Free Motion to Strike - District Court of Federal Claims - federal

Case 1:92-cv-00550-MCW

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS __________________________________________ ) ) ) Plaintiff, ) ) v. ) ) UNITED STATES OF AMERICA, ) ) Defendant. ) ) __________________________________________) NORTHEAST SAVINGS, F.A.

Civil Action No. 92-550C Judge Williams

MOTION OF PLAINTIFF TO STRIKE TESTIMONY OF DANIEL R. FISCHEL Plaintiff, Northeast Savings, F.A., respectfully moves to strike portions of the trial testimony of Daniel R. Fischel pursuant to Rule of the Court of Federal Claims 26. In the testimony at issue, Professor Fischel offered opinions that were not disclosed in his expert report and with respect to topics on which he expressly declined to offer an opinion during his deposition. Northeast, therefore, had no notice of these opinions prior to trial. At trial, Northeast objected to and moved to strike this testimony. The Court initially denied the motions to strike without prejudice. Northeast now renews its motions to strike the testimony. For the reasons stated below, Northeast moves to strike from the trial record the following passages from Professor Fischel's trial testimony: Trial Tr. 1791:7-22; 1796:211798:9; 1804:10-1805:8; 1812:1-1815:4; 1816:4-1819:16; 1820:22-1821:9; 1828:21-1830:6; 1833:5-12; 1835:1-25; 1836:18-1841:7; 1884:17-25; 1887:8-1889:5; 1890:24-1891:5. For the same reasons, Northeast also moves to strike DX 3003, points 2-4 of DX 3004, and point 2.C of DX 3013.

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DISCUSSION Northeast moves to strike Trial Tr. 1804:10-1805:8,1 in which Professor Fischel expressed the opinion that Northeast would not have securitized $500 million in loans absent the breach. Professor Fischel testified as follows at trial: Q. Now, sir, I want you to assume that Dr. Baxter agrees with you that securitization of loans at that time period, '89 and '90, and recourse removal and generally reduction in risk is actually economically beneficial given what we know now about the recession. With that assumption, how would that ­ how is that relevant to analyzing his lost profits model? A. Well, it would be -- if he agreed with that proposition, it would be fundamentally inconsistent with his lost profits damage model, because these were steps, as Mr. Rutland stated, which were taken solely because of the breach. In the absence of the breach, therefore, presumably, they would not have been taken. There would have been -- instead of the credit losses on these assets being shifted to a federal agency, they then would have been incurred by Northeast, but Dr. Baxter's model in the nonbreach world has zero dollars, not one cent, for loan losses, and therefore, if Dr. Baxter agreed with what I said, that would be a fundamental inconsistency with his lost profits damage model. Trial Tr. 1804:10-1805:8. In stark contrast to the above trial testimony, Professor Fischel in his report2 criticized Dr. Baxter's analysis for assuming that Northeast would have securitized $500 million in loans even absent the breach only on the ground that that "assumption" is "speculative": Dr. Baxter implicitly assumes that the but-for bank would have securitized the same amounts of loans at the same time, because he makes no allowance for the additional credit losses that the but-for bank would have had otherwise. This is speculative because the but-for bank would have had more regulatory capital and, therefore, would not have had the same need to securitize loans in order to enhance its risk-based capital ratios." PX 245 at ¶ 25.

1.

A copy of the transcript of Professor Fischel's trial testimony is attached as Exhibit A. The portions we seek to have stricken are identified with yellow highlighting.
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A copy of the text of Professor Fischel's expert report (PX 245) is attached as Exhibit B.

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Professor Fischel took the same view during his deposition, explaining that although he believed Northeast's incentives might have been different in the but-for world, he had no particular opinion as to how Northeast would have behaved because of what was termed the "standing caveat" or "caveat number one," namely, that "it's difficult to predict what would have happened in a world which never existed." Dep. Tr. at 19:15-18:3 Q: Do you have an opinion as to whether Northeast would have done anything differently with respect to securitization if the risk-based capital requirements had been implemented, but supervisory goodwill was not phased out? A: Well, in addition to caveat number one, I would just repeat again that there would have been some incentive to securitize, but it would have been a weaker incentive ­ weaker incentive than what, in fact, existed in the real world. Q: But do you have an opinion one way or the other whether with that weaker incentive, they still would have done it? A: No, I don't, because of caveat number one. Dep. Tr. at 162:1-22 (emphasis added). Thus, because of his view that it is inherently speculative to determine what would have happened in a non-brech world, Professor Fischel made quite clear in his deposition that he had no opinion regarding whether Northeast would have securitized the loans absent the breach. Yet, at trial Professor Fischel offered a pointed opinion that but for the breach, Northeast would not have undertaken the securitization of loans. Professor Fischel began by identifying the fact that "Northeast securitized residential loans" as one of the reasons why he believes that "Northeast benefited from the breach." Trial Tr. 1791:7-22; 1796:22-23. The notion that the breach "benefited" Northeast, of course, requires a comparison between the actual, post-breach

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Relevant excerpts from the transcript of Professor Fischel's deposition are attached in Exhibit C.

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world and the but-for world. Thus, such an assertion necessarily contains an opinion about how Northeast would have behaved absent the breach. As the passage from Professor Fischel's trial testimony quoted above reveals, Professor Fischel did in fact offer an explicit opinion on this matter at trial--in particular, Professor Fischel testified that it was his opinion that absent the breach, Northeast would not have securitized the loans. Because this trial testimony evinces an opinion that Professor Fischel had not previously expressed in his report or deposition, Northeast respectfully requests that the Court strike Trial Tr. 1804:10-1805:8. Insofar as Professor Fischel expressed a similar opinion elsewhere during his testimony at trial, including at Trial Tr. 1791:7-9; 1796:21-1798:9; 1812:1-1814:18; and 1835:1-25, Northeast requests that the Court strike those passages as well.

2.

Northeast moves to strike Trial Tr. 1820:22-1821:9, in which Professor Fischel expressed the opinion that Northeast would have continued paying dividends on preferred stock absent the breach. Professor Fischel testified as follows at trial: Q. Okay. Now, let's move to point 4 of why the breach benefited Northeast. Can you explain that point to us, Professor? A. Yes. As a result of the breach, Northeast decided to cease making ­ to cease paying dividends on two classes of preferred stock, and with respect to one of the classes of preferred stock, the FSLIC, as a result of the, excuse me, nonpayment of dividends was willing to redeem the class of preferred stock at a large discount.

Trial Tr. 1820:22-1821:6. Once again, however, because of what Professor Fischel views as inherent uncertainty regarding the but-for world, Professor Fischel, in his report, criticized Dr. Baxter's analysis for relying on the "speculative" assumption that "[t]he but-for bank would have suspended dividend

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payments on its outstanding preferred and common stock at the same time that the actual bank did." PX 245 at ¶ 12. Professor Fischel took the same view during his deposition: Q: Do you have any opinion as to whether the but-for bank would have been paying more in dividends than the actual bank did? A: Again, there's no way to know. But to the extent that the but-for bank would have had more capital, putting the possibility of increased credit losses to one side, and to the extent that one of the reasons given for eliminating the dividend was to conserve capital, to assume that the same decision would have been made at the same time, even though the reason for the decision would have been different or the reason that motivated the decision in the real world would have been different would not have existed to the same extent in the but-for world, I think it's speculative to make the assumption that Dr. Baxter does. Q: But I take it if he'd made the opposite assumption, you'd also say that was speculative if he assumed that they paid dividends at some more ­ more dividends or some dividends at a different point in time, you'd also say that was speculative, wouldn't you? A: I'm not sure what I would say, but I would say if there were some hypothetical model that somehow attempted to link the payment of dividends to the amount of capital, particularly given the decision in the real world to limit dividends because of the amount of capital, I would say that other assumed model would be subject to caveat number one, but would be more plausible and therefore less speculative than the actual assumption that Dr. Baxter made. Dep. Tr. at 149:2-150:8 (emphasis added). As with the question of whether Northeast would have securitized the loans absent the breach, however, Professor Fischel testified at trial that one way in which the breach "benefited" Northeast was that Northeast "cease[d] paying dividends on two classes of preferred stock." Trial Tr. 1820:25-1821:2. And as with the question of securitization, Professor Fischel attempted to blur the difference between, on the one hand, criticizing Dr. Baxter's analysis as being predicated on a "speculative" assumption--which would have been consistent with Professor Fischel's report and deposition--and, on the other hand, offering the opinion that Dr. Baxter's assumption was actually incorrect--which goes well beyond Professor Fischel's report

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and deposition. But it is patent that Professor Fischel could assert that the breach benefited Northeast only if he was advancing the opinion that Northeast would have continued paying dividends had there been no breach. As the passages quoted above show, Professor Fischel expressly offered such an opinion at trial. Because this trial testimony evinces an opinion that Professor Fischel had not previously expressed in his report or deposition, Northeast respectfully requests that the Court strike Trial Tr. 1820:22-1821:9. Insofar as Professor Fischel expressed a similar opinion elsewhere during his testimony at trial, including at Trial Tr. 1828:21-1830:6; 1833:5-12; and 1835:1-25, Northeast requests that the Court strike those passages as well.

3.

Northeast moves to strike Trial Tr. 1835:1-25, in which Professor Fischel expressed the opinion that Northeast would have engaged in more "high-risk" lending absent the breach. Professor Fischel testified as follows at trial: Do you have any opinion as to the amount of losses Northeast would have suffered had there been no phase-out of supervisory goodwill? A. Yes, I do. Q. Please explain. A. In the absence of the phase-out, as I've described, Northeast would have had a weaker incentive to take steps 1, 2 and 3. They would have had a weaker incentive to reduce the number of loans that they originated, because they would have had more capital absent the breach; they would have had a weaker incentive to securitize residential loans and remove recourse provisions, again because they would have had more capital; and they would have had a weaker incentive to curtail high-risk lines of business, all of those steps that they took in the real world. All three of those steps allowed them to minimize losses as a result of the severe recessionary conditions that they were facing in the northeast and California, and if they had not taken those steps or if they had a weaker incentive to take those steps and therefore did less of them, the losses would have been greater, and Northeast would have performed more poorly.

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Trial Tr. 1835:1-25 (emphasis added). Once again, Professor Fischel's trial testimony is inconsistent with his expert report and deposition testimony, in which he made clear that he had no opinion regarding whether Northeast would have suffered additional credit losses had the government honored its contractual promises. To be sure, in his report Professor Fischel opined that "Northeast eliminated its consumer and commercial lending operations, and reduced its residential lending operations only because it was capital constrained." PX 245 at ¶ 19. As Professor Fischel's discussion in his report shows, however, Professor Fischel meant that FIRREA's risk-based capital requirements--which were not part of the breach--limited how much high-risk lending Northeast could engage in. See PX 245 at ¶ 19. Nowhere in his report did Professor Fischel indicate that Northeast's ability to engage in high-risk lending would not have been similarly limited by the risk-based capital requirements had there been no breach. In his deposition, Professor Fischel made very clear, much as he did with respect to securitization, that the breach might have altered Northeast's incentives but that he could not form a definite opinion as to how Northeast would have behaved but for the breach with respect to its high-risk lending: Q: Suppose FIRREA had just implemented risk-based capital rules, but had not eliminated supervisory goodwill from regulatory capital, would that have provided an incentive to eliminate the consumer lending program for Northeast? A: It would have provided some incentive all else equal, but a much weaker incentive than the incentive that was provided by both the creation of the riskbased capital rules and the increased difficulty of complying with the risk-based capital rules because of the ability to count supervisory ­ lack of ability to counter supervisory goodwill as capital. Q: Do you have an opinion as to whether if ­ or in this hypothetical I just gave you and it's this much weaker incentive, to use your phrase, whether

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that would have been sufficient to induce Northeast to eliminate consumer lending? A: No, I don't think there's any way to know that. Q: So, you have no opinion on that? A: Correct. ... Q. ... Suppose with me that FIRREA had enacted the risk-based capital rules, but did not eliminate supervisory goodwill from regulatory capital. With that assumption, do you have an opinion as to whether the advent of the risk-based capital rules would have been a sufficient incentive to persuade Northeast to eliminate its consumer lending program? A: No, I don't. And I don't think there's any way to know that because even though there still would have been some incentive to shift away from riskier assets, it would have been a much weaker incentive than, in fact, occurred .... ... Q: Do you have any sense as to absent the alleged breach how big a part of Northeast's business that [commercial mortgage loans] would have been? A: No. Because of caveat number one. Dep. Tr. at 145:12-20; 146:4-16; 222:19-22 (emphases added). But at trial, Professor Fischel thought it clear that but for the breach, Northeast would have done more high-risk lending. Indeed, according to Professor Fischel, this was yet another way in which the breach "benefited" Northeast. As explained above with respect to securitization and the payment of dividends, such a view necessarily entails an opinion as to how Northeast would have behaved absent the breach. Therefore, because this trial testimony evinces an opinion that Professor Fischel had not previously expressed in his report or deposition, Northeast respectfully requests that the Court strike Trial Tr. 1835:1-25. Insofar as Professor Fischel expressed a similar opinion elsewhere during his testimony at trial, including at Trial Tr. 1791:7-1791:22; 1814:19-1815:4; 1816:41819:16; 1836:18-1841:7, Northeast requests that the Court strike those passages as well.

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4.

Northeast moves to strike Trial Tr. 1884:17-25, in which Professor Fischel expressed the opinion that Northeast's incremental general and administrative expenses but for the breach would have exceeded 0.5%. Professor Fischel testified as follows at trial: Dr. Baxter assumes that the additional expenses resulting from holding billions of dollars of additional assets is close to zero, 0.5 percent. Less than one-half of 1 percent is the expense figure that he attributes to holding billions of dollars of additional assets, and I think that figure is too low, which is why the blow-up exhibit refers to the assumption being implausible.

Trial Tr. 1884:17-25 (emphasis added). In his report, Professor Fischel was entirely silent on the issue of Northeast's general and administrative expenses. In his deposition, Professor Fischel remained agnostic on the reasonableness of Dr. Baxter's G&A figure: Q: If I'm recalling correctly, Dr. Baxter said that 5 basis points was a reasonable wholesale level of expenses, and I don't think you spoke to this in your report is that correct? A: That's correct. Q: Do you have an opinion as to whether or not that's a reasonable expense figure? A: No, I don't, at least not as I sit here. It might be something I can check or investigate; but as I sit here, I don't have an opinion on it one way or the other. Q: Do you have an opinion as to whether or not the expense levels for operating a retail operation are higher or lower than the expenses associated with a wholesale operation? A: I would assume higher, but I haven't studied that either. Dep. Tr. at 259:11-260:7 (emphasis added). Because this trial testimony evinces an opinion that Professor Fischel had not previously expressed in his report or deposition, Northeast respectfully requests that the Court strike Trial

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Tr. 1884:17-25. Insofar as Professor Fischel expressed a similar opinion elsewhere during his testimony at trial, including at Trial Tr. 1887:8-1889:5; 1890:24-1891:5, Northeast requests that the Court strike those passages as well.

5.

For reasons stated above, Northeast also moves to strike DX 3003, points 2-4 on DX 3004, and point 2.C on DX 3013.4 Finally, should the Court agree that the trial testimony discussed above should be

stricken, Northeast submits that certain demonstrative exhibits used by Professor Fischel that relate directly to the testimony at issue should be stricken as well. DX 3003 presents the net income of Northeast's "New England retail thrift peer group." Professor Fischel testified at trial that this exhibit is relevant to his opinion insofar as it shows that one of the ways in which the breach "benefited" Northeast was by causing it to engage in less "commercial and high-risk lending" than it would have, thereby sparing Northeast the fate of its "New England retail thrift peer group." Trial Tr. 1836:14-1838:15. As discussed in point 3 above, Professor Fischel's opinion that Northeast would have engaged in more high-risk lending absent the breach had not been disclosed previously. Points 2-4 of DX 3004 merely summarize Professor Fischel's opinions given at trial concerning how Northeast would have behaved absent the breach with respect to securitization, high-risk lending, and dividend payments. See, e.g., Trial Tr. 1791:7-1791:22; 1796:21-1797:14; 1814:19-1815:4; 1820:22-1821:6. As discussed in points 1, 2 and 3 above, these opinions had not been disclosed previously. Point 2.C of DX 3013 asserts that "Dr. Baxter's assumption concerning general and administrative expenses is implausible." Professor Fischel explained at trial that this portion of the
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Copies of these exhibits are attached as Exhibits D-F.

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exhibit reflects his opinion concerning the appropriate level of Northeast's incremental general and administrative expenses. Trial Tr. 1883:21-1884:25. As discussed in point 4 above, this opinion had not been disclosed previously. Respectfully submitted, /s/ Charles J. Cooper ___________________________________ Charles J. Cooper COOPER & KIRK, PLLC 555 Eleventh Street, N.W., Suite 750 Washington, D.C. 20004 (202) 220-9600 (202) 220-9601 (fax) Counsel of Record for Plaintiff Northeast Savings, F.A. Of Counsel: Michael W. Kirk Vincent J. Colatriano David H. Thompson David Lehn COOPER & KIRK, PLLC 555 Eleventh Street, N.W., Suite 750 Washington, D.C. 20004 (202) 220-9600 (202) 220-9601 (fax)

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