Date: 11-14-2014

Case Style: Wing F. Chau v. Michael Lewis

Case Number: 13‐1217

Judge: Wesley

Court: United States Court of Appeals for the Second Circuit on appeal from the Southern District of New York (New York County)

Plaintiff's Attorney: STEVEN F. MOLO (Robert K. Kry, Andrew M. Bernie, MoloLamken
LLP, Washington, DC, on the brief), MoloLamken LLP, New
York, NY, for Plaintiffs‐Appellants.

Defendant's Attorney: CELIA GOLDWAG BARENHOLTZ (Gabriel Rauterberg, Annika
Goldman, on the brief), Cooley LLP, New York, NY, for
Defendants‐Appellees Michael Lewis and W.W. Norton & Co., Inc.

DAVID A. SCHULZ (Michael D. Sullivan, Celeste Phillips, Paul Safier,
on the brief), Levine Sullivan Koch & Schulz, LLP, New York,
NY, for Defendant‐Appellee Steven Eisman.

Description: Plaintiffs‐Appellants Wing F. Chau and Harding Advisory LLC appeal
from a March 29, 2013 judgment of the United States District Court for the
Southern District of New York (Daniels, J) dismissing their claims of libel against
Defendants‐Appellees author Michael Lewis, his source, Steven Eisman, and
Lewis’s publisher, W.W. Norton, for twenty‐six allegedly defamatory statements
in Lewis’s book The Big Short. The district court granted Defendants’ motion for
summary judgment and dismissed each of Plaintiffs’ claims. We AFFIRM the
district court’s grant of summary judgment.
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BACKGROUND1
The United States’ housing market collapse in 2008‐2009 and the ensuing
global financial crisis are widely considered the worst financial disasters since
the Great Depression; their causes have been hotly debated. One of the many
books that explore the genesis of the financial decline is The Big Short: Inside the
Doomsday Machine, written by Defendant Michael Lewis and published in 2010
by Defendant W. W. Norton. A work of non‐fiction, The Big Short looks at a
“small group of iconoclasts who ‘shorted,’ or bet against, the subprime mortgage
bond market at a time when most investors thought real estate prices would
continue to rise (i.e., were ‘long’).” One of the so‐called “iconoclasts” described
in The Big Short is Defendant Steve Eisman, who managed a hedge fund and
served as one of Lewis’s sources for the book. Like many of Lewis’s previous
books, a great number of which have dealt with business and financial topics,
The Big Short met with considerable success and spent 28 weeks on The New York
Times best‐seller list.
Thankfully, we do not have to weigh in on the root of America’s fiscal
crisis. The task before us is much more focused: to determine whether one
1 Unless otherwise noted, the following facts are largely taken from the parties’ Rule
56.1 statements and are undisputed.
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chapter of The Big Short—Chapter 6, titled Spider‐Man at the Venetian—contains
statements that are defamatory to Plaintiffs Wing Chau and his business Harding
Advisory.
Chapter 6 comprises twenty‐four pages of the 270‐page, ten‐chapter book,
and one‐third of that chapter focuses on a dinner conversation that took place in
January 2007 at the Wynn Las Vegas Hotel during the 2007 American
Securitization Forum. The dinner was notable in its design to introduce people
who shorted the market to the people who went long. Eisman was in attendance
and was seated next to Chau.
Chau, an “investment professional,” is the founder and owner of Harding
Advisory LLC. He received a BA in economics from the University of Rhode
Island and an MBA from Babson College. After graduating from Babson, he
spent the next twelve years of his career in structured finance. For five years, he
worked as an analyst specializing in asset‐backed securities at Salomon Smith
Barney and Prudential Securities, then spent two years as a portfolio manager at
New York Life Investment Management. With the experience he gained in assetbacked
securities through his work at those firms, Chau set off on his own in
2006 and founded Harding Advisory. At the time of the January 2007 dinner,
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Harding was a top‐ranked manager of Collateralized Debt Obligations2
(commonly known as “CDOs”) and was on its way to issuing more asset‐backed
CDOs by volume than any other CDO manager.
Spider‐Man at the Venetian recounts Eisman’s interaction and discussions
with Chau at that dinner and paints CDO managers in general, and Plaintiffs in
particular, in a negative light. In response to this chapter’s representations, Chau
sued Lewis for writing, Norton for publishing, and Eisman for communicating to
Lewis twenty‐six allegedly defamatory statements (reproduced below). The
district court granted summary judgment to Defendants, finding that none of the
statements were actionable defamation because they either were substantially
true, were not “of or concerning” Plaintiffs, were not reasonably susceptible to
any defamatory meaning, or were mere opinions rather than assertions of fact.
Plaintiffs now appeal, arguing that the court erred in most of its findings. For the
following reasons, we affirm.
2 Though largely irrelevant for purposes of this discussion, a CDO is a type of
structured asset‐backed security that evolved to encompass the mortgage and
mortgage‐backed securities market. Their ready availability and decline in quality is
largely credited with fueling the subprime mortgage crisis.
6
STATEMENTS AT ISSUE
These statements are as they appear in the book, except that the bolded
language in each Statement is the language that was bolded by the district court
in its decision.
1. When Eisman asked exactly what Harding Advisory
advised, Wing Chau explained that he was a CDO
manager. “I had no idea there was such a thing as a
CDO manager,” said Eisman. “I didn’t know there
was anything to manage.”
(“Statement 1”), The Big Short at 138.
2. He’d graduated from the University of Rhode Island,
earned a business degree at Babson College, and
spent most of his career working sleepy jobs at
sleepy life insurance companies—but all that was in
the past.
(“Statement 2”), Id. at 139.
3. Danny didn’t know Wing Chau, but when he heard
that he was the end buyer of subprime CDOs, he
knew exactly who he was: the sucker.
(“Statement 3”), Id. at 139.
4. When they saw that Lippman had seated Eisman
right next to the sucker, both Danny and Vinny had
the same thought: Oh no. This isn’t going to end well.
Eisman couldn’t contain himself. He’d figure out the
guy was a fool, and let him know it, and then where
would they be? They needed fools; only fools
would take the other side of their trades.
(“Statement 4”), Id. at 139.
5. Later, whenever Eisman set out to explain to others
the origins of the financial crisis, he’d start with his
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dinner with Wing Chau. Only now did he fully
appreciate the central importance of the so‐called
mezzanine CDO—the CDO composed mainly of
triple‐B‐rated subprime mortgage bonds—and its
synthetic counterpart: the CDO composed entirely of
credit default swaps on a triple‐B‐rated subprime
mortgage bonds. “You have to understand this,”
he’d say. “This was the engine of doom.” He’d
draw a picture of several towers of debt. The first
tower was the original subprime loans that had been
piled together. At the top of this tower was the
triple‐A tranche, just below it the double‐A tranche,
and so on down to the riskiest, triple‐B tranche—the
bonds Eisman had bet against. The Wall Street firms
had taken these triple‐B tranches—the worst of the
worst—to build yet another tower of bonds: a CDO.
A collateralized debt obligation. The reason they’d
done this is that the rating agencies, presented with
the pile of bonds backed by dubious loans, would
pronounce 80 percent of the bonds in it triple‐A.
These bonds could then be sold to investors—
pension funds, insurance companies—which were
allowed to invest only in highly rated securities. It
came as news to Eisman that this ship of doom was
piloted by Wing Chau and people like him.
(“Statement 5”), Id. at 140.
6. The guy controlled roughly $15 billion, invested in
nothing but CDOs backed by the triple‐B tranche of
a mortgage bond or, as Eisman put it, “the
equivalent of three levels of dog shit lower than
the original bonds.”
(“Statement 6”), Id. at 140.
7. All by himself, Chau generated vast demand for
the riskiest slices of subprime mortgage bonds, for
8
which there had previously been essentially no
demand. This demand led inexorably to the supply
of new home loans, as material for the bonds. The
soy sauce in which Eisman double‐dipped his
edamame was shared by a man who had made it
possible for tens of thousands of actual human
beings to be handed money they could never
afford to repay.
(“Statement 7”), Id. at 140–41.3
8. As it happened, FrontPoint Partners had spent a lot
of time digging around in those loans, and knew that
the default rates were already sufficient to wipe out
Wing Chau’s entire portfolio. “God,” Eisman said to
him. “You must be having a hard time.” “No,” Wing
Chau said. “I’ve sold everything out.”
(“Statement 8”), Id. at 141.
9. It made no sense. The CDO manager’s job was to
select the Wall Street firm to supply him with
subprime bonds that served as the collateral for
CDO investors, and then to vet the bonds
themselves. The CDO manager was further charged
with monitoring the hundred or so individual
subprime bonds inside each CDO, and replacing the
bad ones, before they went bad, with better ones.
That, however, was mere theory; in practice, the
sorts of investors who handed their money to Wing
Chau, and thus bought the triple‐A‐rated tranche of
CDOs—German banks, Taiwanese insurance
companies, Japanese farmers’ unions, European
pension funds, and, in general, entities more or less
required to invest in triple‐A‐rated bonds—did so
3 Plaintiffs quote Statement 7, but make no argument about it in their briefs, and fail to
rebut Lewis’s position that any claim vis‐à‐vis this statement has been abandoned.
Therefore, we consider any claim related to Statement 7 to be abandoned.
9
precisely because they were meant to be foolproof,
impervious to losses, and unnecessary to monitor or
even think about very much. The CDO manager, in
practice, didn’t do much of anything, which is why
all sorts of unlikely people suddenly hoped to
become one.
(“Statement 9”), Id. at 141.
10.“Two guys and a Bloomberg terminal in New
Jersey” was Wall Street shorthand for the typical
CDO manager.
(“Statement 10”), Id. at 141.
11.The less mentally alert the two guys, and the fewer
the questions they asked about the triple‐B‐rated
subprime bonds they were absorbing into their
CDOs, the more likely they were to be patronized
by the big Wall Street firms.
(“Statement 11”), Id. at 141.
12.The whole point of the CDO was to launder a lot of
subprime mortgage market risk that the firms had
been unable to place straightforwardly. The last
thing you wanted was a CDO manager who asked
lots of tough questions.
(“Statement 12”), Id. at 141.
13.The bond market had created what amounted to a
double agent—a character who seemed to represent
the interests of investors when he better
represented the interests of Wall Street bond
trading desks.
(“Statement 13”), Id. at 141–42.
14.To assure the big investors who had handed their
billions to him that he had their deep interests at
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heart, the CDO manager kept ownership of what
was called the “equity,” or “first loss” piece, of the
CDO—the piece that vanished first when the
subprime loans that ultimately supplied the CDO
with cash defaulted.... Now, almost giddily, Chau
explained to Eisman that he simply passed all the
risk that the underlying home loans would default
on to the big investors who had hired him to vet
the bonds.
(“Statement 14”), Id. at 142.
15.But the CDO manager was also paid a fee of 0.01
percent off the top, before any of his investors saw a
dime, and another, similar fee, off the bottom, as his
investor received their money back. That doesn’t
sound like much, but, when you’re running tens of
billions of dollars with little effort and no overhead,
it adds up. Just a few years earlier, Wing Chau was
making $140,000 a year managing a portfolio for the
New York Life Insurance Company. In one year as a
CDO manager, he’d taken home $26 million, the
haul from half a dozen lifetimes of working at New
York Life.... His job was to be the CDO “expert,”
but he actually didn’t spend a lot of time worrying
about what was in CDOs.
(“Statement 15”), Id. at 142.
16.His goal, he explained, was to maximize the dollars
in his care. He was now doing this so well that,
from January 2007 until the market crashed in
September, Harding Advisory would be the
world’s biggest subprime CDO manager.
(“Statement 16”), Id. at 142.
17.Among its other achievements, Harding had
established itself as the go‐to buyer for Merrill
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Lynch’s awesome CDO machine, notorious not
only for its rate of production (Merrill created twice
as many of the things as the next biggest Wall Street
firm) but also for its industrial waste (its CDOs
were later proven to be easily the worst).
(“Statement 17”), Id. at 142.
18.“He ‘managed’ the CDOs,” said Eisman, “but
managed what? I was just appalled that the
structured finance market could be so insane as to
allow someone to manage a CDO portfolio without
having any exposure to the CDOs. People would pay
up to have someone ‘manage’ their CDOs—as if this
moron was helping you. I thought, You prick, you
don’t give a fuck about the investors in this thing.”
(“Statement 18”), Id. at 142‐43.
19.Chau’s real job was to serve as a new kind of front
man for the Wall Street firms he “hired”; investors
felt better buying a Merrill Lynch CDO if it didn’t
appear to be run by Merrill Lynch.
(“Statement 19”), Id. at 143.
20.“Then he says something that blew my mind,” said
Eisman. “He says, ‘I love guys like you who short
my market. Without you I don’t have anything to
buy.’”
(“Statement 20”), Id. at 143.
21. That’s when Steve Eisman finally understood the
madness of the machine. He and Vinny and Danny
had been making these side bets with Goldman
Sachs and Deutsche Bank on the fate of the triple‐B
tranche of subprime mortgage‐backed bonds
without fully understanding why those firms were
so eager to accept them. Now he was face‐to‐face
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with the actual human being on the other side of
his credit default swaps. Now he got it: The credit
default swaps, filtered through the CDOs, were
being used to replicate bonds backed by actual home
loans. There weren’t enough Americans with shitty credit
taking out loans to satisfy investors’ appetite for the end
product. Wall Street needed his bets in order to
synthesize more of them. “They weren’t satisfied
getting lots of unqualified borrowers to borrow
money to buy a house they couldn’t afford,” said
Eisman. “They were creating them out of whole
cloth. One hundred times over! That’s why the
losses in the financial system are so much greater
than just the subprime loans. That’s when I realized
they needed us to keep the machine running. I was
like, This is allowed?”
(“Statement 21”), Id. at 143.
22.Wing Chau didn’t know he’d been handpicked by
Greg Lippmann to persuade Steve Eisman that the
people on the other end of his credit default swaps
were either crooks or morons, but he played the role
anyway.
(“Statement 22”), Id. at 144.
23.Between shots of sake he told Eisman that he would
rather have $50 billion in crappy CDOs than none
at all, as he was paid mainly on volume.
(“Statement 23”), Id. at 144.
24.He told Eisman that his main fear was that the U.S.
economy would strengthen, and dissuade hedge
funds from placing bigger bets against the
subprime mortgage market.
(“Statement 24”), Id. at 144.
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25.But when the meal was over, they watched Eisman
grab Greg Lippmann, point to Wing Chau, and say,
“Whatever that guy is buying, I want to short it.”
Lippmann took it as a joke, but Eisman was
completely serious: He wanted to place a bet
specifically against Wing Chau. “Greg,” Eisman
said, “I want to short his paper. Sight unseen.” Thus
far Eisman had bought only credit default swaps on
subprime mortgage bonds; from now on he’d buy
specifically credit default swaps on Wing Chau’s
CDOs.
(“Statement 25”), Id. at 144.
26.Upon their return they raised it to $550 million,
with new bets against the CDOs created by Wing
Chau. With only $500 million under management,
the position now overwhelmed their portfolio.
(“Statement 26”), Id. at 159.
DISCUSSION4
The parties and district court assume without discussion that New York
substantive law applies to this defamation action. When a federal court sits in
diversity, it applies the choice of law rules of the forum state, here New York.
See Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941). “The parties’
briefs assume that New York law controls, and such implied consent . . . is
4 We review a district court’s grant of summary judgment de novo, drawing all
reasonable inferences and resolving all ambiguities in favor of the non‐movant. Singer
v. Ferro, 711 F.3d 334, 339 (2d Cir. 2013).
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sufficient to establish choice of law.” Krumme v. WestPoint Stevens Inc., 238 F.3d
133, 138 (2d Cir. 2000) (internal quotation marks omitted).
When deciding how to construe allegedly defamatory words—which
when written or in print constitute libel—courts must do so in the context of the
publication as a whole, not just the paragraph or chapter containing them, and
do so “in the same way that the reading public, acquainted with the parties and
the subject would take [them].” Sydney v. Macfadden Newspaper Publ’g Corp., 242
N.Y. 208, 214 (1926). In New York, a plaintiff must establish five elements to
recover in libel: (1) a written defamatory factual statement concerning the
plaintiff; (2) publication to a third party; (3) fault ; (4) falsity of the defamatory
statement; and (5) special damages or per se actionability. Celle v. Filipino Reporter
Enters., 209 F.3d 163, 176 (2d Cir. 2000). On closer inspection, the first element of
these five is actually composed of multiple parts: there must be (A) a writing, it
must be (B) defamatory, it must be (C) factual—that is, not opinion— and it must
be (D) about the plaintiff, not just a general statement. Issues B, C, and D take up
the bulk of our analysis in the present case, with the remainder dealing with the
falsity of the defamatory statement. We find, for the reasons below, the twentysix
statements at issue all fail to fulfill one or more of these elements, making
15
them unable to serve as the basis for a cause of action. Accordingly, the district
court’s grant of summary judgment to Defendants is affirmed.
A. Statements that Simply Are Not Defamatory in Meaning
Not all (or even most) maligning remarks can be considered defamatory. A
statement is defamatory if it exposes an individual “to public hatred, shame,
obloquy, contumely, odium, contempt, ridicule, aversion, ostracism, degradation
or disgrace, or . . . induce[s] an evil opinion of one in the minds of right‐thinking
persons, and . . . deprive[s] one of their confidence and friendly intercourse in
society.” Kimmerle v. N.Y. Evening Journal, Inc., 262 N.Y. 99, 102 (1933). A
statement, therefore, can meet all of the other elements of defamation—be
factual, published, false, and about the plaintiff—but still not be actionable if it
fails to rise to the necessary level of derogation. To be actionable, therefore, the
statement must do more than cause discomfort or affront; the statement is
measured not by the sensitivities of the maligned, but the critique of reasonable
minds that would think the speech attributes odious or despicable
characterizations to its subject.
If a statement is susceptible to only a single meaning, the court must
determine, as a matter of law, whether that one meaning is defamatory. See
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Aronson v. Wiersma, 65 N.Y.2d 592, 593 (1985). Of course, a statement or word is
often capable of more than one definition, and in that case, in New York, courts
employ an ordinary person standard to determine if that statement is
“reasonably susceptible [to] a defamatory connotation.” James v. Gannett Co., 40
N.Y.2d 415, 419 (1976).
Statements 2, 8, 14, 23, 25, and 26 are not reasonably susceptible to a
defamatory connotation and are therefore non‐actionable. Statement 8, for
example, purports to quote Chau stating “I’ve sold everything out.” It is unclear
how such a quote, true or not, could produce hatred, shame, or contempt of
Chau or his business. Perhaps it would give Harding’s investors more
confidence if their money managers also had an equity stake in the investments,
but that they did not does not make the statement defamatory. Statement 14,
which describes Chau as “almost giddily” telling Eisman that he had “passed all
the risk,” is also non‐defamatory: passing risk is the business of a money
manager, and we cannot characterize this as defamatory. Moreover, Lewis’s (or
Eisman’s) characterization of Chau as “almost gidd[]y” is a subjective assessment
and an opinion. This same logic applies to Statement 23. Chau’s statement that
he would “rather have $50 billion in crappy CDOs than none at all, as he was
17
paid mainly on volume” merely conveys a fundamental truth: $10 worth of a
lousy security is worth more than none at all. Similarly, being paid on volume is
a statement that is generally applicable to brokers, dealers, and firms. It is
unclear how an ordinary reader would interpret this, in context, as defamatory.
Statements 25 and 26 are also not defamatory. Statement 25—which
quotes Eisman, referring to Chau in saying, “[w]hatever that guy is buying, I
want to short it” and seeking to place a bet specifically against Chau would not
be interpreted by an average reader as defamatory. James, 40 N.Y.2d at 419.
Chau’s business—by its very nature—operated by having people to bet against.
In this statement, Eisman is merely expressing his intention to bet against
Chau—to short Chau’s long. The same reasoning applies to Statement 26, which
states that Eisman did in fact make new bets against the CDOs created by Chau.
Chau correctly points out that Eisman never actually bet against Harding CDOs
and that this sentence was removed from the tenth and subsequent printings of
the book But even though this statement is conceded to be false, it cannot be
considered defamatory for the same reasons as Statement 25: it would not be
interpreted by an average reader as defamatory.
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Statement 2—that Chau “spent most of his career working sleepy jobs at
sleepy life insurance companies—but that was all in the past,” followed by “He
was newly, obviously rich”—was dismissed as non‐actionable by the district
court on the basis that it was non‐factual and merely Lewis’s opinion of Chau’s
career. We disagree in part with this reasoning, but not with the result. Chau
spent only two years out of twelve prior to starting Harding, working at a life
insurance company—certainly not “most” of his career, and Lewis himself
conceded that this description of Chau’s career was “incomplete.” Because the
“most of his career” part of the statement is concededly false, that part was
improperly characterized by the district court as opinion. It is properly
dismissed, however, because an ordinary person would not take the statement
(albeit incorrect) in context to be sufficiently derogatory to make an actionable
claim for defamation. The parry at the end of the statement in question—“but
that was all in the past,” along with the following assertion that “[Chau] was
newly, obviously rich”—makes clear that “sleepy jobs at sleepy life insurance
companies” is being contrasted with Chau’s “new[]” and “obvious[]” wealth.
Further, in this context, sleepy means a steady, typical job, or even at its most
negative dictionary definition, a job having “little activity, quietly slowly
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moving.” Webster’s Third New International Dictionary 2140 (2002). Such a
characterization is a statement of opinion, and it also does not rise to the odium
necessary to constitute defamatory meaning.
B. Opinion
As mentioned above, only factual statements are actionable as defamation
or libel. This is because, in part, New York law protects derogatory statements
which may be categorized as “opinion” as opposed to “fact.” See Immuno AG. v.
Moor‐Jankowski, 77 N.Y.2d 235, 252 (1991); Steinhilber v. Alphonse, 68 N.Y.2d 283,
289 (1986). Determining whether a statement is an allegation of fact or mere
opinion is a legal question for the court. Brian v. Richardson, 87 N.Y.2d 46, 51
(1995). This is no easy task. Over time, New York courts have identified factors
to be considered in determining whether something is an expression of fact
rather than opinion; statements more likely to be characterized as fact are readily
understood by the reader to have a precise, unambiguous and definite meaning
and can be objectively characterized as true or false. Steinhilber, 68 N.Y.2d at 292.
As with defamation in general, courts make these assessments by looking at the
full context of the communication in which the statement appears, while also
considering the broader social context or setting surrounding the
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communication. Id. Broader social context can include any particular customs or
conventions that could “signal to readers or listeners that what is being read or
heard is likely to be opinion, not fact.” Id. (internal quotation marks omitted).
But this is not necessarily the end of the analysis: if a statement is found to
contain opinion, the court must next determine whether the statement is “pure
opinion” (and thus non‐actionable) or “mixed opinion” (and therefore
actionable). Pure opinion is a “statement of opinion which is accompanied by a
recitation of the facts upon which it is based” or does not imply that it is based
on undisclosed facts. Id. at 289‐90. Mixed opinion, on the other hand, is an
opinion that does imply a basis in undisclosed facts, or facts known only to the
author, and is actionable. Id.
In the instant case, the district court correctly held that Statements 1, 3, 4, 5,
17, 18, 19, 21, and 22 are non‐actionable opinions. In the case of Statements 1, 18,
19 and 21, the use of phrasing such as, “I had no idea . . .” and “I didn’t
know . . .” are particular customs or signals to readers that something is opinion,
not fact. Steinhilber, 69 N.Y.2d. at 292. Likewise, the epithets in Statements 3, 4, 5,
17, 19, 22—“sucker,” “fool,” “frontman,” “industrial waste,” “pilot[]” of the
“ship of doom,” and “crooks or morons”—are hyperbole and therefore not
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actionable opinion. Id. at 294; see also Weiner v. Doubleday & Co., Inc., 535 N.Y.S.2d
597, 600 (1st Dep’t 1988), aff’d, 74 N.Y.2d 586 (1989). While someone may not
appreciate being called a fool, it is an expression of one’s view of another, and
moreover might not reflect reality: history has shown many “fools” to have
indeed been visionaries. Time may prove the insult misguided, but the insult is
not itself a fact—but rather, is one’s perception of facts—at the time it is uttered.
C. Not of and Concerning Plaintiff
In New York, a plaintiff cannot sustain a libel claim if the allegedly
defamatory statement is not “of and concerning plaintiff” but rather only speaks
about a group of which the plaintiff is a member. Kirch v. Liberty Media Corp., 449
F.3d 388, 398 (2d Cir. 2006). As many of the statements concern “CDO
managers” generally, the district court correctly held that they are not “of and
concerning” Chau. This includes Statements 9, 10, 11, 12, and 13, which
respectively describe the “CDO manager’s job;” the “typical CDO manager;”
“[t]he last thing you wanted [from] a CDO manager;” and the “double agent”
created by the bond market. Though Chau is described in the book as a CDO
manager, these statements are solely about the group.
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D. Substantial Truth
Falsity of a statement is needed to make out a claim of libel. But in
defamation law, as in life, determinations of fact and fiction are not zero‐sum. In
New York, a statement need not be completely true, but can be substantially true,
as when the overall “gist or substance of the challenged statement” is true.
Printers II, Inc. v. Prof’ls Publ’g, Inc., 784 F.2d 141, 146‐47 (2d Cir. 1986) (citing
Rinaldi v. Holt, Rinehart & Winston, Inc., 42 N.Y.2d 369 (1977); Fairley v. Peekskill
Star Corp., 83 A.D.2d 294 (2d Dep’t 1981)).
Statements 16, 20, and 24—which describe Plaintiffs’ goal to “maximize
dollars in [their] care;” their “love [of] guys who short [their] market” and
Chau’s “main fear . . . that the U.S. economy would strengthen” thus minimizing
the number of people betting against the subprime mortgage market—are all
completely or substantially true. Plaintiffs’ sole dispute with Statement 16, for
example, is that the first part suggests that “maximiz[ing] the dollars in [Chau’s]
care” was Chau’s only goal, which they state is false and defamatory. But as the
district court pointed out, this sentence does not imply that Chau was indifferent
to his clients’ interests. This statement also lacks a defamatory meaning, as it
merely alleges that Chau intended to expand his business. Likewise, Statement
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20, which includes Chau’s supposed statement that he “love[s] guys like you
who short my market. Without you I don’t have anything to buy” is
substantially true in content: one literally cannot take a long position without
someone taking a corresponding short position. As with Statement 16, Statement
20 is also not defamatory, but rather reflects a reality of the market.
Parallel logic applies to Statement 24; Chau’s entire business operated by
having people to bet against. Bets are simply gambles that the result of an
event—here, mortgage defaults that would devalue CDOs—will favor their side
of the wager. While some may cringe at the thought of investing money as a
gamble, such bets are the nature of much of the financial market and are
especially the case with CDOs. Reducing risk by limiting a CDO to triple‐A
rated mortgage loans is merely placing the odds in favor of those who were long
in the market. Thus, the statement is both substantially true and not reasonably
susceptible to defamatory connotation.
E. Combined Issues of Statements 6 and 15
Statement 6 discusses Plaintiffs’ investment “in nothing but CDOs backed
by the triple‐B tranche of a mortgage bond,” which Eisman characterizes as “the
equivalent of three levels of dog shit lower than the original bonds.” While the
24
“dog shit” comparison is a non‐actionable epithetic opinion, Plaintiffs argue that
the characterization of Harding’s CDOs as backed by nothing but triple‐B
mortgage bonds is false. They contend that of Harding’s “21 CDOs, eight were
high‐grade, backed almost entirely by securities rated A‐/A3 or better.”
(Plaintiffs’ Br. 43). The district court found the statement to be substantially true
and non‐actionable, as all parties conceded that a significant portion of Plaintiffs’
collateral in CDOs was rated triple‐B, and a majority was “non‐prime.” We find
it unnecessary to sort out the “fine and shaded distinctions” of Statement 6
because even if Chapter 6 had published the “truth” (according to Chau) that
38% of Harding’s CDOs were backed by A‐/A3 securities or better, the effect on
the reader would have been appreciably the same. Fleckenstein v. Friedman, 266
N.Y. 19, 23 (1934) (holding that false statements are not actionable if the
statement could have produced no worse an effect on the mind of the reader
than the publication of the truth pertinent to the allegation). Plaintiffs offered
nothing in their submissions to the district court (as reflected in the record) or in
their briefs before us that demonstrates to us the significant superiority of A‐/A3
rated securities over triple‐B rated securities such that the average reader would
come away with a different impression of Chau’s business had Lewis published
25
the former and not the latter. This lack of proof is all the more telling
considering this statement in the broad social context of the financial world at the
time The Big Short was written. We are reminded that the various ratings
assigned to bonds were ever changing and that market participants were
continually coming up with new packages and terminologies to make their
backings appear more attractive. Indeed, this is a major theme of The Big Short.
Accordingly, Statement 6 is non‐actionable.
We affirm the district court’s assessment of Statement 15 as non‐actionable
for similar reasons. Plaintiffs rightly contend that the statement that Chau “took
home $26 million a year” was false: Harding made $25 million in fees in 2007 and
Chau personally received only a portion of that amount. But false statements as
to Chau’s income could have produced no worse an effect on the mind of the
reader than the truth. See Fleckenstein, 266 N.Y. at 23. If indeed Chau spent only
a negligible amount of time considering the quality of his CDOs, we doubt it
matters whether he took home $26 million or a fraction of that amount, as
conceded by Plaintiffs. Accordingly, Statement 15 is non‐actionable.
26
F. Chau’s Argument of Fabricated Quotes as Defamatory
The “false attribution” of a quotation to a speaker may be defamatory if
putting the words in the plaintiff’s mouth “cast[s] doubt on the plaintiff’s fitness
for his profession.” Mahoney v. Adirondack Publ’g Co., 71 N.Y.2d 31, 38 (1987).
Such a “fabricated quotation may injure reputation” if “it attributes an untrue
factual assertion to the speaker” or if “the manner of expression or even the fact
that the statement was made indicates a negative personal trait or an attitude the
speaker does not hold.” Masson v. New Yorker Magazine, Inc., 501 U.S. 496, 511
(1991). To survive a motion for summary judgment, a plaintiff who denies
making a statement that has been attributed to him must also demonstrate that
the statement, “when read in context, was . . . defamatory.” James, 40 N.Y.2d at
419.
Chau denies having said portions of Statements 8, 14, 16, 20, 23, and 24 that
are attributed to him, either as direct quotes or in the form of a paraphrase. This
claim fails, because, as discussed above, Chau did not show that the Statements
were defamatory, or were not substantially true.
27
CONCLUSION
Chapter 6 of The Big Short portrays Chau as starting out from a series of
simple finance‐related jobs to becoming the founder and principal of a financial
firm managing CDOs, which provided him with what many Americans hope
for—great wealth. The market events of 2008 and 2009 may undoubtedly
influence one’s perception as to whether going long on CDOs meant Chau was a
fool, or Chau was a rube, or his motivations were avarice; but hindsight cannot
give such opinions a defamatory meaning. Lewis’s various implications that
Chau was wrong about the mortgage market are not actionable.
The law of defamation in New York is predicated on the free exchange of
ideas and viewpoints. That marketplace can wound one’s pride—for words can
offend or insult—but simple slights are not the stuff of defamation. The tort
requires conduct that vilifies or exposes one to shame “in the minds of rightthinking
persons.” Kimmerle, 262 N.Y. at 102. Chau’s feelings may be hurt but his
claims were rightly dismissed by the district court.
The dissent presses for reversal because, it asserts, the majority opinion
evaluates statements from The Big Short without regard for the context in which
they were made. The dissent examines a “portrait [of] the context [of] the book’s
28
portrayal of appellant” to conclude that the majority’s view of The Big Short is not
“the sole meaning intended by the author or understood by the book’s
readership.” As the dissent recognizes, whether a statement is defamatory is a
fact issue for a jury only if the statement is “reasonably susceptible of a
defamatory connotation.” Davis v. Ross, 754 F.2d 80, 82 (2d Cir. 1985) (internal
quotation marks omitted). However, if a writing “is not susceptible of a libelous
meaning, then innuendo cannot make it libelous.” Tracy v. Newsday, Inc., 5
N.Y.2d 134, 136 (1959). The dissent’s error is that it emphasizes the implication,
perceived tone, and innuendo of Defendants’ writing, even though the
statements in question are either non‐defamatory, privileged opinion, not of or
concerning Plaintiffs, or substantially true. We conclude that the statements are
not libel as a matter of law.
“Consideration of the circumstances and of the broader social context”
confirms our conclusion that The Big Short does not contain actionable
defamation. Steinhilber, 68 N.Y.2d at 294. The dissent highlights the fact that the
individual plaintiff has been “professionally shunned” since The Big Short was
published in 2010. It is understandable that Chau was displeased by a book that
laid a good share of the blame for the financial crisis at the feet of Wall Street
29
banks—and the advisors they chose to manage the CDOs—that collapsed so
spectacularly. Before the crash, Chau was a top manager of asset‐backed CDOs.
By the time the book was published, every CDO managed by Chau was either in
default, liquidated, or downgraded to junk status, and his investors incurred
substantial losses that would damage any money manager’s reputation. Our
dissenting brother exploits Chau’s fate as context for his view that the
Defendants’ writing did not have an “innocent meaning[]”; our view is that a
non‐defamatory reflection on this disastrous chapter of our nation’s financial
history would not necessarily have an “innocent meaning” for those depicted.
We have considered all of Plaintiffs’ contentions on this appeal and have
found them to be without merit. For the reasons above, the judgment of the
district court is AFFIRMED as to all statements.
1
Chau v. Lewis, et al, 13-1217-cv
WINTER, Circuit Judge, dissenting:
I respectfully dissent.1
Michael Lewis=s book describes appellant as admitting to acts that a jury could easily find
to have breached his obligations to investors in the fund that employed him and to have
constituted civil or criminal fraud. Although the authority my colleagues cite demonstrates that
it is axiomatic that allegedly defamatory statements must be viewed by reading the document
as a whole, Sydney v. MacFadden Newspaper Publ=g Corp., 242 N.Y. 208, 214 (1926), their
conclusion that certain statements are not defamatory is reached only by evaluating those
statements in hermetic isolation from the context in which they were made. They conclude that
certain statements can have only a single and non-defamatory meaning even where the book
clearly conveyed a different and defamatory meaning that was adopted by the book=s readership.
And while opinions are protected so long as the facts underlying them are set forth or the opinions
1 This being a dissent, I see no need to prolong matters by examining every statement alleged to be
defamatory. I will limit my remarks to what seem to me to be the most seriously defamatory allegations.
2
do not imply facts that can be disproved, see Steinhilber v. Alphonse, 68 N.Y. 2d 283, 289-92
(1986), my colleagues apply this rule in a fashion that renders opinions protected regardless
of implied facts.
a) Overall Context
The chapter of the book at issue portrays CDO managers, in pre-crisis times, as selling
interests in funds holding portfolios of risk-laden derivatives, the value of which was dependent
on the value of residential mortgages. The Big Short at 136-59. The investors in these funds
relied on the managers to monitor the portfolios to reduce risk. In the book=s words, the
managers were paid Ato select the Wall Street firm to supply [the] . . . bonds that served as
the collateral for CDO investors, [and to] . . . . monitor[] the hundred or so individual subprime
bonds inside each CDO, and [to] replac[e] the bad ones, before they went bad, with better
ones.@ Id. at 141.
While the CDO managers purported to be trained specialists in such management risk,
they had little specialized knowledge. Indeed, the chapter asserts that the less knowledgeable
3
the managers, the fewer questions that were asked of Athe big Wall Street firms@ that put the
various investment packages together, and the more likely those managers were to be patronized
by those firms. Id. While the CDO managers purported to manage, they actually did very little.
According to the book, the managers were actually indifferent to the risks because they were
paid by the volume of managed assets. Id. at 142. As it turned out, of course, the investors
were left with worthless interests, causing or contributing to the ensuing economic crisis.
This portrait is the context to the book=s portrayal of appellant, to which I now turn.
b) Context of Specific Defamatory Statements
A trier of fact could easily find the following.
Appellant is the only CDO manager mentioned by name in the relevant chapter of the
book and is depicted as the poster child for the CDO managers described above. Appellant
is portrayed as lining his own pockets and foisting doomed-to-fail portfolios upon investors.
Although he was paid to monitor the amount of risk in the fund=s portfolio, he worried only about
volume because he was paid by volume. And, knowing that the default rate of residential
4
mortgages was sufficient to wipe out the fund=s holdings, appellant sold all his interests in the
fund, passing all the risk to the fund=s investors, who believed he was monitoring that risk. The
portrayal of the appellant is particularly graphic because it purports to show his state of mind
and his actions out of his own mouth.
The book states that appellant managed a fund controlling Aroughly $15 billion, invested
in nothing but CDOs backed by the triple-B tranche of a mortgage bond,@ described as Adog
shit.@ Id. at 140. The book states that appellant had little training or background in CDO
management because he had Aspent most of his career working sleepy jobs at sleepy life
insurance companies.@ Id. at 139. While appellant was paid to manage these investments to
reduce risk, Ahe actually didn=t spend a lot of time worrying about what was in CDOs.@ Id. at
142. Indeed, the book portrays appellant as not caring about how much risk was borne by the
fund=s investors. Appellant is said to have stated that Ahe would rather have $50 billion in
crappy CDOs than none at all, as he was paid mainly on volume.@ Id. at 144.
5
Moreover, the book depicts appellant as believing that the fund=s portfolio was so risky
that he had taken all his personal wealth out of the fund. When confronted by a dinner partner
who knew that the rates of mortgage defaults were Aalready sufficient to wipe out [the fund=s]
entire portfolio,@ and who noted to appellant that he Amust be having a hard time,@ appellant is
quoted as responding, ANo, . . . I=ve sold everything out.@ Id. at 141. Although the book states
that CDO managers generally keep a piece of the investment so as to assure investors that the
manager=s interests are aligned with the investors, appellant is said to have Aalmost giddily .
. . explained . . . that he simply passed all the risk [of] . . . default on to the big investors who
had hired him to vet the bonds.@ Id. at 142. This statement thus portrays appellant as happily
and knowingly putting his interests before those of the fund=s investors whose interests he was
paid to protect.
c) The Merits
The book=s author admits that he does not use a fact checker, and much of what the
book says about the appellant is known even now (before a trial) as false. For example,
6
appellant=s fund did not manage Anothing but CDOs backed by the triple-B tranche of a mortgage
bond.@ Id. at 140. In fact, 38% of the assets were more highly rated. For another example,
appellant spent only two of his 12-year career at life insurance companies, sleepy or not, and
had substantial experience in CDO management. He did not make $26 million annually; his
income was one-tenth of that.
These falsehoods provide the scenic background for the portrayal of the appellant as
engaging in conduct that a trier of fact could find amounted to fraud in order to line appellant=s
own pockets. This portrayal can be described as non-defamatory only by declining to view it
as a whole; by taking some of the statements and quotations entirely out of the context in which
they were made; by finding that some statements have only a single and non-defamatory
meaning when the book clearly intended a different and defamatory meaning, one adopted by
readers, or so a trier could find; and by labeling some statements as opinion without regard to
the facts that they imply.
7
For example, the chapter describes appellant as being paid vast sums Ato be the CDO
expert,@ id. at 142, and Ato vet@ the fund=s portfolio, and in the book=s words, to Amonitor[] the
. . . bonds inside each CDO, and [to] replac[e] the bad ones, before they went bad, with better
ones,@ id. at 141. However, the chapter states that in reality appellant Aactually didn=t spend
a lot of time worrying about what was in [the] CDOs.@ Id. at 142. The description of appellant
as being paid $26 million by investors to monitor risk while deliberately not doing so is
considered, without discussion, not to be defamatory by my colleagues.
The claim that appellant did not monitor the risk in the fund=s portfolio is made even worse
by the charge that he failed to do so in order to increase his fees. Appellant is quoted as saying
that he would Arather have $50 billion in crappy CDOs than none at all, as he was paid mostly
on volume.@ Id. at 144. This remark is said by my colleagues to be non-defamatory because
$10 worth of lousy stock (or $50 billion in crappy CDOs) is worth more than none at all. That
is not the single possible meaning of the quote; in fact, it is not even a plausible meaning. The
quoted remark was not that $50 billion is worth more than nothing; the plain meaning was that
8
a high volume of CDOs led to a higher income for appellant without regard to the increased peril
to investors. The book does not portray investors as believing they were choosing between
(much less ended up with) $50 billion of crappy CDOs or nothing; they are portrayed as believing
they were investing in a fund with ongoing monitoring of its portfolio. Instead, the book states
that the monitoring extended only to the maximizing of appellant=s fees. The book itself shows
no doubt about this point; the paragraph that describes appellant=s indifference to investors= risk
quotes Eisman as thinking, AYou prick, you don=t give a fuck about the investors . . . .@ Id. at
143.
As noted, the book erroneously describes the fund as holding Anothing but CDOs backed
by the triple-B tranche . . . .@ Id. at 140. My colleagues find this falsehood to be irrelevant
because the Aaverage reader@ would not believe the difference between A-/A-3 rated securities
and triple-B-rated securities to be significant. However, the book itself treats the distinction as
of great significance by quoting Eisman to the effect that the triple-B tranche of a mortgage is
Athe engine of doom,@ id. at 140, and Athe equivalent of three levels of dog-shit lower than the
9
original bonds.@ Id. My colleagues inconsistently find these passages to be either not
defamatory because the average reader would know undisputed facts that render the statements
insignificant or opinions protected because the facts cannot be disproven.2
The book goes further and portrays appellant as knowing the risk had become so great
that he took his personal wealth out of the fund. The assertion that AI=ve sold everything out,@
id. at 141, is regarded by my colleagues as non-defamatory. This view simply ignores the
context in which the purported statement was made: in response to a question of whether
appellant was having a hard time because the mortgage default rate was so great as to wipe
out the fund=s entire portfolio. One could as easily say that a statement that a person took
money handed him by a bank teller is not defamatory because one can ignore a prefatory
statement about a concealed firearm and hold-up note.
2 Perhaps the book=s 28-week presence on the New York Times=s best-seller list was due to sales to
below-average readers.
10
The book=s statement that the appellant had Aalmost giddily@ made about Apass[ing] all
the risk . . . to the big investors who had hired him to vet the bonds,@ id. at 142, is held to be
non-defamatory again only by ignoring the context. The inference clearly intended by the author
was that appellant was well aware of the risks of Acrappy CDOs,@ id. at 144, and concluded that
they were too great for him to take personally. My colleagues find this non-defamatory because,
they say, passing risk is the business of money managers; but the book alleges far more than
informed risk passing. It describes the appellant as not doing the monitoring of risk he was paid
to do, privately caring only about volume rather than reducing risk because he was paid by
volume, and, as he learned of the growing number of defaults in amounts that wiped out the
fund=s portfolio, selling his interests in the fund to pass all risk on to buyers who were deceived
into believing that the risk was being vetted. This description could easily serve as the opening
statement in a civil or criminal fraud trial. See Capital Mgmt. Select Fund Ltd. v. Bennett, 680
F.3d 214 (2d Cir. 2012) (APrivate actions may succeed under Section 10(b) if there are
particularized allegations that the contract itself was a misrepresentation, i.e., the plaintiff=s loss
11
was caused by reliance upon the defendant=s specific promise to perform particular acts while
never intending to perform those acts.@). Appellant=s purported statements would then provide
the evidence of knowing fraud. Id. However, my colleagues= view that only innocent meanings
could as a matter of law be found by a trier of fact would render the admissions irrelevant.
The book=s use of the adverb Agiddily@ in modifying appellant=s purported description of
his conduct suggests glee at accomplishing the fraud. My colleagues find this use as protected
opinion because it does not imply facts that can be disproven. The book=s use of the word
Agiddily@ does not purport to be a quotation from Eisman, and my colleagues state that it is
protected whether the opinion is Eisman=s or Lewis=s. AGiddily@ in my view implies an
observable, describable, physical manifestation that either occurred or did not, i.e., a provable
event. However, even conceding that the issue may be close with regard to Eisman=s opinion,
the issue is not at all close if it is Lewis=s opinion. Such an opinion surely implies first-hand
observation, and Lewis was admittedly not present at the conversation.
12
As my colleagues point out, a statement is defamatory if it exposes the individual "to
public hatred, shame, obloquy, contumely, odium, contempt, ridicule, aversion, ostracism,
degradation or disgrace . . . ." Kimmerle v. N.Y. Evening Journal, 262 N.Y. 99, 102 (1933).
Whether a statement is defamatory is an issue of fact to be determined by a jury if it is
Areasonably susceptible [to] a defamatory connotation.@ Davis v. Ross, 754 F.2d 80 (2d Cir.
1985) (quoting James v. Gannett Co., 40 N.Y. 2d 415, 419 (1976)). Appellant has offered,
in his opposition to summary judgment, evidence that since The Big Short was published, he
has been professionally shunned as a result of its defamatory statements. For example, prior
to the publication of the book, appellant was involved in marketing two real estate investment
funds. However, because of the book, appellant's business partners, fearing that his
involvement would discourage investors, asked appellant to step aside. Moreover, since
November 2011, appellant was the Chief Financial Officer of a company that developed
communications platforms. After several potential investors voiced concerns about appellant
based on the book, the CEO asked appellant to step down from his role. This is sound evidence
13
that the innocent meanings adopted as a matter of law by my colleagues are hardly the sole
meaning intended by the author or understood by the book=s readership.
Were the statements attributed to appellant described above introduced in a civil or
criminal fraud trial in which he was the defendant, they would not be excluded on relevance
grounds. And if the claims made by the book were proven in such a trial, we would unanimously
affirm by summary order admission of the statements and a resultant judgment against appellant.
I, therefore, respectfully dissent.

Outcome: Affirmed

Plaintiff's Experts:

Defendant's Experts:

Comments: