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In March 2005, FMF Capital Group conducted an initial public offering (IPO) of securities to the Canadian public after FMF acquired the Michigan-based subprime mortgage-lending business of Michigan Fidelity Acceptance Corporation (MFAC). Issued at $10 per security, the price of the securities on the Toronto Stock Exchange fell to $0.75 within eight months when the company unexpectedly suspended all distributions to investors. It turns out that FMF may have been the proverbial “canary in the coal mine” for the current credit crisis, which has since precipitated the collapse of the US market for subprime mortgage loans. FMF noted that rising interest rates and increasing default rates had impaired its ability to securitize its mortgage loans and would require it to buy back previously securitized loan pools.

Investors alleged that the company “secretly and methodically dismantled MFAC’s underwriting standards” in an effort to maintain growth in loan originations and concealed from institutional loan purchasers and investors materially adverse information respecting its bad mortgage loans and its degraded underwriting practices.

NERA Senior Vice President Mark Berenblut and Vice President Bradley Heys were retained as neutral experts for the purposes of a settlement approval hearing to assist the court in understanding the full context of the quantum of damages in light of the allegations and known facts of the case.

Mr. Berenblut and Mr. Heys prepared an expert report setting out the issues with respect to economic damage quantification in a securities class action and provided a range of possible damages that could have been found had the case gone to trial.

NERA’s analysis demonstrated that the settlement amount of $29 million fell within the range of potential damages given the possible interpretation of the nature of the disclosures. This allowed the court to assess, given the risks of the litigation and its own preliminary assessment of the allegations, whether the settlement was in the best interests of the class members.

On 11 April 2007, the Ontario Superior Court of Justice approved the proposed settlement.