NERA's Role in Teamsters Local 445 Freight Division Pension Fund, et al. v. Bombardier, Inc., et al.

The Situation

Bombardier, Inc. (BI) is a Canadian corporation that manufactures a variety of products. In the late 1990s, it built mobile homes, financed them through its wholly owned subsidiary Bombardier Capital Inc. (BCI), and packaged them into securities through Bombardier Capital Mortgage Securitization Corporation (BCM), a wholly owned subsidiary of BCI.

Between 1998 and 2001, BCM issued $1.85 billion worth of Certificates in seven separate offerings, each secured by a pool of mobile home loans. The Certificates were typically traded relatively infrequently and in large blocks by sophisticated institutional investors, including the Teamsters Local 445 Freight Division Pension Fund (Teamsters). In May 2002, Teamsters purchased $250,000 par value of the Series 2000-A Class A-2 Certificates for a total investment of $234,826. In December 2002, the Series 2000A Certificates were downgraded to below investment grade.

In February 2005, Teamsters filed suit, alleging misrepresentations about the integrity of the collateral behind the Certificates. Teamsters alleged that executives at BI, BCI, and BCM disregarded underwriting standards, regularly underwrote loans to borrowers who were not creditworthy, and purchased large quantities of defective and deficient mobile home loans. Teamsters contended that these practices caused escalating delinquency rates, which were systematically underreported; that Certificate prices collapsed following the downgrades; and that this conduct violated Rule 10b-5 and Section 10(b) of the Securities Exchange Act of 1934. In February 2006, Teamsters attempted to certify a class of plaintiffs comprising all open market purchasers of the Certificates between 7 February 2000 and 7 February 2005, and invoked the fraud-on-the-market doctrine as a theory of reliance on their claim under Rule 10b-5.

NERA's Role

Retained by counsel for defendants, NERA Chairman Dr. Andrew Carron provided analysis and expert testimony critiquing Teamsters' assertion that the Certificates operated in an efficient market. Teamsters' expert had argued to the district court that, according to Cammer factors, the Certificates traded in an efficient market. Dr. Carron also challenged an event study prepared by plaintiffs' expert, which purportedly demonstrated that, according to Cammer factors, the Certificates traded in an efficient market.

The Result

On 1 August 2006, Judge Shira Scheindlin of the US District Court for the Southern District of New York denied the motion for class certification, concluding that plaintiffs had failed to demonstrate market efficiency. In a decision that frequently cited the NERA affidavit, Judge Scheindlin agreed with Dr. Carron that the plaintiffs' expert used faulty math "which inflates the turnover," employed logic that is "not persuasive" to identify analyst coverage, and relied upon "circular reasoning" to justify the prices used in the plaintiffs' event study.

The Appeal
In December 2006, Teamsters appealed the denial of class certification. The US Court of Appeals for the Second Circuit accepted the appeal.

On 14 October 2008, the Second Circuit upheld the district court's denial of class certification, citing the plaintiffs' failure to prove market efficiency sufficient to support application of the fraud-on-the-market presumption of reliance. The Court agreed that Dr. Carron was more persuasive than the plaintiffs' expert on the issue of whether analyst coverage of the originator of the loans was an adequate substitute for analyst coverage of each class of the Certificates themselves. The Second Circuit also upheld the district court's siding with Dr. Carron on whether there was proof of market makers for the Certificates. The Court's decision may be significant as it relates to future subprime litigation.