bonnett, fairbourn, friedman & balint, p.c. · encouraged those who dealt directly with wells...

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 BONNETT, FAIRBOURN, FRIEDMAN & BALINT, P.C. Andrew S. Friedman (admitted pro hac vice) Wendy J. Harrison (CA SBN 151090) 2901 North Central Avenue, Suite 1000 Phoenix, Arizona 85012 (602) 274-1100 RODDY KLEIN & RYAN Gary Klein Shennan Kavanagh 727 Atlantic Avenue Boston, MA 02111-02810 (617) 357-5500 ext. 15 Interim Co-Lead Class Counsel [Additional counsel appear on signature page.] UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA In re: WELLS FARGO MORTGAGE LENDING PRACTICES LITIGATION This document relates to ALL ACTIONS ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) M:08-md-01930-MMC (JL) PLAINTIFFS’ NOTICE OF MOTION, MOTION FOR CLASS CERTIFICATION AND MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT THEREOF Honorable Maxine M. Chesney Date: January 21, 2011 Time: 9:00 a.m. Location: Ctrm. 7, 19th Floor Case3:08-md-01930-MMC Document360 Filed10/12/10 Page1 of 35

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Page 1: BONNETT, FAIRBOURN, FRIEDMAN & BALINT, P.C. · encouraged those who dealt directly with Wells Fargo borrowers to increase the objectively-determined price at their discretion. Wells

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BONNETT, FAIRBOURN, FRIEDMAN & BALINT, P.C. Andrew S. Friedman (admitted pro hac vice) Wendy J. Harrison (CA SBN 151090) 2901 North Central Avenue, Suite 1000 Phoenix, Arizona 85012 (602) 274-1100 RODDY KLEIN & RYAN Gary Klein Shennan Kavanagh 727 Atlantic Avenue Boston, MA 02111-02810 (617) 357-5500 ext. 15 Interim Co-Lead Class Counsel [Additional counsel appear on signature page.]

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA

In re: WELLS FARGO MORTGAGE LENDING PRACTICES LITIGATION This document relates to ALL ACTIONS

)) ) ) ) ) ) ) ) ) ) ) )))) )

M:08-md-01930-MMC (JL)

PLAINTIFFS’ NOTICE OF MOTION, MOTION FOR CLASS CERTIFICATION AND MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT THEREOF Honorable Maxine M. Chesney

Date: January 21, 2011 Time: 9:00 a.m. Location: Ctrm. 7, 19th Floor

Case3:08-md-01930-MMC Document360 Filed10/12/10 Page1 of 35

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MOTION FOR CLASS CERTIFICATION

NOTICE OF MOTION AND MOTION

TO DEFENDANTS AND THEIR COUNSEL OF RECORD:

PLEASE TAKE NOTICE THAT at 9:00 a.m. on January 21, 2011, or as soon thereafter

as the matter may be heard, in accordance with Rule 23(b)(2) and (b)(3), Federal Rules of Civil

Procedure, Plaintiffs in this action will and do hereby move this Court for an order certifying the

following class seeking injunctive and monetary relief:

All African-American and Hispanic borrowers who at any time since January 1, 2004 have been subjected to Wells Fargo’s subjective discretionary pricing policies.

This motion is based on this Notice of Motion and Motion and the Memorandum in

support thereof. DATED: October 12, 2010 BONNETT, FAIRBOURN, FRIEDMAN, & BALINT, P.C.

/s Wendy J. Harrison Andrew S. Friedman Wendy J. Harrison 2901 North Central Avenue, Suite 1000 Phoenix, Arizona 85012

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MOTION FOR CLASS CERTIFICATION

i

TABLE OF CONTENTS

I. INTRODUCTION .............................................................................................................. 1 II. FACTS. ............................................................................................................................... 2 A. Mortgage Lending in America: A History of Racial Discrimination .................... 2 B. Wells Fargo Mandated A Subjective Discretionary Pricing Policy ........................ 2 1. Wholesale Brokers and Retail Loan Officers Had Discretion to Increase the Interest Rate and Add Loan Charges .................................................... 4 2. The Existence of Discretion Was Uniform Across Business Channels,

Office Location and Product Types for the Entire Class Period. Wells Fargo was Aware Of Its Responsibility to Control the Adverse Impact of Discretion on its Minority Borrowers ......................................................... 6

C. Expert Data Analysis Supports Certification .......................................................... 8 1. There are Statistically Significant Disparities in the Rates Paid by Wells

Fargo’s Minority Borrowers Compared to Those of Similarly Situated Whites ......................................................................................................... 8

D. Plaintiffs Were Affected In The Same Way By Wells Fargo’s Policy as Other Class Members ............................................................................ 10 E. The Statistical Methods for Calculating Monetary Relief are Straightforward and Manageable .......................................................................... 10 F. Wells Fargo’s Expert Analysis Does Not Undermine the Case for Class Certification ........................................................................................... 11 III. OVERVIEW OF WELLS FARGO’S LEGAL RESPONSIBILITIES UNDER THE FAIR LENDING LAWS ........................................................................... 12 IV. ARGUMENT . . . .............................................................................................................. 13 A. Rule 23’s Requirements ........................................................................................ 13 B. The Proposed Class ............................................................................................... 14 C. The Requirements of Rule 23(a) Are Readily Met ............................................... 14 1. Numerosity ................................................................................................ 14 2. Commonality ............................................................................................. 14

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3. Typicality .................................................................................................. 16 4. Adequacy .................................................................................................. 17 D. The Court Should Certify a Class Under 23(b)(2) ................................................ 17 1. Wells Fargo Has Acted On Grounds Generally Applicable To The Class ............................................................................................. 17 2. Plaintiffs Seek Important Injunctive Relief............................................... 18 3. Injunctive Relief Predominates Over Monetary Relief ............................. 19 E. Certification Also Is Appropriate Pursuant To Rule 23(b)(3) .............................. 20 1. Common Questions of Law and Fact Predominate................................... 20 2. Class Treatment is Superior ...................................................................... 24 V. CONCLUSION ................................................................................................................. 25

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TABLE OF AUTHORITIES

Adams v. Pinole Point Steel Co., No. C-92-1962 MHP, 1994 WL 515347 (N.D. Cal. May 18, 1994) ................................. 15 Allison v. Citgo Petroleum Corp., 150 F.3d 402 (5th Cir. 1998) ............................................................................................. 19 Amchem Prods. Inc. v. Windsor, 521 U.S. 591 (1997) .................................................................................................... 18, 20 Barefield v. Chevron U.S.A., Inc., No. C-86-2427 TEH, 1987 WL 65054 (N.D. Cal. Sept. 9, 1987) .............................. 15, 16 Bazemore v. Friday, 478 U.S. 385 (1986) ............................................................................................................ 8 Cornist v. B.J.T. Auto Sales, Inc., 272 F. 3d 322 (6th Cir. 2001) ...................................................................................... 22, 25 County of Los Angeles v. Jordan, 459 U.S. 810 (1982) ........................................................................................................... 16 del Campo v. Amer. Corrective Counseling Svcs., Inc., 254 F.R.D. 585 (N.D. Cal. 2008) ..................................................................................... 13 Domingo v. New England Fish Co., 727 F.2d 1429 (9th Cir. 1984) ..................................................................................... 21, 23 Dukes v. Wal-Mart Stores, Inc., 603 F.3d 571 (9th Cir. 2010) ....................................................................................... passim Ellis v. Costco Wholesale Corp., 240 F.R.D. 627 (N.D. Cal. 2007) ................................................................................. 15, 16 Hanlon v. Chrysler Corp., 150 F.3d 1011 (9th Cir. 1998) ............................................................................... 16, 17, 20 Haynes v. Logan Furniture Mart Inc., 503 F.2d 1161 (7th Cir. 1974) ........................................................................................... 24 Gotthardt v. Nat’l R.R. Passenger Corp.,

191 F.3d 1148 (9th Cir. 1999) ....................................................................................... 19

In re Citric Acid Antitrust Litig., No. 95-1092, C-95-2963 FMS, 1996 WL 655791 (N.D. Cal. Oct. 2, 1996) ................ 21

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In re Hawaii Beer Antitrust Litig., File No. 77-0294A, 1978 WL 1388 (D. Hawaii 1978) ..................................................... 23 In re Initial Public Offering Sec. Litig., 471 F.3d 24 (2d Cir. 2006) ................................................................................................ 13 In re Monumental Life Ins. Co., 365 F.3d 408 (5th Cir. 2004) ....................................................................................... 18, 19 In re Static Random Access Memory (SRAM) Antitrust Litig., No. C 07-01819 CW, 2009 WL 4263524 (N.D. Cal. Nov. 25, 2009) .............................. 24 In re Victor Tech. Sec. Litig., 102 F.R.D. 53 (N.D. Cal. 1984) ........................................................................................ 17 International Molders’ and Allied Workers’ Local Union No. 164, et al. v. Nelson, 102 F.R.D. 457 (N.D. Cal. 1983) ....................................................................................... 14 Jones v. Ford Motor Credit, Co., No. 00Civ.8330RJHKNF, 2005 WL 743213 (S.D.N.Y. Mar. 31, 2005).......................... 16 Jordan v. County of Los Angeles, 669 F.2d 1311 (9th Cir. 1982) ........................................................................................... 16 Kamar v. Radio Shack Corp., 254 F.R.D. 387 (C.D. Cal. 2008) ...................................................................................... 20 Lymburner v. U.S. Fin. Funds, Inc., No. C-08-00325 EDL, 2010 WL 335791 (N.D. Cal. Jan. 22, 2010) ................................ 20 McClain v. Lufkin Indus., Inc., 519 F.3d 264 (5th Cir. 2008) ............................................................................................. 23 McCleskey v. Kemp, 481 U.S. 279 (1987) ............................................................................................................ 9 Miller v. Countrywide Bank, FSB, 571 F. Supp. 2d 251 (D. Mass. 2008) ............................................................................... 12 Phiffer v. Proud Parrot Motor Hotel, Inc., 648 F.2d 548 (9th Cir. 1980) ............................................................................................. 13 Probe v. State Teachers’ Ret. Sys., 780 F.2d 776 (9th Cir. 1986) ............................................................................................. 19 Ramirez v. GreenPoint Mortgage Funding, Inc., --- F.R.D. ---, 2010 WL 2867068 (N.D. Cal. July 10, 2010) ..................................... passim

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Salinas v. Roadway Express, Inc., 735 F.2d 1574 (5th Cir. 1984) ........................................................................................... 19 Sengupta v. Morrison-Knudsen Co., 804 F.2d 1072 (9th Cir. 1986) .......................................................................................... 13 United States v. Youritan Constr. Co., 370 F. Supp. 643 (N.D. Cal. 1973) .................................................................................... 13 Watson v. Fort Worth Bank and Trust, 487 U.S. 977 (1988) .......................................................................................................... 21 Wehner v. Syntex Corp., 117 F.R.D. 641 (N.D. Cal. 1987) ...................................................................................... 14 Wofford v. Safeway Store, Inc., 78 F.R.D. 460 (N.D. Cal. 1978) ........................................................................................ 17 Yamner v. Boich, No. C-92-20597 RPA, 1994 WL 514035 (N.D. Cal. Sept. 15, 1994) .............................. 17 Zinser v. Accufix Research Inst., Inc., 253 F.3d 1180 (9th Cir. 2001) ........................................................................................... 24 RULES Fed. R. Civ. P. 23(a)(1) ................................................................................................................. 14 Fed. R. Civ. P. 23(a)(2) ................................................................................................................. 14 Fed. R. Civ. P. 23(a)(3) ................................................................................................................. 16 Fed. R. Civ. P. 23(a)(4) ................................................................................................................. 17 Fed. R. Civ. P. 23(b)(2) ........................................................................................... 2, 13, 17, 18, 19 Fed. R. Civ. P. 23(b)(3) ........................................................................................... 2, 13, 20, 21, 24 Fed. R. Civ. P. 23(g) ..................................................................................................................... 17 STATUTES U.S.C. § 2803 ............................................................................................................................... 14

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MOTION FOR CLASS CERTIFICATION

1

I. INTRODUCTION

This Multidistrict litigation proceeding consolidates several cases from across the country

challenging the discriminatory impact of Wells Fargo’s Discretionary Pricing Policy.1 By this

motion, Plaintiffs seek to certify a class of minority homeowners who were subject to that policy.

Judge Henderson recently certified a class in a virtually identical mortgage lending

discrimination case pending in this District. Ramirez v. GreenPoint Mortgage Funding, Inc., ---

F.R.D. ---, 2010 WL 2867068 (N.D. Cal. July 10, 2010). In GreenPoint, Judge Henderson

carefully analyzed and applied Dukes v. Wal-Mart Stores, Inc., 603 F.3d 571, 582 (9th Cir. 2010)

(en banc), a recent decision that explains the Ninth Circuit’s class certification standards for

adverse impact claims involving discretionary decision-making policies. Certification of the

proposed class here is appropriate for the same reasons certification was granted in GreenPoint

and Dukes.

Wells Fargo’s retail and wholesale loan pricing included both objectively-based and

subjectively-determined components. Wells Fargo underwrote its loans based on objective risk-

based characteristics. Plaintiffs do not challenge the objective elements of Wells Fargo’s loan

pricing. However, Wells Fargo loan prices also included discretionary rate markups and loan

charges that were imposed based on subjective, non-business justified factors. Plaintiffs

challenge this discretionary pricing policy, through which Wells Fargo allowed and financially

encouraged those who dealt directly with Wells Fargo borrowers to increase the objectively-

determined price at their discretion. Wells Fargo consistently employed this discretionary pricing

policy during the class period and still does so today.

Wells Fargo’s Discretionary Pricing Policy has adversely impacted Wells Fargo’s

minority customers. During the class period, Wells Fargo’s minority borrowers, as a group, were

obligated to pay $560 million more than similarly credentialed white borrowers in just the first

five years of their loans. On average, each borrower in the proposed class is required to pay an

1 Plaintiffs are not seeking to certify any claims of discrimination based on allegations related to borrowers being steered into less favorable loan products. The relevant disparate impact claim is based on discretionary increases in interest rates and loan charges.

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extra $150 annually in finance charges as a result of Wells Fargo’s policy. Because objective

business-justified differences are controlled for in Plaintiffs’ statistical models, there is no

explanation for the price disparities other than the discriminatory impact of the discretionary

elements of Wells Fargo’s pricing system.

For the reasons discussed below, the proposed class of minority homeowners should be

certified under Federal Rules of Civil Procedure Rule 23.2

II. FACTS

A. Mortgage Lending in America: A History of Racial Discrimination

Wells Fargo’s discriminatory lending practices continue a problem that has long plagued

American society. In the post-war days after World War II, racial discrimination in housing was

the norm. By 1963, “the U.S. Commission of Civil Rights had determined that housing was

perhaps the most ubiquitous, deeply rooted civil rights problem in the nation.”3

The passage of civil rights legislation and fair lending laws in the 1960s and 1970s

brought an end to the most virulent forms of overt racial discrimination. But mortgage lenders

found other more subtle ways to discriminate. Through the 1980s and 1990s, lenders engaged in

practices such as redlining (refusing to lend on properties in predominantly minority

neighborhoods), or maintaining offices only in white neighborhoods. First Consolidated and

Amended Class Action Complaint (“FACC”) (Doc. 209) ¶¶ 21, 22.

When mortgage lenders’ redlining practices were discovered and challenged in the 1990s,

they changed their tactics again. Lenders began making mortgage loans to minorities, but

charged them higher interest rates and loan-related fees, on average, than they did to similarly-

situated whites. Id., ¶ 22. Wells Fargo’s technique for doing so is at issue here.

B. Wells Fargo Mandated A Subjective Discretionary Pricing Policy

Through the class period, Wells Fargo was one of the nation’s largest mortgage lenders.

Wells Fargo originated mortgage loans through two business channels – wholesale and retail.

2 Plaintiffs meet the requirements for certification, as discussed below, under Rule 23(a) and Rules 23(b)(2) or 23(b)(3) or both. 3 Thomas J. Sugrue, “The Origins of the Urban Crisis: Race and Inequality in Postwar Detroit 190-91 (1996).

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Deposition of James Wyble (“Wyble”) at 19:14-16.4 Wells Fargo’s wholesale loans were made

through a network of approved mortgage brokers, who obtained basic loan information from the

borrower and submitted it to Wells Fargo for underwriting and approval. Deposition of Kevin

Kelly (“Kelly”) at 39:2-13 (Harrison Decl. Ex. B); Wyble at 78:18-24. Retail loans were loans

made directly by Wells Fargo to borrowers and were originated by Wells Fargo employees called

“loan officers” or “mortgage consultants.” Deposition of Jill Ann Hunt (“Hunt”) at 33:7-34:13,

37:15-28 (Harrison Decl. Ex. C); Deposition of Brian S. Kroll (“Kroll”) at 26:7-27:1 (Harrison

Decl. Ex. D). Wells Fargo continues to originate loans through both its wholesale and retail

channels today.5 Wyble at 331:12-333:4.

The price of all Wells Fargo mortgage loans had two components – an objective risk-

based component based on Wells Fargo’s underwriting criteria, and a subjective discretionary

component that consisted of loan charges and rate markups subjectively determined by the broker

(in wholesale transactions) or by the mortgage consultant (in the retail context) who arranged the

loan. Deposition of Dominic Alfonso (“Alfonso”) at 228:23-229:12 (Harrison Decl. Ex. E);

Wyble at 235:5-11, 242:21-243:4, 250:2-7. Both the objective and subjective components of the

price reflected established company-wide pricing policies to which all borrowers were subjected.

Wyble at 107:20-108:6, 250:21-251:9; WFB 191747 (brokers must originate loans according to

Wells Fargo guidelines) (Harrison Decl. Ex. F); WFB 04195-04203 (Harrison Decl. Ex. G); Hunt

at 67:2-68:4, 78:19-80:6.

Wells Fargo determined the base price (also called the “rate sheet price”) for all loans it

made based on a number of objective risk factors associated with an individual’s loan, such as

FICO score, property value and loan-to-value ratio. Deposition of Mary Borchers (“Borchers”) at

66:15-69:6 (Harrison Decl. Ex. H); Wyble at 152:6-153:2, 170:5-172:1; Deposition of Katie

Peterson (“Peterson”) at 108:2-122:4 (Harrison Decl. Ex. I). The purpose of using objective

4 The Wyble Deposition is attached as Exhibit A to the Declaration of Wendy J. Harrison in Support of Plaintiffs’ Motion for Class Certification (“Harrison Decl.”). 5 Through most of the class period, Wells Fargo originated both prime and subprime loans in its wholesale and retail channels. Wells Fargo stopped making subprime wholesale and retail loans in late 2007 because it could not sell them in the secondary market. Wyble at 21:2-7, 24:21-25:4; Hunt at 53:6-15.

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criteria in loan underwriting was to avoid unbiased and unequal treatment of borrowers. Wyble at

225:4-23. Wells Fargo communicated the loan prices and parameters to brokers and retail

mortgage consultants through rate sheets, which were developed by central management and

distributed on a regular basis. Wyble at 170:5-19, 172:5-21, 173:23-175:6, 177:24-179:4. The

rate sheets showed Wells Fargo’s mortgage consultants and brokers how to calculate the par

interest rate based on the objective risk factors Wells Fargo used in underwriting the loan. Wyble

at 170:5-19, 176:1-18; Deposition of Tonya Wilson (“Wilson”) at 127:23-128:9 (Harrison Decl.

Ex. J). They, in turn, used the rate sheets to quote loan prices to prospective borrowers. Wyble at

134:24-135:17. Plaintiffs’ disparate impact claims do not challenge this objective component of

Wells Fargo’s loan pricing.

Rather, Plaintiffs challenge the discretionary component of Wells Fargo’s loan pricing,

which was carried out on all loans. Wells Fargo allowed and incentivized wholesale brokers and

retail loan officers to mark up the credit price subjectively and without consideration of the

borrowers’ credit characteristics. Wyble at 228:20-230:25, 232:6-15, 235:5-11, 235:20-236:6,

238:25-239:4, 241:5-9, 247:8-14. Once Wells Fargo’s brokers and mortgage consultants

calculated the par rate and other charges on a particular loan using the rate sheets, they could – at

their discretion – mark up that rate and otherwise add finance charges in amounts permissible

under the applicable rate sheet. Wyble at 248-250, 234-236, 240-41. The marked up rate and

other additional charges were not related in any way to the borrowers’ credit characteristics or the

risk of the loan. Wyble at 243:15-23. Ultimately, the higher the interest rate and other charges on

the loan, the higher the compensation to the broker or loan officer. Borchers at 72:20-77:10.

1. Wholesale Brokers and Retail Loan Officers Had Discretion to Increase the Interest Rate and Add Loan Charges

In the wholesale channel, brokers transmitted each customer’s loan application directly to

Wells Fargo.6 Wyble at 121:8-122:7, 131:1-19. Once Wells Fargo’s brokers calculated the par

rate and other charges on a particular loan using the rate sheets, they could – at their discretion –

mark up the price, including the interest rate, in amounts permissible under the applicable rate

6 The brokered loan origination process was essentially the same for prime and non-prime loans. Wyble at 117:3-17, 138:4-10.

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sheet. Wyble at 248-250, 234-236, 240-41. As noted above, these discretionary markups were

not related in any way to the borrowers’ credit characteristics or the risk of the loan. Wyble at

243:15-23. Wells Fargo did not require brokers to justify the amount of the charges and fees they

imposed. Wyble 244:23-245:3, 251:10-17.

Plaintiffs challenge Wells Fargo’s discretionary pricing policy, not the individual actions

of the brokers because Wells Fargo’s policies governed the entire transaction. By its own

admission, Wells Fargo – not the brokers – was the lender in each of its wholesale loan

transactions, making it the creditor on those loans. Kelly at 39:14-16, 40:5-8. All Wells Fargo

brokers were required to follow Wells Fargo’s uniform standards for originating, and processing

mortgage loans. Wyble at 96:19-97:10, 98:2-99:25, 351:6-353:23. In every case, Wells Fargo

required its brokers to submit loans that were consistent with its guidelines. Wyble at 98:2-99:25,

102:13-105:5, 164:19-165:21. Brokers had to comply with the pricing policy, as well as all

polices on broker compensation. Wyble at 227:7-16, 339:14-340:11. In fact, Wells Fargo

imposed and enforced uniform caps on the amount of broker compensation that applied to every

wholesale transaction. Wyble at 249:17-250:1, 266:7-267:3. Wells Fargo monitored its brokers’

activities to ensure compliance with company policies and procedures, and retained the right to

terminate its relation with brokers who failed to comply. Wyble at 277:15-279:25, 304:3-21,

359:10-19, 372:7-373:4.

Wells Fargo’s policy in the retail channel was to allow the same kind of pricing discretion

it afforded its wholesale brokers. Loan originations through Wells Fargo’s retail channel were

similar to wholesale originations, except that they were handled by employee loan officers called

mortgage consultants.7 Hunt at 31:22-32:4; Kroll at 26:7-27:1; Kelly at 40:9-16. Mortgage

consultants operated off of retail rate sheets, which outlined various loan products, rates and

charges. Hunt at 59:8-60:2, 71:16-72:12, 106:18-107:9, 124:23-125:9; Deposition of Greg

7 Wells Fargo originated retail mortgages through two retail channels. The Distributed Retail channel consisted of mortgage consultants who worked and originated loans primarily from Wells Fargo branch offices. Hunt at 32:18-33:1, 33:7-15. Centralized Retail employed Telesales Counselors who contacted potential borrowers by telephone. Hunt at 32:18-33:1, 37:15-23. Discretion was equally available in both channels. Id.

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Pearsall (“Pearsall”) at 74:13-24 (Harrison Decl. Ex. K). Wells Fargo originated both prime and

non-prime retail loans. Hunt at 41:12-20. Mortgage consultants in both the prime and non-prime

were also allowed to, at their discretion, increase the price of the loan by adding charges and fees.

Hunt at 55:15-23, 61:6-62:12, 112:15-25; WFB 04195-04203; Declaration of Elizabeth M.

Jacobson (“Jacobsen Decl.”) dated April 20, 2009, prepared in connection with Mayor and City

Council of Baltimore v. Wells Fargo Bank, N.A., No. 1:08-cv-00062-BEL ¶¶, 22, 24 (Harrison

Decl. Ex. L).

In the prime retail channel, mortgage consultants had discretion to add fees and charges to

create a retail loan with an “overage.” Hunt at 61:6-62:9, 73:19-80:6. Retail loans originated

with an “overage” enhanced the commissions of retail loan originators who made them. Hunt at

80:17-81:8, 83:4-85:5, 88:16-89:16. Through the class period, Wells Fargo followed a company-

wide policy that incentivized those who originated prime and non-prime retail loans to add

discretionary fees to create overages in retail loans. Hunt at 81:14-23; WFB 04195-04203.

It is undisputed that, throughout the class period Wells Fargo’s policy was to allow all

retail prime mortgage consultants discretion in setting the loan rate and in imposing loan charges.

The only area in which the existence of Wells Fargo’s discretionary pricing policy is disputed is

in the retail nonprime channel. Wells Fargo claims that, as of January 2004, it stopped allowing

retail nonprime home mortgage consultants discretion in setting loan rates and fees. Hunt at

225:9-23. However, there is direct evidence that, well after 2004, Wells Fargo’s retail mortgage

consultants did have discretion in setting both the interest rate for the loan and the amount of loan

fees and charges and/or that loan officers were well versed in procedures to override any limits on

discretion. See Jacobson Decl. ¶¶ 22, 24.

2. The Existence of Discretion Was Uniform Across Business Channels, Office Location and Product Types for the Entire Class Period. Wells Fargo was Aware Of Its Responsibility to Control the Adverse Impact of Discretion on its Minority Borrowers

Wells Fargo has maintained that its businesses were complex and that its pricing policies

differed between business channels, products or geographic locations. The evidence, however,

demonstrates that the unifying element of Wells Fargo’s pricing system was to allow discretion in

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the final pricing of the loan to be layered on top of the non-discretionary rate sheet price. See

Sections II.B.1 and II.B.2, supra. As described below, the non-discretionary elements of Wells

Fargo’s pricing system, the business-justified factors, can be controlled for by common statistical

methods based on the wealth of data Wells Fargo obtains to underwrite its loans. See Section

II.C, infra. What is left after statistical regressions is the heart of this case – the discriminatory

effect of the discretionary element of the price. Id.

The mortgage lending industry has long known that discretionary pricing systems can and

do adversely impact certain minorities.8 Indeed, Wells Fargo admits that giving brokers and retail

loan officers discretion in imposing fees and charges on loans creates a fair lending risk. WFB

04422-4429 at 04424(Harrison Decl. Ex. M). Through the class period, Wells Fargo performed

fair lending statistical analyses of both wholesale and retail mortgage originations. WFB 04061

(“The price monitoring program covers all prime and nonprime mortgage loans originated in

WFHM’s retail, wholesale (brokers), and correspondent channels.”) (Harrison Decl. Ex. N). The

testing was designed to identify disparities between the actual loan prices to minorities (as

measured by loan APR) and an acceptable loan price predicted by regression models. Harrison

Decl. Ex. M, at WFB 004426. Wells Fargo has refused to produce any of its fair lending testing

results, hiding them behind the attorney-client privilege.

Wells Fargo’s fair lending testing process validates the statistical analyses performed by

Plaintiffs’ expert in several ways. First, for testing purposes, Wells Fargo uses the loan APR as

the measure of the loan’s cost to the borrower. Harrison Decl. Ex. M, at WFB 004426. Second,

the regressions Wells Fargo conducts are, like those used by Professor Jackson, based on business

justified factors. Id. at WFB 04425 (“The variables included in these models are based on factors

that are consistent with business policy and practices and/or could be statistically significant in

contributing to the estimated APR for each loan”).

8 Alan M. White, Borrowing While Black: Applying Fair Lending Laws to Risk-Based Mortgage Pricing, 60 S. Carolina L. Rev. 677 (2009) (literature review); Marsha Courchane, The Pricing of Home Mortgage Loans to Minority Borrowers: How Much of the APR Differential Can We Explain? 29 J. Real Estate Res. 399 (2007).

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C. Expert Data Analysis Supports Certification

1. There are Statistically Significant Disparities in the Rates Paid by Wells Fargo’s Minority Borrowers Compared to Those of Similarly Situated Whites

Plaintiffs’ statistical analyses were performed by Professor Howell Jackson of Harvard

Law School. He is an eminent legal scholar, an expert in regulation of financial institutions and

an econometrician who has, in his writings, extensively applied statistical techniques to legal and

regulatory issues. See Class Certification Report of Howell E. Jackson (“Jackson Report”) at

Appendix 2.9

As explained in his report, Professor Jackson’ analysis revealed substantial disparities in

the annual percentage rates (“APR”) in loans by Wells Fargo to minority borrowers as compared

to whites.10 The comparison showed that African-Americans are obligated at APRs that were

.674 higher than the average rate of Wells Fargo’s White borrowers. Jackson Report at ¶ 47,

Table 3 “Mean APR by Race 2001-2007”. Hispanics were obligated at rates .245 higher. Id.

These differences persist even when comparing borrowers with comparable credit scores. Id. at ¶

48, Table 4.

Professor Jackson performed extensive regression analyses on Wells Fargo’s loan data to

evaluate and rule out possible causes of the loan price disparities that are grounded in objective

non-discretionary credit and loan characteristics.11 Regression analysis is a standard statistical

tool for determining the relationship between a variable to be studied – the “dependent variable”

and one or more potentially explanatory variables.12 Jackson Report at ¶¶ 31-36, 49. By using

9 The Expert Reports of Howell E. Jackson and Dr. Harold A. Black have previously been lodged with the Court in connection with the pending Motions to Seal. 10 The Annual Percentage Rate (“APR”), as defined by the Federal Reserve Board, is intended to be a measure of the total cost of credit to consumers expressed as a yearly rate. 12 C.F.R. § 226.22. Professor Jackson has concluded that use of the APR, which is maintained in Wells Fargo’s database for each borrower’s transaction, is the most appropriate measure of the overall cost of that borrower’s Wells Fargo loan. Jackson Report at ¶ 43. This is both because the APR accounts for anticipated rate changes associated with variable rate loans and because it includes the all of the up-front costs to the borrower of originating credit. Id. 11 Wells Fargo, like most lenders, maintained data on virtually every aspect of its borrower’s objective credit characteristics. Jackson Report at ¶¶ 34, 53-54, Appendix 4. 12 Regression analysis is often used to evaluate the impact of facially neutral policies. Jackson Report, ¶ 32. It has been used in Court proceedings in many other similar cases. Bazemore v. Friday, 478 U.S. 385, 400 (1986) (regression analysis admissible to show discrimination); Dukes

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regression analysis, one can determine whether minority borrowers paid a higher price for credit

after controlling for plausible non-race based legitimate business characteristics. Id. at ¶¶ 33, 36,

53. Factors for which Professor Jackson’ regressions control include, among many other factors,

loan-to-value ratios, credit scores, loan amounts, loan purposes, occupancy status, documentation

type, debt-to-income ratios and whether or not a prepayment penalty was charged.13 Id. at ¶ 54,

Appendix 4.

After controlling for objective business justified factors used by Wells Fargo in its pricing

process, Professor Jackson identifies statistically significant loan price disparities of 10.1 basis

points per loan for African-Americans and 6.4 basis points for Hispanics. Jackson Report at ¶¶ 7,

56, Table 6. Professor Jackson concludes, “the analysis of Defendant’s data using regression

analysis shows that Defendant’s policies had a disparate impact on the Class as alleged by

Plaintiffs. … This data analysis is common to all Class members, using data that is common to all

Class members, and shows disparate impact which is common to the Class.” Id. at at ¶ 58. The

results are consistent with other studies of discretionary pricing. Id. at ¶¶ 21-24.

The monetary impact of these disparities on the costs of loans is profound. Under

Professor Jackson’s analysis, African-American and Hispanic borrowers, in the aggregate, are

obligated to pay $560 million more for their Wells Fargo loans than similarly situated Whites

over just the first five years of their loans. Jackson Report at Tables 1, 10. If every loan were paid

to full term, minority borrowers would be obligated to pay nearly $2 billion more than White

borrowers. Id. at Table 10.14

v. Wal-Mart Stores, Inc., 603 F.3d 571, 582 (9th Cir. 2010) (en banc); Ramirez v. GreenPoint Mortgage Funding, Inc., 2010 WL 2867068 (N.D. Cal. July 10, 2010). See also McCleskey v. Kemp, 481 U.S. 279, 327-28 (1987) (Brennan, J. dissenting) (“[Petitioner]’s statistics have particular force because most of them are the product of sophisticated multiple-regression analysis. Such analysis is designed precisely to identify patterns in the aggregate, even though we may not be able to reconstitute with certainty any individual decision that goes to make up that pattern.”). 13 Professor Jackson performs dozens of other regressions identified in Appendices 4 and 5. 14 On an annual basis, minority borrowers pay $150 more on average than similarly situated whites. Jackson Report, ¶ 7.

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As discussed more fully below, to the extent there are methodological disagreements

between the experts, they present common questions that can be resolved on the merits. See

Defendants’ Rebuttal Report of Dr. Harold A. Black (“Black Report”). However, even when

properly controlling for the principal methodological differences identified in Dr. Black’s report,

there are statistically significant APR disparities that cannot be explained other than by race. See

Reply Class Certification Report of Howell E. Jackson (“Jackson Reply Report”) at ¶¶ 28-31, 36-

39, Tables 5 and 7.

D. Plaintiffs Were Affected In The Same Way By Wells Fargo’s Policy as Other Class Members

Professor Jackson also analyzed Plaintiffs’ loans. Plaintiffs are all minority borrowers

who obtained loans from Wells Fargo and were subjected to Wells Fargo’s discretionary pricing

policy and paid discretionary charges in connection with their loan. FACC at ¶¶ 106-153,

Exhibits 1-10; Jackson Report at ¶ 59. Each Plaintiff paid a higher rate then they would have but-

for the disparate impact of Wells Fargo’s policies. Jackson Report at ¶¶ 60-63, Table 8. Plaintiffs

were affected by the same types of disparities that affect every other member of the class. Id. at ¶

63. As Professor Jackson notes, the nature of disparate impact evaluation makes it inappropriate

to use Professor Black’s preferred approach to evaluate how any particular borrower’s loans fit

into the overall distribution of the statistical model. Jackson Reply Report at 44-46. Professor

Black’s preferred approach is more consistent with a case alleging disparate treatment. Id.

E. The Statistical Methods for Calculating Monetary Relief are Straightforward and Manageable

Plaintiffs will calculate the individual monetary relief due on a class-wide basis using

available, objective information from Wells Fargo’s loan databases. Jackson Report at ¶¶ 64-65.

Professor Jackson provides an example of how such calculations would be made at the merits

phase of the case. Id. at ¶¶ 70-77. Like the liability determination, the calculation of remedies

does not involve an examination of the individual circumstances of each loan transaction. Id. at ¶¶

66-67. Because Wells Fargo services the majority of loans it originates and therefore has data on

actual prepayment experience, Professor Jackson can use statistical analysis to reach valid

conclusions about actual damages that take account of prepayments. Jackson Reply Report at ¶

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47. Similarly, Professor Jackson can take account of payment history data that Wells Fargo

maintains in its loan servicing records. Id.

F. Wells Fargo’s Expert Analysis Does Not Undermine the Case for Class Certification

In his report for the Wells Fargo, Professor Harold A. Black speculates wildly about

alternative methodologies without demonstrating that they would lead to different results if

applied. Nor does he explain how some of the additional factors he proposes for additional

regression, such as “negotiation skills” and “financial sophistication” are business justified, when

they appear instead to be overt attempts to take advantage of vulnerable borrowers. Jackson

Reply Report at ¶ 24-25.

At bottom, Professor Black is simply out of touch. He stopped doing research of any kind

in 2005 for personal reasons just as revelations concerning the abuses of the modern mortgage

lending industry began to come to light. Deposition of Professor Harold A. Black (“Black”) at

43:12-18. Between 2004 and 2008, he served as a paid board member of New Century Financial

Corporation, one of the nation’s most notorious subprime lenders. Black at 45-46. Although a

New Century director to whom the compliance group reported, he was unaware of the many

claims of predatory lending brought before and after it filed bankruptcy.15 Black at 49-50.

Professor Black also believes that disparate impacts are caused by statistical “outliers” in

the data, each of which may be explained by disparate treatment. Black at 137-138. Not only is

such an analysis inconsistent with disparate impact law, it is incorrect as a matter of statistical

analysis. The results here are explained by the entire distribution rather than just a fraction of

data outliers. Jackson Reply Report at 44-46.16

15 E.g., http://www.consumeraffairs.com/news04/2007/03/oh_new_century.html (describing case filed by Ohio’s attorney general in 2007 seeking remedies for New Century’s predatory practices); In re New Century, Case No. CV 07-00931 DDP (JTLx)(Order Denying Defendants’ Motions To Dismiss And Denying Motion To Strike) (C.D. Cal. Dec. 3, 2008) (describing allegations of New Century’s predatory practices). Professor Black’s status as a defendant in a case brought against the directors of New Century, Black at 46-48, may explain in part his desire to serve as an apologist for mortgage lending industry practices. 16 Although this is not a redlining case, Dr. Black position on the fringe of statistical analysis of complex civil rights questions is exposed by his position that redlining was not a civil rights issue at all, calling it instead a form of discrimination aimed at “property.” Black at 82:3-14.

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Professor Black’s hiatus from relevant research apparently leads to, among other

problems, a lack of understanding of how modern mortgage lending works. He believes, contrary

to the evidence, that Wells Fargo “purchased” loans from brokers in the wholesale marketplace.

Black at 120-122. This misconception affects his entire analysis as it prevents him from

understanding that Wells Fargo’s loan policies governed the pricing process for every loan made

in the wholesale channel. See Section II, supra. Similarly, Professor Black disaggregates the data

by channel and purpose, Black Report at Table 1, but acknowledges that he had no basis to

conclude that any portion of Wells Fargo’s Discretionary Pricing Policy applied differently to his

disaggregated categories. Black at 166-167.17 He acknowledged that he had no basis in the record

to conclude that discretion was not available to pricing decision-makers across lending channels,

across loan types, and across loan purposes. Id. Moreover, Professor Black fails to acknowledge

that even when he controls for channel, loan type and loan purpose using regression, more than

97% of Wells Fargo’s loans still show statistically significant disparities for both African

Americans and Hispanics. Black Report, p. 38, Table 1.18 Finally, Professor Jackson explains that

Professor Black’s attempts to disaggregate are inappropriate because they mask the true effects of

the Wells Fargo’s discretionary pricing policy. Jackson Reply Report at ¶ 36-38. Even so, he

demonstrates, that if, in an excess of caution, one controls for channel, loan product and loan

type, statistically significant disparities persist. Jackson Report at ¶ 56, Table 6; Jackson Reply

Report at ¶¶ 40-41, Tables 7, 8.

III. OVERVIEW OF WELLS FARGO’S LEGAL RESPONSIBILITIES UNDER THE FAIR LENDING LAWS

Throughout this litigation, Wells Fargo has claimed that it cannot possibly be held

responsible for the acts of its pricing decision-makers, including wholesale brokers. The Fair

Housing Act and the Equal Credit Opportunity Act, however, prohibit Wells Fargo from shielding

17 The one exception is retail subprime after 2004, an issue on which the parties dispute the evidence. See Section II.B.1, supra. 18 Only some of the smaller pools of disaggregated data show otherwise – an effect that Professor Black acknowledges could be caused by the relative paucity of observations in those pools. Black at 164. All of Professor Black’s disaggregated pools that exceed 40,000 observations show statistically significant disparities for both African Americans and Hispanic homeowners. Black Report at Table 1.

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itself from liability by delegating decision-making to third-parties. See Phiffer v. Proud Parrot

Motor Hotel, Inc., 648 F.2d 548, 552 (9th Cir. 1980), quoting United States v. Youritan Constr.

Co., 370 F. Supp. 643, 649 (N.D. Cal. 1973) (“the duty to obey the law is non-delegable”); see

also Miller v. Countrywide Bank, FSB, 571 F. Supp. 2d 251, 260 (D. Mass. 2008) (“[Defendant]’s

liability, if any, flows directly from its own participation in the transactions as the ‘creditor’

which set the markup policy at issue.”)

IV. ARGUMENT

A. Rule 23’s Requirements

As discussed throughout the balance of this brief, the Ninth Circuit’s decision in Dukes

sheds significant light on the proper legal analysis to be applied here as it also involved claims of

discrimination through subjective decision-making. The Court explained that “subjective

decision making is a ready mechanism [] for discrimination’ and that courts should scrutinize it

carefully.” 603 F.3d at 612 (citing Sengupta v. Morrison-Knudsen Co., 804 F.2d 1072, 1075 (9th

Cir. 1986)). The Ninth Circuit also recognized that courts from around the country have found

that a consistent corporate policy involving the presence of excessive subjectivity can give rise to

an inference of discrimination and can satisfy the commonality and typicality requirements. Id.

The Ninth Circuit has stated that class certification may “require looking behind the

pleadings to issues overlapping with the merits of the underlying claims.” Id. at 594. The court,

however, may not consider whether the party seeking class certification is likely to prevail on the

merits. Id. at 582. Expert disagreements on the merits of whether disparate impact can be shown

is not a valid basis for denying class certification. Id. at 592 (citing In re Initial Public Offering

Sec. Litig., 471 F.3d 24 (2d Cir. 2006)).

For the reasons discussed below, this case meets all the requirements of Rule 23(a),

23(b)(2) and (b)(3).19 Certification is therefore appropriate.

19 Plaintiffs seek certification under Rule 23(b)(2) or 23(b)(3) or both. The court can simultaneously certify the injunctive and declaratory relief claims under Rule 23(b)(2) and the claim for monetary relief under Rule 23(b)(3). See del Campo v. Amer. Corrective Counseling Svcs., Inc., 254 F.R.D. 585, 596, 597 (N.D. Cal. 2008) (certifying claims for injunctive and declaratory relief, restitution and statutory damages under Rule 23(b)(2) and claims seeking actual damages under Rule 23(b)(3)).

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B. The Proposed Class

The proposed class is defined as: All African-American and Hispanic borrowers who at

any time since January 1, 2004 have been subjected to Wells Fargo’s subjective discretionary

pricing policies. This class definition is objective and presently ascertainable. International

Molders’ and Allied Workers’ Local Union No. 164, et al. v. Nelson, 102 F.R.D. 457, 461 (N.D.

Cal. 1983) (proposed class was ascertainable in that it included all persons of a particular

ethnicity who had been or would become affected by defendant’s practices). The race of a

borrower is ascertainable in Wells Fargo’s lending records as required by federal law. See 12

U.S.C. § 2803.

C. The Requirements Of Rule 23(a) Are Readily Met

1. Numerosity

Numerosity exists if “the class is so numerous that joinder of all members is

impracticable.” Fed. R. Civ. P. 23(a)(1). The proposed class is sufficiently numerous. From

2004 through 2007, Wells Fargo made more than 825,000 loans to African-American and

Hispanic borrowers located across the United States. Jackson Report at ¶ 42. With a national

class of this size, individual joinder is impracticable, if not logistically impossible.

2. Commonality

Commonality exists “if there are questions of law or fact common to the class.” Fed. R.

Civ. P. 23(a)(2); See also Dukes, 603 F.3d at 594. “Answering those questions, on the other

hand, is the purpose of merits inquiry, which can be addressed at trial and at summary judgment.”

GreenPoint, 2010 WL 2867068, at *4 (quoting Dukes, 603 F.3d at 594). Commonality is

satisfied “by showing a single issue common to all members of the class.” Wehner v. Syntex

Corp., 117 F.R.D. 641, 644 (N.D. Cal. 1987).

This case features numerous common questions of fact and law. Plaintiffs and the class

challenge a Wells Fargo policy that was centrally devised and implemented, and uniformly

carried out wherever Wells Fargo did business. Section II.B., supra. Wells Fargo’s policy of

allowing retail loan officers and brokers to charge subjective discretionary charges, fees and rate

markups adversely impacted all Plaintiffs and class members in the same way. Thus, Plaintiffs

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and class members share a common interest in establishing that Wells Fargo’s subjective

discretionary pricing policy violates the ECOA and FHA.

The following legal and factual issues are common to both Plaintiffs and class members:

1) whether Wells Fargo’s subjective discretionary pricing policy is a specific, facially neutral

practice that has effected racial discrimination; 2) whether the policy was centrally devised and

uniformly carried out for all Wells Fargo loans; 3) whether the challenged policy resulted in a

disparity between the subjective discretionary charges imposed on minorities and the subjective

discretionary charges imposed on similarly-situated whites; 4) whether the disparity is statistically

significant; 5) whether the disparity is due to legitimate creditworthiness differences that can be

legally justified under the business necessity doctrine; and 6) whether there are less

discriminatory alternatives.

Courts in the Ninth Circuit have found that an action challenging the legality of a

subjective discretionary business practice applied uniformly to an entire group of employees or

customers is well suited for class certification. See, e.g., Dukes, 603 F.3d at 612; GreenPoint,

2010 WL 2867068, at *6; Ellis v. Costco Wholesale Corp., 240 F.R.D. 627, 638-640 (N.D. Cal.

2007) (in certifying employee class asserting claims of gender-based discrimination in promotion

practices, court found evidence of subjectivity in company-wide policies was sufficient to satisfy

commonality); Adams v. Pinole Point Steel Co., No. C-92-1962 MHP, 1994 WL 515347, at *9

(N.D. Cal. May 18, 1994) (“[Plaintiffs] allege that [defendant’s discriminatory] practices stem

from a subjective hiring criteria and a high level of discretion afforded supervisory employees. A

general policy of discrimination that affects individual class members provides a ‘common

nucleus of operative fact,’ and thus sufficient commonality to support class certification.”);

Barefield v. Chevron U.S.A., Inc., No. C 86-2427 TEH, 1987 WL 65054, at *3 (N.D. Cal. Sept. 9,

1987) (noting that the defendant’s policy of allowing subjective promotion decisions constituted

an “unlawful employment practice that had a class-wide impact”).

In Dukes, the court recognized that “it is well established that plaintiffs may demonstrate

commonality by presenting statistical evidence, which survives a ‘rigourous analysis,’ sufficient

to fairly raise a common question concerning whether there is class wide discrimination.” 603

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F.3d at 603-04. See also GreenPoint, 2010 WL 2867068, at *6; Ellis, 240 F.R.D. at 638-39

(statistical evidence, including regression analysis, supported inference of gender-based

disparities in employment sufficient to satisfy commonality); Jones v. Ford Motor Credit, Co.,

No. 00Civ.8330RJHKNF, 2005 WL 743213, at *9 (S.D.N.Y. Mar. 31, 2005) (noting that

significant statistical disparities are sufficient to demonstrate a class-wide impact); Barefield,

1987 WL 65054, at *3 (plaintiffs used statistical analysis to show a disproportionately low

representation of African-Americans and Hispanics in upper-level jobs).

Dr. Jackson’s statistical analysis establishes commonality by demonstrating that: (1) Wells

Fargo’s subjective discretionary pricing policy resulted in statistically significant disparities in the

prices of loans to minorities as opposed to loans to whites; (2) the disparities exist across the

proposed class and throughout the class period; and (3) the disparities are the result of

discrimination rather than a race-neutral cause. Jackson Report at ¶¶ 52-58. The GreenPoint

court agreed that this statistical showing is sufficient to demonstrate commonality in this type of

case. 2010 WL 2867068, at *6.

3. Typicality

Rule 23(a)(3) requires that the claims of the representative party be typical of the claims

of the class. Typicality does not require that the named plaintiffs’ claims be identical to those of

the class. Representative claims are typical if they are reasonably co-extensive with those of

absent class members. Hanlon v. Chrysler Corp., 150 F.3d 1011, 1020 (9th Cir. 1998).20 Finally,

“a finding of commonality will ordinarily support a finding of typicality.” Barefield, 1987 WL

65054, at *5.

Plaintiffs’ claims are typical of the class. Wells Fargo made loans to the Named Plaintiffs

under the same challenged subjective discretionary pricing policy to which the class was

subjected. Dr. Jackson’s results establish that each Plaintiff paid a higher rate than he or she

20 “As long as the named representative’s claim arises from the same event, practice, or course of conduct that forms the basis of the class claims, and is based upon the same legal theory, varying factual differences between the claims or defenses of the class and the class representative will not render the named representative’s claims atypical.” Jordan v. County of Los Angeles, 669 F.2d 1311, 1321 (9th Cir. 1982), vacated on other grounds, County of Los Angeles v. Jordan, 459 U.S. 810 (1982).

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would have but-for the disparate impact of Wells Fargo’s policies. Jackson Report at ¶¶ 60-63,

Table 8; see also Jackson Reply Report at 44-46. Minor variations arising from the individual

details of each borrower’s loan are irrelevant since all proceed under the same legal theory: that

Wells Fargo’s subjective discretionary pricing policy has a discriminatory impact on minorities.

See Wofford v. Safeway Store, Inc., 78 F.R.D. 460, 488 (N.D. Cal. 1978) (“Factual variations are

not fatal to a proposed class when the claims arise out of the same remedial and legal theory.”).21

4. Adequacy

The Rule 23(a)(4) adequacy inquiry asks two questions: (1) whether the named plaintiffs

and their counsel have any conflicts of interest with other class members, and (2) whether the

named plaintiffs and their counsel will prosecute the action vigorously on behalf of the class.

Hanlon, 150 F.3d at 1020.

Plaintiffs’ counsel have extensive experience in the successful prosecution of this type of

class action, and are capable of vigorously prosecuting this action. See Rule 23(g); Harrison

Decl. Ex. O. They have already been appointed interim class counsel. See Pretrial Orders No.

1(Doc. No. 35 before Judge Martin J. Jenkins) and 2 (Doc. No. 18). There are no conflicts

between Plaintiffs and any members of the class. Plaintiffs and class members were subjected to

the same discriminatory policy and harmed in the same way. They share a common interest in

ending the practice and obtaining redress for their injury.

D. The Court Should Certify a Class Under Rule 23(b)(2)

1. Wells Fargo Has Acted On Grounds Generally Applicable To The Class

Certification under Rule 23(b)(2) is appropriate when the defendant “has acted or refused

to act on grounds generally applicable to the class,” thereby making appropriate final injunctive

relief or corresponding declaratory relief with respect to the class as a whole. Fed. R. Civ. P.

23(b)(2). “Civil rights cases against parties charged with unlawful, class-based discrimination are

21 Moreover, differences in the amount of damages are not appropriately considered at the class certification stage. See Yamner v. Boich, No. C-92-20597 RPA, 1994 WL 514035 at *5 (N.D. Cal. Sept. 15, 1994) (finding that a dispute about the amount of damages is not sufficient evidence to prove a class representative is atypical of a class.); In re Victor Tech. Sec. Litig., 102 F.R.D. 53, 56 (N.D. Cal. 1984).

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prime examples” of Rule 23(b)(2) classes. Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 614

(1997). As is “often acknowledged, (b)(2) was deliberately drafted to facilitate the vindication of

civil rights through the class action device.” Barefield, 1988 WL 188433, at *2; see In re

Monumental Life Ins. Co., 365 F.3d 408, 417 n.16 (5th Cir. 2004).

There is no question that Wells Fargo’s discriminatory actions are generally applicable to

the entire class. Wells Fargo representatives have acknowledged that the policy Plaintiffs

challenge was implemented by Wells Fargo’s central management and was uniformly carried out

wherever Wells Fargo made mortgage loans. See Section II.B., infra. Thus, all Plaintiffs and all

class members -- whose loans were all made under the challenged pricing policy -- were subject

to and affected by Wells Fargo’s uniform practice. Plaintiffs and the class were affected in the

same way. Professor Jackson’s expert report shows that African-Americans and Hispanics as a

group were charged more for their loans than white borrowers after controlling for credit

characteristics, property characteristics and other business justifiable factors used by Wells Fargo

in its price setting and/or underwriting processes. Jackson Report at ¶¶ 49-58.

Wells Fargo’s discriminatory practice continues to affect minorities. Wells Fargo

continues to utilize its discretionary pricing policy. Wyble at 331:12-333:4; Hunt at 136:9-13. In

addition, Wells Fargo is still collecting payments from a substantial portion of the class on loans

charging a discriminatory APR. Regardless of whether the injuries are on-going for all members

of the Class, the basis of the misconduct and the basis for the injunctive relief are the same –

Wells Fargo charged minorities more for their home loans than whites. See In re Monumental,

365 F.3d 408 (23(b)(2) class was cohesive even though only some members of the proposed class

would benefit from injunctive relief prohibiting the continuing collection of discriminatory

premiums).

2. Plaintiffs Seek Important Injunctive Relief

Most importantly, Plaintiffs seek a declaration that Wells Fargo’s ongoing subjective

discretionary pricing policy has a disparate impact on minorities and therefore violates class

members’ federal rights. Accordingly, Plaintiffs seek an order prohibiting Wells Fargo from

utilizing its subjective discretionary pricing policy in originating home mortgages to borrowers.

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Plaintiffs also seek an order prohibiting Wells Fargo from continuing to collect

discriminatory loan payments. A significant number of class members have their mortgages held

by and/or serviced by Wells Fargo and are seeking relief from the on-going collection of

discriminatory payments. See Wells Fargo’s 2009 Annual Report and Wells Fargo News Release

(Harrison Decl. Exs. P-Q). In a similar situation, the Fifth Circuit in In re Monumental explained

that even when only some of the class will benefit from the injunctive relief--such as the

discontinuation of the collection of discriminatory insurance premiums-- the class as a whole is

deemed to properly be seeking injunctive relief. 365 F.3d at 416.

To the extent the injunctive relief is not sufficient to provide complete relief for those

class members who no longer have their mortgages, Plaintiffs also seek other monetary relief– i.e.

a refund of overcharges. This type of relief, like back pay in employment discrimination cases,

falls within the ambit of Rule 23(b)(2).22

3. Injunctive Relief Predominates Over Monetary Relief

The Ninth Circuit in Dukes, recently outlined the standard for determining whether

monetary relief predominates over injunctive relief. The court explained that courts should

consider the “objective effect of the relief sought on the litigation.” 603 F.3d at 617. The

relevant factors will vary case by case but may include: whether the monetary relief sought determines the key procedures that will be used, whether it introduces new and significant legal and factual issues, whether it requires individualized hearings, and whether its size and nature-as-measured by recovery per class member-raise particular due process and manageability concerns…

Id.

In this type of disparate impact case, the Dukes standard is easily met. As the GreenPoint

court explained, “[p]roof of disparate impact is based not on an examination of individual claims,

22 Dukes, 603 F.3d at 618-20 (request for backpay is fully consistent with Rule 23(b)(2) certification); see also Gotthardt v. Nat’l R.R. Passenger Corp., 191 F.3d 1148, 1153 (9th Cir. 1999); Probe v. State Teachers’ Ret. Sys., 780 F.2d 776, 780 (9th Cir. 1986); Salinas v. Roadway Express, Inc., 735 F.2d 1574, 1576 (5th Cir. 1984); Allison v. Citgo Petroleum Corp., 151 F.3d 402, 415 (5th Cir. 1998) (noting that back pay could be sought in a (b)(2) class action “because, as an equitable remedy similar to other forms of affirmative injunctive relief permitted in (b)(2) class actions, it is an integral component of Title VII’s ‘make whole’ remedial scheme”).

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but on a statistical analysis of the class as whole.” 2010 WL 2867068, at *15. The calculations

for monetary relief are based on the same statistical regression analyses that support a finding of

liability. Jackson Report at ¶¶ 64, 77. As a result, monetary relief in no way alters the key

procedures or analyses which will be utilized in the case. And, calculation of monetary relief

certainly does not require individualized hearings. GreenPoint, 2010 WL 2867068, at *14-16

(rejecting the need for loan by loan analysis). Nor does the size of individual recovery threaten

due process or manageability. While economically significant, the recovery of amounts that are

likely to be less than $1,000 per class member is not so great as to warrant special legal concerns.

In comparison, the Dukes Court was concerned with damage awards of up to $300,000 per class

member. Dukes, 603 F.3d. at 622.

E. Certification Also Is Appropriate Pursuant To Rule 23(b)(3)

The court may certify the class under Rule 23(b)(3) if it finds that: 1) the questions of law

or fact common to the members of the class predominate over any questions affecting only

individual members, and 2) a class action is superior to other available methods for the fair and

efficient adjudication of the controversy. Fed. R. Civ. P. 23(b)(3). Plaintiffs satisfy both the

“predominance” and “superiority” requirements.

1. Common Questions of Law and Fact Predominate

The predominance requirement “tests whether proposed classes are sufficiently cohesive

to warrant adjudication by representation.” Amchem Prods. Inc., 521 U.S. at 623. “When

common questions present a significant aspect of the case and they can be resolved for all

members of the class in a single adjudication, there is clear justification for handling the dispute

on a representative rather than on an individual basis.” Hanlon, 150 F.3d at 1022. Predominance

does not require that plaintiffs’ claims be identical to those of the class; all that is required is that

they be reasonably coextensive. Lymburner v. U.S. Fin. Funds, Inc., No. C-08-00325 EDL, 2010

WL 335791, at *5 (N.D. Cal. Jan. 22, 2010). When the claim is that a defendant’s policy and

practices have violated the law, the key question for class certification is whether there is a

consistent defendant practice that could be a basis for consistent liability. Kamar v. Radio Shack

Corp., 254 F.R.D. 387, 399 (C.D. Cal. 2008).

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Certifying a Rule 23(b)(3) class, the GreenPoint Court recognized that common issues

predominate in this type of case. 2010 WL 2867068, at *14-15. With respect to liability, the

overriding common question is whether Wells Fargo’s subjective discretionary pricing policy – to

which Plaintiffs and all class members were subjected – adversely impacts minority borrowers.

Plaintiffs will prove disparate impact through statistical analysis that will establish Wells Fargo’s

liability as to all class members. Resolving this question – the dominant issue in the case – “will

focus on “statistical disparities, not specific incidents.” Id. at *14 (quoting Watson, 487 U.S. at

987).23

Likewise, Wells Fargo’s defenses relating to liability are common to the class. Whether

Wells Fargo disputes the meaning or results of the statistical analyses or has a legitimate

business justification for its subjective discretionary pricing policy, the issues are common to

each class member. Id. at *13. Whether an alternative less discriminatory alternative exists is

similarly common to the class. Id. See also Domingo v. New England Fish Co., 727 F.2d 1429,

1435 (9th Cir. 1984) (describing elements of disparate impact liability).

There are no individual liability issues that seriously challenge the predominance of the

common questions. GreenPoint, 2010 WL 2867068, at *13-16. Factual variations which may

arise from individual relationships between brokers and borrowers are irrelevant to this case,

because Wells Fargo’ pricing policy is at issue here rather than the conduct of individual brokers.

Id. at *14.24 An examination of the particularized actions of each individual broker is therefore

23 Cf. In re Citric Acid Antitrust Litig., No. 95-1092, C-95-2963 FMS, 1996 WL 655791 at *8 (N.D. Cal. Oct. 2, 1996) (ruling, in a price fixing conspiracy class action, that the “dominant issue” was whether the conspiracy existed and whether price-fixing occurred, and further, that “class certification does not require that the common questions be completely dispositive of the litigation.”). 24 The U.S. Supreme Court has squarely held that under the discrimination laws, subjective or discretionary practices akin to the Discretionary Pricing Policy are impermissible if they have disparate impact. Watson v. Fort Worth Bank and Trust, 487 U.S. 977, 990-91 (1988). This “non-delegable duty” has been enunciated by the Department of Justice. Brief of United States as Amicus Curiae, Cason v. Nissan Motor Acceptance Corp., No. 3-98-0223, Middle District of Tennessee (July 31, 2000) (“U.S. Brief”) at 3 (previously filed at docket no. 105.2). See also §III above.

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inappropriate.25 Id.

An understanding of how the Plaintiffs must prove their case also underscores the

incongruity of focusing on supposed differences in each loan transaction. Id. at *15. Where, as

here, statistical analysis demonstrates a consistent disparity in loan prices between minorities and

whites, idiosyncratic individual transactional differences -- such as borrower negotiation skill or

amount of broker time spent arranging the loan -- simply need not be considered. In Cornist v.

B.J.T. Auto Sales, Inc., 272 F. 3d 322, 327-28 (6th Cir. 2001), a loan pricing case that did not

involve allegations of race discrimination, the court thoughtfully evaluated the ways in which

statistics derived from loan data can wash out assertions of difference between similarly situated

individuals:

When the evidence demonstrates a consistent difference in the base price for cash and credit customers, legitimate reasons for the individual price differences approach the vanishing point. While any particular cash customer may be, for example, a better bargainer than a particular credit customer, we would be hard pressed to say that all or nearly all cash customers are better bargainers than credit customers. Similarly, while market conditions may idiosyncratically increase the price for any particular customer, we cannot think of any reason why this economic fact would disproportionately befall the credit customer. We avoid the logical fallacy of equating correlation with causation by making our statistical premise explicit. The evidentiary tool of seeking a systematic quality in the price disparity rests on the sensible premise that legitimate reasons for varying the base price do not consistently correlate with cash/credit status.

272 F.3d at 328 (emphasis added).

Notably, both the issue in Cornist and the issue here involve subjective discretionary

pricing policies. The Sixth Circuit’s evaluation of the importance of statistical evidence in price

disparity cases applies identically to minority/non-minority customers as it does to cash and credit

25 This issue has been briefed and the Court rejected Wells Fargo’s arguments in its Order Denying Defendant’s Motion to Join Brokers as Necessary Parties dated August 11, 2009 (Doc. No. 167) and Order Denying Defendant’s Motion For Leave To File Third Party Complaint Against Phoenix Home Loans and Schaefer Financial Services dated April 8, 2010 (Doc. No. 243).

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customers.26 Differences in individual borrower transactions with loan brokers are irrelevant

unless there is proof that they consistently correlate with race or ethnicity.

The common issues are not limited to liability. All of the remedies sought by Plaintiffs

can be calculated using available, objective information contained in Wells Fargo’s own

centralized databases. As Professor Jackson explains, the approach is straightforward. It

involves a calculation of the difference between what the Plaintiff or class member actually paid

(as measured by the loan’s APR) and the predicted APR the individual would have paid but for

the discriminatory impact of the challenged policy. Jackson Report at ¶ 64. This calculation can

be performed by computer, and can generate both an individualized as well as aggregated

monetary relief amount. Id. at ¶¶ 64, 71-77.

Nor is it a bar to class certification that class members fall along different parts of the

spectrum of impact of the challenged policy, as Professor Jackson has provided a meaningful way

to award damages on a classwide basis in light of the impact of the policy. Jackson Reply Report

¶ 44-46. In Domingo v. New England Fish Co., 727 F.2d 1429, 1444-45 (9th Cir. 1984), the Ninth

Circuit concluded likewise:

Determination of the award could proceed along any of several avenues, all of which are designed to estimate the difference between what non-whites actually earned and what they would have earned but for the discrimination. The court could determine a lump sum to be distributed among claimants in proportion to the number of seasons they worked or should have worked, or it could make individual awards based on the difference between what claimants actually earned and what they would have earned, on the average, had non-whites occupied their fair share of the better paying jobs.

See also McClain v. Lufkin Indus., Inc., 519 F.3d 264, 280-81 (5th Cir. 2008); In re Hawaii Beer

Antitrust Litig., File No. 77-0294A, 1978 WL 1388 at *4 (D. Hawaii 1978) (“the law on proof of

damages permits ascertaining the amount of damage through just and reasonable approximation,

and that application of this principle to class actions will allow computation and distribution of

damages through reliable, accepted statistical methods . . .”).

26 Where, as here, there is detailed data for more than 825,000 loans to class members and for more than six million loans overall, there is little chance that incidental correlations of characteristics to race or ethnicity affect the overall results. See Jackson Report ¶¶ 32-46.

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Courts have found predominance of common issues and certified 23(b)(3) classes when

regression analyses can be used to calculate individual remedies. See, e.g., GreenPoint, 2010 WL

2867068, at *13-16; In re Static Random Access Memory (SRAM) Antitrust Litig., No. C 07-

01819 CW, 2009 WL 4263524, at *11-12 (N.D. Cal. Nov. 25, 2009) (court found plaintiffs’

experts’ economic principles and regression analysis constituted plausible methodologies that

could be used to calculate damages).

2. Class Treatment Is Superior

Rule 23(b)(3) requires that a class action be superior to other available methods for the

fair and efficient adjudication of the controversy. Fed. R. Civ. P. 23(b)(3). “Consideration of

these factors requires the court to focus on the efficiency and economy elements of the class

action so that cases allowed under subdivision (b)(3) are those that can be adjudicated most

profitably on a representative basis.” Zinser v. Accufix Research Inst., Inc., 253 F.3d 1180, 1190

(9th Cir. 2001) (citation omitted).

The superiority considerations favor certification. GreenPoint, 2010 WL 2867068, at *16.

Class members would have little interest in pursuing individual actions. To Plaintiffs’

knowledge, there are no pending individual actions by class members against Wells Fargo.

Indeed, it would be neither economically feasible nor efficient for Class members to pursue their

claims against Wells Fargo on an individual basis. The monetary recovery for the majority of

class members is relatively small. This, coupled with the cost of statistical analysis proving

disparate impact against a corporate defendant, makes vindication of class members’ rights

extremely difficult, if not impossible. Thus, allowing minority borrowers to proceed as a class

affords them their only likely chance for recovery against Wells Fargo. The class action is not

only superior, but probably the only effective remedy available. Id. See also Haynes v. Logan

Furniture Mart Inc., 503 F.2d 1161, 1164 (7th Cir. 1974) (a court must consider the “inability of

the poor or uninformed to enforce their rights, and the improbability that large numbers of class

members would possess the initiative to litigate individually”).

Finally, this case is manageable as a class action. As explained above, liability will be

established through common statistical proof, and remedies can be calculated without the need for

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individualized inquiries to determine class members’ entitlement to relief or the amount of that

relief. Professor Jackson’s analysis amply demonstrates that significant disparities in loan prices

exist across the proposed class and through the class period, and that the disparities are caused by

discrimination rather than race-neutral factors such as creditworthiness. Jackson Report at ¶¶ 49-

58. Given the disparities shown in Professor Jackson’s report, a consideration of supposed

transactional differences is meaningless. See Cornist, 272 F.3d at 328 (“When the evidence

demonstrates a consistent difference in the base price for cash and credit customers, legitimate

reasons for the individual price differences approach the vanishing point.”). See Jackson Reply

Report at ¶¶ 24-29.

The remedies Plaintiffs seek do not raise any significant manageability concerns.

GreenPoint, 2010 WL 2867068, at *16 (“The class action is manageable because liability will be

determined based on common statistical proof, and remedies can be calculated on a class-wide

basis”). As Professor Jackson’s report explains, Plaintiffs will calculate the individual relief due

(whether injunctive or monetary relief) on a class-wide basis using available, objective

information from Wells Fargo’s centralized loan databases. Jackson Report at ¶¶ 64-77. The

excess amount that individual class members paid above what white Wells Fargo borrowers paid

in markups and charges is mechanically ascertainable from existing data sets. Like the liability

determination, the calculation of remedies does not involve an examination of the individual

circumstances of each loan transaction. Id. at ¶¶ 64, 77.

V. CONCLUSION

For the foregoing reasons, Plaintiffs’ Motion for Class Certification should be granted.

DATED: October 12, 2010.

BONNETT, FAIRBOURN, FRIEDMAN, & BALINT,

P.C. /s Wendy J. Harrison Andrew S. Friedman (admitted pro hac vice) Wendy J. Harrison (CA SBN 151090) 2901 North Central Avenue, Suite 1000 Phoenix, Arizona 85012

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RODDY KLEIN & RYAN Gary Klein (admitted pro hac vice) Shennan Kavanagh (admitted pro hac vice) 727 Atlantic Avenue Boston, MA 02111-02810 (617) 357-5500 ext. 15 Co-Lead Interim Class Counsel ROBBINS GELLER RUDMAN & DOWD LLP Shawn A. Williams 100 Pine Street, Suite 2600 San Francisco, CA 94111 ROBBINS GELLER RUDMAN & DOWD LLP Samuel H. Rudman Robert M. Rothman (admitted pro hac vice) 58 South Service Road, Suite 200 Melville, NY 11747 Liaison Interim Class Counsel CHAVEZ & GERTLER, L.L.P. Mark A. Chavez (CA SBN 90858) 42 Miller Avenue Mill Valley, California 94941 (415) 381-5599 ROBBINS GELLER RUDMAN & DOWD LLP John J. Stoia, Jr. (SBN 141757) Theodore J. Pintar (SBN 131372) 655 West Broadway, Suite 1900 San Diego, CA 92101 Telephone: (619) 231-1058 MILLER LAW LLC Marvin A. Miller Matthew E. Vantine Lori A. Fanning 115 South Lasalle Street, Suite 2910 Chicago, IL 60603 (312) 332-3400

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ANDRUS & ANDERSON LLP Lori E. Andrus (SBN 205816) Jennie Lee Anderson (SBN 203586) 155 Montgomery Street, Suite 900 San Francisco, CA 94104 (415) 986-1400 THE WALKER LAW FIRM Barry W. Walker Two 20th Street North, Suite 1320 Birmingham, Alabama 35203 (205) 252-2770 LAW OFFICES OF TIMOTHY DILLON Timothy P. Dillon 361 Forest Avenue, Suite 205 Laguna Beach, CA 92651 (949) 376-2800 BARROWAY TOPAZ KESSLER MELTZER & CHECK, LLP Joseph H. Meltzer Edward W. Ciolko Joseph A. Weeden Peter Muhic Donna Siegel Moffa 280 King of Prussia Road Radnor, PA 19087 (610) 667-7706 ROBERT D. ALLISON & ASSOCIATES Robert D. Allison Bruce C. Howard Steven P. Schneck 122 S. Michigan Ave., Suite 1850 Chicago, IL 60603 (312) 427-7600 Attorneys for Plaintiffs

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CERTIFICATE OF SERVICE I, Wendy J. Harrison, hereby certify that a true copy of the foregoing document was lodged with the Clerk of the Court to be filed under seal. A copy of the foregoing document was delivered via e-mail to the following on October 12th, 2010:

Robert D. Phillips, Jr. [email protected] Tyree P. Jones, Jr. [email protected] David S. Reidy [email protected] REED SMITH LLP 101 Second Street, Suite 1800 San Francisco, California 94105 Telephone: (415) 543-8700

/s Wendy J. Harrison Wendy J. Harrison

Case3:08-md-01930-MMC Document360 Filed10/12/10 Page35 of 35