tammy L. Roy

David R. Owen

(all admitted pro hac vice)

CAHILL GORDON & REINDEL LLP

80 Pine Street

New York, NY 10005

Redacted Public Version


Plaintiff,

vs.

J.P. MORGAN SECURITIES INC., JPMORGAN CHASE &

CO., MOODY’S CORPORATION, MOODY’S INVESTORS

SERVICE, INC., and THE MCGRAW-HILL COMPANIES,

INC.,

Defendants.


Plaintiff,

vs.

THE MCGRAW-HILL COMPANIES, INC., FITCH, INC.,

MOODY’S CORPORATION, and MOODY’S INVESTORS

SERVICE, INC.,

Defendants.


Plaintiff,

vs.

COUNTRYWIDE SECURITIES CORPORATION,

COUNTRYWIDE HOME LOANS, INC., CWALT, INC.,

CWMBS, INC., COUNTRYWIDE FINANCIAL

CORPORATION, MOODY’S CORPORATION, MOODY’S

INVESTORS SERVICE, INC., THE MCGRAW-HILL

COMPANIES, INC., and FITCH, INC.,

Defendants.

-i-

TABLE OF CONTENTS

PRELIMINARY STATEMENT .................................................................................................... 1

FACTUAL BACKGROUND ......................................................................................................... 5

Overview of the Federal Home Loan Bank of Pittsburgh .................................................. 5

The Bank’s Investment Process for PLMBS .................................................................... 10

Standard & Poor’s and Its Credit Rating Opinions ........................................................... 15

The Bank’s Investments .................................................................................................... 21

The Bank’s Post-Purchase Review of its Investments ...................................................... 23

These Lawsuits.................................................................................................................. 24

APPLICABLE LEGAL STANDARDS ....................................................................................... 26

LEGAL ARGUMENT .................................................................................................................. 27

I. THERE IS NO EVIDENCE OF AN ACTIONABLE MISSTATEMENT BY S&P ....... 27

A. No S&P Rating Existed When the Bank Purchased the Vast Majority

of the Certificates .................................................................................................. 27

B. There is No Evidence that S&P’s Opinions Were Objectively False ................... 32

C. There is No Evidence that S&P’s Opinions Were Subjectively

Disbelieved ........................................................................................................... 39

1. The Law Requires the Bank to Present Evidence that the

Relevant S&P Rating Committees Did Not Subjectively

Believe the Ratings Assigned to the Certificates at the Time

They Were Assigned ................................................................................. 39

2. The Extensive Record Contains No Evidence that Could

Support the Required Showing of Subjective Falsity ............................... 44

D. Other Alleged Misstatements Are Not Actionable ............................................... 48

1. Statements of Independence and Objectivity Are Not

Actionable ................................................................................................. 49

2. Alleged Misstatements in the Offering Documents Are Not

Attributable to S&P................................................................................... 52

-ii-

II. THERE IS NO EVIDENCE THAT THE BANK ACTUALLY AND JUSTIFIABLY

RELIED ON S&P’S RATINGS IN MAKING ITS PURCHASES ................................. 54

A. The Bank’s Purchase of Each Certificate Was Based on its

Independent Investigation of Information and Criteria It Selected ...................... 55

B. The Bank Entered a Contract with S&P that Disclaims Reliance ........................ 58

C. The Bank’s Claimed Reliance on S&P’s Ratings as Assurances that

the Bank Would Never Suffer Investment Losses Cannot Satisfy the

Justifiable Reliance Requirement for a Fraud Claim ............................................ 59

III. THERE IS NO EVIDENCE THE BANK SUFFERED ANY LOSS, LET ALONE A

LOSS PROXIMATELY CONNECTED TO A STATEMENT BY S&P ........................ 64

A. The Bank Has Suffered No Actual Loss ............................................................... 65

B. The Bank’s Claim that the “Real Value” of the Certificates at the

Time of Purchase Was Zero Is Fatal to Its Damages Claim ................................. 68

C. The Bank Cannot Prove that S&P’s Alleged Misrepresentations

Proximately Caused its Alleged Loss ................................................................... 70

1. The Bank Does not Disaggregate Losses Caused by the

Financial Crisis or Alleged Misrepresentations by Third

Parties and Improperly Seeks to Make S&P an Ex-Post Insurer

of its Investments ...................................................................................... 71

2. The Bank Fails to Show a Link Between S&P’s Alleged

Misrepresentations and the Bank’s Supposed Losses ............................... 75

IV. THE BANK’S FRAUD CLAIM IS ALSO BARRED BY THE CONTRACTUALLY

AGREED TO STATUTE OF LIMITATIONS ................................................................ 78

CONCLUSION ............................................................................................................................. 80

-iii-

TABLE OF AUTHORITIES

Page(s)

Cases

Abu Dhabi Commercial Bank v. Credit Suisse,

No. 115417/2010 (N.Y. Sup. Ct. Aug. 4, 2011) ....................................................................45n

In re Aetna, Inc. Sec. Litig.,

617 F.3d 272 (3d Cir. 2010).....................................................................................................49

Aozora v. Morgan Stanley,

No. 652118/13, at 10 (Sup. Ct. N.Y. Co. Aug. 11, 2014) ......................................................58n

Argent Classic Convertible Arbitrage Fund L.P. v. Rite Aid Corp.,

315 F. Supp. 2d 666 (E.D. Pa. 2004) .....................................................................................71n

Assured Guaranty Municipal Corp. v. DLJ Mortgage Capital, Inc.,

2014 WL 3288335 (Sup. Ct. N.Y. Co. 2014) ........................................................................56n

B.O. v. C.O.,

404 Pa. Super. 127, 590 A.2d 313 (1991) ..............................................................................64n

In re Bank of America Corp. Sec.,

757 F. Supp. 2d 260 (S.D.N.Y. 2010)....................................................................................41n

In re Bear Stearns Mortgage Pass-Through Certificates Litig.,

851 F. Supp. 2d 746 (S.D.N.Y. 2012)........................................................................................5

Berckeley Investment Group, Ltd. v. Colkitt,

455 F.3d 195 (3d Cir. 2006)...........................................................................................69n, 71n

Berda v. CBS Inc.,

800 F. Supp. 1272 (W.D. Pa. 1992) .........................................................................................40

Blumenstock v. Gibson,

811 A.2d 1029 (Pa. Super. Ct. 2002) .................................................................................27, 59

Boca Raton Firefighters and Police Pension Fund v. Bahash,

506 Fed. App’x. 32 (2d Cir. 2012)...........................................................................................50

Boca Raton Firefighters and Police Pension Fund v. Bahash,

574 Fed. App’x. 21 (2d Cir. 2014) (Summary Order) ...........................................................50n

Bortz v. Noon,

729 A.2d 555 (Pa. 1999) ........................................................................................................57n

-iv-

Central Bank N.A. v. First Interstate Bank, N.A.,

511 U.S. 164 (1994) ...................................................................................................................3

City of Edinburgh Council v. Pfizer, Inc.,

754 F.3d 159 (3d Cir. 2014).......................................................................................33n, 46, 50

City of Omaha, Nebraska Civilian Employees’ Retirement System v. CBS Corp.,

679 F.3d 64 (2d Cir. 2012).....................................................................................33n, 40n, 41n

City of Pontiac Policemen’s & Firemen’s Ret. Sys. v. UBS AG,

752 F.3d 173 (2d Cir. 2014).....................................................................................................50

Coleman v. Sears, Roebuck & Co.,

319 F. Supp. 2d 544 (W.D. Pa. 2003) ........................................................................32, 33, 39n

In re Colonial Bancgroup, Inc. Securities Litig.,

2:09-CV-00104-RDP-WC, 2013 WL 4788627 (M.D. Ala. Sept. 9, 2013) ...........................40n

Compuware Corp. v. Moody’s Investors Servs., Inc.,

499 F.3d 520 (6th Cir. 2007) ...................................................................................................42

In re Credit Suisse First Boston Corp.,

431 F.3d 36 (1st Cir. 2005) ....................................................................................................41n

In re Credit Suisse First Boston Corp.,

No. Civ. A. 02-12056-GAO, 2005 WL 852455 (D. Mass. Mar. 31, 2005) .............................33

Danann Realty Corp. v. Harris,

157 N.E.2d 597 (N.Y. 1959) ....................................................................................................59

DeMarco v. Lehman Bros., Inc.,

309 F. Supp. 2d 631 (S.D.N.Y. 2004)....................................................................................40n

Denny v. Barber,

576 F.2d 465 (2d Cir. 1978).....................................................................................................33

Dexia SA/NV v. Bear, Stearns & Co.,

No. 12-cv-4761 (JSR) (S.D.N.Y. filed Jan. 22, 2013) .....................................................74, 74n

In re Donald J. Trump Casino Sec. Litig.,

7 F.3d 357 (3d Cir. 1993).........................................................................................32, 40n, 63n

Dura Pharmaceuticals, Inc. v. Broudo,

544 U.S. 336 (2005) ...................................................................................................70, 71, 71n

ECA, Local 134 IBEW Joint Pension Trust v. JP Morgan Chase Co.,

553 F.3d 187 (2d Cir. 2009)...................................................................................................50n

-v-

Edward J. DeBartolo v. Coopers & Lybrand,

928 F. Supp. 557 (W.D. Pa. 1996) .............................................................................64, 65, 69n

Emery v. Third Nat’l Bank of Pittsburgh,

308 Pa. 504, 162 A. 281 (1932) .................................................................................55n, 64, 65

Emery v. Third National Bank,

314 Pa. 544 (Pa. 1934) ...........................................................................................................64n

Ertel v. Patriot-News Co.,

544 Pa. 93, 674 A.2d 1038 (1996) ...........................................................................................26

In re Eugenia VI Venture Holdings, Ltd. Litigation,

649 F. Supp. 2d 105 (S.D.N.Y. 2008), aff’d sub nom. Eugenia VI Venture Holdings, Ltd. v.

Glaser, 370 F. App’x. 197 (2d Cir. 2010) ...............................................................................66

Fait v. Regions Fin. Corp.,

655 F.3d 105 (2d Cir. 2011)...................................................................................33n, 39n, 41n

Federal Home Loan Bank of Pittsburgh v. JP Morgan Securities LLC,

No. GD09-016892, 2010 WL 7928643 (Pa. Ct. Comm. Pl. Nov. 29, 2010) ................... passim

Federal Housing Finance Agency v. HSBC North America Holdings, Inc.,

11 2014 WL 3702587 (S.D.N.Y. Jul. 25, 2014) ..............................................................47, 48n

First Equity Corp. v. Standard & Poor’s Corporation,

690 F. Supp. 256 (S.D.N.Y. 1988), aff’d, 869 F.2d 175 (2d Cir. 1989) ............................42, 46

Florida State Conference of N.A.A.C.P. v. Browning,

522 F.3d 1153 (11th Cir. 2008) .............................................................................................50n

Footbridge Ltd. v. Countrywide Home Loans, Inc.,

No. 09 Civ. 4050 (PKC) 2010 WL 3790810 (S.D.N.Y. Sept. 28, 2010) ................................45

Fort Worth Employees’ Retirement Fund v. J.P. Morgan Chase & Co.,

1:09-cv-03701, Dkt. No. 38-21 (S.D.N.Y.), at ¶ 29 ..............................................................18n

Frederick Chusid & Co. v. Marshall Leeman & Co.,

279 F. Supp. 913 (S.D.N.Y. 1968) ........................................................................................58n

Fulton Bank, N.A. v. UBS Securities, LLC,

Civ. A. No. 10-193, 2011 WL 5386376 (E.D. Pa. Nov. 7, 2011)......................27n, 30, 42, 71n

Gabriel Capital, L.P. v. NatWest Finance, Inc.,

177 F. Supp. 2d 169 (S.D.N.Y. 2001)....................................................................................27n

Gallup v. Clarion Sintered Metals, Inc.,

489 Fed. App’x. 553 (3d Cir. 2012).........................................................................................51

-vi-

Ganino v. Citizens Utils. Co.,

228 F.3d 154 (2d Cir. 2000)...................................................................................................43n

Gibbs v. Ernst,

538 Pa. 193, 647 A.2d 882 (1994) ...................................................................................26, 49n

In re Gillingham,

143 B.R. 55 (Bankr. W.D. Pa. 1992), aff’d, 150 B.R. 907 (W.D. Pa. 1993) ...........................53

In re Goldman Sachs Group, Inc. Sec. Litig.,

No. 10 Civ. 3461, 2014 WL 2815571 (S.D.N.Y. Jun. 23, 2014)...........................................50n

Gruber v. Price Waterhouse,

776 F. Supp. 1044 (E.D. Pa. 1991) ..........................................................................................51

GSC Partners CDO Fund v. Washington,

368 F.3d 228 (3d Cir. 2004).............................................................................................42, 44n

HSH Nordbank AG v. UBS AG,

95 A.D.3d 185 (N.Y. App. Div. 2012) ....................................................................................63

Hubbard v. BankAtlantic Bancorp, Inc.,

688 F.3d 713 (11th Cir. 2012) .......................................................................................70n, 72n

Huddleston v. Infertility Ctr. of Am., Inc.,

700 A.2d 453 (Pa. Super. Ct. 1997) .........................................................................................49

IKB Int’l S.A. v. Bank of Am.,

12 Civ. 4036 (LAK), 2014 WL 1377801 (S.D.N.Y. Mar. 31, 2014) ....................27n, 40n, 44n

In re Ikon Office Solutions, Inc.,

277 F.3d 658 (3d Cir. 2002)...............................................................................................34, 45

In re Ikon Office Solutions, Inc. Sec. Litig.,

131 F. Supp. 2d 680 (E.D. Pa. 2001), aff’d, 277 F.3d 829 (3d Cir. 2002).............................45n

Janus Capital Group, Inc. v. First Derivative Traders,

131 S. Ct. 2296 (2011) .......................................................................................................52, 53

Jenkins v. KYW, A Div. of Grp. W, Westinghouse Broad. & Cable, Inc.,

829 F.2d 403 (3d Cir. 1987).....................................................................................................42

Joffee v. Lehman Bros.,

No. 04 Civ. 3507 RWS, 2005 WL1492101, at *10-11 (S.D.N.Y. June 23, 2005) ................40n

Joyce v. Bobcat Oil & Gas, Inc.,

Civ. No. 1:CV–07–1421, 2008 WL 919724 (M.D. Pa. Apr. 3, 2008) ...................................71n

-vii-

Kane v. Peugeot Motors of America,

No. CIV. A. 93-4011, 1994 WL 263341 (E.D. Pa. June 9, 1994) ...........................................29

Kaufman v. Mellon National Bank & Trust Co.,

366 F.2d 326 (3d Cir. 1996)...............................................................................................68, 69

Kostryckyj v. Pentron Lab. Techs., LLC,

52 A.3d 333 (Pa. Super. Ct. 2012) ...........................................................................................26

Krisel v. Duran,

258 F. Supp. 845 (S.D.N.Y. 1966), aff’d 386 F.2d 179 (2d Cir. 1967) .................................58n

Lattanzio v. Deloitte & Touche, LLP,

476 F.3d 147 (2d Cir. 2007)............................................................................................. passim

In re Lehman Bros. Mortgage-Backed Sec. Litig.,

650 F.3d 167 (2d Cir. 2011)...............................................................................................7, 16n

In re Lehman Bros. Securities & ERISA Litig.,

684 F. Supp. 2d 485 (S.D.N.Y. 2010)....................................................................................46n

Lentell v. Merrill Lynch & Co.,

396 F.3d 161 (2d Cir. 2005)...................................................................................................76n

Leykin v. AT&T Corp.,

423 F. Supp. 2d 229 (S.D.N.Y. 2009), aff’d, 216 Fed. App’x 14 (2d Cir. 2007) ....................75

Lind v. Jones, Lang LaSalle Americas, Inc.,

135 F. Supp. 2d 616 (E.D. Pa. 2001) ...............................................................................40, 64n

Mahn Real Estate Corp. v. Shapolsky,

577 N.Y.S.2d 824 (App. Div. 1991) ........................................................................................59

Manning v. Temple University,

No. Civ. A. 03-4012, 2004 WL 3019230 (E.D. Pa. Dec. 30, 2004), aff’d, 157 Fed. App’x.

509 (3d Cir. 2005) ..................................................................................................................60n

MBIA Ins. Corp. v. J.P. Morgan Sec. LLC,

43 Misc. 3d 1221(A) ................................................................................................................51

McCabe v. Ernst & Young, LLP,

494 F.3d 418 (3d Cir. 2007)...........................................................................................70n, 77n

McClellan v. Health Maintenance Organization of Pennsylvania,

413 Pa. Super. 128 (1992)......................................................................................................49n

In re Merrill Lynch & Co. Inc. Research Reports Sec. Litig.,

273 F. Supp. 2d 351 (S.D.N.Y. 2003)....................................................................................44n

-viii-

In re MF Global Holdings Ltd. Sec. Litig.,

982 F. Supp. 2d 277 (S.D.N.Y. 2013)....................................................................................40n

MHC Mut. Conversion Fund, L.P. v. Sandler O’Neill & Partners, L.P.,

761 F.3d 1109 (10th Cir. 2014) ...............................................................................................34

In re Moody’s Corp. Sec. Litig.,

No. 07 Civ. 8375(GBD), 2013 WL 4516788 (S.D.N.Y. Aug. 23, 2013) ..............................71n

Moore v. Steinman Hardware Co.,

319 Pa. 430, 179 A. 565 (1935) .....................................................................................55n, 56n

Morilus v. Countrywide Home Loans, Inc.,

651 F. Supp. 2d 292 (E.D. Pa. 2008) .......................................................................................30

Mullen v. New Jersey Steel Corp.,

733 F. Supp. 1534 (D.N.J. 1990) ...........................................................................................60n

New Hope Books, Inc. v. Datavision Prologix, Inc.,

No. 01741, 2003 WL 21672991 (Pa. Ct. Com. Pl. June 24, 2003) .........................................49

In re Nutrisystem, Inc. Sec. Litig.,

653 F. Supp. 2d 563 (E.D. Pa. 2009) .....................................................................................45n

Ohio Police & Fire Pension Fund v. Standard & Poor’s Financial Services, LLC,

813 F. Supp. 2d 871 (S.D. Ohio 2011), aff’d, 700 F.3d 829 (6th Cir. 2012) ...................43, 45n

In re Omnicare, Inc. Sec. Litig.,

2014 WL 5066826 (6th Cir. Oct. 10, 2014) .....................................................................41n, 41

Pennsylvania Public School Employees’ Retirement System v. Bank of America,

874 F. Supp. 2d 341 (S.D.N.Y. 2012)....................................................................................40n

Peters v. Stroudsburg Trust Co.,

348 Pa. 451, 35 A.2d 341 (1944) .......................................................................................68, 69

Pfizer, Inc. v. Stryker Corp.,

02 Civ. 8613 (LAK), 2005 WL 44383 (S.D.N.Y. Jan. 10, 2005) ..........................................42n

Phoenix Light SF Ltd. v. Goldman Sachs Group, Inc.,

43 Misc. 3d 1233(A), 2014 WL 2650534 (N.Y. Sup. Ct. June 13, 2014) .............................56n

Phoenix Light SF Ltd. v. Merrill Lynch,

No. 653235/2013 (N.Y Supr. Oct. 3, 2014) .................................................................29, 30, 32

Physicians Mutual Insurance Co. v. Asset Allocation and Management Co.,

Civ. A. No. 06 C 5124, 2007 WL 2875237 (N.D. Ill. Sept. 28, 2007) ....................................66

-ix-

Plumbers’ & Pipefitters’ Loc. No. 562 Supp. Plan & Trust v. J.P. Morgan Accept. Corp. I,

No. 08 CV 1713 (ERK) 2012 WL 601448 (E.D.N.Y. Feb. 23, 2012) ..................................40n

Plumbers’ Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp.,

632 F.3d 762 (1st Cir. 2011) ......................................................................................15, 40n, 43

Podany v. Robertson Stephens, Inc.,

318 F. Supp. 2d 146 (S.D.N.Y. 2004)..............................................................33, 40n, 41n, 43n

Polaski v. Levin,

176 Pa. Super. 370, 107 A.2d 876 (1954) ..............................................................................68n

Police & Fire Ret. Sys. Of City of Detroit v. Goldman, Sachs & Co.,

No. 10 CIV. 4429 (MGC), 2014 WL 1257782 (S.D.N.Y. Mar. 27, 2014) ...........................43n

Quinn v. McGraw-Hill Cos., Inc.,

168 F.3d 331 (7th Cir. 1999) .............................................................................................59, 63

Quinn v. McGraw-Hill Cos.,

No. 97-3037 (C.D. Ill. Apr. 21, 1997), aff’d, 168 F.3d 331 (7th Cir. 1999) ......................29, 30

Reese v. McGraw-Hill Cos.,

293 F.R.D. 617. (S.D.N.Y. 2013) ..........................................................................................50n

Reimer v. Tien,

356 Pa. Super. 192, 514 A.2d 566 (1986) ..............................................................................60n

Rizzo v. Rohrback,

8 Pa. D. & C.3d 122 (Ct. Com. Pl. 1978), aff’d, 261 Pa. Super. 455 (Pa. Super Ct. 1978) .....3n

Rohm and Haas Co. v. Continental Cas. Co.,

566 Pa. 464, 781 A.2d 1172 (2001) .........................................................................................27

Rothermel v. Phillips,

292 Pa. 371, 141 A. 241 (1928) .............................................................................................56n

Saleh Holdings Group v. Chernov,

30 Misc. 3d 1220(A), 2011 WL 452999 (Sup. Ct. N.Y. Co. 2011) .........................................66

In re Salomon Analyst A T & T Litig.,

350 F. Supp. 2d 455 (S.D.N.Y. 2004).............................................................................. passim

In re Sanofi-Aventis Sec. Litig.,

774 F. Supp. 2d 549 (S.D.N.Y. 2011)......................................................................................34

Scott v. LTS Builders, LLC,

No. 1:10-CV-0581, 2012 WL 5207456 (M.D. Pa. Oct. 22, 2012) ..........................................30

-x-

Shapiro v. Cantor,

123 F.3d 717 (2d Cir. 1997).....................................................................................................53

Shoemaker v. Commonwealth Bank,

700 A.2d 1003 (Pa. Super. Ct. 1997) .................................................................................27, 29

Space Coast Credit Union v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,

No. 12-60430, 2014 WL 1230719 (S.D. Fla. Mar. 25, 2014)..................................................43

Spaw v. Springer,

715 A.2d 1188 (Pa. Super. Ct. 1998) .......................................................................................26

TCA Girard, LP v. Morgan, Lewis & Bockius, LLP,

No. 245 EDA 2013, slip op. (Pa. Super. Ct. Sept. 18, 2014) ...................................................67

Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital Inc.,

531 F.3d 190 (2d Cir. 2008)...................................................................................................40n

Tsereteli v. Residential Asset Securitization Trust 2006-A8,

692 F. Supp. 2d 387 (S.D.N.Y. 2010)....................................................................................40n

U.S. v. McGraw-Hill Cos.,

2013 WL 3762259 (C.D. Cal. July 16, 2013) ........................................................................50n

In re Valuevision Internat’l Inc. Sec. Litig.,

896 F. Supp. 434 (E.D. Pa. 1995) ....................................................................................32n, 33

Viacom Int’l, Inc. v. YouTube, Inc.,

676 F.3d 19 (2d Cir. 2012).......................................................................................................48

Virginia Bankshares, Inc. v. Sandberg,

501 U.S. 1083 (1991) .............................................................................................................32n

Wang v. Bear Stearns Cos. LLC,

No. 11 Civ. 5643, 2014 WL 1512032 (S.D.N.Y. Apr. 16, 2014) ............................................40

Warner-Lambert Pharma. Co. v. John J. Reynolds, Inc.,

178 F. Supp. 655 (S.D.N.Y. 1959) aff’d, 280 F.2d 197 (2d Cir. 1960) .................................58n

Weissberger v. Myers,

90 A.3d 730, 735 (Pa. Super. Ct. 2014) ...................................................................................26

In re Williams Sec. Litig.-WCG Subclass,

558 F.3d 1130 (10th Cir. 2009) .............................................................................................72n

Winer Family Trust v. Queen,

503 F.3d 319 (3d Cir. 2007)...............................................................................................33, 45

-xi-

Wittekamp v. Gulf & Western, Inc.,

991 F.2d 1137 (3d Cir. 1993).................................................................................................64n

WM High Yield Fund v. O’Hanlon,

Civ. A. No. 04-cv-3423, 2013 WL 3230667 (E.D. Pa. June 27, 2013) ........................... passim

In re Worlds of Wonder Sec. Litig.,

35 F.3d 1407 (9th Cir. 1994), superseded by statute on unrelated grounds ...........................34

Wright v. Ernst & Young LLP,

152 F.3d 169 (2d Cir. 1998).....................................................................................................53

Young v. Edwards,

72 Pa. 257 (1872) ...................................................................................................................55n

Zanett Lombardier, Ltd. v. Maslow,

815 N.Y.S.2d 547 (1st Dep’t 2006), aff’d, 2004 WL 5359470 (Sup. Ct. N.Y. Co. July 9,

2004) ......................................................................................................................................26n

ZL Technologies, Inc. v. Gartner, Inc.,

No. CV 09-02393, 2009 WL 3706821 (N.D. Cal. Nov. 4, 2009) ..........................................50n

Regulations

17 C.F.R. § 229.1100 et seq. ..........................................................................................................55

17 C.F.R. §§ 230.433(d)(ii), (h)(2) ................................................................................................55

17 C.F.R. § 240.17g-8(d)(1)(ii) .....................................................................................................47

Rules

Pa. R. Civ. P. 1019(b) ..................................................................................................................49n

Pa. R. Civ. P. 1035.2 ....................................................................................................................1, 6

Pa. R. Civ. P. 1035.3 ......................................................................................................................26

Statutes

§ 21D of the Securities Exchange Act of 1934, 15 U.S.C. § 78u-4 ...............................................35

Financial Institutions Reform, Recovery, and Enforcement Act of 1989, Pub. L. No. 101-73, 103

Stat 183 (1989) .......................................................................................................................50n

-xii-

Treatises

Restatement (Second) of Torts § 547 (1979) .................................................................................57

Restatement (Second) of Torts § 549 (1979). ................................................................................65

AND NOW COMES Defendant McGraw Hill Financial, Inc. (“S&P”),1 by and through

its undersigned attorneys and pursuant to Pennsylvania Rule of Civil Procedure 1035.2, hereby

files the following Brief in Support of in Motion for Summary Judgment.

PRELIMINARY STATEMENT

As touted on its website and in its securities filings, the stated mission of Plaintiff Federal

Home Loan Bank of Pittsburgh (“Plaintiff” or the “Bank”) is to ensure the flow of credit and

mortgage funding to its hundreds of member financial institutions—members that included high-

ly sophisticated entities such as Chase Bank USA, N.A. (“Chase”) and Lehman Brothers Bank,

FSB (“Lehman”).2 A primary way that the Bank seeks to carry out this mission is through its

investments in private label mortgage-backed securities (“PLMBS”). By 2007, the Bank had

amassed an enormous investment portfolio that included $10.5 billion in PLMBS.3 Among these

massive investment positions were the 14 “prime” and “Alt-A” PLMBS purchased by the Bank

in 2006 and 2007 (the “Certificates”) that remain at issue in these cases.4 As the record demon-

strates, the Bank purchased these securities from brokers and sponsors unaffiliated with S&P

based on the Bank’s independent investigation and assessment of the securities’ risks and poten-

1 As of May 1, 2013, Defendant The McGraw-Hill Companies, Inc. was renamed McGraw Hill Financial,

Inc. (“McGraw Hill”). Because the sole claim in this case concerns McGraw Hill’s former business unit,

Standard & Poor’s Ratings Services, we refer to it herein as “S&P.”

2 See FHLBank Pittsburgh, About Us, http://www.fhlb-pgh.com/about-us/ attached to the Declaration of

Whitney M. Smith dated October 13, 2014 (“Smith Decl.”) as Ex. 95.

3 Smith Decl. Ex. 50, at 76 (FHLB Pittsburgh, 2007 Form 10-K (March 13, 2008)).

4 The Certificates were issued by the transactions identified as Countrywide Alternative Loan Trust 2006-

J3 (“CWALT 2006-J3”), Countrywide Alternative Loan Trust 2006-J6 (“CWALT 2006-J6”), IndyMac

INDX Mortgage Loan Trust 2006-AR29 (“INDX 2006-AR29”), Lehman Mortgage Trust 2006-8 (“LMT

2006-8”), Residential Asset Securitization Trust 2006-A16 (“RAST 2006-A16”), Countrywide Alterna-

tive Loan Trust 2007-J1 (“CWALT 2007-J1”), Countrywide Alternative Loan Trust 2007-1T1 (“CWALT

2007-1T1), CHL Mortgage Pass-Through Trust 2007-J3 (“CHL Trust 2007-J3”), Structured Adjustable

Rate Mortgage Loan Trust Series 2007-10 (“SARM 2007-10”), J.P. Morgan Mortgage Loan Trust 2007-

A5 (“JMMT 2007-A5”), J.P. Morgan Mortgage Loan Trust 2007-A6 (“JMMT 2007-A6”), Structured Ad-

justable Rate Mortgage Loan Trust Series 2007-11 (“SARM 2007-11”).

-2-

tial for profit. As the record further demonstrates, the Bank has received (and continues to re-

ceive) interest and principal payments on the Certificates it still holds and has already recovered

its entire aggregate investment in the 14 Certificates, plus nearly $200 million more. On these

grounds, and a number more, summary judgment should be granted.

Years after its purchases of the Certificates, in 2009, in the midst of what Alan Greenspan

has described as the “most wrenching [financial crisis] since the end of the second world war,”5

Thereafter, however, in its annual report to Congress, in May 2009, the Bank’s regulator sharply

criticized the Bank’s investment strategy, noting that the Bank “at times has emphasized short-

term earnings and returns to member institutions, rather than moderating longer-term risks and

ensuring the FHLBank’s financial stability.”7 Quick to deflect its regulator’s criticisms of its in-

vestment decisions, the Bank filed these cases shortly thereafter in the fall of 2009.

The Bank’s Complaints named multiple defendants, including the entities that sponsored,

structured and sold the securities to the Bank (the “Securities Defendants”). The Bank asserted

that the Securities Defendants, which included affiliates of the Bank’s own members, had lied to

the Bank regarding the underwriting guidelines used to originate the loans underlying the Certif-

icates. The Bank has also asserted that the Securities Defendants provided “bad loan data to the

rating agencies,” which “effectively understated the risk of default, the severity of loss, and the

5 Smith Decl. Ex. 51 (Alan Greenspan, We Will Never Have a Perfect Model of Risk, Financial Times,

(Mar. 16, 2008)).

6 Smith Decl. Ex. 58, at PGH-FHLB00376551; see also Smith Decl. Ex. 62, at 150 (FHLB Pittsburgh

2008 Form 10-K).

7 Smith Decl. Ex. 64, at 63 (Fed. Housing Finance Authority, Report to Congress 2008) (May 18, 2009)).

-3-

amount of credit enhancement needed to insulate AAA certificates from loss.”8

In the Complaints, the Bank also named the credit rating agencies that had assigned rat-

ings to the Certificates, Moody’s, Fitch and S&P (the “Rating Agency Defendants”). The Bank

has never alleged any communications between these independent rating agencies, much less a

conspiracy, and it is undisputed that they each assigned their highest ratings to the securities at

issue. See Demonstrative Ex. A.11.9

As a result of settlements and the prior Orders of the Court dismissing certain claims, all

that remains of these cases is a single fraud claim against the sole remaining defendant, S&P.

While S&P assigned ratings to the 14 Certificates still at issue, the fact is that the Bank pur-

chased the vast majority of these Certificates before there were any credit ratings by S&P on

which the Bank could have possibly relied. Indeed, 12 of the 14 Certificates ultimately rated by

S&P were purchased by the Bank after the Bank had analyzed the Certificates and participated

in negotiations affecting the final structure of the Certificates but before S&P had made any

statement whatsoever about them. Thus, in pursuing claims against S&P, the Bank seeks to

make S&P the after-the-fact insurer of investments the Bank itself negotiated. But, the absence

of any pre-purchase statement by S&P is fatal to the Bank’s fraud claim. See Section I.A.

Moreover, the credit ratings that S&P ultimately issued were not “false.” Credit ratings

are statements of opinion. An opinion is only actionable if it both lacks an objective basis and is

subjectively disbelieved by the speaker at the time expressed. As the Court has already held in

8 Smith Decl. Ex. 80, at 5 (Pl.’s Mem. in Support of Motion for Leave to Amend Complaint to Seek Puni-

tive Damages from Countrywide (Oct. 2, 2013)). The statements made to the Court by the Bank in its

written submissions are binding admissions. See Rizzo v. Rohrback, 8 Pa. D. & C.3d 122, 126 (Ct. Com.

Pl. 1978) (“[A]n admission made on the record in the course of a judicial proceeding . . . is competent as

evidence in the same case.”).

9 The Demonstrative Exhibits can be found in Tabs A.1-12 of Volume I of the Appendix in Support of

McGraw Hill’s Motion for Summary Judgment (the “Appendix” or “App.”).

-4-

these cases, “[t]he test is not whether the maker of the opinion should have known that the rat-

ings were false and misleading – this is a negligence standard, the use of which is barred by the

First Amendment.”10 The Bank cannot make the required showing. First, as confirmed by the

Bank’s pre- and post-purchase analysis, as well as the independent opinions of various other

market participants, there was an objective basis for S&P’s forward-looking opinions regarding

the creditworthiness of the Certificates. See Section I.B. Second, there is no evidence in the

record that the relevant S&P rating committees subjectively disbelieved the ratings they as-

signed. The Court has already held that the Bank must produce such evidence for a fraud claim.

The Bank’s failure to do so compels summary judgment. See Section I.C.

Further, the Bank performed its own pre-purchase credit analysis and relied on its own

investigation of the Certificates, not on S&P’s later-published opinions. See Section II.A. In

fact, the Bank entered into a written contract with S&P pursuant to which the Bank expressly

disclaimed any reliance on S&P’s ratings. See Section II.B. In addition, the Bank’s attempt to

convert S&P’s credit ratings into free insurance policies against investment losses has no basis in

the record (or in common sense) and falls far short of meeting the justifiable reliance require-

ment necessary for its fraud claim. See Section II.C.

Finally, although it perhaps hoped to earn more, the Bank received nearly $200 million

more in principal and interest payments on the investments at issue than it initially paid for them.

The Bank thus has no out-of-pocket, or legally cognizable,

loss and its fraud claim in turn fails as a matter of law. See Section III.

10

See Federal Home Loan Bank of Pittsburgh v. JP Morgan Securities LLC, No. GD09-016892, 2010

WL 7928643, at *9 n.8 (Pa. Ct. Comm. Pl. Nov. 29, 2010) (hereinafter “November 29, 2010 Ruling”).

11 Smith Decl. Ex. 18

Id.

-5-

Each of these points is independently fatal to the Bank’s claims.12

FACTUAL BACKGROUND

Overview of the Federal Home Loan Bank of Pittsburgh

Plaintiff is one of 12 Federal Home Loan Banks (the “FHLBs”) created by Congress in

1932 (JPM I ¶ 33)13 and describes itself as “a fundamental part of the country’s financial system,

like the Federal Reserve System or the Federal Deposit Insurance Corporation.” (Id. ¶ 34). The

Bank is regulated by the Federal Housing Finance Agency (“FHFA”), the successor of the Fed-

eral Housing Finance Board (“FHFB”).14 12 U.S.C. § 1440. Over the relevant time period, the

Bank managed, and invested in, billions of dollars in mortgage assets, (see Smith Decl. Ex. 50, at

49 (FHLB Pittsburgh 2007 Form 10-K)),

See Craig Howie

(Head of Advances and Collateral at FHLB) Tr. 488:7-13; Paul Dimmick (then Head of Capital

Markets at FHLB) Tr. 49:3-10.

Peter

Rubinsky (FHLB) Tr. 275:14-23.

“Member banks” within a given FHLB’s geographic reach purchase capital stock of the

12

S&P presents its summary judgment motion without citation to the documents produced by the Bank

but later clawed-back on the basis of a claimed bank examiner’s privilege. The motion regarding the use

of such documents, as well as other documents withheld from production by the Bank on the same

grounds, was fully submitted to the Court in November 2013 and remains pending.

13 Each of the Complaints is cited herein as follows: “JPM I” refers to the Amended Complaint filed in

Federal Home Loan Bank of Pittsburgh v. J.P. Morgan Securities, Inc. et al., No. 09-16892 (C.P. Alle-

gheny) on January 8, 2010; “JPM II” refers to the Amended Complaint filed in Federal Home Loan Bank

of Pittsburgh v. J.P. Morgan Securities, Inc. et al., No. 09-16893 (C.P. Allegheny) on January 8, 2010;

“Lehman” refers to the Complaint filed in Federal Home Loan Bank of Pittsburgh v. The McGraw-Hill

Companies, Inc. et al., No. 09-17818 (C.P. Allegheny) on October 2, 2009; “Countrywide” refers to the

First Amended Complaint filed in Federal Home Loan Bank of Pittsburgh v. Countrywide Securities

Corp., et al., No. 09-18482 (C.P. Allegheny) on January 23, 2014.

14 “The Bank’s Regulator” refers to either the FHFA or FHFB as appropriate given the time period.

-6-

FHLB in exchange for, most notably, the ability to obtain funding from the FHLB to originate

mortgage loans. See Smith Decl. Ex. 50, at 1 (FHLB Pittsburgh 2007 Form 10-K); JPM I ¶ 36-

37. Over the relevant time period, the Bank’s members consisted of hundreds of U.S. lending

institutions,

Affiliates of Chase and Lehman were involved in the structuring and/or sale of 9 of

the 14 Certificates at issue in these cases, with an aggregate par value at purchase of about $2

billion.16 JPM I ¶¶ 64, 93, 105; JPM II ¶ 57; Lehman ¶¶ 5, 39, 67, 83.

Over the relevant time period, the Bank performed its mission in three primary ways: (1)

by generating earnings for the benefit of its members through investments in PLMBS; (2) by ex-

tending advances and loans to its member banks so they could in turn extend mortgages to poten-

tial borrowers; and (3) by purchasing mortgage loans from its members through a program

known as the Mortgage Partnership Finance Program (the “MPF Program”). Each of these activ-

ities is described further below.

Investments in PLMBS

“A residential mortgage-backed security” “represents the right to receive a portion of the

cash flows generated by a collection of residential home mortgage loans.” See Lehman ¶ 23;

JPM I ¶ 42 (same); JPM II ¶ 26 (same); Countrywide ¶ 41 (same). “[D]ifferent risk levels, or

‘tranches’ of risk, are created by using various types of credit enhancement, such as subordinat-

ing lower tranches to absorb losses first, overcollateralizing the loan pools in excess of the bond

amount, or creating an excess spread fund to cover the difference between the interest collected

15

See Craig Howie (FHLB) Tr. 300:18-24; 348:10-13.

16 JPMorgan Chase & Co. controlled more than 10% of JP Morgan Securities, Inc., which was a “seller

and participant” with respect to 5 Certificates at issue. JPM I ¶¶ 3, 13-14; JPM II ¶ 3. Affiliated Lehman

entities Lehman Brothers Holdings Inc. and Structured Asset Securities Corporation were involved in the

origination, securitization, and/or sale of 4 Certificates at issue. Lehman ¶¶ 5-6.

-7-

from borrowers and amounts owed to investors.” In re Lehman Bros. Mortgage-Backed Sec.

Litig., 650 F.3d 167, 171 (2d Cir. 2011). See also November 29, 2010 Ruling, 2010 WL

7928643, at *13 (noting that “the credit quality of the mortgage pool underlying each certificate

plus credit enhancement” must be sufficient to support the ratings assigned to a security).

“PLMBS” (short for “private label mortgage-backed security”) is a term used to describe

mortgage-backed securities that are securitized with mortgages that do not conform to the criteria

set by the Government Sponsored Enterprises Freddie Mac, Fannie Mae and Ginnie Mae. The

mortgages that make up these securities do not have the backing of the government and as a re-

sult carry a greater risk.17

The Bank maintained a large investment portfolio that, in 2007, included $10.5 billion in

PLMBS

Smith Decl. Ex. 50, at 76 (FHLB Pittsburgh, 2007 Form 10-K); Dimmick (FHLB) Tr.

112:19-113:5.

(See Dimmick (FHLB) Tr. 118:4-119:5; 808:24-809:11).

Smith Decl. Ex. 42, at PGH-FHLB00150782

Dimmick (FHLB) Tr. 808:24-809:11;18 Smith Decl. Ex. 42, at PGH-FHLB00150734.

17

See Private-Label Mortgage Backed Securities Take Root, Financial Times, dated February 22, 2013

(Smith Decl. Ex. 77).

-8-

Advances and Loans to Member Banks

Kristina Williams (Chief Financial Officer

(“CFO”) at FHLB) Tr. 311:17-312:1; Howie (FHLB) Tr. 137:17-138:18.19

See David Manganaro (Collateral

Manager at FHLB) Tr. 179:5-12).

Manganaro (FHLB) Tr. 178:6-20, 192:22-193:2; see also Howie (FHLB)

Tr. 315:14-25.

Smith Decl. Ex. 41, at

PGH-FHLB0066747-48

Howie (FHLB) Tr. 323:1-24; Manganaro (FHLB) Tr. 207:20-208:20.

the Bank purchased $230 million of PLMBS backed by

Lehman loans in October 2007 and purchased another $136 million of PLMBS backed by Leh-

19 See also Smith Decl. Ex. 42, at PGH-FHLB00150760

; Smith Decl. Ex. 49, at PGH-FHLB00692362-63

); see also Howie (FHLB) Tr. 243:16-17; 244:23-245:5

-9-

man loans in November 2007. These two purchases are among those that serve as the basis for

the Bank’s claim against S&P.

The MPF Program

The Bank also bought mortgage loans directly from its members through the MPF Pro-

gram. Smith Decl. Ex. 50, at 11 (FHLB Pittsburgh 2007 Form 10-K). To participate in the MPF

Program, the Bank required its members to supplement the loan assets to be purchased by the

Bank with extra “credit enhancement” to assure that “the Bank’s exposure to credit risk on [the

relevant] mortgage loans is no greater than that of a mortgage asset rated at least AA.” Id. at 56.

To calculate the amount of “credit enhancement” needed to satisfy this condition, the Bank con-

ducted a credit analysis similar to the analysis a rating agency performs in assigning a credit rat-

ing to a securitization.

See Howie (FHLB)

Tr. 257:14-258:25.

See Smith Decl. Ex. 22, at PGH-

FHLB00468024

-10-

Smith Decl. Ex. 31,

at FHLBC-MCGRAW-SUB-00000015 (KPMG Validation)

See also Smith Decl. Ex. 30, at PGH-

FHLB00581915

The Bank’s Investment Process for PLMBS

Smith Decl. Ex. 26, PGH-FHLB00518399

Id. at PGH-FHLB00518401.

See, e.g.,


20

Smith Decl. Ex. 16, at PGH-

FHLB00574712.

-11-

Declara-

tion of John Schoolman, dated October 13, 2014 (“Schoolman Decl.”) Ex. 61, at PGH-

FHLB00310019

Dimmick (FHLB) Tr. 208:21-25; Smith Decl. Ex. 15, at PGH-FHLB00211582,

(see, e.g.,

Catherine Hewlett (Trader at FHLB) Tr. 831:9-833:10)

See Hewlett (FHLB) Tr. 180:17-20


Dimmick

(FHLB) Tr. 67:2-21; 212:5-213:6; 1690:15-1691:2

21

Dimmick (FHLB) Tr. 38:23-25.

Id. at 39:1-3.

Rubinsky (FHLB) Tr. 86:17-21; 169:18-170:6.

Elizabeth Cates (FHLB) Tr. 74:7-9; 75:16-25.

-12-

See Dimmick (FHLB) Tr. 399:14-401:20; Hewlett (FHLB)

Tr. 97:17-25, 413:21-414:4

Hewlett (FHLB) Tr. 90:10-19; Smith Decl. Ex. 85, at 6-17

Pl.’s Suppl. Resp. to S&P’s Interrog. No. 6 (Jan. 10, 2014) (“Pl. Resp. to Interrog. No. 6”)).

Hewlett (FHLB) Tr. 645:5-17; Smith Decl., Ex. 85, at 9

(“Pl. Resp. to Interrog. No. 6”) (“The source of this information is presently unknown, but most

likely came from [the broker].”).

(see, e.g., Hewlett (FHLB) Tr. 1069:24-1070:3;

1071:6; Smith Decl. Ex. 45, at PGH-FHLB00127608

See Dimmick (FHLB) Tr. 208:1-19.

See, e.g., Hewlett (FHLB) Tr. 947:6-10; Schoolman

Decl. Ex. 61, at PGH-FHLB00310019

See Wil-

liams (FHLB) Tr. at 141:3-8

-13-

Dim-

mick (FHLB) Tr. 1203:15-1203:18

Dimmick

(FHLB) Tr. 1551:24-1552:11

Hewlett (FHLB) Tr. 324:18-

325:10

See, e.g., Dimmick

(FHLB) Tr. at 1558:1-1559:1

Rating agency opinions simply had nothing to do with it.

Indeed, the Bank’s process of negotiation, analysis and purchase almost always took

place before S&P rated the security.

See Demonstrative Exs. A.1-A.1024 and page 28, infra).

Dimmick (FHLB) Tr. 1117:20-

1119:25; Smith Decl. Ex. 82, at Response to Interrogatory No. 4 (Pl.’s Obj. and Suppl. Resp. to McGraw-

Hill’s Interrogs. Regarding Allegations Made by Plaintiff) (Nov. 11, 2013).

24 App. Vol. I, Tabs A.1-A.10.

-14-

The

Bank’s purchase was also typically made before the Sponsor of the Certificate had finalized the

prospectus supplement governing the terms of the security and it was filed with the SEC.25

Compare Smith Decl. Ex. 85, at 6-17 (Pl.’s Resp. to Interrog. No. 6 (listing dates of prospectus

supplements), with Chart at page 28, supra. 26


Id. at PGH-

FHLB00575864.

Dimmick (FHLB) Tr. 490:9-19

25

The trusts that issue the Certificates are the “filers” of the Offering Documents and are referred to here-

in as the “Issuers.” The entities that controlled those trusts and sponsored and sold the securities here,

i.e., JPMorgan, Countrywide, Indymac and Lehman, are referred to herein as the “Sponsors.” See Smith

Decl. ¶¶ 99-110, setting forth links to these publicly filed and publicly available documents.

See, e.g., Hewlett (FHLB) Tr. 1102:14-17

See id. at 965:14-21.

-15-

Standard & Poor’s and Its Credit Rating Opinions

S&P is a credit rating agency registered with the Securities and Exchange Commission

(“SEC”) as an NRSRO. Its ratings are the forward-looking opinions of committees of rating pro-

fessionals regarding the creditworthiness of particular securities and securities issuers.27 S&P’s

rating opinions are stated in the form of letter designations, AAA to D, and reflect the relevant

rating committee’s collective opinion about the relative capacity of a particular obligation or ob-

ligor to timely pay interest and principal in accordance with the terms of a given obligation.

Smith Decl. Ex. 29, at S&P-FHLB 0046459-61 (Standard & Poor’s Ratings Definitions (2007)).

S&P’s ratings are made available on S&P’s website, S&P’s subscription-based services and

through financial reporting services such as Bloomberg. See Declaration of Jeffrey Simon (S&P)

(“Simon Decl.”) ¶ 3;28 Hewlett (FHLB) Tr. 685:4-9

S&P publishes its ratings definitions on its website.29 As disclosed, S&P’s AAA designa-

tion represents the collective opinion of the members of an S&P rating committee that an obli-

gor’s present capacity to meet its financial commitments is “extremely strong.” See Smith Decl.

Ex. 29, at S&P-FHLB 0046459 (Standard & Poor’s Ratings Definitions). Credit rating opinions

are not guarantees against losses at any point in the future. See Plumbers’ Union Local No. 12

Pension Fund v. Nomura Asset Acceptance Corp., 632 F.3d 762, 775-76 (1st Cir. 2011) (“If the

purchaser wants absolute protection against errors of opinion, the answer is insurance rather than

27

Smith Decl. Ex. 96 (Standard & Poor’s Ratings Services Form NRSRO Application, available at

http://www.standardandpoors.com/en_US/web/guest/regulatory/form-nrsro).

28 App. Vol. I, Tab B.

29 See Smith Decl. Ex. 96 (Ex. 1 to S&P’s Form NRSRO Application, available at

http://www.standardandpoors.com/en_US/web/guest/regulatory/form-nrsro); see also Simon Decl. ¶ 7.

-16-

lawsuits [against credit rating agencies].”).30

S&P publishes its credit ratings. See Simon Decl. ¶¶ 3, 6. These publications also con-

tain information regarding the nature and limitation of credit ratings, including that they “are

solely statements of opinion and not statements of fact or recommendations to purchase, hold, or

sell any securities or make any other investment decisions. Accordingly, any user of the infor-

mation contained herein should not rely on any credit rating or other opinion contained herein in

making any investment decision. Ratings are based on information received by Ratings Ser-

vices.” See Simon Decl. Exs. 1, 2, 3.

S&P’s discloses its rating process for PLMBS to the public as follows:

• First, S&P begins with a loan-by-loan collateral analysis of the proposed pool by an-

alyzing what is commonly referred to as a “loan tape”31 using its LEVELS model.32

Loan tapes are provided to S&P by the sponsors of the PLMBS.

• If excess spread33 is a source of credit enhancement, S&P analyzes the cash flows of

the transaction by using another of its ratings models, the SPIRE model.34

30

See, e.g., Marshal Auron (Chief Credit Officer (March 2008 to April 2009) at FHLB) Tr. 56:3-57:3

James Michael Hemphill (Chief Credit Risk Officer (2004-2008)

at FHLB) Tr. 273-74

Cates (FHLB) Tr. 410:10-20

Dimmick (FHLB) Tr. 1312:23-1313:18

31 A “loan tape” is an electronic spreadsheet which contains multiple characteristics regarding each mort-

gage in the collateral pool including, among other things, delinquencies, location of the mortgaged prop-

erty, and additional financial information about the borrower. See, e.g., Smith Decl. ¶¶ 111-16 (referenc-

ing links to loan tapes available on the SEC website).

32 See Smith Decl. Ex. 36, at 9 (Testimony of Susan Barnes, “Subprime Mortgage Market Turmoil: Ex-

amining the Role of Securitization” (April 17, 2007) (“Barnes Congressional Testimony”) (“S&P evalu-

ates the overall creditworthiness of a pool of mortgage loans by conducting loan level analysis-each

mortgage loan is analyzed individually. This analysis is performed using our LEVELS model.”)). Susan

Barnes was the head of S&P’s RMBS group during the relevant period.

33 Excess spread is a “type[] of credit enhancement” made up of “the difference between the interest col-

lected from borrowers and amounts owed to investors.” In re Lehman Bros. Mortgage-Backed Sec. Litig.,

650 F.3d at 171.

34 See Smith Decl. Ex. 36, at 10 (Barnes Congressional Testimony); see also Smith Decl. Ex. 10 (S&P

-17-

• An S&P analyst will then review the deal’s transactional documents regarding the

legal and structural aspects of the transactions.35

• Following these steps, a rating committee convenes.36 S&P’s ratings on the Certifi-

cates, like all of S&P’s ratings, are assigned by committee.37

“Rating agencies generally do not . . . conduct audits or due diligence reviews of issuer-

provided information.” Smith Decl. Ex. 3, at 26 (SEC Report on the Role and Function of Credit

Rating Agencies in the Operation of the Securities Markets (January 2003)). Similarly, S&P

does not “rate to fraud,” that is to say S&P neither assumes nor speculates about possible fraud in

the information it is given.38 Instead, generally, S&P relies on the institutions that structure and

sell securities to warrant that the information provided to S&P is accurate and complete in all

Launches SPIRE Cash Flow Model for RMBS (September 12, 2005)); Smith Decl. Ex. 92 (Plaintiff’s Ex-

pert Report of Professor Peter Beling on the Rating Methodologies and Models of S&P (June 23, 2014)

(“Beling Report”), ¶ 19

35 Smith Decl. Ex. 36, at 11 (Barnes Congressional Testimony (“S&P will review the legal documents,

and where appropriate, opinions of third party counsel that address transfer of the assets and insolvency of

the transferor, as well as security interest and other legal or structural issues.”)).

36 See id., at 6 (“To determine a rating, we convene a rating committee comprised of S&P personnel who

bring to bear particular credit experience and/or structured finance expertise relevant to the rating.”);

Smith Decl. Ex. 8 (Testimony of Kathleen Corbet before Senate Committee, “Examining the Role of Rat-

ings Agencies in Capital Market” (S&P DOJ 0068381) (February 2005) (“When sufficient information to

reach a rating conclusion has been received and analyzed, we convene a rating committee comprised of

S&P Ratings Services personnel who bring to bear particular credit experience and/or expertise relevant

to the rating.”)).

37 See Smith Decl. Ex. 13, at 3-4 (Report on Implementation of Standard & Poor’s Ratings Services Code

of Conduct (February 2006) (S&P DOJ 1995727) (“The rating committee process is central to Ratings

Services analytic quality and consistency. The rating committee is comprised of individuals who collec-

tively have the knowledge and expertise in developing a rating for that type of issuer or issue. . . . Ratings

are determined by the vote of a rating committee, not an individual analyst.”)).

38 See Errol Arne (S&P Analyst) Tr. 217:24-218:2 George Kimmel (S&P

Analyst) Tr. 113:9-114:22

-18-

material respects. See Smith Decl. Exs. 19 & 25; Schoolman Decl. Exs. 9, 13, 21, 25, 32, 35, 45,

50, 56, 62 (S&P Rating Letters); see also Smith Decl. Ex. 11, at S&P-FHLB 0002865-66 & Ex.

38, at S&P-FHLB 0002883 (Standard & Poor’s Ratings Services Code of Conduct (October

2005 & June 2007)). For PLMBS, S&P relies upon sponsor or issuer representations and war-

ranties that, inter alia, the information provided to S&P regarding the pool of underlying loans is

true and accurate.39 In fact, the Bank’s proffered expert, Dr. Joseph Mason,40 acknowledged this

fact in a recent report he submitted in another case filed in the Southern District of New York:

“rating agencies also do not have access to loan files and underwriting manuals, but rely crucial-

ly upon limited loan information supplied by the securitizer.”41 Mason concluded that if loan

information is misrepresented, as the Bank has alleged here, then the “market will be unable to

establish the true risk of the loans and therefore structure and price that risk appropriately.”42

S&P’s rating criteria, including the criteria used to rate PLMBS, is also the result of a

committee process. See Scott Mason (S&P Analyst) Tr. 22:2-7

S&P’s criteria reflects the judgment of the criteria committee as to the

factors that are relevant to a security’s likelihood of repayment of principal and interest. Mason

39

See Matthew Maciaszek (S&P Analyst) Tr. 103:5-15

George Kimmel (S&P) Tr. 122:20-123:3

Frank Raiter (former-head of RMBS at S&P (retired April 2005)) Tr. 64:8-65:6

Arne (S&P) Tr. 52:18-53:2

40 On June 23, 2014, pursuant to a schedule agreed to by the parties and ordered by the Court, the Bank

served S&P with two reports it intends to rely on in these cases: Expert Report of Dr. Joseph Mason and

the Beling Report, discussed supra n. 34. Smith Decl. Exs. 91 & 92.

41 Smith Decl. Ex. 79, at ¶ 29 (Report of Joseph R. Mason filed on September 27, 2013 in Fort Worth

Employees’ Retirement Fund v. J.P. Morgan Chase & Co., 1:09-cv-03701, Dkt. No. 224-1 (S.D.N.Y.)).

42 Id. at ¶ 30.

-19-

(S&P) Tr. 270:12-21

S&P publishes its criteria to the mar-

ket. See Dennis Marlo (Chairman of the Bank’s Board) Tr. 179:21-25

S&P’s rating criteria and assumptions for PLMBS are embedded in its rating models.

See, e.g., Smith Decl. Ex. 21, at PGH-FHLB00720996

These models are and were publicly available

throughout the relevant time

See supra p. 9. As S&P updates its criteria or assump-

tions, the LEVELS model is also updated, and S&P publishes these adjustments to the market.

See, e.g., Smith Decl. Ex. 21, at PGH-FHLB00720998

43

See Maciaszek (S&P) Tr. 26:6-13

; see also Steven Tencer (S&P Analyst) Tr. 75:1-9

44 See also Smith Decl. Exs. 14, 34, 44 (Standard & Poor’s Announces Release of LEVELS® Version

5.6(d) (Feb. 13, 2006) (S&P-FHLB82-00047417); Standard & Poor’s Enhances LEVELS® 6.0 (Mar. 1,

2007) (S&P-FHLB0062285) (announcing LEVELS 6.0 and explaining that S&P’s view is that “[h]igh

FICO pools require less credit enhancement”); Standard & Poor’s Enhances LEVELS® 6.1 Model (Nov.

9, 2007) at S&P-FHLB 00002262 (announcing LEVELS 6.1 and stating that S&P was reducing its reli-

ance on FICO scores as a predictor of default, given, inter alia, performance data on loans that had been

issued in the “expanded underwriting environment”).

-20-

See, e.g., Smith Decl. Ex. 22, at PGH-FHLB 00468024

To support and explain its views and ratings, S&P publishes commentaries and articles

about its opinions regarding the state of investment markets, including the housing and RMBS

markets. For example, on May 15, 2006, S&P published A More Stressful Test Of A Housing

Market Decline On U.S. RMBS, Smith Decl. Ex. 20 (S&P-FHLB 0083965), which made clear

that S&P’s ratings at that time were subject to a particular uncertainty relating to housing market

declines. The report concluded that “[i]f a more severe or prolonged recession occurs in con-

junction with a 20% national decline in home prices [as simulated], even more investment-grade

bonds would likely suffer downgrades.” Id. at S&P-FHLB 0083971. S&P further warned that

its simulation “assume[d] that unemployment is relatively uniform throughout the country and

peaks at 6.5%” and that “defaults are very sensitive to unemployment.” Id. The actual decline in

home prices and increase in unemployment during the three years following this S&P report sig-

nificantly exceeded those cautionary estimates, and was coupled with the “worst recession in

generations.” See Smith Decl. Ex. 70, at 3, 33 (2011 Economic Report of the President and An-

nual Report of the Council of Economic Advisers); Smith Decl. Ex. 72, at 101 (2012 Economic

Report of the President and Annual Report of the Council of Economic Advisers). All S&P pub-

lications were available to the Bank,45

45

Smith Decl. Ex. 4, at S&P-FHLB 0089289.

46 See, e.g., Smith Decl. Exs. 21 & 37

-21-

The Bank’s Investments

The single remaining claim in these cases relates to 14 PLMBS investments on which the

Bank allegedly earned less than it hoped. See JPM I, ¶ 64; JPM II, ¶ 54; Lehman, ¶¶ 39, 53, 67,

83; Countrywide, ¶ 64. Each Certificate is backed by “prime” or “Alternative A” (“Alt-A”)

mortgages, not “subprime” mortgages.47 See Simon Decl. Exs. 1-3; JPM I ¶ 63; JPM II ¶ 49;

Countrywide ¶ 63.

As S&P disclosed to the market, over the relevant time period, borrower FICO scores and

loan-to-value (“LTV”) ratios contained in the loan tapes provided to it by securities sponsors

and/or issuers weighed heavily in S&P’s rating analysis. Smith Decl. Ex. 34 (Standard & Poor’s

Enhances LEVELS® 6.0 Model (March 1, 2007)).48 PLMBS may be backed by one or more

mortgage pools providing collateral support. The pools directly and indirectly backing the Cer-

tificates had weighted average FICO scores ranging from 689 to 761, and LTVs ranging from

77.78% to 62.59%.49 Market participants generally consider FICO scores above 720 to be “high”

47

A “prime” mortgage meets the standards for quality mortgages set out by Fannie Mae and Freddie Mac,

the two government-sponsored enterprises (GSEs) responsible for purchasing the majority of home loans.

It is generally limited to borrowers with strong credit histories. Smith Decl. Ex. 2 (Standard & Poor’s

Structured Finance Glossary of Securitization Terms (“Securitization Glossary”) (June 25, 2003)); see

also http://homeguides.sfgate.com/prime-mortgage-loans-2615.html. An “Alt-A” mortgage is “a first-lien

residential mortgage loan that generally conforms to traditional ‘prime’ credit guidelines, although the

LTV ratio, loan documentation, occupancy status, property type, or other factor causes the loan not to

qualify under standard underwriting programs. Less-than-full documentation is typically the reason for

classifying a loan as ‘alternative A.’” Smith Decl. Ex. 2 (Securitization Glossary). A “subprime” loan is

a first- or second-lien residential mortgage loan made to a borrower who has a history of delinquency or

other credit problems. Id.

48 “A substantial body of economic research indicates that LTV ratio and credit score are among the most

important factors when estimating the risk level associated with individual mortgages.” See Smith Decl.

Ex. 7, at 4 (U.S. Gov’t Accountability Office, GAO-05-194, Mortgage Financing: Actions Needed to

Help FHA Manage Risks from New Mortgage Loan Products (2005)).

49 See Smith Decl. Ex. 47, at S-A-26, S-A-34, S-A-37, S-A-45 (SARM 2007-11 Pro. Supp.); Ex. 28, at S-

32, S-33, S-37, S-38 (RAST 2006-A16 Pro. Supp.); Ex. 27, at S-6, S-7 (LMT 2006-8 Pro. Supp.); Ex. 46,

at A-5, A-7, A-10, A-13 (JPMMT 2007-A6 Pro. Supp.); Ex. 40, at A-6, A-8, A-9, A-11, A-14 (JPMMT

2007-A5 Pro. Supp.); Ex. 33, at A-3, A-5, A-14, A-15 (CWALT 2007-J1 Pro. Supp.); Ex. 32, at S-A-3, S-

A-4, S-A-12, S-A-13 (CWALT 2007-1T1 Pro. Supp.); Ex. 17, at S-37, S-38, S-45, S-46, S-53, S-54, S-

-22-

FICO scores.50 Loans that have LTVs below 75% have been characterized as “low” LTVs.51

Based on the evaluations of these and other factors, in 2006 and 2007, the different rating

committees at S&P evaluating the Certificates rated the senior Certificates AAA. See, e.g. Si-

mon Decl. Exs. 1-3; Beling Report, ¶ 2.

See Beling Report ¶ 2

Over the seven or more years that these Certificates have been in existence, the Bank has

continued to receive principal and interest payments, and the interest income it has received has

substantially surpassed all of the Bank’s internal forecasts.52

See Affidavit of David J. Denis in Support of McGraw Hill Financial, Inc.’s

Motion for Summary Judgment (“Denis Aff.”),53 Ex. C. In fact, based on the interest and princi-

61, S-62 (CWALT 2006-J3 Pro. Supp.); Ex. 39, at A-3, A-4 (CHL 2007-J3 Pro. Supp.); Ex. 23, at S-31,

S-32 (CWALT 2006-J6 Pro. Supp.); Ex. 24, at S-35, S-37 (INDX 2006-AR29 Pro. Supp.); Ex. 43, at S-

A-15, S-A-23 (SARM 2007-10 Pro. Supp.).

50 See Office of Federal Housing and Enterprise Oversight (“OFHEO”); Smith Decl. Ex. 55 (Recent

Trends in Home Prices: Differences Across Mortgage and Borrower Characteristic (August 2008), at Fig-

ures 1a-1b); Smith Decl. Ex. 74 (Federal Reserve Bank of New York Staff Reports; Payment Changes

and Default Risk: The Impact of Refinancing on Expected Credit Losses (June 2012)).

51 See OFHEO Report: Recent Trends in Home Prices: Differences across Mortgage and Borrower Char-

acteristic (August 2008), at Figures 2a-2b; see also Smith Decl. Ex. 78, at 107 (The Federal Home Loan

Banks Combined Year-End Report for the Year Ended December 31, 2012 (stating that “an LTV of 80%

or lower” is a “benchmark[] indicating reduced credit risk of default”).)

52 See Smith Decl. Ex. 90, at 3-5 (Pl.’s Am. Obj. and Resp. to the Countrywide Defs.’ Fifth Set of Inter-

rog. (Apr. 23, 2014); Smith Decl. Ex. 81, at 107, 152, 160, 214, 222, 290, 296, 348 (Pl’s Obj. and Resp.

to the JPMorgan Defs.’ First Set of Req. for Admission to Plaintiff (Nov. 11, 2013)); see also Mason Ex-

pert Report ¶¶ 104-06 (explaining damages calculations that account for monthly principal and interest

distributions made by the relevant securitization trustees).

53 See App. Vol. I, Tab D.

-23-

pal received to date and the current market price for the Certificates still held by it, the Bank now

holds cash and marketable securities that are worth almost $200 million more than the amount

the Bank originally paid for the Certificates. (See Denis Aff., Ex. D; see also Section III).

The Bank’s Post-Purchase Review of its Investments

After purchase, the Bank periodically conducted an “Other-Than-Temporary Impair-

ment” or “OTTI” review of its PLMBS assets.

Smith Decl. Ex. 57

The OTTI review process was a “subjective” pro-

cess by which the Bank’s management determined whether it was “probable” in their view that

the Bank would “receive all of [its] contractual cash flows” in connection with each of the

PLMBS it owned. Smith Decl. Ex. 54, at 27 (FHLB Pittsburgh 2008 2Q Form 10-Q (Aug. 5,

2008)); Williams (FHLB) Tr. 216:7-9.

Williams (FHLB) Tr. 221:10-222:5; Smith

Decl. Ex. 60, at PGH-FHLB00695766; see also Smith Decl. Ex. 59, at PGH-FHLB00164182.

Williams (FHLB) Tr. 208:6-211:2, 222:14-223:20.

Based on its own rigorous analysis, from 2006 through 2008, the Bank reported in its

own audited financial statements its conclusion that each of the securities at issue would pay all

expected interest and principal. Smith Decl. Ex. 54, at 27 (FHLB Pittsburgh 2008 2Q Form 10-

Q; Williams (FHLB) Tr. 216:7-9

, 224:18-23. In so reporting, the Bank

independently confirmed S&P’s similar assessment of the very same securities. The Bank filed

-24-

its conclusions with the SEC in its quarterly filings, Smith Decl. Ex. 52, at 52,

Williams (FHLB) Tr. 220:24-221:9.

Smith Decl. Ex. 62 (FHLB Pittsburgh 2008

Form 10-K; Smith Decl. Ex. 59, at PGH-FHLB00192777

Smith Decl. Ex. 58, at 51.

These Lawsuits

In late 2009, despite repeated internal assessments and public assurances by the Bank

confirming that its PLMBS investment performance had been driven by unprecedented market

events that were unanticipated even by late 2008, the Bank sued for fraud, alleging that it had

been deceived in 2006 and 2007 by the Securities and Rating Agency Defendants.

The claims against the Securities Defendants alleged that these Defendants had “misrep-

resented the underwriting standards that were used in making the loans” underlying the Certifi-

cates, “misrepresented the credit quality of AAA-rated bonds issued from each Trust purchased

by Pittsburgh FHLB,” and that “[a]ll losses sustained by Pittsburgh FHLB associated with the

securities at issue resulted from Pittsburgh FHLB’s reliance on [the Securities Defendants]’ ma-

54

Based on performance data, S&P had already taken rating actions on the same Certificates;

See Demonstrative Ex. A.12 S&P’s Rating Actions

(App. Vol. 1, Tab A.12).

-25-

terial misrepresentations and omissions.”55 The Bank’s claims of fraud against Moody’s and

Fitch, like its claim against S&P, were based upon each agency’s credit ratings on the Certifi-

cates. See, e.g. Lehman ¶¶ 199; 215 (alleging that the ratings assigned by Fitch and Moody’s

were “fraudulent”). The credit ratings independently assigned by Moody’s and Fitch on the Cer-

tificates were identical to the credit ratings assigned by S&P. See Demonstrative Ex. A.11 (list-

ing the ratings assigned by each rating agency) (App. Vol. I, Tab A.11).

In these cases, the Bank has also asserted that the Securities Defendants misrepresented

the characteristics of the loans within these pools to both the Bank and the Rating Agency De-

fendants. In its filings to this Court, the Bank has stated that:

• “Countrywide knew the securities it sold to Pittsburgh-FHLB were not ‘AAA,’ be-

cause the data describing the underlying loans was corrupted by fraud and inflated

appraisals [and] many underlying loans were wrongly identified as ‘Full documenta-

tion’ loans.”56

• “Countrywide knew that, in providing bad loan data to the rating agencies, it effec-

tively understated the risk the loans would default, the severity of loss that would re-

sult from default, and the amount of credit enhancement needed to insulate the AAA

certificates Pittsburgh FHLB purchased, from loss.”57

• “Countrywide also knew that, in order for the rating agencies to accurately rate the

securities and require credit enhancement levels that would insulate AAA bonds

from loss, the rating agencies required accurate loan-level data.”58

• “Countrywide knew that the AAA ratings it received for its securities were not bona

fide” and “consistently provided the rating agencies with loan-level detail riddled

with inaccuracies.”59

55

Countrywide, ¶¶ 416, 425 (emphasis added). See also JPM I, ¶¶ 294, 309 (asserting nearly identical

allegations against JPMorgan); JPM II, ¶¶ 173, 188 (same); Lehman, ¶¶ 311 (asserting nearly identical

allegations against those Certificates’ underwriters).

56 Countrywide, ¶¶ 247, 248, 254. See also Smith Decl. Ex. 83, at ¶¶ 7, 8, 11

57 Id.

58 Id.

59 Smith Decl. Ex. 80, at 47-48 (Pl.’s Mem. in Support of Motion for Leave to Amend Complaint to Seek

-26-

The Bank has settled its claims against the Securities Defendants, and against Moody’s

and Fitch. See Smith Decl. Exs. 86, 87 & 93 (Orders dated Jan. 15, 2014 & Jul. 8, 2014). It now

seeks to hold S&P liable for the entirety of its supposed “losses.” Mason Report, ¶ 111 (dis-

claiming any effort to allocate losses).

APPLICABLE LEGAL STANDARDS

At summary judgment, “a non-moving party must adduce sufficient evidence on an issue

essential to his case and on which he bears the burden of proof such that a jury could return a

verdict in his favor. Failure to adduce this evidence establishes that there is no genuine issue of

material fact and the moving party is entitled to judgment as a matter of law.” Ertel v. Patriot-

News Co., 544 Pa. 93, 100-02, 674 A.2d 1038, 1041-42 (1996); see also Pa. R. Civ. P. 1035.2,

1035.3.

Generally, fraud requires “(1) a representation; (2) which is material to the transaction at

hand; (3) made falsely, with knowledge of its falsity or recklessness as to whether it is true or

false; (4) with the intent of misleading another into relying on it; (5) justifiable reliance on the

misrepresentation; and (6) the resulting injury was proximately caused by the reliance.” See,

e.g., Gibbs v. Ernst, 538 Pa. 193, 207, 647 A.2d 882, 888-89 (1994).60 Where, as here, a fraud

claim is based on an allegedly false opinion, subjective and objectively falsity must be shown.

See Section I.B.

In order to survive summary judgment, the Bank must come forward with “clear and

convincing” evidence of each of these elements—the “highest burden in [Pennsylvania] civil

law.” Weissberger v. Myers, 90 A.3d 730, 735 (Pa. Super. Ct. 2014) (quoting Spaw v. Springer,

Punitive Damages from Countrywide (Oct. 2, 2013), Case No. 09-018482, Dkt. No. 237.

60 Pennsylvania law and New York law are the same with regard to the elements of common law fraud.

See Zanett Lombardier, Ltd. v. Maslow, 815 N.Y.S.2d 547, 548 (1st Dep’t 2006), aff’d 2004 WL 5359470

(Sup. Ct. N.Y. Co. July 9, 2004).

-27-

715 A.2d 1188, 1189 (Pa. Super. Ct. 1998); Kostryckyj v. Pentron Lab. Techs., LLC, 52 A.3d

333, 338-39 (Pa. Super. Ct. 2012)). Evidence is only clear and convincing when it is “‘so clear,

direct, weighty, and convincing as to enable the jury to come to a clear conviction, without hesi-

tancy, of the truth of the precise facts of the issue.’” Rohm and Haas Co. v. Continental Cas.

Co., 566 Pa. 464, 476-78, 781 A.2d 1172, 1179 (2001) (citation omitted). Mere “[u]nsupported

assertions and conclusory accusations” are not sufficient. Blumenstock v. Gibson, 811 A.2d

1029, 1034 (Pa. Super. Ct. 2002) (affirming grant of summary judgment).

LEGAL ARGUMENT

I. THERE IS NO EVIDENCE OF AN ACTIONABLE MISSTATEMENT BY S&P

A. No S&P Rating Existed When the Bank Purchased the Vast Majority of the

Certificates

The Bank’s proof of a pre-purchase statement by S&P upon which it actually relied is in-

dispensable for a claim of fraud. See Shoemaker v. Commonwealth Bank, 700 A.2d 1003, 1005

(Pa. Super. Ct. 1997) (“To prevail on a fraud cause of action, a plaintiff must prove that . . . the

defendant made a misrepresentation . . . [and] the plaintiff justifiably relied upon the misrepre-

sentation.”); Pennsylvania Suggested Standard Civil Jury Instructions § 17.240 (Civ) (2013) (“In

order for a plaintiff to recover against the defendant, you must find . . . that the defendant made a

misrepresentation to the plaintiff [and] that the plaintiff relied on the defendant’s misrepresenta-

tion.”). A plaintiff cannot as a matter of law (or common sense) ground its fraud claim on a

statement that had yet to be made when it decided to act.61

61

This rule of law is known to and was conceded in another matter by the very same lawyers appearing

for the Bank here. See Gabriel Capital, L.P. v. NatWest Finance, Inc., 177 F. Supp. 2d 169, 174 & n.4

(S.D.N.Y. 2001) (granting defendants summary judgment and holding that “there could be no reliance on

the Offering Memorandum as a matter of law” where plaintiff was provided with final offering memoran-

dum after it decided to purchase the security). See also, e.g., Fulton Bank, N.A. v. UBS Securities, LLC,

Civ. A. No. 10-193, 2011 WL 5386376, at *11 (E.D. Pa. Nov. 7, 2011) (granting motion to dismiss for

failure to plead, inter alia, reliance where plaintiff-investor appeared to have already made its decision to

invest before it could have relied on a statement made by the defendant UBS); IKB Int’l S.A. v. Bank of

-28-

Here, with respect to 12 of the 14 Certificates, S&P had made no statement about the

Certificate before the Bank made its purchase.

(See Hewlett (FHLB) Tr. 1140:2-12

id. 1137:15-1139:11

Hewlett (FHLB) Tr. 942:9-14

see also Dimmick

(FHLB) Tr. 1887:11-25).

Since the Bank identified the relevant purchase date for each of the Certificates, see JPM

I ¶ 64; JPM II ¶ 54; Schoolman Ex. 4; Lehman ¶¶ 39, 53, 67, 83; Countrywide ¶ 64, those dates

can be easily compared to the dates when S&P issued its ratings. As the chart below indicates,

for the 12 Certificates listed, the Bank made its purchase before S&P had issued its ratings.

Security Plaintiff’s Purchase Date Date of S&P’s Rating Letter62

INDX 2006-AR29 September 26, 2006 September 28, 2006

LMT 2006-8 November 10, 2006 November 30, 2006

RAST 2006-A16 December 13, 2006 December 28, 2006

CWALT 2007-1T1 January 17, 2007 January 30, 2007

Am., 12 Civ. 4036 (LAK), 2014 WL 1377801, at *21 (S.D.N.Y. Mar. 31, 2014) (granting motion to dis-

miss on the basis that the trade dates alleged by the plaintiff all preceded the dates of the respective pro-

spectus supplements that were alleged to contain the misrepresentations at issue).

62 S&P communicates its ratings to the entity that engages it to rate the security in a “rating letter.” The

rating letter states, inter alia: “This letter constitutes Standard & Poor’s permission to you to disseminate

the above-assigned rating to interested parties. Standard & Poor’s reserves the right to inform its own

clients, subscribers, and the public of the rating.” Smith Decl. Exs. 19 & 25; Schoolman Decl. Exs. 9, 13,

21, 25, 32, 45, 50, 56, 62.

-29-

CWALT 2007-J1 January 31, 2007 February 28, 2007

CHL 2007-J3 June 28, 2007 June 29, 2007

JPMMT 2007-A5 (2A1) September 25, 2007 September 27, 2007

JPMMT 2007-A5 (3A1) September 25, 2007 September 27, 2007

SARM 2007-10 October 11, 2007 October 30, 2007

JPMMT 2007-A6 (2A1) November 15, 2007 November 29, 2007

JPMMT 2007-A6 (4A1) November 15, 2007 November 29, 2007

SARM 2007-11 November 16, 2007 November 30, 2007

At best, the only statement available to the Bank at purchase that had anything to do with

credit ratings was the statement by brokers not affiliated with S&P regarding the broker’s expec-

tation that the Certificate would ultimately receive top ratings from at least two rating agencies,

not necessarily including S&P. Those are not statements by S&P. And whatever claims might

lie against those speakers, their statements cannot support a claim of fraud against S&P as a mat-

ter of law. “[T]he law is clear that to prevail on a fraud claim, [the] plaintiff must establish [that]

. . . the defendant[] made a misrepresentation to the plaintiff.” Kane v. Peugeot Motors of Amer-

ica, No. CIV. A. 93-4011, 1994 WL 263341, at *5 (E.D. Pa. June 9, 1994) (emphasis added); see

also Phoenix Light SF Ltd. v. Merrill Lynch, No. 653235/2013 (N.Y. Sup. Ct. Oct. 3, 2014)

(Smith Decl. Ex. 94); see also Shoemaker, 700 A.2d at 1005.

This common-sense principle was applied to statements about “anticipated” ratings long

before the recent financial crisis in Quinn v. McGraw-Hill Cos., No. 97-3037 (C.D. Ill. Apr. 21,

-30-

1997), aff’d, 168 F.3d 331 (7th Cir. 1999) (Smith Decl. Ex. 1). In Quinn, a plaintiff bond inves-

tor received documents from a broker which stated that: “the bond’s issuers ‘anticipated’ that

Standard & Poor’s Ratings Group (S&P) . . . would give the bonds an ‘A’ rating.” The investor

later claimed it had purchased the bonds based “on the anticipated ‘A’ rating from S&P.” In

dismissing the claim against S&P, the District Court stated: “The Complaint only alleges that

when the banks bought the bonds, a third party unrelated to S&P or to Defendant represented

that it anticipated that the bonds would receive an ‘A’ rating from S&P. Furthermore, the Com-

plaint alleges that [plaintiff] relied on representations by [the broker] and by a third party regard-

ing the anticipated ‘A’ rating when he purchased the bonds. Thus, the Complaint fails to allege .

. . a false statement of material fact . . . and reliance by the plaintiff.” Just this month, a New

York court dismissed similar investor claims for RMBS losses where “the alleged misrepresenta-

tions . . . were set forth in [final prospectus] documents that post-date the purchase (and therefore

cannot constitute the basis of a fraud claim).” See Phoenix Light SF Ltd., supra at 2.

This case is not different.

These facts cannot support a claim against S&P. See

id.; see also Fulton Bank, 2011 WL 5386376, at *11 (“The fundamental flaw in [plaintiff’s] ar-

gument is that it has failed to allege any statements or actions by [defendant] upon which it re-

lied. . . . [Plaintiff] initially contacted its brokers . . . who encouraged purchasing [the security],

so it is much more likely that if any reasonable reliance occurred, it was based on those exchang-

es, independent of UBS.”); Scott v. LTS Builders, LLC, No. 1:10-CV-0581, 2012 WL 5207456,

at *5 (M.D. Pa. Oct. 22, 2012) (“Justifiable reliance requires reliance on a misrepresentation by

the defendant, not reliance on the conduct of a third party, or reliance on Plaintiffs’ own expecta-

-31-

tions as to what the report would say.”); Morilus v. Countrywide Home Loans, Inc., 651 F. Supp.

2d 292, 308 (E.D. Pa. 2008) (granting summary judgment to defendant where transaction closed

based on communications between plaintiff and broker and plaintiff provided no proof of “any

representations – let alone misrepresentations” made by defendant to plaintiff before closing).

The Bank does not dispute these facts (see Smith Decl. Ex. 85, at 6-17 (Pl.’s Resp. to In-

terrog. No. 6)) but argues that the essential threshold requirement of a pre-purchase statement by

S&P can be ignored because, the Bank now says, it could have backed out of its purchase if two

rating agencies—any two rating agencies—had not eventually rated the security AAA. See id. at

4, 25; Smith Decl. Ex. 84, ¶ 4 (Pl.’s Opp. to McGraw Hill’s Mot. to Compel Pl. to Resp. to Cer-

tain Interrog. (Dec. 16, 2013)); Hewlett (FHLB) Tr. at 1139:10. On its face, it is difficult to un-

derstand how such a contention permits a claim against S&P specifically; the Bank has never

cited any legal or factual support for this proposition.

Moreover, the Bank has not produced any supposed contractual provision supporting its

alleged right to cancel the trade for any reason having to do with ratings, let alone a provision

making its purchase contingent on a AAA rating from S&P. At the time of the Bank’s purchas-

es, the only deal document in existence was the prospectus (not the prospectus supplement),

which did not condition issuance on the transaction receiving any AAA rating, let alone any rat-

ing by S&P. See, e.g., Smith Decl. Ex. 39, at 109 (CHL 2007-J3 Prospectus, June 27, 2007

(stating that the securities would be rated “in one of the four highest rating categories63 by the

nationally recognized statistical rating agency or agencies . . . specified in the related prospectus

supplement”)). Notably, the “prospectus supplement,” like S&P’s ratings, did not exist at the

time of the Bank’s purchases in 11 of the same 12 instances. (Compare Smith Decl. Ex. 85, at 6-

63

These categories include a wide range of possible ratings that vary from BBB to AAA. Smith Decl. Ex.

29, at S&P-FHLB 0046459.

-32-

17 (Pl.’s Resp. to Interrog. No. 6 (listing dates of prospectus supplements), with Chart at page 28,

supra (listing the purchase dates)). The identical defect was also found in Phoenix Light, supra,

where the alleged misstatements in a post-purchase “final prospectus supplements” could not

support a claim of fraud because plaintiff’s “purchase decisions were made prior to the release of

the final prospectus supplements.” Phoenix Light SF Ltd., supra at 2.

Whatever claims might lie in contract or tort against brokers or sponsors for the alleged

assurance on which the Bank claims to have actually relied when it made its purchase decisions,

no statement, let alone a misstatement, by S&P existed that time. This fact is fatal to the Bank’s

claims against S&P with regard to these 12 Certificates.64

B. There is No Evidence that S&P’s Opinions Were Objectively False

Putting aside the fact that S&P’s credit ratings on the Certificates did not exist when the

Bank made its decisions to purchase, the Bank’s fraud claim based on subsequently issued opin-

ions requires the Bank to prove both that each opinion was objectively false and that it was sub-

jectively disbelieved by the speaker at the time it was expressed. See, e.g., In re Donald J.

Trump Casino Sec. Litig., 7 F.3d 357, 368 (3d Cir. 1993); Coleman v. Sears, Roebuck & Co.,

319 F. Supp. 2d 544, 551-52 (W.D. Pa. 2003) (granting summary judgment to defendant where

plaintiff failed to meet burden to, inter alia, present clear and convincing evidence that predic-

tion was “not genuinely and reasonably believe[d]” as required for Pennsylvania common law

fraud claim).65 There is no evidence, let alone clear and convincing evidence, to support either of

64

It is clear that in these 12 instances the Bank could not have possibly relied on an S&P rating, and the

Bank’s recurring practices strongly evince a generalized lack of reliance on actual ratings in place of as-

surances by brokers. Consistent with this record, there is also no evidence that the Bank actually relied on

S&P ratings in its purchases of the two remaining Certificates for various additional reasons. See Section

II, supra.

65 See also Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083 (1991); In re Valuevision Internat’l Inc.

Sec. Litig., 896 F. Supp. 434, 444-45 (E.D. Pa. 1995) (summarizing Virginia Bankshares as holding that

“subjective falseness alone cannot provide a basis for liability”). A statement that a price was “fair and

-33-

these requirements as to any of the ratings at issue.

To prove objective falsity, the Bank must demonstrate with clear and convincing evi-

dence that the rating opinions at issue had no objective basis, i.e., that “provable facts” existed

that “conflicted with or contradicted the opinion” issued. In re Credit Suisse First Boston Corp.,

No. Civ. A. 02-12056-GAO, 2005 WL 852455, at *5-*6 (D. Mass. Mar. 31, 2005) (dismissing

claim that an analyst’s “buy” rating on a security was objectively false), overruled on other

grounds by Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007); In re ValueVision

International Sec. Litig., 896 F. Supp. 434, 444 (E.D. Pa. 1995).

To make this showing, the Bank cannot rely on hindsight evidence of poor performance

during the financial crisis to show that a forecast did not pan out; this cannot make the opinion

objectively false when issued. See Coleman, 319 F. Supp. 2d at 551 (“However, predictions of

the future . . . cannot serve as a basis for a fraud claim simply because the statements are not re-

alized in the future.”); Denny v. Barber, 576 F.2d 465, 470 (2d Cir. 1978) (rejecting “fraud by

hindsight” because the law does not expect clairvoyance); Winer Family Trust v. Queen, 503

F.3d 319, 332 (3d Cir. 2007) (upholding dismissal based on plaintiff’s “impermissible attempt to

prove fraud by hindsight”); Podany v. Robertson Stephens, Inc., 318 F. Supp. 2d 146, 153-54

(S.D.N.Y. 2004). Hindsight bias is a particularly acute issue here because it is undisputed that

high” can “be false because, given the state of the corporation and the mood of the market, the price was

not fair and high” or “because the corporate officers who issued the statement did not believe that the

price was high or fair, even if objectively the price was high and fair. The former can be termed objective

falseness, while the latter can be termed subjective falseness.” ValueVision, 896 F. Supp. at 444. Recent

decisions involving fraud claims under the federal securities laws confirm the twin requirements of objec-

tive and subjective falsity for claims based on allegedly “false” opinions. See City of Edinburgh Council

v. Pfizer, Inc., 754 F.3d 159, 170 (3d Cir. 2014) (“Opinions are only actionable under the securities laws

if they are not honestly believed and lack a reasonable basis.”); Fait v. Regions Fin. Corp., 655 F.3d 105

(2d Cir. 2011) (establishing that liability under Sections 11 and 12 of the Securities Act of 1933 as to “be-

lief[s] or opinion[s]” can exist “only to the extent that the statement was both objectively false and disbe-

lieved by the defendant at the time it was expressed”); City of Omaha, Nebraska Civilian Employees’ Re-

tirement System v. CBS Corp., 679 F.3d 64, 67-68 (2d Cir. 2012) (applying Fait to claims under 10(b)

and 20(a) of the Securities Exchange Act of 1934).

-34-

S&P subsequently downgraded its ratings on the Certificates. But, falsity must be shown based

on information available at the time the opinion was issued. See In re Ikon Office Solutions, Inc.,

277 F.3d 658, 673 (3d Cir. 2002) (granting summary judgment on Section 10(b) claim because

“the mere second-guessing of calculations will not suffice; appellants must show that Ernst’s

judgment—at the moment exercised—was sufficiently egregious such that a reasonable account-

ant reviewing the facts and figures should have concluded that IKON’s financial statements were

misstated and that as a result the public was likely to be misled”); In re Sanofi-Aventis Sec. Litig.,

774 F. Supp. 2d 549, 567 (S.D.N.Y. 2011) (dismissing Section 10(b) claim on the basis of cer-

tain statements where “Plaintiffs have also failed to offer any specific allegations of contempo-

raneous institutional knowledge that could be ascribed to Sanofi that rendered the publicly ex-

pressed opinions false”) (emphasis added).

Here, the undisputed record shows that S&P’s opinions about the Certificates had an ob-

jective basis that was corroborated by the contemporaneous opinions of multiple sophisticated

market participants at the time, including the Bank itself. Under such circumstances, the Bank

cannot establish objective falsity. See MHC Mut. Conversion Fund, L.P. v. Sandler O’Neill &

Partners, L.P., 761 F.3d 1109, 1118 (10th Cir. 2014) (holding that complaint failed to state a

claim of fraud based on an opinion where “multiple and independent expert analysts who study

the company’s portfolio reach[ed] the same view” which served “to confirm rather than under-

mine the conclusion that the company’s opinion had a reasonable (if not universally shared) basis

for the opinion it expressed”); In re Ikon Office Solutions, Inc., 277 F.3d at 669 (finding that a

third party accounting firm’s subsequent audit “is highly probative of the competence of [de-

fendant’s] 1997 audit opinion and undermines any suggestion that [defendant] could not reason-

ably have opined that IKON’s financial statements fairly presented its financial condition in ac-

-35-

cordance with GAAP”); In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1426 (9th Cir. 1994)

(affirming decision granting summary judgment to defendant based on allegedly false accounting

opinion because plaintiff failed, inter alia, to meet its burden to “prove that . . . the accounting

judgments which were made were such that no reasonable accountant would have made the same

decisions if confronted with the same facts”) (citation and internal quotation marks omitted), su-

perseded by statute on other grounds, 15 U.S.C. § 78u-4.

Each of the Certificates at issue was rated by multiple rating agencies working inde-

pendently. See Demonstrative Ex. A.11 (App. Volume I, Tab A.11). Thus, at least one—if not

two—rating agencies, using its own methodologies and criteria, independently arrived at the

same view of the creditworthiness of the Certificates as S&P did. The Bank

Dimmick (FHLB) Tr. 1675:19-24.

Each of the Sponsors of the Certificates also independently endorsed the creditworthiness

of the Certificates in the Offering Documents,66 all of which were filed with the SEC (see, e.g.,

JPM I ¶¶ 210-211), subjecting the Sponsors and Issuers to potential liability under the Securities

Act of 1933. In re Bear Stearns Mortgage Pass-Through Certificates Litig., 851 F. Supp. 2d

746, 772 (S.D.N.Y. 2012) (“If Bear Stearns knowingly fed incomplete or inaccurate information

to the Rating Agencies . . . the ratings’ unqualified reproduction in the Offering Documents

would constitute an actionable misrepresentation and omission.”). As the Bank alleged in the

Complaints “[e]ach Defendant represented in the Offering Documents and verbally that each of

66 The Prospectuses and Prospectus Supplements (“Pro Supps.”), filed with the SEC in connection with each transaction, are referred to collectively herein as the “Offering Documents.”

-36-

the bonds” the Bank purchased “was worthy of being rated ‘AAA’” and “by providing a rating,

each Defendant represented that they had sufficient reliable facts on which to base a rating.”

See, e.g., Countrywide ¶¶ 170-71. Accordingly, as the Bank admits by its own allegations, each

of the Sponsors represented that the Certificates warranted AAA ratings based upon their own

evaluation of the mortgage characteristics of each security.

Finally, the evidence also shows that the Bank

See Factual Background, at 13; see also Smith Decl. Ex. 15, at PGH-FHLB00211582

See Factual Background, at 10.

After the Bank’s purchases, its own post-purchase monitoring of the Certificates further

demonstrates that, with actual performance data in hand, the Bank continued to believe the credit

quality of the Certificates was strong throughout 2008. As noted above, the Bank confirmed the

credit quality of the Certificates for OTTI accounting purposes,67 and concluded repeatedly

throughout 2008 that the Certificates would continue to pay interest and principal even as the

financial crisis progressed.

The Bank cannot demonstrate that there was no objective basis for

67

Smith Decl. Ex. 61, at PGH-FHLB00514116 (dated Feb. 24, 2009).

68 App. Volume I, Tab A.12.

-37-

S&P’s ratings in 2006 and 2007, when the Bank confirmed post-purchase

that there was an objective basis to believe that the Certificates would make timely payments.

In short, time and time again throughout this period, and based on its own analysis, the

Bank continued to take the same view as that expressed by S&P in 2006 and 2007 that the Certif-

icates at issue would continue to pay principal and interest, even in the face of late 2007 and ear-

ly 2008 reports of poor collateral performance among subprime securities and declines in market

value for all securities.

Smith Decl. Ex. 53, at PGH-FHLB00280782.

See Smith Decl. Ex. 56, at PGH-FHLB00412765 (emphasis added).

(Williams (FHLB) Tr. 226:4-22),

See Smith Decl. Ex. 58, at PGH-FHLB00276551

-38-

Against this overwhelming record, the Bank offers the report of Dr. Peter Beling

Dr. Beling’s Re-

port does not demonstrate objective falsity for at least three reasons:

First, Dr. Beling’s disagreements with S&P’s methodologies or analysis would, at best,

support only a claim “that it was unreasonable for the rating agencies to believe the ratings accu-

rately predicted the risk of nonpayment”—a claim this Court has already determined is barred by

the First Amendment. See November 29, 2010 Ruling, 2010 WL 7928643, at *10 n.9.71

Second,

The fact that the Sponsors, Moody’s, Fitch and the Bank all independently reached the same

conclusion demonstrates that there was, at least, an objective basis for S&P’s credit ratings. Dr.

Beling’s views are mere hindsight second-guessing that cannot support a fraud claim.

69

The Bank first reported that it recognized OTTI on seven PLMBS within its portfolio when it filed its

2008 annual report with the SEC on March 27, 2009. See Smith Decl. Ex. 62, at 119 (FHLB Pittsburgh’s

2008 Form 10-K). At that time the Bank recognized OTTI on certain Certificates at issue here, but still

maintained that it considered the price decline in the remainder of its portfolio to be “temporary” and that

the “unrealized losses and a decrease in fair value [were] due to interest rate volatility, illiquidity in the

marketplace, and credit deterioration in the U.S. mortgage markets.” Factual Background, at 23-24; Smith

Decl. Ex. 62, at 153-54 (2008 Form 10-K).

70

Smith Decl. Ex. 92, at 5-9

(Beling Report).

(Id. at 5; emphasis added).

-39-

Third,

The Bank

cannot support a claim of fraud with Dr. Beling’s after-the-fact, litigation-rooted criticisms.

In summary, as the record demonstrates, there is ample evidence in the record that multi-

ple independent market participants, including the Bank itself, held the opinion that the Certifi-

cates at issue were of the highest credit quality when the Bank purchased them. Thus, the Bank

cannot offer, as it must, clear and convincing evidence that S&P’s credit ratings on the 14 Certif-

icates at issue were objectively false when published.

C. There is No Evidence that S&P’s Opinions Were Subjectively Disbelieved

1. The Law Requires the Bank to Present Evidence that the Relevant

S&P Rating Committees Did Not Subjectively Believe the Ratings As-

signed to the Certificates at the Time They Were Assigned

The Bank’s fraud claim has been sustained to this point on the basis of its generalized al-

legations of S&P’s supposed disbelief and the liberal pleading standard for state of mind. Now,

after three years of discovery, the Bank can no longer rest on allegations. Instead, it must present

clear and convincing evidence that the speakers—in this case, each of the relevant rating com-

mittees that issued the ratings in these cases—did not subjectively believe their opinions when

expressed. See November 29, 2010 Ruling, 2010 WL 7928643, at *11 (holding Certificates at

issue actionable only “upon a showing that the rating agencies did not truly believe that the credit

quality of the mortgage pool underlying each certificate plus credit enhancement, if any, was suf-

-40-

ficient to support its AAA ratings at the time the ratings were assigned”).72

This required showing is governed by several principles of law. First, the Bank must pre-

sent evidence specific to the speakers of the alleged misstatements, i.e., here, the relevant rating

committees. See Lind v. Jones, Lang LaSalle Americas, Inc., 135 F. Supp. 2d 612, 616 (E.D. Pa.

2001) (“[I]n evaluating a motion for summary judgment on a fraud claim, it is therefore neces-

sary to examine both what was stated and the state of knowledge of the agent who made the

statement.”) (emphasis added).73

Facts known to, or opinions held by, other individuals within

an organization do not suffice to prove what the actual speaker knew or believed. See Berda v.

CBS Inc., 800 F. Supp. 1272, 1277-79 (W.D. Pa. 1992) (granting summary judgment where

“there is no evidence of record that, at the time [the speakers made statements at issue], either of

them was aware of [internal discussions concerning potential restructuring]” and the speakers’

acknowledgment of “rumors” about potential restructuring was insufficient to impute knowledge

to them); Wang v. Bear Stearns Cos. LLC, No. 11 Civ. 5643, 2014 WL 1512032, at *10

72

See also Fait, 655 F.3d at 110; Coleman, 319 F. Supp. at 551 (“[P]rojections, estimates or forecasts

‘may be actionable misrepresentations if the speaker does not genuinely and reasonably believe them.’”)

(quoting In re Donald J. Trump, 7 F.3d at 368); City of Omaha, 679 F.3d at 67; Plumbers’ Union Local

No. 12 Pension Fund, 632 F.3d at 775; IKB Int’l S.A., 2014 WL 1377801; Plumbers’ & Pipefitters’ Loc.

No. 562 Supp. Plan & Trust v. J.P. Morgan Accept. Corp. I, No. 08 CV 1713 (ERK) 2012 WL 601448, at

*15 (E.D.N.Y. Feb. 23, 2012) (“[A] credit rating is not an objective fact, but rather ‘a statement of opin-

ion by each agency that it believed, based on the models it used and the factors it considered, that the

credit quality of the mortgage pool underlying each Certificate was sufficient to support the assigned rat-

ing” and is “not actionable unless the speaker did not truly hold the opinion at the time it was made.”); In

re Colonial Bancgroup, Inc. Securities Litig., 2:09-CV-00104-RDP-WC, 2013 WL 4788627, at *6 (M.D.

Ala. Sept. 9, 2013); In re MF Global Holdings Ltd. Sec. Litig., 982 F. Supp. 2d 277, 305 (S.D.N.Y. 2013);

Pennsylvania Public School Employees’ Retirement System v. Bank of America, 874 F. Supp. 2d 341, 353

(S.D.N.Y. 2012); Tsereteli v. Residential Asset Securitization Trust 2006-A8, 692 F. Supp. 2d 387, 393

(S.D.N.Y. 2010); Podany, 318 F. Supp. 2d at 153-54 (defining subjective falsity as requiring that plaintiff

show that the speaker of an opinion “did not sincerely believe the opinion they purported to hold”).

73 See also Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital Inc., 531 F.3d 190, 195 (2d

Cir. 2008); Joffee v. Lehman Bros., No. 04 Civ. 3507 RWS, 2005 WL 1492101, at *10-11 (S.D.N.Y. June

23, 2005) (finding that plaintiffs adequately pled falsity of buy reports by alleging that the analysts’ views

of the securities were “the exact opposite” of what they recommended to the public); DeMarco v. Lehman

Bros., Inc., 309 F. Supp. 2d 631 (S.D.N.Y. 2004) (analyzing the analyst’s beliefs with respect to the stock

he recommended).

-41-

(S.D.N.Y. Apr. 16, 2014) (dismissing claim against corporation where there was no evidence

broker who represented that corporation was financially sound knew of corporation’s “precarious

financial position” or that he did not subjectively believe his investment advice).

Second, as the Court has previously held, the Bank cannot make its required showing by

relying on evidence that purportedly shows that the speakers came to unreasonable conclusions,

were unreasonable in their processes, or “should have” known that their opinions were inaccu-

rate. See November 29 Ruling, 2010 WL 7928643, at *9 n.8 & 10 n.9 (“The test is not whether

the maker of the opinion should have known that the ratings were false and misleading – this is a

negligence standard, the use of which is barred by the First Amendment. . . . The amended com-

plaint also alleges that it was unreasonable for the rating agencies to believe the ratings accurate-

ly predicted the risk of nonpayment. This would only constitute a negligent misrepresentation

claim.”) (emphasis added).74

Similarly, the Bank may not rely on purported evidence to the effect that the speakers of

the rating opinions at issue were allegedly “reckless” in rendering them.75 See In re Omnicare

74

See also City of Omaha, 679 F.3d at 68 (“Moreover, even if the second amended complaint did plausi-

bly plead that defendants were aware of facts that should have led them to begin interim impairment test-

ing earlier, such pleading alone would not suffice to state a securities fraud claim after Fait.”); Podany,

318 F. Supp. 2d at 154 (“It is not sufficient to allege, as plaintiffs have done in both cases addressed here,

that it would have been possible to reach a different opinion than that reached by defendant based on in-

formation available to defendant at the time, or even that the defendant’s opinion was unreasonable. A

securities fraud action may not rest on allegations that amount to second-guesses of defendants’ opinions

about the future value of issuers’ stock—second-guesses made all too easy with the benefit of hind-

sight.”); In re Salomon Analyst A T & T Litig., 350 F. Supp. 2d 455, 489 (S.D.N.Y. 2004) (“It is not suffi-

cient for these purposes to allege than an opinion was unreasonable, irrational, excessively optimistic, not

borne out by subsequent events, or any other characterization that relies on hindsight or falls short of an

identifiable gap between the opinion publicly expressed and the opinion truly held.”).

75 Although the element of scienter generally can be satisfied with “recklessness” in non-opinion fraud

actions, proof of subjective falsity, which requires a showing of genuine disbelief, is the required standard

in fraud cases based on an opinion. See In re Omnicare Sec. Litig., 2014 WL 5066826, at *13. Thus, sci-

enter is subsumed by the higher standard of subjective falsity. See In re Credit Suisse First Boston Corp.,

431 F.3d 36, 48 (1st Cir. 2005) (observing that the falsity and scienter requirements “essentially merge”

in cases of “misstatements of opinion”), overruled on other grounds by Tellabs, Inc. v. Makor Issues &

Rights, Ltd., 551 U.S. 308 (2007); In re Bank of America Corp. Sec., 757 F. Supp. 2d 260, 311 (S.D.N.Y.

-42-

Sec. Litig., 2014 WL 5066826, at *13 (6th Cir. Oct. 10, 2014) (holding that recklessness is insuf-

ficient for a fraud claim based on an opinion; instead, plaintiff must show that the “defendants

knowingly misrepresented or omitted facts to deceive, manipulate, or defraud the public”). See

also First Equity Corp. v. Standard & Poor’s Corporation, 690 F. Supp. 256, 258-59 (S.D.N.Y.

1988), aff’d, 869 F.2d 175 (2d Cir. 1989). In First Equity, the court explained that, consistent

with an actual malice standard, plaintiff could prevail on a fraud claim only upon a showing of

“actual knowledge of [the statement’s] falsity or with reckless disregard of its truth or falsity,”

not “through proof of recklessness.” Id. at 258-59. The court defined reckless disregard as re-

quiring “sufficient evidence to permit the conclusion that the defendant in fact entertained seri-

ous doubts as to the truth of its publication.” Id. See also Compuware Corp. v. Moody’s Inves-

tors Servs., Inc., 499 F.3d 520, 527-28 (6th Cir. 2007) (holding proof of “failure to investigate”

or “depart[ure] from reasonably prudent conduct” insufficient to establish actual malice); Jenkins

v. KYW, A Div. of Grp. W, Westinghouse Broad. & Cable, Inc., 829 F.2d 403, 466 (3d Cir. 1987)

(holding that plaintiff had not established actual malice where no evidence existed to show that

defendant entertained “serious doubts” about the truthfulness of the statements at issue).

Alleged financial motivations and incentives are also insufficient. Indeed, evidence of an

improper motivation is routinely rejected under the federal pleading standards and, thus, it is in-

conceivable that any alleged profit motive here could meet the even more exacting clear and

convincing standard.76 See, e.g., GSC Partners CDO Fund v. Washington, 368 F.3d 228, 238

2010) (explaining that if a plaintiff “successfully plead[s] that an opinion is fraudulently stated, it is tan-

tamount to successfully pleading scienter”). 76

The burden on summary judgment is higher than the exacting standard for pleading state of mind in

federal securities fraud actions. See Pfizer, Inc. v. Stryker Corp., 02 Civ. 8613 (LAK), 2005 WL 44383,

at *4 (S.D.N.Y. Jan. 10, 2005) (discussing the requirements for pleading scienter in securities fraud

claims under Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act and

noting that summary judgment in a common law fraud action is governed by “the more demanding clear

-43-

(3d Cir. 2004); Fulton Bank, 2011 WL 5386376, at *10 (dismissing securities and common law

fraud claims against UBS because “the fact that UBS could earn substantial sales commissions

and fees for underwriting the securities and managing ARS auctions is an allegation that could

be imputed as motivation for simply making profit and is not sufficiently concrete to infer scien-

ter”); Plumbers’ Union Local No 12 Pension Fund, 632 F.3d at 776 (“That a . . . rating company

[may be] interested in securing more business may be true, but it does not make the report of the

rating false or misleading.”).77

Finally, genuine disbelief must be proven as to the specific statements at issue, i.e., as to

each of the AAA ratings at issue in this case. November 29, 2010 Ruling, 2010 WL 7928643,

*11. As this Court and others have recognized, generalized claims regarding supposed rating

modeling deficiencies that are not tied to the specific securities at issue do not meet this standard.

See Space Coast Credit Union v. Merrill Lynch, Pierce, Fenner & Smith, Inc., No. 12-60430,

2014 WL 1230719, at *5 (S.D. Fla. Mar. 25, 2014) (dismissing fraud claims against defendants

where complaint “talks at length about the Agency Defendants’ use of flawed RMBS ratings and

correlation assumptions for CDOs in general,” but “offers no facts to support its conclusory as-

sertions that these issues materially affected” the securities at issue); Ohio Police & Fire Pension

Fund v. Standard & Poor’s Financial Services, LLC, 813 F. Supp. 2d 871, 883-84 (S.D. Ohio

2011) (finding plaintiff’s allegations that rating agencies “used out-of-date models based on as-

and convincing evidence standard”) (emphasis added). Thus, the kinds of allegations that federal courts

have found insufficient to allege fraud in federal securities actions cannot suffice—even if evidence can

now be shown in support—to meet the more stringent clear and convincing standard that applies here.

77 See also Ganino v. Citizens Utils. Co., 228 F.3d 154, 170 (2d Cir. 2000); Police & Fire Ret. Sys. Of

City of Detroit v. Goldman, Sachs & Co., No. 10 CIV. 4429 (MGC), 2014 WL 1257782, at *5 (S.D.N.Y.

Mar. 27, 2014); Podany, 318 F. Supp. 2d at 155 (explaining that a demonstration of defendants’ “motive

to publish false opinions,” without more, is not a strong indicator of the falsity of the opinion); In re Sa-

lomon, 350 F. Supp. 2d at 466 (“Conflicts of interest and institutional pressures” that created “motive and

incentive for analysts in general to issue falsely positive reports” are not “sufficient to support a securities

fraud claim for false statement of opinion.”).

-44-

sumptions that did not reflect the realities of the mortgage market,” “had not updated the models

. . . since 2002 and 1999,” and “did not implement updated models that they had developed” “in-

sufficient to support an inference that the rating agencies did not actually hold the opinion about

the sufficiency of the credit enhancements to justify each rating at the time each rating was is-

sued”), aff’d 700 F.3d 829 (6th Cir. 2012).78

2. The Extensive Record Contains No Evidence that Could Support the

Required Showing of Subjective Falsity

The extensive record in these cases, amassed over a three year discovery period, contains

no evidence that the relevant S&P rating committees that analyzed and assigned credit ratings on

the Certificates did not genuinely believe their ratings when assigned.

Voluminous record evidence further negates any showing of subjective disbelief. In fact,

the record shows the undisputed facts that, throughout the relevant time period, S&P: (1) public-

ly disclosed its criteria and assumptions for rating PLMBS; (2) made its credit rating models

78

See also GSC Partners CDO Fund v. Washington, 368 F.3d 228, 239 (3d Cir. 2004) (statements made

during due diligence period that could not be connected directly to any misleading statement in offering

circular were insufficient to raise a strong inference of scienter); IKB Int’l S.A., 2014 WL 1377801, at *10

(“To the extent plaintiffs allege that defendants’ knowledge can be inferred from generally fraudulent

practices in the RMBS industry . . . these allegations are also insufficient because they are not connected

to the particular securitizations in issue.”); Police & Fire Ret. Sys., 2014 WL 1257782, at *5 (explaining

that allegations that, assumed true, “rating agencies ‘repeatedly eased their rating standards in order to

capture more market share” and “ratings models had not been updated on a timely basis” did not meet the

legal threshold of subjective falsity where the complaint did not “clearly allege the rating agencies’

knowledge of the ratings’ falsity at the time they were made”); In re Salomon, 350 F. Supp. 2d at 466

(“[G]eneralized allegations about conflicts of interest, incentives to increase compensation, or internal

pressure on analysts that is not tied to the particular stock at issue are not sufficient [to establish scien-

ter].”); In re Merrill Lynch & Co. Inc. Research Reports Sec. Litig., 273 F. Supp. 2d 351 (S.D.N.Y. 2003)

(finding that emails concerning securities other than the ones at issue failed to meet pleading requirements

necessary to allege that a false statement was made with respect to the security at issue).

79 See Maciaszek (S&P) Tr. 264:6-17, 291:4-19; Leslie Albergo (S&P Analyst) Tr. 292:20-293:12; Arne

(S&P) Tr. 262:10-263:2; Kimmel (S&P) Tr. 354:7-355:6; Tencer (S&P) Tr. 379:23-380:14.

-45-

publicly available for use (and market scrutiny); (3) made public its views and observations

about the PLMBS and housing markets; and (4) disclosed the nature and limitations of its rating

opinions. See Factual Background, at 15-20. Furthermore, the Bank’s own expert, Professor

Peter Beling,

See Beling Report at ¶ 2

Transparency is the opposite of fraud, and negates any inference of scienter.

See, e.g., Footbridge Ltd. v. Countrywide Home Loans, Inc., No. 09 Civ. 4050 (PKC) 2010 WL

3790810, at *20 (S.D.N.Y. Sept. 28, 2010) (disclosure negates a finding of fraud, as it is “incon-

sistent with a state of mind going toward deliberate illegal behavior”).80

Hindsight arguments that S&P’s publicly available criteria and models were not the

“best” models that S&P could have used to predict the future performance of the Certificates are,

as this Court has determined, “barred by the First Amendment.” See November 29, 2010 Ruling,

2010 WL 7928643, at *9 n.8. See also In re Ikon Office Solutions, Inc., 277 F.3d at 673 (“[T]he

mere second-guessing of calculations [does] not suffice” to give rise to liability for fraud based

on a financial opinion.”); Winer Family Trust, 503 F.3d at 332 (affirming dismissal of fraud

claim because plaintiff’s allegations, premised on statements made two years after the alleged

fraudulent statements occurred, constituted an “impermissible attempt to prove fraud by hind-

sight”). Courts considering similar fraud-by-hindsight claims against rating agencies have re-

80

See In re Ikon Office Solutions, Inc. Sec. Litig., 131 F. Supp. 2d 680, 704 (E.D. Pa. 2001) (granting

summary judgment on 10b-5 claim based on audit opinion for failure to prove scienter “especially in light

of the highly detailed documentary evidence of [defendant’s] procedures, calculations and findings” that

defendants had disclosed concerning defendant’s creation of the supposedly fraudulent audit opinion),

aff’d, 277 F.3d 829 (3d Cir. 2002); In re Nutrisystem, Inc. Sec. Litig., 653 F. Supp. 2d 563, 576 (E.D. Pa.

2009) (dismissing fraud claims based on statements related to future revenues because information was

disclosed as it became available).

-46-

peatedly upheld this principle.81

It thus follows that statements that the Bank has previously cited by individual S&P em-

ployees that may imply that he or she may have disagreed about which criteria or model was

“better” at predicting the future—even assuming these out-of-context statements actually reflect

an analytical disagreement—is not evidence of fraud. 82 See, e.g., City of Edinburgh Council,

754 F.3d at 171-72 (holding that certain employees’ disagreement with company interpretation

of clinical trial data did not render company’s statements false or even unreasonable); First Equi-

ty Corp., 690 F. Supp. at 259-60 (granting S&P summary judgment on fraud claim because sup-

posed inconsistencies among employees’ understanding as to the meaning and purpose of state-

ment describing bond did not support an inference that the statement at issue was published with

“actual knowledge of its falsity or with reckless disregard of its truth or falsity”), aff’d, 869 F.2d

17 (2d Cir. 1989). Moreover, any statement by an employee that was not part of the committees

that issued the ratings on the Certificates is irrelevant to the subjective state of mind inquiry re-

quired here. See Salomon, 350 F. Supp. 2d at 468-69 (rejecting plaintiff’s “attempt[] to tar one

analyst with the words and behavior of another, where the only factually-supported connection

81

See Ohio Police & Fire Pension Fund, 813 F. Supp. 2d at 883-84 (dismissing misstatement claim on

motion to dismiss where “[m]uch of the complaint” did nothing more than “recite[] congressional hearing

testimony and news articles from late 2007 to 2009 concerning the in-hindsight failure of the Rating

Agencies to accurately analyze the credit risks associated with subprime mortgages”); Abu Dhabi Com-

mercial Bank v. Credit Suisse, No. 115417/2010, slip op. at 7 (N.Y. Sup. Ct. Aug. 4, 2011) (dismissing

fraud claim based on allegations that S&P employed “antiquated” “models and default inputs” that “re-

sulted in unjustifiably high credit ratings” because “[n]either of these allegations rises to the level of con-

duct that would be sufficient to state a cause of action for fraud or fraudulent inducement”) (Smith Decl.

Ex. 71); In re Lehman Bros. Securities & ERISA Litig., 684 F. Supp. 2d 485, 495 (S.D.N.Y. 2010) (hold-

ing allegations insufficient where “[a]t best, they support an inference that some employees believed that

the ratings agencies could have used methods that better would have informed their opinions”).

82 As the Bank represented in its 2007 Form 10-K, filed on March 13, 2008 (Smith Decl. Ex. 50), models

are not perfect predictors of the future: “Models are inherently imperfect predictors of actual results be-

cause they are based on assumptions about future performance. The Bank’s models could produce unreli-

able results for a number of reasons, including invalid or incorrect assumptions underlying the models or

incorrect data being used by the models.”

-47-

between the two men is that they worked at the same company in the same division”).83

The Bank

Such a contention is baseless. So-

liciting and considering market feedback on proposed criteria is not only reasonable as a matter

of common sense, new rules recently issued by the SEC actually require rating agencies to solicit

and to “consider[] the comments” received. See 17 C.F.R. § 240.17g-8(d)(1)(ii). Even if the

SEC did not require this information, however, receipt and consideration of market feedback

does not demonstrate that a rating agency did not subjectively believe its rating opinions.

Finally, the Bank cannot meet its required showing by retrospectively pointing to public

reports discussing generalized issues in the housing markets during the relevant time period to

which the Bank had equal access.86 Such reports do not constitute evidence of actual knowledge

83

In dismissing the claim that one analyst’s opinion with respect to an AWE stock offering was “false,”

the Salomon court noted the “sharp contrast” between that claim and a separate claim that a second ana-

lyst issued a false opinion with respect to AT&T stock. The claims relating to the opinion on AT&T,

which the court noted the defendants did not “with good reason” seek to dismiss, were based on docu-

ments that demonstrated that the analyst in question had changed his opinion of AT&T from “lukewarm

ratings” to high ratings in exchange for “getting his young twins accepted into [a] prestigious preschool”

and had later admitted in an email that “[o]nce coast was clear . . . and my kids confirmed” he “went back

to [his] normal negative self on [AT&T].” 350 F. Supp. 2d at 459-61, 465 n.4.

84 See, e.g., Raiter Tr. 118:24-122:23, 128:14-129:4; Thomas Warrack (Client Value Manager at S&P) Tr.

82:22-84:5, 154:22-155:10.

See Smith Decl. Ex. 6, at S&P-FHLB 0085064.

86 See, e.g., Cates (FHLB) Tr. 401:22-402:13

Mark Blasinsky (Structured Finance

Manager at FHLB) Tr. at 134:10-135:4, 138:7-138:21

-48-

of the alleged falsity of a statement about a particular mortgage-backed security. See Federal

Housing Finance Agency v. HSBC North America Holdings, Inc., 11 2014 WL 3702587, at *42

(S.D.N.Y. Jul. 25, 2014) (granting plaintiff summary judgment on actual knowledge element and

affirmative defense and finding that “no reasonable jury” could find that the GSEs “knew” of

alleged misstatements in Offering Documents based on evidence that “the GSEs knew that con-

ditions existed in the marketplace – particularly in regard to the Originators’ underwriting prac-

tices – that created a risk of false representations appearing in the Offering Documents”);87 see

also Viacom Int’l, Inc. v. YouTube, Inc., 676 F.3d 19, 32-33 (2d Cir. 2012) (holding that internal

estimates showing that 75-80 percent of video streams contained copyrighted material were “in-

sufficient, standing alone, to create a triable issue of fact as to whether YouTube actually knew .

. . [of] the existence of particular instances of infringement.”).

In short, there is no evidence in the record that the relevant S&P rating committees did

not subjectively believe their rating opinions on each of the Certificates when issued.

D. Other Alleged Misstatements Are Not Actionable

Years into these lawsuits, and notwithstanding the absence of any reference to them in

the Complaints, the Bank has recently sought to bolster its false ratings claims by identifying

other allegedly fraudulent statements in interrogatory responses served in January 2014. Specifi-

cally, the Bank now claims that certain statements by S&P about “independence” and “objectivi-

ty” and statements appearing in the Offering Documents about credit ratings are “additional

fraudulent statements by S&P.” See Smith Decl. Ex. 85, at 17-24 (Pl.’s Resp. to Interrog. No. 6).

87

In Federal Housing Finance Agency, the Court found that “the GSEs’ awareness of risks associated

with low- and no-documentation loans,” its “general knowledge of ‘the subprime marketplace,’ which

saw declines in RMBS performance, lesser adherence to underwriting standards, and increasing borrower

fraud,” and “the performance of similar loans from the same Originators or dealers” “could not support a

finding” that the GSE had “actual knowledge of falsity of the alleged false statements in the Offering

Documents [including the credit ratings at issue].” Id. at *17-18 (emphasis added).

-49-

These newly asserted statements add nothing to the Bank’s claims because they are not actiona-

ble misstatements, were not actually relied upon by the Bank in making its purchases and/or

were not made by or attributable to S&P. Further, the Bank’s causation and damages expert does

not even attempt to connect these other alleged misstatements to any alleged losses.

1. Statements of Independence and Objectivity Are Not Actionable

Facing insurmountable defects in its original fraud claim against S&P,88 the Bank now

seeks to piggy-back off inapposite claims made against S&P by the U.S. Government in 2013

under a federal statute. See Smith Decl. Ex. 85, at 20-24 (Pl.’s Resp. to Interrog. No. 6). Specif-

ically, the Bank now identifies statements regarding S&P’s “independence” and “objectivity”

dating back years before the Bank purchased the Certificates and despite the admitted absence of

any FHLB witness claiming to have considered such statements in connection with any invest-

ments at issue. See id. at 3–5; 17-20.

These statements cannot support the Bank’s position for several reasons. First, S&P’s

statements of “independence” and “objectivity” are not actionable as a matter of law because

they are insufficiently specific to form the basis of a fraud claim.89 See, e.g., Huddleston v. Infer-

tility Ctr. of Am., Inc., 700 A.2d 453, 461 (Pa. Super. Ct. 1997) (affirming trial court determina-

88

The Complaints could hardly be clearer in identifying S&P’s credit ratings on the Certificates as the

sole basis for the Bank’s fraud claim against S&P. See, e.g., JPM I ¶ 329 (alleging “common law fraud

against S&P regarding BAH7, BAE4, DAK6, and DAB6”); JPM II ¶ 208; Lehman ¶ 183; Countrywide ¶

316. In order to bring a claim on previously unidentified statements, the Bank must seek this Court’s

permission to amend its pleadings against S&P. See Pa. R. Civ. P. 1019(b) (“Averments of fraud or mis-

take shall be averred with particularity.”); McClellan v. Health Maintenance Organization of Pennsylva-

nia, 413 Pa. Super. 128, 143, 604 A.2d 1053, 1060-61 (1992) (A plaintiff must “set forth the exact state-

ments or actions plaintiff alleges constitute the fraudulent misrepresentations.”), abrogated in part as

stated in Tri-County Landfill v. Pine Twp. Zoning Hearing Bd., 83 A.3d 488 (Pa. Commw. Ct. 2014).

The Bank has not sought leave to amend its pleadings and, thus as a preliminary matter, any claim based

on these statements is not properly before the Court. In any event, for the reasons stated above, amend-

ment would be futile.

89 In order for a purported misrepresentation to be actionable under Pennsylvania law, it must of course be

material. Gibbs v. Ernst, 538 Pa. at 193, 647 A.2d at 888-89 (1994).

-50-

tion that fertility clinic’s representation that it was the “premier” surrogacy program in the coun-

try was not fraud); New Hope Books, Inc. v. Datavision Prologix, Inc., No. 01741, 2003 WL

21672991, at *5 (Pa. Ct. Com. Pl. June 24, 2003) (granting summary judgment and explaining

that “broad, vague, and commendatory language” must be distinguished from fraud). These

types of statement are not material because they do not “ascertain anything on which a reasona-

ble investor might rely.” In re Aetna, Inc. Sec. Litig., 617 F.3d 272, 284 (3d Cir. 2010).

Indeed, the Second Circuit has held that these exact words by S&P are too vague to be ac-

tionable. In Boca Raton Firefighters and Police Pension Fund v. Bahash, 506 Fed. App’x. 32,

37 (2d Cir. 2012), the Second Circuit affirmed the District Court’s dismissal of claims based on

S&P’s statements regarding its independence and objectivity, finding such statements were pre-

cisely the kind that the court previously held are not actionable.90 506 Fed. App’x. at 37; City of

Edinburgh Council, 752 F.3d at 172 (noting that “vague and general” statements of optimism are

“understood by reasonable investors” as immaterial); City of Pontiac Policemen’s & Firemen’s

Ret. Sys. v. UBS AG, 752 F.3d 173, 183 (2d Cir. 2014) (“It is well-established that general state-

ments about reputation, integrity, and compliance with ethical norms are inactionable. . . they are

90

The Second Circuit just reaffirmed this conclusion. Addressing plaintiff’s motion for relief from the

judgment, the Court reasserted that statements of S&P regarding its “independence” and “integrity” “are

too general to cause a reasonable investor to rely upon them as a guarantee that ratings would not be made

without regard to profits, market share, or client feedback.” See Boca Raton Firefighters and Police Pen-

sion Fund v. Bahash, 574 Fed. App’x. 21 (2d Cir. 2014) (Summary Order) (citing ECA, Local 134 IBEW

Joint Pension Trust v. JP Morgan Chase Co., 553 F.3d 187, 206 (2d Cir. 2009)).

In rejecting the plaintiff’s argument, the District Court in Boca Raton distinguished U.S. v. McGraw-Hill

Cos., 2013 WL 3762259, at *8, *10 (C.D. Cal. July 16, 2013), a decision which denied a motion to dis-

miss a claim under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989

(“FIRREA”) based on similar statements of independence. The District Court noted that “most signifi-

cantly” the elements of a FIRREA claim are different than the elements of a claim under the federal secu-

rities laws (which, of course, mirror Pennsylvania law). See Reese v. McGraw-Hill Cos., 293 F.R.D. 617,

620 n.2. (S.D.N.Y. 2013). Most notably, “materiality [under FIRREA] seems to take on a much lower

evidentiary threshold” as compared to the federal securities law. Florida State Conference of N.A.A.C.P.

v. Browning, 522 F.3d 1153, 1173 (11th Cir. 2008).

-51-

‘too general to cause a reasonable investor to rely upon them.’”).91

Second, the Bank admittedly cannot point to any evidence that anyone from the Bank ac-

tually relied upon S&P’s statements of “independence” and “objectivity” in purchasing the Cer-

tificates at issue. By the Bank’s admission, there is no witness who is able to “isolate a particular

instance when this representation was made,” (see Smith Decl. Ex. 85, at 20 (Pl.’s Resp. to Inter-

rog. No. 6)), let alone that such statement was relied on by anyone at the Bank in purchasing the

Certificates. The Bank’s litigation claim that these representations were “so pervasive and fun-

damental” (id. at 20–21) is not a substitute for actual and justifiable reliance. See Gallup v. Clar-

ion Sintered Metals, Inc., 489 Fed. App’x. 553, 556 (3d Cir. 2012) (“[A] plaintiff unaware of the

relevant statement” . . . “[can]not establish reliance on that basis.”); Gruber v. Price Water-

house, 776 F. Supp. 1044, 1047–49 (E.D. Pa. 1991) (granting summary judgment on common

law fraud claim where plaintiffs’ failure to read the prospectus before purchasing stock preclud-

ed a finding of actual reliance); MBIA Ins. Corp. v. J.P. Morgan Sec. LLC, 43 Misc. 3d 1221(A)

(Table), 2014 WL 1797065, at *20 (N.Y. Sup. Ct. May 6, 2014) (“[I]t is obvious that MBIA

cannot sustain a claim for fraudulent misrepresentation based on the content of the spreadsheet . .

. for the simple reason that there is absolutely no evidence that anyone at MBIA as much as

glanced at the content of the spreadsheet.”).

Finally, there is no evidence that these other statements are proximately connected in any

way to any purported loss by the Bank. Even the Bank’s flawed report on causation, see Section

III.C, does not even attempt to link these statements to the Bank’s alleged losses. See Smith

91

See also ZL Technologies, Inc. v. Gartner, Inc., No. CV 09-02393, 2009 WL 3706821, at *4 (N.D. Cal.

Nov. 4, 2009) (defendant’s representation that its research was “high quality” and “independent and ob-

jective” was not actionable as it did not “pertain to specific or absolute characteristics” and was not “fac-

tually verifiable”); In re Goldman Sachs Group, Inc. Sec. Litig., No. 10 Civ. 3461, 2014 WL 2815571, at

*5 (S.D.N.Y. Jun. 23, 2014) (noting that “in Bahash, statements about the reputation and integrity of S&P

[were] not a guarantee against the specific deficiencies alleged to have afflicted its ratings process”).

-52-

Decl. Ex. 91, Mason Report ¶ 91 (“It is therefore, my opinion that the AAA misrepresentation

was a substantial factor in bringing about Pittsburgh FHLB’s losses.”) (emphasis added).

2. Alleged Misstatements in the Offering Documents Are Not Attributa-

ble to S&P

In its January 2014 interrogatory responses, the Bank also identified as “fraudulent” cer-

tain statements about S&P’s ratings and the ratings process that appeared in the prospectus sup-

plements for the Certificates at issue. See, e.g., Smith Decl. Ex. 85, at 17 (Pl.’s Resp. to Interrog.

No. 6) (quoting the prospectus supplement statement that “[t]he ratings assigned by S&P to

mortgage pass-through certificates address the likelihood of the receipt of all distributions on the

mortgage loans by the related certificateholders under the agreements pursuant to which the cer-

tificates are issued” and “S&P’s ratings take into consideration the credit quality of the related

mortgage pool, including any credit support providers, structural and legal aspects associated

with the certificates, and the extent to which the payment stream on the mortgage pool is ade-

quate to make the payments required by the certificates.”). Even assuming that such statements

were false—and there is no record evidence that they were—S&P did not make such statements

and the Bank cannot maintain a fraud claim against S&P based on them.

Indeed, the Court has already rejected the Bank’s previous attempt to assert a claim

against S&P for statements in the Offering Documents when it dismissed the Bank’s claim

against S&P under Section 11 of the 1933 Act. In dismissing that claim, this Court ruled that

S&P and the other rating agencies are not liable for allegedly fraudulent statements made in the

Offering Documents because the rating agencies are not “underwriters” under the federal securi-

ties laws. November 29, 2010 Ruling, 2010 WL 7928643, at *3.

The Bank attempts to circumvent the Court’s decision by again asserting that S&P should

be held liable for statements made by others in the Offering Documents. See Smith Decl. Ex. 85,

-53-

at 17-20 (Pl.’s Resp. to Interrog. No. 6). These statements, however, were made by the Issuers

that filed the Offering Documents and the entities that controlled them—here, the Sponsors. The

Supreme Court has held that “[f]or purposes of Rule 10b-5, the maker of a statement is the per-

son or entity with ultimate authority over the statement, including its content and whether and

how to communicate it.” Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296,

2302 (2011). Without control, “a person or entity can merely suggest what to say, not ‘make’ a

statement in its own right.” Id. See also Central Bank N.A. v. First Interstate Bank, N.A., 511

U.S. 164 (1994); Wright v. Ernst & Young LLP, 152 F.3d 169, 175 (2d Cir. 1998) (“Anything

short” of “actually mak[ing] a false or misleading statement” “is merely aiding and abetting, and

no matter how substantial that aid may be, it is not enough to trigger [primary] liability . . . .”);

Shapiro v. Cantor, 123 F.3d 717, 720–21 (2d Cir. 1997).

These cases are consistent with Pennsylvania law that requires a plaintiff to show that the

defendant made a representation in order to impose liability for a fraudulent misrepresentation.

See Section I.A, supra; In re Gillingham, 143 B.R. 55, 62 (Bankr. W.D. Pa. 1992), (“All negotia-

tions took place between plaintiff and Mr. Gillingham. Mrs. Gillingham made no representations

whatever, false or otherwise, to plaintiff concerning the diamond. There can be no fraud because

the first essential element of fraud . . . is lacking.”), aff’d, 150 B.R. 907 (W.D. Pa. 1993).

Here, the contents of the Offering Documents—even with regard to the description of the

rating agencies’ rating opinions—were under the control of the Sponsors and thus, were the

statements of the Issuers and Sponsors.92 See Janus, 131 S. Ct. at 2302 (“Even when a

speechwriter drafts a speech, the content is entirely within the control of the person who delivers

92

The Bank See Keith Werber (Transaction Manager

at Countrywide) Tr. 92:10–96:10

-54-

it,” thus “it is the speaker who takes credit—or blame—for what is ultimately said.”). Indeed,

the record here is clear that the Issuers/Sponsors did in fact register the securities and file the Of-

fering Documents with the SEC.93 Furthermore, as this Court has already recognized, the Rating

Agencies had no role in the sale and distribution of the securities pursuant to the Offering Docu-

ments. See November 29, 2010 Ruling, 2010 WL 7928643, at *3 (dismissing Section 11 claims

against S&P and other rating agencies because “they were not involved in any activities relating

to the distribution and sale of securities”).

Finally, even ignoring the fact that the statements in the prospectus supplements were not

as a matter of law statements by S&P, any fraud claim based on such statements is baseless as

the record is clear that the Bank

As noted above, in most instances the decision to

purchase the Certificates was made before the prospectus supplements were even issued. See

Factual Background, at 12-14.

II. THERE IS NO EVIDENCE THAT THE BANK ACTUALLY AND JUSTIFIABLY

RELIED ON S&P’S RATINGS IN MAKING ITS PURCHASES

The Bank’s fraud claims against S&P as pled in the Complaints were based on its conten-

tions that (1) the Bank was forced to rely on S&P ratings because the Bank had unequal access to

information and lacked the ability to conduct its own independent analysis (see, e.g., Lehman ¶¶

134-38) and (2) the Bank’s alleged reliance on credit ratings reasonably and justifiably assured

the Bank that it had “virtually no risk of incurring any loss” (see, e.g., id. ¶ 38). More than three

years of discovery, millions of pages of documents and 96 depositions later, it is clear that these

93

See Smith Decl. ¶¶ 99-110, setting forth links to these publicly filed and publicly available documents.

-55-

contentions are not factually supported by the record.

A. The Bank’s Purchase of Each Certificate Was Based on its Independent In-

vestigation of Information and Criteria It Selected

The Bank cannot credibly maintain that it was unable to perform its own credit analysis

due to a supposed lack of information. First, as demonstrated below, the Bank cannot identify

any “unequal” information that it actually asked for and was unable to obtain. Indeed, there is no

indication that S&P had any special access or information of any kind about the Bank’s invest-

ments that was unavailable to the Bank. To the contrary, as demonstrated in the Factual Back-

ground, at 8, the Bank It is a

well-settled tenet of Pennsylvania law that there can be no justifiable reliance on a subjective

opinion where both parties have equal access to the facts upon which that opinion is based.94

Second, the record amply confirms that the Bank

Thus, as a matter of law, the Bank did not rely on S&P’s ratings.

The applicable federal regulations for public offerings of mortgage-backed securities

(SEC Regulation AB) require issuers to file and disclose publicly all material terms of the secu-

rity, including, but not limited to, information concerning the security’s underlying assets. 17

C.F.R. § 229.1100 et seq. And if potential investors want more or different information, they can

94

See Young v. Edwards, 72 Pa. 257, 261 (1872) (“It is not enough to show that a fact relied upon by

[plaintiff] did not exist; the fact relied upon by him must have been falsely represented by [defendant] to

exist. The representation must not have been a mere expression of opinion on matters equally open to the investigation and observation of both parties.”) (emphasis added); see also, e.g., Moore v. Steinman

Hardware Co., 319 Pa. 430, 433-35, 179 A. 565, 567 (1935) (“A mere false assertion of value when no

warranty is intended is not grounds for relief, because the assertion is a matter of opinion. Especially is

this true where the one supposed to rely on such statement has an equal opportunity to ascertain the facts

on which such opinion might be based.”); Emery v. Third Nat’l Bank of Pittsburgh, 308 Pa. 504, 510, 162

A. 281, 283 (Pa. 1932) (“‘Where the means of knowledge are at hand, and equally available to both par-

ties, and the subject of purchase is alike open to their inspection, if the purchaser does not avail himself of

these means and opportunities, he will not be heard to say that he has been deceived by the vendor’s mis-

representations.’”).

-56-

request it from the issuer. To facilitate a level playing field for investor requested information,

the rules also mandate that an issuer file with the SEC all “material information about . . . the se-

curit[y]” that was made available to any investor by request or otherwise. 17 C.F.R. §§

230.433(d)(ii), (h)(2). Here, the Offering Documents contained detailed information about the

mortgage pools underlying the Certificates, see, e.g., Smith Decl. Ex. 28, at S-32, S-33, S-37, S-

38 (RAST 2006-A16 Pro. Supp.); Ex. 43, at S-49, S-52, S-A-15, S-A-23 (SARM 2007-10 Pro.

Supp.), and in fact the Issuers publicly filed loan tapes with the SEC in connection with the ma-

jority of the Certificates.95

Notwithstanding that the Bank was directly dealing with brokers and sponsors that could

have provided it with the very loan level information that it now contends was vital to a pre-

purchase analysis, the Bank concedes that it never requested such information, nor availed itself

of the publicly filed loan tapes. See Smith Decl. Ex. 82, at Resp. No. 7 (Pl.’s Obj. and Suppl.

Resp. to McGraw Hill’s Interrog. Regarding Allegations Made by Pl. (Nov. 11, 2013) (“Based

on Plaintiff’s investigation to date, Plaintiff did not receive loan files or loan tapes and did not

make requests to Defendants or third parties for loan files or loan tapes.”).

See Dimmick (FHLB) Tr. 1492:14-25, 1493:11-24,

1494:13-1495:11. The Bank was cutting corners. Unequal access to information simply had

nothing to do with it. The relevant inquiry for a misrepresentation claim is whether the infor-

95

See Smith Decl. ¶¶ 111-16.

-57-

mation regarding the nature of the risk assumed was accessible to the plaintiff.96 The Bank’s de-

cision to skip analysis that “would be expensive” does not and cannot support a claim of fraud.

The record is also clear that the Bank

See Factual Background, at 12-14. The

Restatement of Torts provides:

(1) Except as stated in Subsection (2), the maker of a fraudulent misrepresentation

is not liable to another whose decision to engage in the transaction that the repre-

sentation was intended to induce is not caused by his belief in the truth of the rep-

resentation but is the result of an independent investigation made by him.

(2) The fact that the recipient of a fraudulent misrepresentation is relying upon his

own investigation does not relieve the maker from liability if he by false state-

ments or otherwise intentionally prevents the investigation from being effective.97

Restatement (Second) of Torts § 547 (1), at 104. “Ordinarily one who makes an investigation

will be taken to rely upon it alone as to all facts disclosed to him and all facts that must have

been obvious to him in the course of it.” Id. § 547 cmt. a.

96

See supra n. 94. See also Phoenix Light SF Ltd. v. Goldman Sachs Group, Inc., 43 Misc. 3d 1233(A)

(Table), 2014 WL 2650534 (Sup. Ct. N.Y. Co. June 13, 2014) (dismissing RMBS fraud claim because

“[t]he true nature of the risk being assumed could, admittedly, have been ascertained from reviewing

these loan files and plaintiffs never asked for them”); Assured Guaranty Municipal Corp. v. DLJ Mort-

gage Capital, Inc., 2014 WL 3288335, at *5 (Sup. Ct. N.Y. Co. 2014) (same); see also Rothermel v. Phil-

lips, 292 Pa. 371, 375-78, 141 A. 241, 243 (1928) (concluding that a plaintiff’s decision to review the in-

ventory it was purchasing without seeking an appraisal rendered its reliance upon the defendant’s repre-

sentation concerning the value of the inventory unreasonable); Moore, 319 Pa. at 433-37, 1179 A. at 567-

68 (finding that the plaintiff had equal opportunity to ascertain the statement of value of the stocks be-

cause the corporate books and records were available to the plaintiffs for the purpose of determining the

shares’ value).

97 Pennsylvania courts have adopted the Restatement of Torts when defining the elements of intentional

misrepresentation claims. See, e.g., Bortz v. Noon, 729 A.2d 555, 560-61 (Pa. 1999). While the Pennsyl-

vania Supreme Court has not yet had the opportunity to address whether it would adopt Section 547 of the

Restatement, its application of the Restatement in other contexts suggests that it would follow the Re-

statement’s guidance in this context as well.

-58-

Because the Bank

as a matter of law,

the purchase of each Certificate was made in reliance on the Bank’s own investigation and not on

S&P’s ratings.

B. The Bank Entered a Contract with S&P that Disclaims Reliance

The record also demonstrates that the Bank

Smith Decl. Ex. 4, at S&P-FHLB 0089289

Smith Decl. Ex. 5 (S&P-FHLB 0089296).

98

Contractual obligations governing the use of information apply regardless of the medium by which that

information is obtained. See Warner-Lambert Pharma. Co. v. John J. Reynolds, Inc., 178 F. Supp. 655,

665 (S.D.N.Y. 1959) (“[O]ne who acquires a secret formula or a trade secret through a valid and binding

contract [cannot] escape from an obligation to which he bound himself simply because the secret is dis-

covered by a third party or by the general public.”) aff’d, 280 F.2d 197 (2d Cir. 1960); Frederick Chusid

& Co. v. Marshall Leeman & Co., 279 F. Supp. 913, 917 (S.D.N.Y. 1968) (“[P]arties have the right by

contract to prevent disclosure of such materials, even though they are not secret or confidential and may

indeed be a matter of public knowledge.”); Krisel v. Duran, 258 F. Supp. 845, 860 (S.D.N.Y. 1966)

(“[A]n idea, if valuable, even though it does not contain novel, secret or confidential material, may be

protected . . . even when the subject matter of the idea is common or open to public knowledge.”), aff’d

386 F.2d 179 (2d Cir. 1967); but see Aozora v. Morgan Stanley, No. 652118/13, at 10 (Sup. Ct. N.Y. Co.

Aug. 11, 2014). Accordingly, the Bank cannot escape the limitations of the contract by arguing that it did

not use it to access the particular ratings at issue here.

-59-

Smith Decl. Ex. 4, at S&P-FHLB 0089292

See Quinn v. McGraw-Hill Cos., Inc., 168 F.3d 331, 336 (7th Cir. 1999).

New York courts have

long-held that sophisticated parties can agree to be precluded by contract from relying on certain

representations, and have accordingly barred sophisticated investors of asset-backed securities

from bringing claims for fraud where they have entered contracts that bar their reliance claims.

See Danann Realty Corp. v. Harris, 157 N.E.2d 597, 599 (N.Y. 1959); Mahn Real Estate Corp.

v. Shapolsky, 577 N.Y.S.2d 824, 826 (App. Div. 1991).

C. The Bank’s Claimed Reliance on S&P’s Ratings as Assurances that the Bank

Would Never Suffer Investment Losses Cannot Satisfy the Justifiable Reli-

ance Requirement for a Fraud Claim

Even if the record included facts showing that the Bank actually relied on S&P ratings

(and it does not), the Bank must also demonstrate that its reliance was reasonable and justified.

“It is not enough simply to assert that a statement was ‘fraudulent’ and that reliance upon it in-

99

See Smith Decl. Ex. 4

-60-

duced some action . . . . Before fraud will be found, a plaintiff must demonstrate that he justifi-

ably relied on the false statement.” Blumenstock, 811 A.2d at 1038. The Bank cannot offer evi-

dence in support of this element of its claim.

As a large and sophisticated financial institution with special expertise in home loans, the

Bank implausibly hinges its fraud claim on the premise that it relied on AAA ratings as insur-

ance-like protection against all future investment losses. S&P’s rating pub-

lications make clear that S&P’s ratings opinions are neither investment recommendations nor

guarantees,

See, e.g., Laraine Barabas (Trader at FHLB) Tr. 100:10-12; Hewlett

(FHLB) Tr. 697:22-698:25; Howie (FHLB) Tr. 247:10-14; see also Barabas (FHLB) Tr. 541:3-

14

The Bank attempts to bolster

this testimony with the report of Mason who claims that S&P represented that a “AAA rating

provides protection against loss in economic environments up to and including the Great De-

pression.” Smith Decl. Ex. 91, Mason Report ¶ 25. S&P said no such thing. Moreover, as the

record in these cases confirms, a credit rating opinion is neither a guaranty of future investment

performance nor a “protection against loss.” Real assurances and “protection” can be bought as

insurance for a premium payment. S&P ratings are only its opinion, publicly available for free.

A plaintiff cannot rely on its own subjective understanding to support a claim of justifia-

ble reliance where that understanding is mistaken and could have been easily corrected by its

own review of information at hand.100 Even the Bank

100

See, e.g., Reimer v. Tien, 176 Pa. Super 192, 198-200, 514 A.2d 566, 569 (1986) (holding that the

plaintiff’s reliance on her subjective interpretation of the school’s representation concerning class size

-61-

See Vincent Ashoff (Audit Manager at FHLB) Tr. 120:19-24

S&P makes abundantly clear that its ratings are neither investment recommendations nor

insurance policies. See Simon Decl. Exs. 1, 2, 3 (cautioning in publications that credit ratings

“are solely statements of opinion,” are “not statements of fact or recommendations to purchase,

hold, or sell any securities or make any other investment decisions” and are “subject to with-

drawal at any time”). In May 2006, S&P also specifically and publicly warned of potential

downgrades of ratings of RMBS under certain economic circumstances. See, e.g., Smith Decl.

Ex. 20 (S&P-FHLB 0083965) (S&P publication A More Stressful Test Of A Housing Market De-

cline On U.S. RMBS). S&P also warned investors of the obvious fact that there is

See Smith Decl. Ex. 37, at PGH-FHLB00146973

In light of such disclosures, the Bank could not have justifiably relied on S&P’s ratings

as a guarantee that the Bank would never suffer an investment loss.

The Bank’s self-serving definition of S&P’s AAA rating is also belied by information

known to and disseminated by the Bank to its own investors as a rated entity. First, because the

was unreasonable given her access to a brochure displaying images of large lecture halls); Manning v.

Temple University, No. Civ. A. 03-4012, 2004 WL 3019230, at *11 (E.D. Pa. Dec. 30, 2004) (holding

that the plaintiff’s reliance on alleged statements regarding the nature of the university appeal process was

not justified where the full process was laid out in a student handbook available to the plaintiff), aff’d, 157

Fed. App’x. 509 (3d Cir. 2005); see also Mullen v. New Jersey Steel Corp., 733 F. Supp. 1534 (D.N.J.

1990) (concluding that the plaintiff’s understanding of his former employer’s policies was unjustifiable in

light of the record, including unambiguous contractual language, a clear statement by the treasurer con-

cerning the agreement, and no contrary statement).

-62-

debt of the FHLB system is rated, the Bank undertakes to report to its investors how they should

treat ratings (see Smith Decl. Ex. 73, Consolidated Bond and Consolidated Discount Notes (Mar.

19, 2012); Rubinsky (FHLB) Tr. 312:22-313:2; 314:14-23). In so doing, the Bank itself has dis-

claimed performance assurances of the kind advanced here by the Bank’s traders and its paid ex-

pert. Specifically, the Bank warned potential investors in its own debt that credit ratings as-

signed to securities “may be subject to revision or withdrawal at any time by the assigning rating

organization.” Smith Decl. Ex. 73, at 12 (Consolidated Bond and Consolidated Discount Notes

(Mar. 19, 2012)). Susceptibility to change or withdrawal “at any time” is the opposite of the

Bank’s opportunistic categorization of AAA ratings as guaranteeing “zero risk of default.”

Smith Decl. Ex. 12, at PGH-

FHLB00529255-64

(Cates (FHLB) Tr. 27:22-28:5),

See Factual Background, at 16, n. 30.

Third, the Bank’s subjective understanding of credit ratings is directly contradicted by the

disclaimers in the Offering Documents for the very Certificates at issue. For example, while the

Bank now purports to believe that AAA ratings represent “zero risk of default,” the Offering

Memoranda for the Certificates at issue plainly state that the ratings assigned to the securities

-63-

“Do Not Assure Their Payment.” See, e.g., Smith Decl. Ex. 39, at 9 (CHL 2007-J3, Prospectus).

The Offering Memoranda also state that the ratings on the Certificates “may be lowered or with-

drawn at any time by the assigning rating agency.” Smith Decl. Ex. 39, at S-8, S-100 (CHL

2007-J3 Pro. Supp.) (emphasis added)). The Offering Memoranda further warn that the amount

of designated credit enhancement on the Certificates might be insufficient to cover all losses,

which could cause “holders of more senior classes” to “incur realized losses” and prevent them

from “receiv[ing] all of their principal payments.” See, e.g., Smith Decl. Ex. 40, at S-17, S-18

(JPMMT 2007-A5 Pro. Supp.). Such explicit statements regarding the possibility of rating

changes or withdrawals, as well as the potential insufficiency of credit enhancement, are incon-

sistent with a notion that a rating equates to “protection against loss in economic environments

up to and including the Great Depression.” Smith Decl. Ex. 91, Mason Report ¶ 25.

Courts have found that similar disclaimers in offering documents precluded any claim of

justifiable reliance of the sort the Bank urges here. In Quinn v. McGraw-Hill Companies, the

Seventh Circuit affirmed on appeal the dismissal of a complaint against S&P because the plain-

tiff could not show that his reliance on the S&P rating at issue was reasonable where the issuers

had disclosed the substantial risks associated with the investment and warned that the S&P rating

“was ‘not a recommendation to buy, sell, or hold any such Bonds and may be subject to revision

or withdrawal at any time.’” 168 F.3d at 336. The court concluded that “these explicit state-

ments . . . should have alerted Quinn to the fact that he was responsible for doing his own home-

work about the risks he was assuming” and that “no reasonable jury could find that Quinn rea-

sonably relied on S&P’s evaluation of the quality of the bonds.” Id.101 Given the abundant

101

The Third Circuit held the same in In re Donald J. Trump Casino Sec. Litig. and granted the defend-

ants’ motion to dismiss because “the accompanying warnings and cautionary language served to negate

any potentially misleading effect that the prospectus’ statement about the Partnership’s belief in its ability

to repay the bonds would have on a reasonable investor. The prospectus clearly and precisely cautioned

-64-

warnings contained in the Offering Documents relating to each Certificate,102 the Bank could not

have justifiably relied on S&P’s ratings as guarantees or assurances against any losses as it now

self-servingly claims. See also HSH Nordbank AG v. UBS AG, 95 A.D.3d 185, 188 (N.Y. App.

Div. 2012) (dismissing a fraud claim, inter alia, on the basis of the fact that plaintiff “was explic-

itly warned of the risks it was undertaking”).

Where, as here, the plaintiff is a very sophisticated, long-time participant in the mortgage

markets and a purchaser of billions of dollars in PLMBS investments, the Bank’s inaccurate and

wildly overstated misapprehensions as to the meaning of S&P ratings are impossible to justify as

a matter of law and summary judgment should be granted on this ground as well.103

III. THERE IS NO EVIDENCE THE BANK SUFFERED ANY LOSS, LET ALONE A

LOSS PROXIMATELY CONNECTED TO A STATEMENT BY S&P

Under Pennsylvania law, a plaintiff asserting a fraud claim is entitled to recover only

with proof of an actual out-of-pocket loss. Emery v. Third National Bank, 308 Pa. 504, 515, 162

A. 281, 285 (1932). A plaintiff is only entitled to recover against a particular defendant if he can

that the bonds represented an exceptionally risky, perhaps even speculative venture . . . .” 7 F.3d at 357.

102See generally Smith Decl. Exs.17, 23, 24, 27, 28, 32, 33, 39, 40, 43, 46, 47. Among other things, those

disclosures (1) explain the nature of credit ratings (see, e.g., Ex. 23, at S-106 (CWALT 2006-J6 Pro.

Supp.); (2) warn that ratings are not recommendations to buy, sell, or hold a security (see, e.g., Ex. 39, at

S-8, S-100 (CHL 2007-J3 Pro. Supp.); (3) caution that a rating can be “lowered or withdrawn at any time”

(see, e.g., Ex. 39, at S-8, S-100 (CHL 2007-J3 Pro. Supp.); (4) inform that ratings of securities “Do Not

Assure Their Payment” (see, e.g., Ex. 39, at 9 (CHL 2007-J3 Prospectus); (5) state that the Certificates

are “not insured by any financial guaranty insurance policy” (see, e.g., Ex. 40, at S-17-S-18 (JPMMT

2007-A5 Pro. Supp.); (6) explain that the credit enhancement provided “May Not Be Sufficient To Pro-

tect Senior Certificates From Losses” (see, e.g., Ex. 17, at S-25 ((CWALT 2006-J3 Pro. Supp.); and (7)

warn that certain loans, e.g., interest-only loans, reduced documentation loans, and Alt-A loans, may car-

ry particular risks (see, e.g., Ex. 39, at S-20 (CHL 2007-J3 Pro. Supp.); Ex. 43, at S-49 (SARM 2007-10

Pro. Supp.)).

103 See Wittekamp v. Gulf & Western, Inc., 991 F.2d 1137, 1144-45 (3d Cir. 1993) (concluding that the

plaintiff, as president and former CEO of another company, was clearly a sophisticated party and thus his

alleged reliance was unjustifiable); see also Lind, 135 F. Supp. at 621-22 (granting defendant’s summary

judgment motion after finding, inter alia, that the plaintiff, a sophisticated and experienced businessman

who had familiarity with the commercial leasing industry, unjustifiably relied on the defendant’s state-

ment concerning rumored merger discussions); see also B.O. v. C.O., 590 A.2d 313, 316, 404 Pa. Super.

127, 133 (1991); Emery v. Third National Bank, 314 Pa. 544, 547, 171 A. 881, 882 (1934).

-65-

show that the defendant’s conduct was the proximate cause of its alleged losses. Edward J. De-

Bartolo Corp. v. Coopers & Lybrand, 928 F. Supp. 557, 562-63 (W.D. Pa. 1996). As evidence

of damages and causation, the Bank relies exclusively on the Mason Report.104 Mason’s report

does not offer the requisite evidence necessary to sustain the Bank’s burden on these required

elements.

A. The Bank Has Suffered No Actual Loss

The Bank did not contract with S&P on these Certificates. By settling its claims against

the Securities Defendants, the Bank chose to resolve any claims it may have had to recover any

expected “benefit” of its PLMBS bargain. The sole remaining claim against S&P as a third party

opinion provider is limited to its “out-of-pocket loss,” if any. See, e.g., Edward J. DeBartolo

Corp., 928 F. Supp. at 566 (surveying cases and concluding that “the Pennsylvania cases which

have allowed benefit of the bargain type damages do not involve claims against defendants who

were not parties to the underlying agreement”); Restatement (Second) of Torts § 549 cmt. g

(1977) (“When the plaintiff has not entered into any transaction with the defendant but has suf-

fered his pecuniary loss through reliance upon the misrepresentation in dealing with a third per-

son, [the out-of-pocket rule] must of necessity be applied.”).

The Bank concedes this principle of law in Mason’s report which acknowledges that the

relevant law does not permit a claim for the profits a plaintiff may have hoped to gain from its

purchases. (Mason Report ¶ 109). Instead, the only legal remedy available to the Bank is lim-

ited to its actual loss. Emery, 308 Pa. at 515, 162 A. at 285 (rejecting fraud recovery under a

“contract-warranty rule which . . . gives the plaintiff the value of his bargain”); November 29,

104

The Bank has been clear that it intends to rely on expert testimony to satisfy its burden. See Smith

Decl. Ex. 89, at 4 (Pl.’s Obj. and Resp. to Rating Agencies Third Set of Interrog. To Pl. (Jan. 29, 2014)

(“The amount of Pittsburgh FHLB’s anticipated out-of-pocket losses is a subject for expert opinion”).

-66-

2010 Ruling, 2010 WL 7928643, at *13 (observing that, “[u]pon a showing of fraud, [a] plaintiff

may seek the difference between what it paid to acquire what it believed to be AAA-rated securi-

ties and what an investor would have paid for those securities without AAA ratings or with AAA

ratings with a disclaimer”). As discussed in Section III.B, the Bank offers no evidence of the

value of the Certificates on the purchase date, and Mason takes the incredible position that the

Certificates were valueless on that date.

In fact, the record demonstrates that the Bank has not suffered any out-of-pocket loss

from the challenged investments. As shown by the affidavit of Prof. David Denis, as of the

March 31, 2014 date that Mason uses for its damages calculations, in the aggregate the Bank has

recovered the entire amount it paid to acquire the Certificates plus an additional approximately

$200 million. (Denis Aff. at ¶ 14, Ex. D).

This actual and substantial profit to the Bank extin-

guishes any recovery that it could obtain from a third party like S&P for an alleged fraud.

To evade this fact, the Bank implausibly proposes that the hundreds of millions of dollars

in interest the Bank has received all of these years should simply be ignored.106

Specifically, the

Bank asserts that it can recover alleged principal losses suffered, notwithstanding that it has re-

ceived a total amount in interest and principal that exceeds the amount it paid for the Certificates.

Smith Decl. Ex. 91, Mason Report ¶ 109. The Bank’s position is incorrect as a matter of law.

Courts have repeatedly rejected the Bank’s argument and held that where the combined principal

and interest payments a plaintiff has received “far exceed[] that amount of the unpaid principal,”

the plaintiff has suffered no “actual pecuniary loss of the type recoverable on a fraud claim.”

105

See Denis Aff. at ¶ 9, Ex. C.

106 Id.

-67-

Saleh Holdings Group v. Chernov, 30 Misc. 3d 1220(A) (Table), 2011 WL 452999, at *4 (Sup.

Ct. N.Y. Co. 2011) (granting motion to dismiss a claim for $500,000 in lost principal on a loan

where the plaintiff had received more than $900,000 in interest payments on the same loan); see

also In re Eugenia VI Venture Holdings, Ltd. Litig., 649 F. Supp. 2d 105, 122 & n.14 (S.D.N.Y.

2008) (granting summary judgment for defendant on plaintiff’s claim for “lost principal” where

plaintiff actually recovered $3.3 million more than it had loaned: “Whether principal, interest, or

some combination of the two, these are not out-of-pocket losses required to sustain a claim of

fraud”), aff’d sub nom. Eugenia VI Venture Holdings, Ltd. v. Glaser, 370 F. App’x. 197 (2d Cir.

2010); Physicians Mutual Insurance Co. v. Asset Allocation and Management Co., Civ. A. No.

06 C. 5124, 2007 WL 2875237, at *7 (N.D. Ill. Sept. 28, 2007) (granting summary judgment to

defendant where, inter alia, plaintiff could not establish actual loss because plaintiff “recovered

the entire purchase price of their original investment plus interest”). Because it has suffered no

out-of-pocket loss here, summary judgment is thus appropriate. See TCA Girard, LP v. Morgan,

Lewis & Bockius, LLP, No. 245 EDA 2013, slip op. at 36 (Pa. Super. Ct. Sept. 18, 2014) (grant-

ing summary judgment where plaintiff failed to demonstrate damages).

But, it is not surprising that the Bank wants to overlook the actual returns on the Certifi-

cates,

-68-

107 There is no legal basis to disregard these substantial benefits.

B. The Bank’s Claim that the “Real Value” of the Certificates at the Time of

Purchase Was Zero Is Fatal to Its Damages Claim

As this Court noted in ruling on the Preliminary Objections, “[u]pon a showing of fraud,

[a] plaintiff may seek the difference between what it paid to acquire what it believed to be AAA-

rated securities and what an investor would have paid for these securities without AAA ratings or

with AAA ratings with a disclaimer.”108 Mason’s report does not offer the proof described by the

Court. Instead, it sets forth the implausible view that the Certificates were worth “zero” at the

time of purchase because “these Certificates would not have been sold” without a rating.109 Ma-

son’s opinion crudely misstates the concept of value to advance a defective legal argument.

The intrinsic value of the Bank’s investments cannot be seriously denied. With each Cer-

tificate, the Bank purchased a senior or “super-senior” interest in a structured pool of mortgage

loans supported by certain credit protections negotiated by the Bank. Such an interest had value

and continues to have value today. In fact, Mason’s calculations acknowledge that the Bank’s

Certificates have a present market value110—notwithstanding that the ratings on the Certificates

have been downgraded significantly and even amid these lawsuits and allegations against the Se-

curities Defendants and Rating Agency Defendants with regard to these Certificates. Mason’s

report overlooks this glaring inconsistency.

Unsurprisingly, Pennsylvania law rejects claims based upon superficial assertions that in-

107

See Denis Aff. at ¶¶ 8-9, Exs. B1-14, C.

108 November 29, 2010 Ruling, 2010 WL 7928643, at *13.

109 Mason Report at ¶ 96 (“Economically, had the market known that S&P’s proprietary ratings model

was not valid or that S&P did not truly believe that the credit enhancement provided for the Certificates

was sufficient to support its AAA ratings, generally, these Certificates would not have been sold. Thus,

the effective ‘real’ value of these Certificates is zero and the Pittsburgh FHLB’s pecuniary loss is the en-

tire amount paid for the Certificates.”) (emphasis added).

110 Id. at ¶ 100 (subtracting proceeds from hypothetical sales “at market rates on March 31, 2014”).

-69-

vestments were “worthless” upon purchase. In Peters v. Stroudsburg Trust Co., the Pennsylva-

nia Supreme Court rejected the argument that bonds the plaintiff was induced to acquire were

“worthless” and that the plaintiff should be able to recover the entire value of his investment:

At the trial plaintiff definitely refused to include in his offer to prove damages

‘any evidence of the value of the bonds as received at the time of this exchange.’ .

. . . There is nothing in the record to indicate the market value of either the

[bonds] at the time of the exchange, or at any other time. It was impossible,

therefore, for a jury to pass upon the alleged loss, and . . . the learned court

properly entered a nonsuit.

348 Pa. 451, 453-55, 35 A.2d 341, 343 (1944) (emphasis added).111 The Third Circuit applying

Pennsylvania law has reached the same conclusion. In Kaufman v. Mellon National Bank &

Trust Co., the plaintiffs offered a similar argument that subsequent losses showed that they had

“received nothing of value” in exchange for their investment. 366 F.2d 326, 331 (3d Cir. 1966).

The court disagreed:

The fallacy in the argument lies in the erroneous premise upon which it is predi-

cated. They ultimately lost the full amount of their investment but it does not fol-

low that the property rights which they acquired at the time of the transaction

were valueless. When the plaintiffs consummated their contract with Center they

immediately acquired equitable ownership of the shopping center, subject only to

the first mortgage held by the defendant. . . . The equitable ownership had an as-

certainable worth equal to the value of the improved lands and the partially com-

pleted buildings.

Id. (emphasis added). The Kaufman court concluded that, because “[t]he plaintiffs offered no

evidence as to the value of their equitable ownership but were apparently content to rest on their

claim” that the investment was worthless, “the plaintiffs failed to prove damage.” Id. The

Kaufman opinion similarly forecloses the Bank’s argument that a summary conclusion that the

111

Cf. Polaski v. Levin, 176 Pa. Super. 370, 370, 107 A.2d 876, 877 (1954) (holding that trial court com-

mitted reversible error in instructing the jury that it could award plaintiff $600—which was the difference

between what he paid for the car at issue and its apparent salvage value when he resold it—where “there

was no evidence of value of the automobile in ‘good condition’ at the time of the transaction, nor was

there evidence of its value in its actual, or defective, condition . . . . there was no way for the jury to arrive

at the loss sustained by plaintiff”).

-70-

securities were valueless can substitute for an actual assessment of value on the purchase date.

By way of its expert, the Bank now makes the same claim rejected in Peters and Kauf-

man and has ignored this Court’s guidance that it submit evidence of the value of the Certificates

at the time of purchase. Thus, the Bank has failed to prove actual damages as a matter of law

and summary judgment can be entered for S&P on this basis alone.

C. The Bank Cannot Prove that S&P’s Alleged Misrepresentations Proximately

Caused its Alleged Loss

In addition to proving that it has suffered out-of-pocket damages, a fraud plaintiff must

show that the damages it seeks to recover were proximately caused by the fraud it alleges. The

essence of the proximate cause (or “loss causation”) requirement is proof of the “link” by which

the alleged misrepresentation caused the loss.112 As the Supreme Court has observed, fraud ac-

tions exist, “not to provide investors with broad insurance against market losses, but to protect

them against those economic losses that misrepresentations actually cause.” Dura Pharmaceuti-

cals, Inc. v. Broudo, 544 U.S. 336, 345 (2005).113

Among the most important non-fraud factors that can affect investment performance are

“external market forces and [issuer]-specific or industry-specific facts, conditions, or other

events unrelated to the alleged fraud.” WM High Yield Fund v. O’Hanlon, Civ. A. No. 04-cv-

112

See Edward J. DeBartolo, Corp., 928 F. Supp. at 562 (“[F]rom time immemorial proof of proximate

cause—the legal link between the misconduct alleged and the injury averred—has been a precondition of

recovery under theories of fraud and deceit.”) (citation and internal quotation marks omitted); see also

Berckeley Investment Group, Ltd. v. Colkitt, 455 F.3d 195, 222 (3d Cir. 2006) (explaining that “‘proxi-

mate cause’ is known as ‘loss causation’” and that the two terms refer to the same concept “but with dif-

ferent labels”).

113 See also id. at 347-48 (rejecting pleading rule that “would tend to transform a private securities action

into a partial downside insurance policy”); McCabe v. Ernst & Young, LLP, 494 F.3d 418, 425 & n.3 (3d

Cir. 2007) (holding that a fraud plaintiff must show that the “the defendant misrepresented or omitted the

very facts that were a substantial factor in causing the plaintiff’s economic loss (loss causation),” which

“limits the circumstances in which an investor can sue over a failed investment, so that the individual al-

legedly responsible for the misrepresentation or omission does not become an insurer against all the risks

associated with that investment”).

-71-

3423, 2013 WL 3230667, at *12 (E.D. Pa. June 27, 2013) (citing Dura). Likewise, where differ-

ent actors are accused of having made distinct misrepresentations, the losses proximately caused

by each defendant’s misstatements must be separately considered. Id. at *17 (“Plaintiffs’ pro-

posed measure of damages does not take into account any portion of the price decline related to

the fraud allegedly committed by numerous defendants other than Deloitte and Neas.”). These

other factors must be disaggregated from the purported losses caused by the alleged misrepresen-

tation of a defendant. See Dura, 544 U.S. at 343. By requiring evidence that “allow[s] a fact-

finder to ascribe some rough proportion of the whole loss to [the defendant’s] misstatements,”

the disaggregation requirement discourages opportunistic plaintiffs and limits recovery to losses

actually caused by the fraud. See Lattanzio v. Deloitte & Touche, LLP, 476 F.3d 147, 158 (2d

Cir. 2007).114 Without any analysis that considers the “tangle of factors” that affect the value of

complex securities, a plaintiff cannot meet its burden. See Dura, 544 U.S. at 343.115

1. The Bank Does not Disaggregate Losses Caused by the Financial Cri-

sis or Alleged Misrepresentations by Third Parties and Improperly

Seeks to Make S&P an Ex-Post Insurer of its Investments

Mason explicitly acknowledges that he does not even attempt to disaggregate the impact

114

This showing is not equivalent to damages apportionment: disaggregation determines whether a de-

fendant’s conduct caused the plaintiff’s loss, and therefore whether the defendant is liable at all, while

apportionment allocates responsibility among defendants whose liability has already been established.

See Hubbard v. BankAtlantic Bancorp, Inc., 688 F.3d 713, 726 (11th Cir. 2012) (distinguishing the “pre-

cise apportionment . . . needed only to prove the amount of damages” from “evidence separating the vari-

ous causes of the decline in the security’s price [required] to establish loss causation”).

115 The same causation standard and analysis governs both Pennsylvania common law fraud and federal

securities fraud claims. See Joyce v. Bobcat Oil & Gas, Inc., Civ. No. 1:CV–07–1421, 2008 WL 919724,

at *14 (M.D. Pa. Apr. 3, 2008) (dismissing Pennsylvania state law negligent misrepresentation claim for

failure to satisfy proximate cause as required by federal law); Fulton Bank, 2011 WL 5386376, at *15

(applying federal securities law standards to analysis of state-law negligent misrepresentation claim); Ar-

gent Classic Convertible Arbitrage Fund L.P. v. Rite Aid Corp., 315 F. Supp. 2d 666, 686 (E.D. Pa. 2004)

(applying the same analysis to Pennsylvania common law fraud claims as to federal 10b-5 claims). There

is significant support for the proposition that the federal loss causation standard derives from common

law tort principles. See, e.g., Dura, 544 U.S. at 343; Berckeley, 455 F.3d at 222 (“Causation in the securi-

ties context is strikingly similar to the familiar standard in the torts context.”)

-72-

of non-fraud factors on the Bank’s claimed loss. His opinion explicitly discounts the possibility

that any of the Bank’s alleged losses flowed from either of: (1) the financial crisis that had yet to

occur when the relevant S&P rating committees conducted their analysis, and (2) misstatements

allegedly made by the Sponsors about, inter alia, the loan collateral upon which S&P’s credit

ratings were based.116 This defect is fatal to the Bank’s claim and courts have granted summary

judgment where a plaintiff fails to undertake such an analysis. See, e.g., WM High Yield Fund¸

2013 WL 3230667, at *11-12 (applying Pennsylvania law and granting summary judgment for

defendants where plaintiff failed to disaggregate losses caused by actions of multiple defend-

ants).117

First, Mason implausibly opines that “‘economic conditions’ . . . did not contribute to [the

Bank’s] loss” and “macroeconomic variables cannot, therefore, be considered separately from

the AAA misrepresentation” even when they occurred years after the alleged misrepresenta-

tion.118 Mason’s “analysis” attempts an end-run around the Bank’s burden. Given that the

Bank’s alleged losses coincide perfectly with a market disruption focused in housing prices, it is

simply not plausible for Mason to assert that “‘economic conditions’ . . . did not contribute to

116

Smith Decl. Ex. 91, Mason Report ¶ 111 (“Although I understand that Pittsburgh FHLB initially

brought this lawsuit against numerous other parties, including the securities underwriters and other rating

agencies, I am not attempting to allocate losses among the past and present defendants.”); id. ¶ 95 (“Dam-

ages are not dependent upon whether or not factors like the declining housing market contributed to the

decline in the value of the certificates.”)

117 See also Lattanzio, 476 F.3d at 158; In re Moody’s Corp. Sec. Litig., No. 07 Civ. 8375(GBD), 2013

WL 4516788, at *12 (S.D.N.Y. Aug. 23, 2013) (granting summary judgment where plaintiff’s loss causa-

tion expert did not “establish that market forces and other factors unrelated to [the misrepresentation] did

not play a significant role in Plaintiffs’ economic loss”); In re Williams Sec. Litig.-WCG Subclass, 558

F.3d 1130, 1143 (10th Cir. 2009) (upholding summary judgment where plaintiffs did not disaggregate

because “[t]here are too many intervening factors at play—including the total meltdown of the telecom-

munications industry—to allow [plaintiffs’ expert] to reliably equate bankruptcy with the risks that the

original misstatements concealed”); Hubbard, 688 F.3d at 729 (upholding judgment as a matter of law

where Plaintiff failed “to present evidence that would give a jury some indication, however rough, of how

much of the decline in Bancorp’s stock price resulted not from the fraud but from the general downturn in

the Florida real estate market”).

118 Smith Decl. Ex. 91, Mason Report ¶ 92.

-73-

[the Bank’s] loss.”119 Indeed, Mason’s statement does not reflect a factual conclusion of whether

economic conditions actually contributed to the Bank’s loss, but rather his personal view that

S&P should be legally responsible for the obvious impact of the financial crisis on these invest-

ments, because he believes the financial crisis was not worse than the Great Depression.120 Ac-

cording to Mason’s logic, the terms, structure, loan collateral and accompanying risk disclosures

of the Certificates themselves are irrelevant because the only relevant investment risk to consider

was a repeat occurrence of a 1930’s economy.

Putting aside Mason’s superficial comparison of the recent financial crisis to the Great

Depression, it is undisputed that the PLMBS products the Bank purchased did not exist during

the Great Depression and have only been developed in very recent years, a history well known to

the Bank. See Smith Decl. Ex. 9 (Untested Loan Products, June 1, 2005) (quoting the Bank’s

Chief Operating Officer, noting the lack of history with new mortgage products). For Mason to

conclude that an S&P AAA rating was an ex-ante pronouncement by S&P that a stress exceeding

the Great Depression was the only relevant risk strains credulity. In any event, to hold S&P ret-

roactively responsible for the unknown impact of a future market crisis is the antithesis of “cau-

sation” analysis.121 By improperly converting S&P’s rating into an insurance-like guarantee,

119

Id.

120 Mason’s superficial analysis is at odds with the conclusions of others. See Smith Decl. Ex. 66 (Finan-

cial Crisis Inquiry Commission Closed Session, 24 (Nov. 17, 2009) (testimony of Ben Bernanke, Chair-

man of the Federal Reserve) (“As a scholar of the Great Depression, I honestly believe that September

and October of 2008 was the worst financial crisis in global history, including the Great Depression.”))

121 Mason does not even address the unprecedented nature of the financial crisis. At the time, those in

charge of the economy were publicly stating: “I don’t see (subprime mortgage market troubles) posing a

serious problem. I think it’s going to be largely contained.” U.S. Treasury Secretary Henry Paulson,

Speech before The Committee of 100 (Apr. 20, 2007), available at

http://www.committee100.org/podcast/. Even those with the highest vantage points were taken by sur-

prise: “I did not anticipate a crisis of this magnitude and this severity.” Smith Decl. Ex. 67 (Hearing on

the Nomination of Ben S. Bernanke Before the Sen. Comm. on Banking, Housing and Urban Affairs,

111th Cong. 29 (2009) (statement of Ben Bernanke), available at http://www.gpo.gov/fdsys/pkg/CHRG-

111shrg54239/pdf/CHRG-111shrg54239.pdf).

-74-

Mason subverts loss causation rather than proves it.

Second, Mason also fails to account for other factors not attributable to S&P affecting the

Certificates’ performance, such as the Sponsors’ alleged misrepresentations regarding the mort-

gage loan collateral to the public, including S&P. As set forth above, the Bank has accused the

Sponsors of, among other things, having lied about the underlying mortgage loan collateral to

both the Bank and S&P. See Factual Background, at 25. The Bank’s filing and settlement of its

claims that the Securities Defendants in these cases were “providing bad loan data to the rating

agencies” underscores Mason’s failure to consider the important concurrent factors contributing

to the Bank’s alleged loss, including factors for which S&P cannot possibly be held responsible.

This glaring oversight draws an illuminating contrast with another opinion Mason recently of-

fered in another PLMBS litigation against the same Sponsors named as defendants here and that

included one of the very same securitizations at issue here.

In an opinion Mason wrote in December 2012 in Dexia SA/NV v. Bear, Stearns & Co.,

Mason concludes that all of the plaintiff’s PLMBS losses were caused by “the growing market

realization of the defective nature of the underwriting behind the [collateral] loans.”122 Fully

blaming the issuers and sponsors for misstatements about the underlying collateral, Mason’s

Dexia opinion ascribes no fault to the rating agencies that would have used that “bad loan data”

for rating analysis. Indeed, Mason goes so far in his recent Dexia opinion as to blame the entire

housing and financial crisis on the same issuer/sponsor misrepresentations about mortgage loan

underwriting that he blames for the plaintiff’s poor investment performance. He states in Dexia

that “the decline in home prices was the result – not the cause – of the decline in underwriting

122

Smith Decl. Ex. 76 (Report of Joseph R. Mason, Ph.D. ¶ 7, Dexia SA/NV v. Bear, Stearns & Co., No.

12-cv-4761, Dkt. No. 38-21 (JSR) (S.D.N.Y. filed Jan. 22, 2013).)

-75-

quality and the failure to adhere to stated or published underwriting standards.”123

Having recently submitted an opinion that blamed PLMBS issuers/sponsors named both

here and in Dexia, it is quite rich for Mason in this case to fully blame S&P, who received the

same allegedly false representations from the same defendants about loan details as the plaintiffs

in both cases.124 Just as in Dexia, the Sponsors here made representations that the underlying

mortgage loan collateral conformed to stated underwriting guidelines.125 And just as in Dexia, the

Bank has alleged that those representations were false. Having been able to calculate alleged

damages resulting from issuer/sponsor misstatements in Dexia, Mason’s calculations in this case

could and should have disaggregated these impacts, as all fraud plaintiffs are required to do.

S&P is accordingly entitled to summary judgment upon the admitted failure to even at-

tempt to exclude other distinct causes, including those identified and alleged by the Bank in these

very cases, from the Bank’s loss causation analysis. See WM High Yield Fund, 2013 WL

3230667, at *17 (granting summary judgment where “[p]laintiffs’ proposed measure of damages

does not take into account any portion of the price decline related to the fraud allegedly commit-

ted by numerous defendants other than Deloitte and Neas. And no proof of damages arising

from these Defendants’ conduct has been provided.”).

2. The Bank Fails to Show a Link Between S&P’s Alleged Misrepresen-

tations and the Bank’s Supposed Losses

Consistent with the improper treatment of an S&P rating as the cause of any and all loss-

es, the Bank’s expert does not actually link S&P’s rating to a concealed investment risk that later

123

Id. ¶ 21.

124 Mason’s report readily acknowledges that a fraud by an issuer/sponsor can lead to AAA RMBS de-

faults through no fault of S&P. See Smith Decl. Ex. 91, Mason Report ¶ 50 (explaining a past default of

AAA RMBS as “the result of fraud at Guardian Savings & Loan in the early 1990s”).

125 See, e.g., Smith Decl. Ex. 43, at S-52 (SARM 2007-10 Pro. Supp.). The other Prospectus Supplements

contain similar representations.

-76-

materialized as is required by applicable law under the “materialization of risk” theory of loss

causation that the Bank purports to offer. See, e.g., WM High Yield Fund, 2013 WL 3230667, at

*15 (citing Lattanzio, 476 F.3d at 157). To satisfy this requirement, a plaintiff must show that its

loss was foreseeable to the defendant and that “‘the risk that caused the [plaintiff’s] loss was

within the zone of risk concealed by the misrepresentations and omissions’” of the defendant.

Id. (quoting Lattanzio, 476 F.3d at 157). The Bank does not provide the required showing.

As the case law makes clear in “materialization of the risk” analysis, a plaintiff must

identify “the subject of the misrepresentations or omission that allegedly caused plaintiff’s loss,

i.e., the risk concealed by defendant’s fraud.” Leykin v. AT&T Corp., 423 F. Supp. 2d 229, 240

(S.D.N.Y. 2009), aff’d 216 Fed. App’x 14 (2d Cir. 2007). At various points in time, the Bank

has pointed to two alleged risks that were supposedly concealed. First, the Bank points to the

allegedly concealed risk that the “Certificates were not protected by Great Depression-worthy

credit enhancement” and asserts that the Bank would not have purchased the Certificate if it had

known this.126

Second, the Bank points to the allegedly concealed risk that “S&P did not truly

believe that the credit enhancement required for the Certificates was sufficient to support the

AAA ratings.”127

As a matter of law, both formulations of allegedly concealed risks fail.

First, a plaintiff must show that its loss resulted from a risk that was concealed, and not

from risks that were disclosed.128 The Bank cannot do this. Indeed, the risk disclosures in the

126

Smith Decl. Ex. 91, Mason Report ¶ 91.

127 Smith Decl. Ex. 91, Mason Report ¶ 60 (emphasis added).

128 See, e.g., Lattanzio, 476 F.3d at 158 (rejecting loss causation where “Plaintiffs have not alleged facts to

show that [Defendant’s] misstatements, among others (made by [the issuer]) that were much more conse-

quential and numerous, were the proximate cause of plaintiffs’ loss”); see also Lentell v. Merrill Lynch &

Co., 396 F.3d 161, 177 (2d Cir. 2005) (“[W]here (as here) substantial indicia of the risk that materialized

are unambiguously apparent on the face of the disclosures alleged to conceal the very same risk, a plain-

tiff must allege (i) facts sufficient to support an inference that it was defendant’s fraud—rather than other

salient factors—that proximately caused plaintiff’s loss; or (ii) facts sufficient to apportion the losses be-

-77-

Offering Documents negate the first of Mason’s formulations of the allegedly concealed risk.

For example, the Offering Documents warned that the Certificates “are not insured by any finan-

cial guaranty insurance policy” and that the Certificates’ credit enhancement was “limited in na-

ture and may be insufficient to cover all losses on the mortgage loans.”129 Similarly, the Offering

Documents’ explanations about its ratings and criteria, including its warnings that “a security

rating is not a recommendation to buy, sell or hold securities and may be subject to revision or

withdrawal at any time.” 130 Such warnings flatly contradict Mason’s treatment of the ratings as

assurances of performance.

Moreover, Mason’s opinion that the Bank would not have purchased the Certificates if it

had known that “the Certificates were not protected by Great Depression-worthy credit en-

hancement” conflates the required elements of loss causation and reliance. Mason states: “It is

my opinion that S&P could not properly rate the securities and the marketplace could, therefore,

not accurately price the return required for the risk assumed. Had the Pittsburgh FHLB known of

such circumstances, it would not have purchased these Certificates.”131 This formulation uses

“but-for” logic that closely identified with the required element of reliance and is also known as

“transaction causation.” But, loss causation analysis does not focus on whether the plaintiff was

induced to enter into the transaction, but rather on whether any losses resulting from entering that

transaction were caused by the defendant’s misrepresentation.132 As with the Bank’s theories

tween the disclosed and concealed portions of the risk that ultimately destroyed an investment.”).


contain similar disclosures. Smith Decl. Exs. 17, 23, 24, 27, 28, 32, 33, 39, 40, 46, 47.


contain identical disclosures. Smith Decl. Exs. 17, 23, 24, 27, 28, 32, 33, 39, 40, 46, 47.

131 Mason Report at ¶ 94 (emphasis added).

132 McCabe, 494 F.3d at 429; see also WM High Yield Fund, 2013 WL 3230667, at *9 (holding that loss

causation analysis is distinct from the “but for” analysis of reliance).

-78-

generally, this but-for transaction causation logic improperly makes S&P the insurer against all

losses regardless of the actual cause.

As to the Bank’s second attempt to identify an allegedly concealed risk, i.e., that S&P

concealed a “risk” that it “did not truly believe the ratings,” such a theory is deficient to demon-

strate a proximate loss because it effectively collapses the loss causation element into the misrep-

resentation element. See, e.g., WM High Yield Fund, 2013 WL 3230667, at *15. A supposedly

concealed risk that S&P subjectively “disbelieved” its rating would fully manifest if S&P made

any intentional misstatement. If that supposed showing itself suffices as a link to support the ret-

roactive insurance-like recovery sought here, then the purpose of the loss causation requirement

is defeated. For this reason, courts have rejected the theory offered by the Bank here, noting that

if it were permitted, the loss causation element “‘would be completely subsumed by the element

of misstatement.’” Id. (quoting Lattanzio, 476 F.3d at 157).133

In short, the Bank attempts to conflate loss causation with various other elements of fraud

to disguise the fact that it has offered no actual proof that links the Bank’s purported losses to

any of S&P’s alleged misrepresentations. This is fatal to its claim.

IV. THE BANK’S FRAUD CLAIM IS ALSO BARRED BY THE CONTRACTUALLY

AGREED TO STATUTE OF LIMITATIONS

As set forth above, the Bank

Smith Decl. Ex. 4.

133

In WM High Yield Fund, plaintiffs asserted that Deloitte as auditor had “concealed” a general risk that

its audits contained a mistake under GAAP. In rejecting this overbroad formulation, the Court held that

“materialization of that risk—an actual auditing or accounting error (a misstatement)—cannot be conflat-

ed with proof of loss causation.” Id.

-79-

Id. at S&P-FHLB 0089293 (emphasis in original).

The Bank filed these cases in September and October 2009. Accordingly, the Bank must

have determined that it had a claim against S&P as set forth in its Complaints no later than these

filing dates. Yet, the allegations on which the Complaints are based occurred well over a year

before the Bank filed these cases. See, e.g., Countrywide ¶¶ 224-27 (relying on the March and

August 2008 Fitch downgrades of 17.9% of all AAA-rated residential MBS as an example of the

“inadequacy of the Rating Agencies’ predictive models” both generally and as to the Certificates

at issue in this case); Lehman ¶¶ 109-11 (relying on S&P’s July 2007 rating actions on certain

PLMBS as support for its allegations that S&P could not “reasonably estimate the risk of de-

fault” of the Certificates); id. at ¶¶ 112-15 (quoting from S&P’s July 10, 2007 announcement

regarding reports of mortgage fraud and efforts to increase review of lender’s fraud detection

practices); JPM I ¶ 222 (relying on a Form 10-Q filed by “PHH (as significant originator [for the

underlying loans for the securities at issue]” on August 8, 2008); ¶¶ 224-27 (relying on internal

Chase email outlining “cheats and tricks” to gain approval for “risky mortgages” that was pub-

lished on March 29, 2008 in the Pittsburgh Tribune Review).134

This Court has already held that the Bank is barred from pursuing claims against Defend-

ant Countrywide where the claims against Countrywide were based on information that was pub-

licly available more than a year before the Bank filed its claims. See Smith Decl. Ex. 75, Feder-

al Home Loan Bank of Pittsburgh v. Countrywide Securities Corp., No. GD-09-018482 (Pa. Ct.

Com. Pl. Nov. 26, 2012) (stating that “a reasonably diligent investor, owning certificates pur-

134

See Smith Decl. Ex. 53 (JP Morgan Memo Shows Tricks of Mortgage Trade, Pittsburgh Tribune (Mar.

29, 2008)).

Redacted Public Version

Documents

Transcript of Redacted Public Version