In an opinion today, Judge Nathan granted summary judgment and dismissed a $500 million suit brought by Bank of America against Bear Stearns Asset Management and three of its executives. The suit concerned Bank of America’s underwriting of a “CDO squared” that included substantial mortgage-related assets from two Bear Stearns hedge funds. Bank of America alleged it was not timely told of redemption requests from the hedge funds’ investors that, shortly after the CDO squared closed, led to those funds liquidating and allegedly driving down the price of the type of mortgage assets in the CDO squared. Judge Nathan’s decision was based on (among other things) the fact that Bank of America’s damages expert, Dr. Mukesh Bajaj, improperly measured its losses by comparing the price Bank of America paid for assets to the “fire sale” prices for similar assets that the hedge funds were forced to swiftly liquidate:
The problem with Dr. Bajaj’s methodology has been addressed in case law and in previous testimony in other cases by Dr. Bajaj himself. The Second Circuit has instructed that “the damage award resulting from a breach of an agreement to purchase securities is the difference between the contract price and the fair market value of the asset at the time of breach.” Because “fire sales” involve below-value sales, courts have found that they are not properly used to measure damages because they do not properly measure the fair market value of an asset at the time of a breach or of a fraud . . . . BOA argues . . . that the prices assessed by Dr. Bajaj were not the result of “fire sales” and that his model did not include any price effects unrelated to BSAM’s omissions. This position, though necessary for its attempt to salvage Dr. Bajaj’s testimony, conflicts with the position that BOA has consistently taken throughout this litigation. For example, BOA’s counsel stated to this Court at oral argument on July 2,2012, that “because of the redemption requests, BSAM had to make fire sales of its remaining assets.” Successive complaints, including the Second Amended Complaint, which was filed after the close of almost all discovery, alleged that BSAM was “forced” in mid-June of 2007 to “liquidate about $5 billion worth of the Funds’ holdings,” i.e. that there was a fire sale . . . . Thus, the problem identified by Dr. Bajaj himself remains fatal to the reliability of his findings: the data that he measures and purports represent sales before and after disclosure are, in fact, measuring ordinary selling against forced selling . . . . Without Dr. Bajaj’s testimony, Plaintiffs cannot prove loss causation, and therefore cannot prove proximate cause.
Brune & Richard represents one of the individual defendants in the case. The New York Times covered the decision here.