Federal Home Loan Mortgage Corporation (NYSE:FRE) ("Freddie Mac" or the "Company") is a government-sponsored provider of mortgage services.
The original Complaint alleges that Defendants violated federal securities laws by issuing a series of materially false and misleading statements to the market throughout the Class Period, statements which had the effect of artificially inflating the market price of the Company's securities.
Specifically, the Complaint alleges that Defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, by issuing a series of material misrepresentations to the market between April 18, 2000 and June 6, 2003, thereby artificially inflating the price of Freddie Mac securities. During the Class Period, the Company issued statements that failed to disclose and/or misrepresented the following adverse facts, among others: (1) that the Company failed to properly classify hedges and assets with respect to derivative securities; (2) that the Company used "cookie jar" accounting wherein Freddie Mac deferred gains to subsequent quarters in a bid to keep its revenue and earning growth steady; (3) that the Company provided investigators with altered and misleading documents in order to conceal the Company's improper accounting; (4) that the Company lacked adequate internal controls and was therefore unable to ascertain the true financial condition of the Company; and (5) that as a result, the value of the Company's net income and financial results were materially misstated at all relevant times.
On June 9, 2003, the Company announced sweeping changes in its management team. These changes arose out of the Company's January 22, 2003 announcement that it would have to restate its financial results for fiscal years 2000, 2001, and 2002. Market reaction to the news was swift. Shares of Freddie Mac fell $9.61 per share or 16 percent to close at $50.26 per share, wiping out $7 billion in market value.
Several purported shareholder class action lawsuits have been filed against Freddie Mac and certain of its present and former executive officers. In June of 2003, twelve Complaints were filed in the US Federal courts for the Southern District of New York ("SDNY") and the Eastern District of Virginia. The First Identified Complaint was filed in the SDNY. On August 08, 2003 a Complaint was filed in the U.S. District Court for the Southern District of Ohio. Following the filing in Ohio, the three district courts instituted a Multi District Litigation ("MDL") panel to manage the cases.
The cases were consolidated in each court and transferred to the Eastern District of Virginia for further proceedings first. Subsequently, on November 6, 2003, the SDNY court entered an order in which the "motion for transfer to the Eastern District of Virginia, under 28 U.S.C. 1407 is deemed moot."
Following numerous proceedings, the amended Complaint (Reference Complaint) was finally filed in the U.S. District Court for the Southern District of Ohio on January 15, 2004. However, in February 24, 2004, the case was reopened in the SDNY as a Multi District litigation (1:04-MD-1584), and on April 1, 2004, the Defendant, Freddie Mac, filed a Motion to Dismiss the amended Complaint with prejudice pursuant to F.R.C.P. 12(b)(6). As of July 15, 2005, further proceedings had not yet been disclosed or taken.
According to a press release dated April 20, 2006, Freddie Mac announced that it has reached an agreement in principle to settle the securities class action and shareholder derivative lawsuits that were filed following the Company's restatement of financial results for the years 2000 through 2002. The proposed settlement of these actions includes a cash payment by Freddie Mac of $410 million. The settlement is also based on corporate governance reforms instituted by the Company under its current management. The settlement does not include any admission of wrongdoing by the Company. The class action cases, entitled Ohio Public Employees Retirement System, et al. v. Freddie Mac, et al., against the Company and certain former executive officers, and the shareholder derivative lawsuits, entitled Maureen Henry, et. al. v. Brendsel, et al., and Esther Sadowsky Testamentary Trust v. Brendsel, et al., on behalf of the Company against certain former executive officers and current and former members of the Company's Board of Directors, have been consolidated and are pending in the U.S. District Court for the SDNY. The proposed settlement is subject to a number of conditions, including approval by the Retirement Boards of Ohio Public Employees Retirement System (which has occurred) and State Teachers Retirement System of Ohio; negotiation and execution of final documentation; and preliminary and final court approval.
A settlement fairness hearing was held on October 26, 2006 before the Honorable John E. Sprizzo, at the United States District Court for the SDNY, at which time final approval of the settlement was granted.
According to a press release dated on July 15, 2008, the U.S. District Court for the SDNY ordered an initial distribution of the $410,000,000 settlement in the matter, "Ohio Public Employees Retirement System and State Teachers Retirement System Of Ohio, et al. v. Freddie Mac f.k.a. Federal Home Loan Mortgage Corporation, Leland C. Brendsel, Vaughn A. Clarke, David W. Glenn, and Gregory J. Parseghian, MDL-1584, Lead Case No. 03-CV-4261 (JES)."
