Finance Expert Witness Report on Financial Crisis Losses Found Partially Admissible


Court: United States District Court for the Southern District of New York’
Jurisdiction: Federal
Case Name: Loreley Fin. (Jersey) No. 3 Ltd. v. Wells Fargo Sec.
Citation: 2019 U.S. Dist. LEXIS 160087


The plaintiff, a financial investment company, invested in three collateral debt obligations (CDOs), consisting primarily of residential mortgage-backed securities. Those investments upended in 2007 and 2008. The CDOs defaulted and the plaintiff’s entire investment was lost. The plaintiff alleged that the defendant, who created the three CDOs, did not disclose any conflicts of interest or their prior knowledge that the CDOs were bound to fail. Specifically, the plaintiff claimed that a hedge fund client of the defendant exerted undue influence over the CDOs. The plaintiff alleged the hedge fund client had picked inferior collateral for two of the debt obligations to give advantage to their plan to bet against the CDOs.

The plaintiffs filed a suit alleging fraud, conspiracy, rescission, fraudulent conveyance, aiding and abetting, and unjust enrichment. They retained a finance expert witness to support their case.

The Finance Expert Witness

The finance expert witness held a Ph.D. in economics and had over 30 years of experience in analyzing market structure, corporate behavior, and financial performance. He taught economics and finance and spent six years as an economist at the San Francisco Federal Reserve Bank. The finance expert also held various roles in the private sector as an economist and consulted as a specialist economist on legal issues surrounding financial products, including mortgage-backed securities and CDOs.

The expert offered a report opining on the general CDO market, financial rating agency behavior, and the hedge fund client’s business methods of selecting the CDO’s collateral. The defendant challenged the admissibility of the expert’s report. The defendant particularly focused on the expert’s testimony as to what the rating agencies would have done if certain information had been revealed, which was used to justify the expert’s estimate of out-of-pocket costs. The defendant claimed the finance expert lacked experience in ratings.


The court noted that a large part of the expert’s study was dedicated to the general factual discussion of the hedge fund client’s business and their method of selecting collateral for debt obligations. The court noted, however, that the report did not purport to address any factual claims which they were considering when ruling on the motion for summary judgment. The court ruled that the expert had set out the evidence on which his opinions were based. The court considered the expert’s statements of fact as the context for his expert opinion but they relied on the evidence cited in the Rule 56.1 statements of the parties to determine the relevant facts.

The court also considered the finance expert’s testimony regarding the materiality of the collateral selection process for the CDO investors as background only. The court based this ruling on SEC v. Tourre and United States v. Tomasetta, stating the determination of the materiality of the alleged fraud was to be made by the fact-finder, not by the plaintiff. The court also recognized that the plaintiff had agreed during oral argument that the expert’s testimony was not essential in order to prove materiality. Regarding the defendant’s challenge to the expert’s testimony on rating agencies, the court noted that the plaintiff did not rely on his expert opinion on ratings because they had retained another expert for that area.

The court also noted that the defendant was free to challenge the validity of the expert’s findings however they found that the expert’s report did not contain mere conclusions. The court ruled that the expert’s report relied on credible sources and was therefore admissible. The Court noted that “[t]o the extent that [the expert’s] conclusions are broader than supported by the data … that goes to weight rather than admissibility,” citing In re: N. Sea Brent Crude Oil Futures Litig.


The defendant’s motion to exclude the finance expert witness’s testimony was denied but with one exception. Since the expert’s rebuttal opinion was not addressed by the scheduling order, the motion to exclude the expert’s supplemental declaration was granted.