Case 1:12-cv-00257-JB-GBW Document 447 Filed 05/10/16 Page 1 of 119IN THE UNITED STATES DISTRICT COURTFOR THE DISTRICT OF NEW MEXICOSECURITIES AND EXCHANGE COMMISSION,Plaintiff,vs.No. CIV 12-0257 JB/LFGLARRY A. GOLDSTONE,CLARENCE G. SIMMONS, III, andJANE E. STARRETT,Defendants.MEMORANDUM OPINION AND ORDERTHIS MATTER comes before the Court on: (i) Plaintiff Securities and ExchangeCommission’s Motion to Exclude and/or Limit Testimony of Christopher Laursen, Joseph J.Floyd, William W. Holder, Steven M. Hilfer, and Christopher M. James, filed May 9, 2014(Doc. 291)(“SEC Motion”); (ii) the Defendants’ Motion to Exclude the Proffered ExpertTestimony of Lawrence Weiner, Dale Kitchens, and Michael Mayer, filed May 9, 2014 (Doc.292)(“Defs. Motion”); and (iii) Plaintiff Securities and Exchange Commission’s Motion to StrikeErrata Changing Testimony of Defendants’ Proposed Experts Christopher Laursen andChristopher James, filed June 2, 2014 (Doc. 300)(“MTS”). The Court held a hearing on January14, 2016.The primary issues are: (i) whether the Court should allow the parties’ expertwitnesses to testify that the Defendants’ judgments were reasonable or material; (ii) whether theCourt should admit the parties’ event studies into evidence; and (iii) whether the Court shouldstrike the Defendants’ errata, because they change the substance of their expert witnesses’testimony. The Court will exclude portions of the expert witnesses’ testimony, because theystate legal conclusions drawn by applying the law to the facts. The Court will admit the event

Case 1:12-cv-00257-JB-GBW Document 447 Filed 05/10/16 Page 2 of 119studies into evidence as evidence of materiality and, if necessary, damages. The Court will strikemost of the Defendants’ errata because they change the substance of their experts’ testimony.The Court will thus grant the SEC Motion, the Defs. Motion, and the MTS in part and deny themin part.FACTUAL BACKGROUNDThe Court takes its facts from the Complaint, filed March 13, 2012 (Doc. 1). The Courtpresents the facts solely to provide context for the Motion. It continues to adhere to the decisionson the facts it reached in its Unsealed Memorandum Opinion and Order, filed August 22, 2015(Doc. 371)(“Summary Judgment MOO”).The Defendants are former officers of Thornburg Mortgage, Inc.: Larry A. Goldstonewas the chief executive officer, Clarence G. Simmons, III, was the chief financial officer, andJane E. Starrett was the chief accounting officer. See Complaint ¶ 1, at 1, filed March 13, 2012(Doc. 1). The Securities and Exchange Commission (“SEC”) alleges that the Defendants wereinvolved in fraudulent misrepresentations and omissions made in connection with the 2007 Form10-K.1 Complaint ¶¶ 1-3, at 1-2. The SEC asserts that the Defendants misled and withheldimportant financial information from Thornburg Mortgage’s outside auditor, KPMG LLP, suchas the impending collapse of a large European hedge fund that held mortgage-backed securities1A Form 10-K is “[a] comprehensive summary report of a company’s performance thatmust be submitted annually to the Securities and Exchange Commission. Typically, the 10-Kcontains much more detail than the annual report.”10-K, 0-k.asp (last visited August 9, 2014). An annual report is“an annual publication that public corporations must provide to shareholders to describe theiroperations and financial conditions. It includes information such as company history,organizational structure, equity, holdings, earnings per share, subsidiaries, etc.” 10-K,Investopedia, (last visited August 9, 2014).-2-

Case 1:12-cv-00257-JB-GBW Document 447 Filed 05/10/16 Page 3 of 119(“MBS”) similar to the Thornburg Mortgage’s adjustable rate mortgage (“ARM”) securities.2Complaint ¶¶ 76-79, at 22.Thornburg Mortgage was a publicly traded single-family mortgage lender and real estateinvestment trust, founded in 1993, headquartered in Santa Fe, New Mexico, and was once thesecond-largest independent mortgage company in the United States of America afterCountrywide Financial Corporation. See Complaint ¶ 2, at 1; id. ¶ 20, at 7. During the timerelevant to the Complaint’s allegations, Thornburg Mortgage’s shares were traded on the NewYork Stock Exchange. See Complaint ¶ 20, at 7. Thornburg Mortgage’s lending operationsfocused on “jumbo” and “super-jumbo”3 ARM securities; Thornburg Mortgage also purchased2An “adjustable rate mortgage” is a “mortgage in which the lender can periodically adjustthe mortgage’s interest rate in accordance with fluctuations in some external market index.”Adjustable Rate Mortgage, Black’s Law Dictionary 1102 (9th ed. 2009).3“Jumbo” and “super-jumbo,” in reference to ARM securities, describe the amount of amortgage. Super jumbo mortgage, Wikipedia (Dec. 24, 2012), jumbo mortgage. These mortgages exceed the conforming loan limit that theFederal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan MortgageCorporation (“Freddie Mac”) set. Super jumbo mortgage, Wikipedia. Fannie Mae purchasesand guarantees mortgages that meet its funding criteria.Fannie Mae, anniemae.asp (last visited August 9, 2014). Both FannieMae and Freddie Mac are government-sponsored enterprises, that is, financial servicescorporations that the United States Congress created.See Fannie Mae, Wikipedia, Mae (last updated July 26, 2014); Freddie Mac, Wikipedia, Mac (last updated July 18, 2014); Government-SponsoredEnterprise, Wikipedia, enterprise (lastupdated January 9, 2014). “Together, Fannie Mae and Freddie Mac purchase or guaranteebetween 40 to 60% of all mortgages originated in the United States annually, depending uponmarket conditions and consumer trends.” Fannie Mae, Investopedia. The conforming limits thatFannie Mae and Freddie Mac set vary by county, but the conforming loan limit for 2013 and2014 for most of the United States (including all of New Mexico) is 417,000.00. Higher-valueareas, such as the District of Columbia, have conforming loan limits of up to 625,500.00. SeeFHA Announces Conforming Loan Limits for 2014, released November 26, 613Final.pdf. “Jumbo” mortgage loans areloans that exceed the local conforming loan limit and have higher interest rates because of theincreased risk of issuing a larger loan. Jumbo Mortgage, Wikipedia (Oct. 11, 2013), mortgage. The term “super-jumbo” is not expressly defined-3-

Case 1:12-cv-00257-JB-GBW Document 447 Filed 05/10/16 Page 4 of 119ARM securities that third parties originated. Complaint ¶ 21, at 7. Thornburg Mortgage paid outmost of its earnings in dividends, and obtained financing for its mortgage and investmentbusiness through reverse repurchase agreements4 backed by ARM securities. See Complaint ¶ 3,at 2.Thornburg Mortgage’s reverse repurchase agreements “typically consisted of asimultaneous sale of pledged securities to a lender at an agreed price in return for ThornburgMortgage’s agreement to repurchase the same securities at a future date (the maturity date) at ahigher price.” Complaint ¶ 22, at 7-8. The reverse repurchase agreements required ThornburgMortgage to maintain a certain degree of liquidity and subjected Thornburg Mortgage to margincalls if the value of the ARM securities serving as collateral on the agreements fell below aspecified level. See Complaint ¶ 22, at 8. A margin call would generally require ThornburgMortgage to pay cash to reduce its loan amount or to pledge additional collateral to the lender,either on the same day that Thornburg Mortgage received the margin call or on the followingday, unless the parties agreed otherwise. See Citigroup Global Markets, Inc. as IntermediatingAgent for Citigroup Global Markets Limited and [Counterparty] Thornburg Mortgage, Inc.,or regulated, but mortgage companies use it internally and independently to set loan parameters.See Super jumbo mortgage, Wikipedia. The definition may vary according to a particularlender’s criteria and the area where the mortgage is being sought. See Super jumbo mortgage,Wikipedia. The United States government did not explicitly guarantee Fannie Mae or FreddieMac’s securities, but there was widespread belief of an implied federal guarantee. See FannieMae, Wikipedia; Freddie Mac, Wikipedia.4A “repurchase agreement” is a “short-term loan agreement by which one party sells asecurity to another party but promises to buy back the security on a specified date at a specifiedprice. Often shortened to repo.” Repurchase Agreement, Black’s Law Dictionary 1419 (9th ed.2009)(emphasis in original). A “reverse repurchase agreement” is the same agreement from thebuyer’s point of view rather than the seller’s. Repurchase agreement, Wikipedia (Nov. 23,2013), agreement. “For the party selling the security(and agreeing to repurchase it in the future) it is a repo; for the party on the other end of thetransaction (buying the security and agreeing to sell in the future) it is a reverse repurchaseagreement.”Reverse Repurchase Agreement, Investopedia (Dec. 8, epurchaseagreement.asp.-4-

Case 1:12-cv-00257-JB-GBW Document 447 Filed 05/10/16 Page 5 of 119International Securities Lenders Association ISLA Global Master Securities Lending Agreement§ 5.8, at 11, filed May 21, 2012 (Doc. 37-6)(brackets in original); Master Repurchase AgreementBetween Greenwich Capital Markets, Inc., and Thornburg Mortgage, Inc. § 4(c) at 5, filed July20, 2012 (Doc. 60-2); id. at § 11(a), at 7-8; Master Repurchase Agreement Between CreditSuisse First Boston Corporation and Thornburg Mortgage Asset Corporation § 4(c), at 4, filedJuly 20, 2012 (Doc. 60-3); id. at § 11(a), at 7; Complaint ¶ 23, at 8. Thornburg Mortgage’sfailure to timely meet a margin call would be an event of default and allowed a lender to declareThornburg Mortgage in default, which would trigger cross-defaults on Thornburg Mortgage’sother reverse repurchase agreements, and all lenders with whom Thornburg Mortgage haddefaulted would then be allowed to seize and to sell the ARM securities collateralizingThornburg Mortgage’s loans. See Complaint ¶ 24, at 8. Receiving margin calls was part ofThornburg Mortgage’s normal course of business, as the value of its ARM securities oftenfluctuated. See Complaint ¶ 25, at 8.Citigroup Global Markets, Inc.’s margin call on February 21, 2008, was the largest of thethree margin calls that Thornburg Mortgage could not immediately meet -- 196 million. SeeComplaint ¶ 33, at 10. In response to Thornburg Mortgage’s inability to meet the CitigroupGlobal margin call on February 21, 2008, Citigroup Global sent a letter to Goldstone andSimmons, stating that Thornburg Mortgage had breached the parties’ reverse repurchaseagreement and reserving Citigroup Global’s right to declare Thornburg Mortgage in default. SeeComplaint ¶ 3, at 2; id. ¶ 34, at 10-11 (citing Letter from Stephen G. Malekian to ThornburgMortgage, Inc., Re: The Global Master Securities Lending Agreement dated as of September 20,2007 Between Citigroup Global Markets, Inc. as Intermediating Agent for Citigroup GlobalMarkets Limited and Together with Citigroup Global Markets, Inc. and Thornburg Mortgage-5-

Case 1:12-cv-00257-JB-GBW Document 447 Filed 05/10/16 Page 6 of 119(dated Feb. 21, 2008) filed May 21, 2012 (Doc. 37-7)(“Citigroup Global Letter”)). CitigroupGlobal made clear that, although Citigroup Global was not exercising its rights under the reverserepurchase agreement, it was not waiving its right to declare Thornburg Mortgage in default or toamend the underlying reverse repurchase agreement. See Complaint ¶ 34, at 11. In an emailfrom Goldstone to Simmons, Starrett, and others, dated February 21, 2008, Goldstone stated thathe had negotiated a “payment plan with Citigroup Global in order to satisfy the call by the end of[the following] week[.]” Complaint ¶ 61, at 18 (alterations in original)(quoting Email from ClaySimmons to Nyira Gitana, Subject: FW: TMA Update at 2, sent February 21, 2008, at 9:30 a.m.,filed May 21, 2012 (Doc. 37-10)). Thornburg Mortgage paid the Citigroup Global margin callover seven days and made the final payment of seventy-five million dollars on February 27,2008. See Complaint ¶ 35, at 11.In the last week of February, 2008, Thornburg Mortgage had to sell the interest-onlyportions of its ARM loans (“I/O Strip Transactions”) to generate sufficient cash to meet themargin calls it received in the second half of the month. Complaint ¶ 36, at 11. The I/O StripTransactions further depleted Thornburg Mortgage’s liquidity to meet margin calls.SeeComplaint ¶ 36, at 11. In an email from Goldstone to Simmons and Starrett on February 22,2008, Goldstone informed them of some of Thornburg Mortgage’s plans to raise liquidity tomeet margin calls: “‘Citi sold two of [Thornburg Mortgage’s] IO securities[5] as well for a gainof approximately 25 million and net proceeds to Citi of 10 million.’” Complaint ¶ 67, at 19-20(alteration in original)(quoting Email from Larry Goldstone to Garret Thornburg, AnneAnderson, David Ater, Eliot Cutler, Francis Mullin III, Ike Kalangis, Michael Jeffers, Owen5“Interest only (IO) strips are the interest portion of mortgage, Treasury, or bondpayments, which [are] separated and sold individually from the principal portion of those /iostrips.asp.-6-

Case 1:12-cv-00257-JB-GBW Document 447 Filed 05/10/16 Page 7 of 119Lopez, and Stuart Sherman, Subject: TMA Update - Friday Morning, February 22 at 2, sentFebruary 22, 2008 at 8:42 a.m., filed May 21, 2012 (Doc. 37-8 at