Mortgage Expert Allowed to Testify Despite Not Updating the Earnings Model
Posted on May 8, 2025 by Expert Witness Profiler
The lawsuit concerns whether “Freddie Mac concealed its overextension in the nontraditional mortgage market—generally composed of instruments known as subprime mortgages or low credit and high risk instruments—and its materially deficient underwriting, risk management and fraud detection practices through misstatements and omissions to investors.”
Plaintiff Ohio Public Employees Retirement System (“OPERS”) retained Howard Shapiro as a putative non-scientific expert in the mortgage finance industry during August 1, 2006 through and including November 20, 2007 (the “Relevant Period”).
Freddie Mac alleged that Shapiro is unqualified to offer his opinions, his opinions are unreliable, and therefore, do not meet the threshold of admissibility for expert evidence established by Rules 403 and 702 of the Federal Rules of Evidence.
OPERS also designated Shapiro as a fact witness pursuant to Fed. R. Evid. 701.
Mortgage Expert Witness
Howard S. Shapiro was a chartered financial analyst who specialized in the mortgage finance industry for a significant part of his professional career.
From early 2006 through December 2008, he was a Vice President and Analyst at Fox-Pitt Kelton, a sell-side firm that specializes in financial services.
His area of expertise is in studying the operations of mortgage finance companies, studying the credit risk that they take, studying their underwriting and product practices, and studying their usage of capital.
Discussion by the Court
Shapiro’s first step was to review all of Freddie Mac’s public disclosures from the Relevant Period. Next, he reviewed other publicly available documents about Freddie Mac’s activities during the Relevant Period. Shapiro then reviewed “other analyses of Freddie Mac;” only; in this case, he had access to Freddie Mac’s own internal analyses. He reviewed more than 100 internal assessments (totaling more than 4,000 pages) related to Freddie Mac’s credit risk and underwriting.
Shapiro utilized the above methodology to reach his opinion that Freddie Mac was “externally reporting exposure to ‘subprime’ (broadly defined in its own disclosures) at a paltry 0.2% of the portfolio and internally recognizing that roughly 12% of the portfolio was behaving like subprime..” Had he been made aware of Freddie Mac’s internal credit risk and underwriting assessments during the Relevant Period, Shapiro opines that he “would have rated the stock as ‘Underperform’ and advised our clients to avoid purchasing it” during the Relevant Period.
Analysis
Shapiro’s Opinions Are Not based on Sufficient Facts
According to Freddie Mac, Shapiro’s opinions are not based on sufficient facts. However, the Court determined that Freddie Mac’s argument that Shapiro should have looked at more and/or different evidence is not a basis on which to exclude him.
Shapiro’s Opinions are not the Product of Reliable Principles or Methods
Freddie Mac claimed that Shapiro failed to analyze whether the internal assessments he cited would have changed the “total mix” of information available from Freddie Mac’s public disclosures.
To the contrary, Shapiro documented in his Rebuttal Report with regard to Freddie Mac’s underwriting that he “found repeated internal discussions, statements and conclusions stretching across the entire Relevant Period pointing to a significant, and multi-faceted, problem within the Company related to underwriting.”
According to Freddie Mac, Shapiro’s opinions rest on a “faulty legal premise,” namely that Freddie Mac was obligated to disclose “as much information as they could disclose without putting themselves at any competitive risk.”
Shapiro, however, stated his view as a financial analyst that he would have preferred Freddie Mac to provide “as much information as they could disclose without putting themselves at any competitive risk.”
Freddie Mac criticized Shapiro for not updating the earnings model he used during the Relevant Period in connection with his opinions in the present case because “another expert cannot replicate it.” However, there was no need for Shapiro to update his 20-year-old financial model that he no longer had access to.
Freddie Mac argued that Shapiro’s opinions on falsity and materiality are not the product of reliable principles or methods. Shapiro explicitly testified that he was not offering opinions on either of these issues.
Freddie Mac contended Shapiro’s opinion on loss causation is not the product of reliable principles or methods. However, Shapiro has not been called to opine on the subject of loss causation. Rather, he “will testify that capital insufficiency and unexpected future losses due to credit risk were, in his view, largely responsible for the stock decline on November 20, 2007.”
Shapiro Impermissibly Opined on Ultimate Liability Issues
Freddie Mac asserted Shapiro’s testimony should be excluded because he impermissibly opined on ultimate liability issues by offering legal conclusions on falsity and materiality.
However, Shapiro is not attempting to instruct the jury on a legal test for falsity or materiality and is not applying any such test to the facts of the case.
Held
The Court granted in part and denied in part Freddie Mac’s motion to exclude the testimony of Howard S. Shapiro. Shapiro will not be allowed to opine as an expert on securities fraud, falsity, materiality or loss causation.
Key Takeaway:
The trial court’s gatekeeping analysis with respect to an expert’s methodology is very flexible and must be tied to the facts of a particular case, depending on the nature of the issue, the expert’s particular expertise, and the subject of his testimony.
Particularly with respect to non-scientific experts, like Shapiro, the relevant reliability concerns may focus upon personal knowledge or experience.
Case Details:
| Case Caption: | Ohio Public Employees Retirement System V. Federal Home Loan Mortgage Corp., Et Al. |
| Docket Number: | 4:08cv160 |
| Court Name: | United States District Court for the Northern District of Ohio, Eastern Division |
| Order Date: | March 28, 2025 |
