Full opinion text
OPINION & ORDER DENISE COTE, District Judge: Table of Contents PROCEDURAL HISTORY.453 BACKGROUND.458 This case is complex' from almost any angle, but at its core there is a single, simple question. Did defendants accurately describe the home mortgages in the Offering Documents for the securities they sold that were backed by those mortgages? Following trial, the answer to that question is clear. The Offering Documents did not correctly describe the mortgage loans. The magnitude of falsity, conservatively measured, is enormous. Given the magnitude of the falsity, it is perhaps not surprising that in defending this lawsuit defendants did not' opt to prove that the statements in the Offering Documents were truthful. Instead, defendants relied, as they are entitled to do, on a multifaceted attack on plaintiffs evidence. That attack failed, as did defendants’ sole surviving affirmative defense of loss causation. Accordingly, judgment will be entered in favor of plaintiff. PROCEDURAL HISTORY In September 2011, the Federal Housing Finance Agency (“FHFA”) brought sixteen lawsuits against banks and related entities and individuals to recover damages on behalf of two Government-Sponsored Enterprises, the Federal ’National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) (collectively “GSEs”) arising out of the GSEs’ investments in residential mortgage-backed securities (“RMBS”), specifically their investment in so-called private-label RMBS (“PLS”). FHFA had been created in the midst of the financial crisis, on July 30, 2008, pursuant to the Housing and Economic Recovery Act of 2008, Pub.L. No. 110-289, 122 Stat. 2654 (codified at 12 U.S.C. § 4617), to oversee the GSEs as well as the Federal Home Loan Banks. It became conservator of the GSEs on September 6, 2008. The discovery, motion practice, and trials of the sixteen' actions were coordinated before this Court, as described in FHFA v. UBS Americas Inc., No. 11cv5201 (DLC), 2013 WL 3284118, at *1-9 (S.D.N.Y. June 28, 2013), reconsideration denied sub nom. FHFA v. JPMorgan Chase & Co., No. 11cv6188 (DLC), 2013 WL 5354212 (S.D.N.Y. Sept. 25, 2013). Fact discovery in the actions largely concluded on .December 6, 2013. The trials of the sixteen cases were separated into four tranches, with the earliest tranche scheduled for trial in January 2014, and the fourth tranche Set for trial in early 2015. Expert discovery concluded in waves, with the final wave ending on November 26, 2014. Ultimately, only this lawsuit, one of the sixteen actions, proceeded to trial. This case is referred to as the “Nomura Action.” The Nomura corporate defendants are Nomura Holding America, Inc. (“NHA”), Nomura Securities International, Inc. (“Nomura Securities”), Nomura Credit & Capital, Inc. (“NCCI”), Nomura Asset Acceptance Corporation (“NAAC”), and Nomura Home Equity Loan, Inc. (“NHELI”). The five individual Nomura defendants-David Findlay (“Findlay”), John Graham (“Graham”), Dante LaRocca (“LaRoeca”), Nathan Gorin (“Gorin”), and John McCarthy (“McCarthy”) (collectively “Individual Defendants”) — signed Registration Statements for the PLS and were officers or directors of multiple Nomura defendants. Co-defendant RBS Securities Inc. (“RBS”), known at the time of the transactions as Greenwich Capital Markets, Inc., underwrote four of the seven securitizations (“Securitizations”) at issue here. FHFA alleges that defendants are liable under Sections 12(a)(2) and 15 of the Securities Act of 1933, 15 U.S.C. §§ 772(a)(2), 77o (the “Securities Act claims”), and parallel provisions of the District of Columbia’s and Virginia’s Blue Sky laws, D.C.Code § 31-5606.05(a)(l)(B), (c), Va. Code Ann. § 13.1-522(A)(ii) (collectively .the “Blue Sky claims”). FHFA alleges that four sets of representations in each of the seven Prospectus Supplements were false. ■ They are representations regarding the origination and underwriting of the loans within the SLGs backing the Certificates; loan-to-value (“LTV”) and combined loan-to-value (“CLTV”) ratios and appraisals, including compliance with Uniform Standards of Professional Appraisal Practice (“USPAP”); occupancy status; and the credit ratings of the Certificates; In advance of'trial several rulings on summary judgment motions, Daubert motions, and motion's in limine were issued. Of particular importance are decisions ruling that, as a matter of law, defendants were not entitled to two statutory affirmative defenses — the GSEs’ knowledge of falsity, and. defendants’ due diligence and reasonable care, FHFA v. HSBC N. Am. Holdings Inc., 33 F.Supp.3d 455, 493 (S.D.N.Y.2014), FHFA v. Nomura Holding Am. Inc. (“Due Diligence Opinion”), 68 F.Supp.3d 439, 485-86, 2014 WL 7232443, at *40 (S.D.N.Y. Dec. 18, 2014); decisions excluding evidence of the GSEs’ affordable • housing goals (“Housing Goals”), FHFA v. Nomura Holding Am., Inc. (“Housing Goals Opinion ”), No. 11cv6201 (DLC), 2014 WL 7229361, at *4 (S.D.N.Y. Dec. 18, 2014), and the flawed statistical analysis regarding loss causation offered by defendants’ expert Kerry Van-dell (“Vandell”), FHFA v. Nomura Holding Am., Inc. (“Vandell Opinion”), No. 11cv6201 (DLC), 2015 WL 539489, at *11 (S.D.N.Y. Feb. 10, 2015); and a decision interpreting certain language in the Prospectus Supplements at issue here, FHFA v. Nomura Holding Am., Inc. (“Hunter Opinion”), 74 F.Supp.3d 639, 653-54, 2015 WL 568788, at *11 (S.D.N.Y. Feb. 11, 2015). On January 15, 2015, FHFA was. granted leave to voluntarily withdraw its Securities Act Section. 11 claim, and the parties prepared for a bench trial in lieu of a jury trial.. See FHFA v. Nomura Holding Am. Inc. (“Post-Filing Payments Opinion”), 68 F.Supp.3d 486, 496-98, 2014 WL 7232590, at *9-11 (S.D.N.Y. Dec. 18, 2014) (holding no right to jury trial in Section 12(a)(2) action). The parties’ pretrial order in the Nomu-ra Action, proposed findings of fact and conclusions of law, and defendants’ pretrial memorandum were submitted on February 20, 2015. FHFA submitted an opposition to defendants’ pretrial memorandum on February 27; over FHFA’s objections, the Court received defendants’ response on March 9. With the parties’ consent, the trial was conducted in accordance with the Court’s customary practices for non-jury proceedings, which includes taking direct testimony from witnesses under a party’s control through affidavits submitted with the pretrial order. The parties also served copies of all exhibits and deposition testimony that they intended to offer as evidence in chief at trial with the pretrial order. Affi-ants were cross-examined and presented them redirect testimony in court beginning on March 16. Additional witnesses also testified at that time. Accommodating the Court’s request, the parties largely organized the presentation at trial around topics. This meant that plaintiff’s and defendants’ witnesses on a topic were typically called to the stand right after each other. The nine topics, in roughly the order they were presented at trial, were background to the PLS industry, valuation, data summary, re-underwriting, sampling and extrapolation; diligence, Individual Defendants, materiality, damages,, and loss causation. No witnesses were ultimately called for - cross-examination on two additional issues: the location of sale, and principal and interest payments. At trial, FHFA called thirteen fact witnesses and nine experts. FHFA’s fact witnesses fell into three categories. FHFA called witnesses to testify about defendants’ due diligence practices, including Brian Farrell (“Farrell”), Vice President in the Credit Risk Department at RBS; Joseph Kohout (“Kohout”), former head (until mid-2006) of the Diligence Group at Nomura Securitiés and later N.CCI; Randall Lee (“Lee”),’ former collateral analyst at Nomura Securities and NCCI; Neil Spagna (“Spagna”), former head (after mid-2006) of the Diligence Group at Nomura Securities and later NCCI; and Charles Cipione (“Cipione”), Managing Director at AlixPartners, LLP, a financial and operational consulting firm, who presented data and summary statistics about defendants’ due diligence practices. FHFA also called the five Individual Defendants. In addition, FHFA offered the affidavits of several witnesses to testify to the location of the GSEs’ headquarters during the period relevant here. They are Kenneth Johansen, Financial Controller Manager at Freddie Mac, Chaka Long, Senior Account Executive at Fannie Mae, and Kevin Palmer, Vice President of Strategic Credit Costing and Structuring at Freddie Mac. Defendants chose not to cross-examine these witnesses and they did not appear at the trial. FHFA’s ten expert witnesses and the principal subjects of their testimony were: Peter Rubenstein, an independent consultant with expertise in residential x-eal estate, who provided background on the PLS and RMBS industry generally; John Kil-patrick (“Kilpatrick”), Managing Director of Greenfield Advisors, a real estate and economic consulting firm headquartered in Seattle, Washington, who testified about property appraisals underlying the sample of loans at issue here (“Sample loans”); Robert Hunter (“Hunter”), an independent consultant with expertise in residential loan credit issues, who testified about the results of his re-underwriting review of the Sample loans; Dr. Charles Cowan (“Co-wan”), Managing Partner of Analytic Focus LLC, a statistical research and analysis consultancy firm, who testified about his statistical extrapolations of Kilpatrick’s and Hunter’s findings; Steven Campo, founder and principal of SeaView Advisors, LLC, a private equity firm, who testified to the role of independent accountants in reviewing representations in Offering Documents; Leonard Blum, a principal at Blum Capital Advisors LLP, an investment banking consulting firm, who testified as to what information those in the RMBS industry considered to be material, as did Dr. William Schwert (“Schwert”), Distinguished University Professor of Finance and Statistics at the William E. Simon Graduate School of Business Administration of the University of Rochester and Research Associate of the National Bureau of Economic Research; James Finkel, Managing Director at Duff & Phelps, LLC, a corporate finance consulting firm, who opined as to the appropriate amount of damages due FHFA; and Dr. James Barth (“Barth”), the Lowder Eminent Scholar in Finance at Auburn University, a Senior Finance Fellow at the Milken Institute, and a Fellow at the Wharton Financial Institutions Center, who testified regarding defendants’ loss causation defense. FHFA also offered excerpts from the depositions of Michael Aneiro (“Aneiro”), former Freddie Mac PLS trader; Vicki Beal (“Beal”), corporate representative of Clayton Holdings LLC (“Clayton”), speaking as fact witness and Rule 30(b)(6) desig-nee; Frank Camacho, former Vice President for Credit Risk at RBS; Debashish Chatterjee, Rule 30(b)(6) designee for Moody’s Investors Service (“Moody’s”); James DePalma, former Director at No-mura Securities; Jacqueline Doty (“Doty”), corporative representative for CoreLogic, Inc. (“CoreLogic”), a valuation diligence firm; David Hackney (“Hackney”), former PLS trader at Freddie Mac; Jeffrey Hartnagel (“Hartnagel”), former member of Nomura’s Diligence Group; Tracy Jordan, former due diligence underwriter at Clayton; Steven Katz (“Katz”), former managing director of Nomura’s trading desk (“Trading Desk”); Peter Kempf (“Kempf’), Rule 30(b)(6) designee for American Mortgage Consultants, Inc. (“AMC”); Pamela Kohlbek, a former employee of Clayton; Sharif Mahdavian, Rule 30(b)(6) designee for Standard & Poor’s (“S & P”); Brett Marvin (“Marvin”), former managing director and head of the Trading Desk at Nomura; Nancy Prahofer, former Head of Litigation at NHA; Shayan Salahuddin, (“Salahuddin”), former PLS trader at Fannie Mae; Christopher Scampoli (“Scampoli”), Senior Credit Analyst consultant in Nomura’s Diligence Group; Richard Syron (“Syron”), former Chairman and CEO of Freddie Mac; and James Whittemore, former Senior Vice President and Chief Underwriter at RBS. Defendants called seventeen fact witnesses and nine experts. In addition to Kohout, Lee, Spagna, and the five Individual Defendants, defendants’ fact witnesses included four residential real estate appraisers who had conducted or supervised some of the appraisals at issue here, Lee Clagett (“Clagett”), Michele Morris (“Morris”), Dan Platt (“Platt”), and William Schall (“Schall”). Defendants also called three former GSE officials, Patricia Cook (“Cook”), former Executive VP of Investments and Capital. Markets at Freddie Mac; Daniel Mudd (“Mudd”), former President and CEO of Fannie Mae; and Peter Niculescu (“Niculescu”), former Executive Vice President and Chief Business Officer at Fannie Mae. To testify about third-party due diligence practices, defendants called Derek Greene, Client Services Manager for Nomura at Clayton. And to counter Cipione’s statistics on defendants’ due diligence, they called David Mishol (“Mish-ol”), Vice President with Analysis Group, Inc., an economic consulting company. Defendants’ expert witnesses included several who addressed aspects of the analyses conducted by FHFA’s expert Kilpatrick. They were Michael Hedden (“Hedden”), a Managing Director at FTI Consulting, Inc. (“FTI”), a business consulting firm; Lee Kennedy (“Kennedy”), Founder and Managing Director of AV-Metrics, an automated valuation model (“AVM”) testing firm; Dr. Hans Isakson (“Isakson”), Professor of Economics at the University of Northern Iowa; and Dr. Jerry Hausman (“Hausman”), MacDonald Professor of Economics at the Massachusetts Institute of Technology. Michael Forester (“Forester”), co-founder and managing director of Crosscheck Compliance LLC, a regulatory compliance, loan review, and internal audit services firm, testified regarding his review of Hunter’s re-underwriting project. Dr. Andrew Barnett (“Barnett”), George Eastman Professor of Management and Professor of. Statistics at the Sloan School of Management, Massachusetts Institute of Technology, testified about his analysis of Co-wan’s extrapolations. John Richard, a portfolio manager and financial consultant, testified about the types of information that reasonable investors in the PLS market considered significant during the period 2005 to 2007. Vandell, Dean’s Professor of Finance and Director of the Center for Real Estate at the Paul Merage School of Business, University of California, Irvine testified about defendants’ loss causation defense. Dr. Timothy Ridd-iough (“Riddiough”), E.J. Plesko Chair and Professor in the Department of Real Estate and Urban Land Economics at the Wisconsin School of Business, testified about defendants’ loss causation defense as well as the appropriate measure of damages. Defendants offered their own excerpts from the depositions of Aneiro, Beal, Doty, Hackney, Katz, Kempf, Marvin, Salahud-din, and Syron. In addition, they offered excerpts from the depositions of Clint Bon-’ kowski, former Operations Director and Divisional Vice President at Quicken Loans, Inc., a residential loan originator (“Quicken”); Jeff Crusinberry, Rule 30(b)(6) designee for Fremont Investment & Loan (“Fremont”); Teresita Duran, Rule 30(b)(6) designee for the former Ocwen Financial Corp.; Ashley Dyson, former Senior Trader on Fannie Mae’s PLS desk; Natasha Hanson, Rule 30(b)(6) designee for Fitch Ratings (“Fitch”); Tracy Hillsgrove, Rule 30(b)(6) designee for Ocwen Financial; Perri Henderson, former Associate Director in Portfolio Management at the adjustable-rate mortgage desk at Freddie Mac; Gary Kain, former Senior Vice President of Investments and Capital Markets at Fannie Mae; Gretchen Leff, Rule 30(b)(6) designee for Wells Fargo Bank, N.A. (“Wells Fargo”); Richard Rothleder, Rule 30(b)(6) ’ designee for WMC Mortgage LLC (“WMC”); Guy Sin-dle, Rule 30(b)(6) designee for Deloitte & Touche (“Deloitte”); and Theresa Whitec-otton, Rule 30(b)(6) designee of Bridgefield Mortgage Corp., testifying as to ResMAE Mortgage Corp.’s (“ResMAE”) originating practices. The bench trial was held from March 16' to April 9, 2016, and this Opinion presents the Court’s findings of fact and conclusions of law. The findings of fact appear principally in the following Background section, but also appear in the remaining sections of the Opinion. BACKGROUND I. RMBS The RMBS industry was a major economic force in 2005, 2006, and 2007, when defendants sold the securities at issue to the GSEs. RMBS are intricately structured financial instruments backed by hundreds or thousands of individual residential mortgages, each obtained by individual borrowers for individual houses. The process by which these discrete loans were to be issued, bundled, securitized, and sold is summarized first. RMBS entitle the holder to a stream of income from pools of residential mortgage loans held by a trust. Non-agency RMBS — RMBS offered by entities other than GSEs and the Government National’ Mortgage Association, or Ginnie Mae — are known as PLS. The PLS purchased by the GSEs were backed by subprime and Alt-A mortgages. Subprime loans are made to borrowers with impaired credit. Alt-A loans are typically offered to. borrowers with stronger credit, but they are a riskier loan than a prime loan. Because they are riskier than prime loans, sub-prime and Alt-A loans generally have higher interest rates. A. Originating a Residential Mortgage Loan Originators issuing subprime loans and Alt-A loans are the entities charged with evaluating and approving would-be borrowers’ applications for mortgage loans. While this process inevitably involves judgment, the originator’s underwriting, guidelines are central to the process of originating mortgages. Underwriting guidelines are intended to ensure that loans are originated in á consistent manner throughout an organization. They assist’an originator in assessing- the borrower’s ability to pay the mortgage debt and the sufficiency of the collateral that will secure the loan; they also help the originator decide the terms on which to approve a. loan. To the extent the originator intends to sell the loan, the guidelines also permit the originator to describe the qualifying characteristics for a group of loans and to negotiate a sale based on that description. 1. Credit and Capacity Borrowers typically apply for a loan by completing a Uniform' Residential Loan Application (known as “Form 1003”). In completing the Form 1003, a borrower discloses under penalty of civil liability or criminal prosecution her income, employment, housing history, assets, liabilities, intended occupancy status for the property, and the sources of the funds she will use in paying the costs of closing the loan. Every loan at issue here required a final Form 1003 signed by all borrowers. Among other things, originators rely on objective factors, such .as a borrower’s credit score (often called a FICO score) and history, and a borrower’s debt-to-income (“DTI”) ratio, to assess a borrower’s ability and willingness to make required mortgage payments. FICO scores may determine the maximum amount of the loan that the originator will issue and the originator’s ceiling for the LTV ratio for the property. Originators often require that the borrower’s credit history, as reflected in a credit report, contain at least three trade lines — that is, credit accounts reported to credit rating agencies. Unexplained credit inquiries on a credit report may suggest undisclosed debt obligations that may negatively affect the borrower’s DTI ratio calculation or even reflect deceit by the borrower. Credit inquiries made right around the time of the borrower’s application for the loan, however, may reflect nothing more than the borrower shopping around for a good mortgage loan rate. The calculation of a borrower’s DTI ratio will also typically include consideration of “payment shock,” which refers to the degree to which a borrower’s monthly housing payments will increase with the new loan. The amount of information an originator - gathers 'from a borrower depends on the type of loan being issued. A full documentation or “full doc” loan requires the borrower to substantiate current income and assets by providing documents, süch as pay stubs, a W-2 form, and bank account statements. Other types of loans require less. Stated income, verified assets (“SIVA”) programs do not require a borrower to provide documentation to support her represented ineome, but do require verification of assets. Stated income, stated assets (“SISA”) programs do not require the borrower to provide' documentation confirming her claim of éither income or assets. And “No income, no assets” (“NINA”) programs do not require borrowers even to state an income or their assets, let alone confirm them with documentation. No matter what the loan program, however, underwriting guidelines require an originator to evaluate the borrower’s ability and willingness to repay a mortgage loan. Accordingly, originators assess, inter alia, the reasonableness of disclosed income asserted by the borrower and use a variety of information to verify income and assets. For instance, a written or verbal verification of employment may be obtained and online sources may provide the underwriter with information about salary ranges based on occupation and location. When a borrower fails to meet the requirements of an originator’s underwriting guidelines, many originators permit their underwriters to exercise discretion and allow exceptions to the guidelines. The originators’ guidelines typically explain the circumstances under which exceptions may be granted, including how to document any exception that has been made. Exceptions to guidelines are documented in the loan file (described below) so that the exceptions may be understood and evaluated by others within the organization and, in those cases in which the loan will be sold, by those who acquire the loan. Exceptions to underwriting guidelines typically require the presence of compensating factors. For example, a low LTV ratio, which reflects strong collateral securing the loan, might compensate for a higher-than-guidelines-permitted DTI ratio. During the origination process, originators assemble the documents associated with the mortgage loan into a “loan file.” The loan file includes, at a minimum, a borrower’s completed Form 1003, a property appraisal, a credit report, and legally required documents like HUD-1 forms and TIL disclosures. During the relevant period, documents were frequently received in paper form and then scanned to convert them to digital images, but this conversion might not occur until after the origination process. Some originators created and relied on electronic loan files. 2. Collateral During the underwriting process, originators must also determine whether the value of the mortgaged property is sufficient to support repayment of the loan in the event of default. The primary tool for assessing the value of the collateral for the' loan is an appraisal of the property. The most common metric for measuring the collateral risk associated with a loan is the LTV ratio. When the mortgage supports the purchase of a property, the value of the collateral is usually measured as the lesser of the sales price or the appraisal value. Appraisals are also prepared in connection with the refinancing of existing debt. Accurate appraisals are particularly important in the case of second mortgages, because an overstated appraisal value increases the likelihood that the liquidated collateral value will be insufficient to cover both the first and second mortgages. Appraisals are, essentially, an estimate of a property’s market value as of a given date. A central component of all residential appraisals is the selection of comparable properties with which to assess the value of the subject property (“compara-bles”). Appraisers are supposed to select the best comparables — which typically means the geographically closest properties with the most similar characteristics, such as lot size, house size, style, and number of bathrooms — that have been the subject of sales transactions within the past year. Appraisers also consider market conditions, including housing supply and demand in the property’s neighborhood. Appraisers document their work in a formal report, usually using a Fannie Mae Form 1004 or Freddie Mac Form 70 Uniform Residential Appraisal Report (“URAR”). When the appraisal is in connection with a sale of the property, the appraiser is required to analyze the sales contract. While accuracy and good faith should be the watchwords of appraisers, it is easy for appraisers to inflate their appraisals through their selection and analysis of comparables. For instance, an appraiser can choose a comparable from a nicer neighborhood, ignore key features of a comparable’s sales price, such as thousands of dollars of assistance with closing costs or escrowed repair funds that are not associated with the value of the property, or ignore more recent comparables that reflect a local market’s turn for the worse. An appraiser might also mislabel the number of stories in a comparable, or fail to follow up on evidence that a property had been flipped, raising doubt about the sales price’s reflection of market value. ■ For these reasons, the URAR is supposed to include sufficient information about each selected comparable and its relevant characteristics to permit meaningful review. Appraisers may inflate their appraisals because of pressure from loan officers. An' officer may mention the desired appraisal value he is seeking, ask for the appraiser to call back if she cannot hit a specific value, or send out appraisal assignments to multiple appraisers with the explanation that the assignment will be given to the first one who can find the target value. Appraisers can be made to understand that their ability to receive future assignments depends upon delivery of the desired results. During the overheated housing market at issue here, residential appraisers felt intense pressure to inflate appraisals. Defendants’ appraisal expert, Hedden, observed that such pressure was simply part of what appraisers were faced with “on a regular basis.” Defendants’ appraiser witnesses acknowledged that they and other appraisers with whom they worked experienced pressure to provide “predetermined appraisal values.” In a national survey of appraisers conducted in late 2006, 90% of the participating appraisers indicated that they felt some level of “uncomfortable pressure” to adjust property valuations. This was an increase of 35% from a survey conducted three years earlier. Indeed, the widespread feelings of discomfort prompted 11,000 appraisers in 2007 to submit a petition to Congress and the Appraisal Subcommittee of the Federal Financial Institutions Examination Council, copying “[o]ther state or federal agencies with authority in the ... matter.” The petition explained that the signatories were licensed and certified real estate appraisers who seek your assistance in solving a problem facing us on a daily basis. Lenders ... have individuals within their ranks, who, as a normal course of business, apply pressure on appraisers to hit or exceed a predetermined value. This pressure comes in many forms and includes the following:. • the withholding of business inflate values, • the withholding of business if we refuse to to guarantee a predetermined value, • the withholding of business if we refuse to ignore deficiencies in the property, • refusing to pay for an appraisal that does not give them what they want, • black listing honest appraisers in order to use “rubber stamp” appraisers, etc. The petition requested action.. It added, “We believe that this practice has adverse effects on our local and national economies and that the potential for great financial loss exists. We also believe that many individuals have been adversely affected by the purchase of homes which have been over-valued.” It was against this backdrop that in 2008 FHFA - announced the Home Valuation Code of Conduct (“HVCC”). See T. Dietrich Hill, Note, The Arithmetic of Justice: Calculating Restitution for Mortgage Fraud, 113 Colum. L.Rev.1939, 1946- & n. 49 (2013). Under the HVCC, the lender, whether it be a bank or a mortgage company, was not permitted to have direct, substantive contact with the appraiser. Even though the HVCC was’only briefly in effect, see 15' U.S.C. § 1639e(j) (“[T]he Home Valuation Code of Conduct announced by the Federal Housing Finance Agency on December 23, 2008, shall have no force or effect.”), one of the residential home appraisers testifying for defendants indicated that the HVCC had a salutary effect on the practices of lending officers. B. Overview of the Securitization Process The loans at issue here were sold almost immediately after origination. During the period 2005 to 2007, originators sold sub-prime and Alt-A loans either individually or in the aggregate in what are known as trade pools to sponsors, like Nomura. With these sales, the originators received payments allowing them to originate more loans. A sponsor could accumulate tens of thousands of loans from scores of originators... ' Sponsors would then select loans from among those on its books, place the selected loans into groups for securitization, and sell them to depositors, typically a sponsor’s affiliate. Depositors would transfer the groups of loans to trusts created specifically for each securitization. These loans formed the supporting loan groups (“SLGs”) whose principal and interest payments were channeled to investors. Depositors issued certificates entitling holders to payments; these would then be marketed and sold by underwriters. When selling a pool of loans, the originator provided a “loan tape” for the loans. Loan tapes are spreadsheets containing 50 to 80 fields of collateral and borrower data for each loan, including the borrower’s name, street address, FICO score, DTI ratio, LTV ratio, property type, loan amount, loan purpose, interest rate, owner-occupancy status, documentation program, and presence of mortgage insurance. The information on these loan tapes was the principal source of data for the disclosures to investors and the SEC that were made in the Offering Documents for the PLS. A more detailed description of this process and the roles played by critical participants in this process follows. 1.The Sponsor Each RMBS needed a sponsor. Sponsors purchase loans ■ from originators or loan aggregators, a transaction that is generally governed by a Mortgage Loan Purchase Agreement, which contains representations and warranties. The sponsor holds title to the loans before they are transferred to the RMBS depositor. During the securitization process, sponsors have access to information about individual loans, including the loan files created at the time the loan was originated and the loan originator’s guidelines. As the loans it holds on, its books mature, sponsors also have access to information about loan performance from the loan’s servicers, such as any delinquency or default history. 2.The Depositor Depositors are special purpose vehicles (“SPVs”) — essentially shell corporations— that exist for one purpose: to purchase the loans from the sponsor and deposit them in a trust. This step creates a true sale of the assets, thereby protecting certificate-holders against the risk of a subsequent bankruptcy by the sponsor. The depositor establishes a trust and deposits the loans into the trust in exchange for certificates. The depositor also issues Registration Statements, Prospectus Supplements, and other Offering Documents for the securiti-zation. Apart from their directors and officers, SPVs typically have no employees or other business operations. The RMBS trusts created by depositors are typically established pursuant to a Pooling and Servicing Agreement (“PSA”). The trustee for each trust is generally responsible for maintaining custody of operative documents related to the mortgage loans, receiving the cash flows each month from the entities servicing the loans, and allocating the cash flows to the certificate-holders and others pursuant to the rules laid out in the PSA. 3.The Underwriter To pay for the loans it has purchased, the depositor sells the certificates produced during the trust transaction to the underwriters who will take the securities to market. The lead underwriter for an' RMBS often designs the structure of the securitization and coordinates with the rating agencies to obtain credit ratings for the deal. Typically, the lead underwriter is also responsible for performing due diligence to ensure that the Offering Documents are accurate and complete. If an underwriter’s due diligence uncovers discrepancies between.the loans intended for the RMBS and the description of the loans, in the Offering Documents for the securiti-zation, it may choose to eliminate nonconforming loans from the loan pool or to revise the Offering Documents for the sec-uritization so that they accurately describe the loans. 4.The Servicer Another entity essential to securitization is the loan servicer. The servicer for the mortgage loans interacts with the individual borrowers on behalf of the trust. It, collects monthly mortgage payments and forwards the receipts to a master servicer or trustee. When a loan becomes delinquent, the servicer takes steps to cure the delinquency. These steps- may include foreclosure proceedings that may in turn result in the trust obtaining ownership of the property, which is referred to as Real Estate Owned (“REO”). The servicer is then responsible for selling the REO property and forwarding the liquidation proceeds to the master servicer or trustee. C. Structure of an RMBS Instrument and Credit Enhancement RMBS certificates are backed by one or more groups of loans that collateralize a certificate. The stream of payments that are made to investors in RMBS over time consist of the principal and interest payments on the certificates. These flow from the underlying principal and interest payments made by the individual borrowers on the mortgage loans within the SLG (or SLGs); the rate at which interest payments are made to investors in an RMBS is referred to as the coupon rate. The credit profile of RMBS can be improved through “credit enhancement” features. These features are critically important to credit rating agencies, particularly for RMBS supported by subprime and Alt-A loans. Enhancements are designed to protect investors in the more senior certificates — the more expensive, less risky, and higher-rated certificates — from loss. Credit enhancements can be external or internal. External enhancements include bond insurance or financial guarantees. Internal RMBS credit enhancements include subordination and overcolla-teralization. 1. Subordination Subordination refers to a structure in which each class or tranche of certificates has a different right to the flow of payments and the allocation of losses. Credit risk in the pool is thus distributed unequally among the certificate-holders, usually protecting the senior certificates against losses at the expense of junior certificates. Certificates in senior tranches are given a first claim on cash flows and a last position with regard to losses. Only after senior-tranche certificates have been “filled up” does payment flow to more junior tranches. This pattern is followed for all subordinate certificates; once they are filled up, the next in line receives its payments. This is referred to as a “waterfall,” as the payments cascade from the senior tranches to the junior in a fixed order. Because they carry less risk, the more senior class of certificates have higher credit ratings and earn less in interest. In sub-prime RMBS during 2005 to 2007, subordinate tranches were typically designed to absorb a complete loss on the order of 20% to 30% of the underlying collateral; in Alfc-A transactions, the subordinated tranches were generally designed to protect against losses on the magnitude of 5% to 10%. 2. Overcollateralization Overcollateralization occurs when the total balance on the mortgage loans in the securitization exceeds the total balance on the mortgage loans underlying the certificates issued. This excess collateral insulates the certificates from loss. D. Securing a Credit Rating Credit ratings for securities reflect a judgment by credit agencies about the credit risk of owning the security. A higher rating signals a less risky security. Senior certificates in RMBS are usually rated AAA (or triple-A), which is the highest rating level. Junior certificates usually have lower credit ratings. Since the rating of AAA conveys the same credit risk regardless of whether the RMBS are backed by prime or non-prime loans, RMBS backed by non-prime loans necessarily require greater credit enhancement to obtain a AAA rating. Three rating agencies were principally involved in rating the RMBS at issue here: Moody’s, S & P, and Fitch. The sponsor, depositor, or the underwriter of an RMBS provides information to rating agencies so that the agencies can evaluate the risk in the pool of loans and issue appropriate credit' ratings for the certificates. Such information was contained on loan tapes. Of particular importance to agencies providing ratings for subprime and Alt-A RMBS were the LTV ratios of the loans in the proposed securitization. In their view, LTV ratios were “key predictors” of foreclosure rates and an LTV ratio of 80% was a particularly critical threshold. According to S & P’s criteria for reviewing sub-prime transactions, loans with LTV ratios between 80% and 90% are one-and-a-half times more likely to be foreclosed than loans with LTV ratios below 80%. And loans with LTV ratios between 95% and 100% are 4.5 times more likely to enter foreclosure than loans with LTV ratios below 80%. Rating agencies also attached importance to the property’s occupancy status, since borrowers are more likely to make payments on their primary residence, and to originators’ compliance with their own underwriting guidelines, because agencies viewed compliance with an originator’s guidelines as assurance that a loan was legitimate. To assess a securitization, rating agencies relied on the accuracy of the loan tapes provided by the sponsor or underwriter. The agencies did not have access to the loan files or conduct any due diligence to verify the loan tape data. Using loan tape data, the three credit rating agencies used models to forecast foreclosure frequency, expected losses, and cash flows on the RMBS that they rated. The ratings and loss estimates generated by the models were extremely sensitive to loan-level data; if incorrect data was used — data reflecting more favorable loan characteristics — these models would require less credit support than should have been required of the securitization. At times, rating agencies advised sponsors what degree of subordination would be required to obtain a AAA or equivalent rating. Credit rating agencies reserved the right to request additional information about the loans to maintain their ratings or to withdraw their ratings entirely in the event information supplied to them was inaccurate or misrepresented. Analysts at rating agencies also reviewed Offering Documents to confirm that they included representations and warranties attesting to the accuracy of the loan-level information and that the mortgage loans had been originated in compliance with the originators’ underwriting guidelines. E. “Scratch-and-Dent” Loans RMBS were only as good as their underlying mortgage loans. When, at the time of securitization, loans were known not to comply with originators’ guidelines, to have missing documentation, or to have already become delinquent, the loans were referred to as “scratch-and-dent” loans. To obtain AAA ratings, credit rating agencies would typically demand more credit enhancements and structural safeguards like more overcollateralization or higher levels of subordination.' RMBS with scratch-and-dent loans typically traded at discounts to par value. When loans that were acknowledged as scratch-and-dent loans were securitized and sold, non-compliance was reported in Offering Documents, for instance, by referring to the loans as having impaired loan documentation or as loans that have been delinquent or “modified.” The disclosure documents might also advise that a specific percentage of the loans were originated with “substantial deviations” from the originators’ guidelines, or even specifically state that the loans “violated the underwriting guidelines or program guidelines under which they were intended to have been originated” and describe specific defects such as “the failure to comply with maximum loan-to-value ratio requirements.” F. RMBS Market Dynamics During the period 2005 to' mid-2007, the supply and demand for.RMBS increased significantly, and competition among RMBS sponsors was intense. To function at all, the RMBS market required cooperation between entities at all levels of the process. In particular, issuers of RMBS built and strengthened their relationships with originators, who supplied the loans being bundled and sold. Participants in a securitization were often vertically integrated, meaning that participants like the sponsor, the depositor, and the underwriter, or some combination thereof, were often related or affiliated. Vertical integration meant that the senior individuals working on a particular RMBS at the sponsor, underwriter and depositor were often the same individuals. II. The Seven At-Issue Securitizations Defendants sold the GSEs seven certificates (“Certificates”), which in turn were part of the seven separate Securitizations. A brief summary of the relevant facts and circumstances sui'rounding those Securiti-zations follows. Each of the seven- Securitizations was issued pursuant to one of three-shelf registrations. • Each Securitization was described in a set of Offering Documents, consisting of the original Registration Statement,' any Amended Registration Statements, , a Prospectus, and a Prospectus Supplement. The representations made in the seven = Prospectus. Supplements, described in detail below, are at the heart of the Nomura Action. In total, three Registration Statements and four Amended Registration Statements were used to issue the seven Securitizations. As the table below shows, Nomura acted as sponsor and depositor for all seven of the Certificates, and as the sole lead underwriter and seller for two of them. RBS was the sole lead underwriter for three of the Certificates and a co-lead underwriter for a, fourth. - Securitization_Sponsor Depositor_Lead Underwriter(s) NAA 2005-AR6_NCCI_NAAC_Nomura Securities NHELI 2006-FM1 NCCI_NHELI_Nomura Securities NHELI 2006-HE3 NCCI NHELI RBS & Nómura Securities NHELI 2006-FM2- NCCI NHELI_ RBS_ NHELI 2007-1 NCCI NHELI_RBS NHELI 2007-2 NCCI NHELI_RBS_ NHELI 2007-3_NCCI , NHELI_Lehman Brothers Inc. The Certificates were all offered by-means of Prospectus Supplements. Each Supplement bore a “Supplement Date,” included a “Cut-off Date,” and was filed with the SEC on a “Filing Date.”: The Supplement Date is the date actually Usted on the coyer of the Prospectus Supplement; the Cut-off Date is the “date for establishing the composition of the asset pool” in a securitization, see 17' C.F.R. § 229.1103(a)(2); and the Fifing Date is the date on which the Prospectus and Prospectus Supplement were actually filed with the SEC. The table below provides these dates. Securitization Cut-off Date Supplement Date Filing Date NAA 2005-AR6 11/1/2005 11/29/2005 11/30/2005 NHELI 2006-FM1 1/1/2006 1/27/2006 1/31/2006 NHELI 2006-HE3 8/1/2006 8/29/2006 8/30/2006 NHELI 2006-FM2 10/1/2006 10/30/2006 10/31/2006 NHELI 2007-1 1/1/2007 1/29/2007 1/31/2007 NHELI 2007-2 1/1/2007 1/20/2007 2/1/2007 NHELI 2007-3 4/1/2007 4/27/2007 5/1/2007 A summary of the seven Certificates’ relevant characteristics, including the Certificates’ tranches and their primary SLG, is provided in the table below. Securitization Tranche SLG Loans in SLG SLG Aggregate Principal Balance NAA 2005-AR6 III-A-1 III 376 $79,889,908 NHELI 2006-FM1 I-A 1 2,532 $405,436,188 NHELI 2006-HE3 I-A-l 3,618 $586,249,148 NHELI 2006-FM2 I-A-l 1 3,891 $677,237,695 NHELI 2007-1 II-l-A II-l 474 $108,349,253 NHELI 2007-2 I-A-l 3,001 $481,674,027 NHELI 2007-3 I-A-l 1,896 $334,386,584 Together, the Certificates had an' original unpaid principal balance of approximately $2,05 billion, and the GSEs paid slightly more than the amount of the unpaid principal balance when purchasing them. A Freddie Mac trader located at Freddie Mac’s headquarters in McLean, Virginia purchased six Certificates; a Fannie Mae trader located at its headquarters in Washington, D.C. purchased the NAA 2005-AR6 Certificate. The purchase prices paid by the GSEs are fisted below. Securitization Purchase Price NAA 2005-AR6 $65.979.707 NHELI 2006-FM1 $301,591,187 NHELI 2006-HE3 $441,739,000 NHELI 2006-FM2 $525,197,000 NHELI 2007-1 $100,548,000 NHELI 2007-2 $358,847,000 NHELI 2007-3 $245,105,000 A. Principal and Interest Payments The GSEs still hold the seven Certificates and have continued to receive principal and interest payments on them. The coupon rates for six of the seven Certificates were tied to the London Interbank Offered Rate (“LIBOR”) rate. Six of the Prospectus Supplements stated that “[t]he per annum pass-through rate on the ... Certificate[ ] will equal the lesser of (i) the sum of One-Month LIBOR for that distribution date plus” one of two percentages “or (ii) the applicable Net Funds Cap.” The exception was NAA 2005-AR6, which provided for an initial fixed interest rate. The amount of principal and interest on the Certificates received by the GSE from date of exchange through February 28, 2015, as stipulated to by the parties, is provided below. Securitization Principal Payments Through 2/28/2015 Interest Payments Through 2/28/2015 NAA 2005-AR6 2.801.327 $17,517,513 NHELI 2006-FM1 $282,411,183 $23,756,542 NHELI 2006-HE3 $331,937,382 $34,559,137 NHELI 2006-FM2 $346,402,921 $42,099,996 NHELI 2007-1 $53,271,881 8,701,219 NHELI 2007-2 $235,700,674 $29,010,757 NHELI 2007-3 $127,924,783 $19,350,587 B. Age of Supporting Loans There were over 32,000 loans supporting the Seven Securitizations. Of these, 15,806 are in the primary SLGs supporting the seven Certificates. Most of the loans supporting the Certificates were originated months before them securitization. The table below illustrates that the “time gap” between a loan’s origination and a Securiti-zation’s filing date was over 90 days for almost 2/3 (68.2%) of the loans backing these seven Certificates. For almost 60%, the gap was four months or more. Securitization Loan Count 0-30 days 31 to 60 days 61 to 90 days 91 to 120 days 121 to 150 days 151 to 180 days Greater than 18 0 days NAA 2005-AR6 325 29 226 57 13 NHELI 2006-FM1 2532 0 0 2532 0 0 0 0 NHELI 2006-FM2 3891 0 0 0 0 3891 0 0 NHELI 2006-HE3 3613 0 0 304 1064 538 1201 506 NHELI 2007-1 403 14 125 184 79 1 0 0 NHELI 2007-2 3001 0 1438 0 208 320 458 577 NHELI 2007-3 1914 0 0 35 18 952 61 848 Total: 15,679 14 1,592 3,281 1,426 5,702 1,733 1,931 C. The Certificates’ Credit Enhancements Each Certificate is in a senior tranche of its Securitization, and each Securitization had several credit enhancements designed to shield senior certificates from losses. Among other things, each of these Certificates was protected by from five to eleven subordinated tranches. For example, in NHELI 2006-FM1, Freddie Mac purchased a Certificate linked to the senior-most tranche, class IA-l, which was supported by loans from SLG I. That tranche had an initial principal balance of approximately $428 million; the subordinated tranches had a total principal balance of approximately $220 million. All realized losses on Group I loans were to be allocated to the subordinated tranches, until their $220 million principal balance was reduced to zero. Only then would losses begin to affect the senior tranches. Holding a senior tranche Certificate also entitled the GSE to principal payments from a separate SLG: if payments from Group II were made in full on that SLG’s' associated certificates, any additional cash flow would go to the GSE’s senior certificate. The table below displays the number of tranches subordinate to the GSE s’ Certificates for each Securitization, as well as the face value of those subordinate tranches. In each case, a subordinate tranche designated “Tranche X” represented the Certificate’s overcollateralization. Securitization Number of Subordinate Tranches Face Value of Subordinate Tranches NAA 2005-AR6 $64,412,464 NHELI 2006-FM1 12 $220,837,934 NHELI 2006-HE3 12 $264,970,098 NHELI 2006-FM2 12 $275,696,345 NHELI 2007-1 3,208,528 NHELI 2007-2 11 $237,310,229 NHELI 2007-3 10 $305,662,765 III. Due Diligence Nomura came late to the RMBS business. It made its first subprime purchase in the spring of 2005, at a time when activity in the RMBS market was already intense, and it exited the RMBS business in late 2007, at a time when the market was imploding. Nomura was an aggregator of mortgage loans that were originated by others. Nomura’s Trading Desk purchased the approximately 16,000 loans that populated the seven SLGs backing the GSEs’ Certificates from many different sellers. 122 of the loans were purchased individually through Nomura’s loan-by-loan channel, and the rest were plucked from 194 trade pools acquired by Nomura (“Trade Pools”). Together, these 194 Pools held over 54,000 individual loans. After it won a bid for a Trade Pool, but before it purchased the Pool, Nomura performed a due diligence review of loans in the Pool. The group designated to . conduct due diligence was a small, isolated unit within Nomura that was inadequately integrated into the overall operations of the company. Nomura never' created any written due diligence procedures or standards to guide the work of this unit. By and large the unit was beholden to the Trading Desk, which made many of the key decisions that governed the operations of the due diligence unit. And, despite the mistaken assertions of top Nomura officials, the unit responsible for pre-acquisition due diligence had no role whatsoever in reviewing disclosures made in the Prospectus Supplements about the mortgage loans that backed the SLGs. In conducting its pre-acquisition due diligence, Nomura repeatedly made choices intended to save money and to satisfy the sellers of the loans. Nomura routinely purchased and then securitized loans that had received “failing” credit and compliance grades from its due diligence vendors. It failed to subject thousands of the loans at issue here to genuine credit or valuation diligence, opting instead to use less expensive screening mechanisms. And once' the loans were on Nomura’s books — with limited exceptions that are immaterial for present purposes — Nomura performed no further diligence. Nomura neither performed credit nor valuation due diligence once it had determined which loans would populate the SLGs supporting its securitizations, nor did it consider the information -gleaned from the credit and valuation due diligence that had been performed on any of those loans before No-mura purchased them. Nor did Nomura use crucial information learned through due diligence when composing its descriptions of loans in the Prospectus Supplements. RBS’s due diligence was no better. Despite serving as lead underwriter on three of the seven Securitizations and co-lead underwriter on a fourth,-RBS relied almost exclusively on Nomura’s pre-acquisition ' due diligence results for two of the Securitizations, and the diligence it performed on the loans in the other two Secu-ritizations was perfunctory. This section describes these programs and their failures. A. Nomura’s Due Diligence At the time that he was Chief Legal Officer (“CLO”) for NHA and Nomura Securities, Findlay oversaw the creation of Nomura’s due diligence program. But beyond attending some very large meetings with consultants at some point between 2002 and 2004, he remembers nothing about this. And in the period between its creation and its shuttering in 2007, no part of Nomura’s due diligence program was ever reduced to writing. Nomura has no written manual or guidelines and no fixed policies to govern its review of loans at either purchase or securitization. 1. Bidding Process Nomura’s website posted the terms or pricing matrix that Nomura applied when purchasing individual loans. Among the criteria used in the matrix were the loan’s LTV ratio at various points compared to the loan amount, for instance, at five step increments between an LTV ratio of 80 and 95. Other criteria included the FICO score, DTI ratio, and owner-occupancy status. According to the matrix, Nomura would pay more for a loan with a lower LTV ratio, a higher FICO score, a lower DTI ratio or that was owner-occupied. Nomura’s matrix reflected its understanding of the models used by credit ratings agencies and. how they would grade classes of loans in a securitization. It was. Nomu-ra’s policy not to purchase loans with an LTV ratio over 100% or a DTI ratio over 55%. The securitization process at Nomura began with the announcement by an originator or seller that it had a pool of loans for sale. The seller sent an email to potential buyers attaching a loan tape. Using the information on the pool sent by the seller, a collateral analyst at Nomura would stratify the data according to various traits, such as the percentage of loans in the pool that fell within different FICO score ranges, thereby creating what No-mura called “strats.” The analyst would also load the loan tape data into a central database to track each individual loan on its journey through purchase and securiti-zation. The Nomura database was called the Loan Management System (“LMS”). The loan tape data describing the characteristics of a loan that was entered into LMS was never altered, although it would be later augmented by servicing information if Nomura purchased the loan. Thus, the Originator’s description of the borrower’s FICO score and DTI ratio, the LTV ratio for the property, and the property’s owner-occupancy status would not be changed even if Nomura might learn contrary information during- pre-acquisition due diligence or while the loan was on its books. Traders at Nomura then reviewed the strats, which gave them a rough snapshot of the loan pool, and made a decision whether to make a bid for the pool of loans. Through this process Nomura purchased loans in trade pools, which were classified as “mini-bulk” (balance of less than $25 million) or “bulk” (balance of more than $25 million) lots. Roughly 89% of the loans in the seven SLGs came from bulk Trade Pools. With certain loan originators, the Trading Desk entered into agreements that capped, the sample size of loans it could review during pre-acquisition due diligence. For example, when purchasing a Fremont Trade Pool, Nomura and Fremont agreed that Nomura would perform due diligence on a 25% sample. 2. The Diligence Group After Nomura won a bid on a trade pool, it was the responsibility of the Diligence Group, also referred to' as the Credit Group or Residential Credit Group, to conduct due diligence on the loans. The Diligence Group coordinated due diligence on the basis of the loan tapes supplied by each originator; it never reviewed the originator’s loan files. The Diligence Group was small. For most of the relevant period, it consisted of just three people. From 2005 to mid-2006, Kohout was the head of the Diligence Group; in mid-2006, he was replaced by Spagna. Throughout, the Group was supervised by Graham in his capacity as the head of the Transaction Management Group. Graham, in turn, was supervised by LaRocca. Kohout, Spagna, Graham and LaRocca all testified at trial; the deposition testimony of Hartnagel and Scam-poli was received into evidence. The Diligence Group was too small to do an effective job, a point that its first manager repeatedly made in writing and in conversation with his colleagues. The Diligence Group also lacked independence. It was the Trading Desk that made the important structural and methodological decisions. The Trading Desk dictated the size of any due diligence sampling and even, in some instances, which methods would be employed in choosing samples and which tests would be run on the samples. As early as April 2005, Kohout warned that the Trading Desk’s decisions resulted in “Credit’s role in both the sample selection and management of risk on bulk transactions [being] diminished to the point of that of a non effective entity.” The Trading Desk was seemingly oblivious to the very serious risks associated with some of its decisions. For example, it proposed that Nomura purchase loans whose files were missing crucial documents, such as final Form 1003 and HUD-1, and enter a side-letter agreement allowing the seller to produce the missing forms later. Kohout pointed out that this was an invitation to fraud. As was customary among securitizers, Nomura relied on vendors to perform most of its due diligence work. Nomura’s vendors included Clayton, AMC, CoreLogic, and Hansen Quality (“Hansen”). Those vendors sent a continuous flow of voluminous reports to the Diligence Group. The Diligence Group was too leanly staffed to do any careful review of the data. Over and over again, it simply “waived in” and purchased loans its vendors had flagged as defective. Three types of diligence are of particular importance to the issues in this case, and they are described in detail here. They are credit, compliance, and valuation due diligence. In credit due diligence, the originator’s loan files are reviewed to assess whether the loan was originated in compliance with the originator’s written underwriting guidelines. Compliance due diligence determines whether the loan was issued in compliance with federal, state, and local laws and regulations. Valuation due diligence assesses the reasonableness of the original appraised value of the underlying property. 3. Credit & Compliance Due Diligence Nomura conducted its pre-acquisition credit and compliance due diligence in two ways. For single loan acquisitions and some mini-bulk pools, Nomura sent all of the loans to its vendors for credit and compliance review. For larger mini-bulk pools and all bulk pools, Nomura’s Trading Desk would dictate a sample size for review. Accordingly, the credit and compliance review for the vast majority of the loans purchased by Nomura was conducted on a sample whose size was dictated by the Trading Desk. While Nomura witnesses testified that Nomura’s Diligence Group could request permission to. increase the size of the sample, Nomura presented no evidence of any instance in which such permission was granted. Indeed, the only evidence about a specific request revealed just the opposite. When the Diligence Group asked permission to increase a sample size for a pool of loans originated by Fremont, the Trading Desk refused. Fremont loans were the only loans underlying NHELI 2006-FM1 and NHELI 2006-FM2. a. Sampling Nomura generally sampled between 20% and 35% of bulk pool loans. Nomura typically used larger samples from bulk pools when it was buying loans for the first time from an originator or where the trade pool included unfamiliar loan products. When selecting the loans for a sample, Nomura did not use random sampling. This made it impossible to extrapolate to an entire pool the results from conducting due diligence on only a sample of the loans. Nor did Nomura, despite its claim at trial, use truly “adverse” sampling. Instead, at the insistence of the Trading Desk, the Diligence Group used S & P Fi