I. The original complaint filed in 2004 charges Fannie Mae and certain of its officers with violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. More specifically, the complaint alleges that the Company failed to disclose and misrepresented the following material adverse facts which were known to defendants or recklessly disregarded by them: (1) that the Company applied accounting methods and practices that do not comply with GAAP in accounting for the enterprise's derivatives transactions and hedging activities; (2) that the Company had materially understated its accrued cost-of-access liability by $50-$80 million; (3) that the Company used 'cookie jar' accounting wherein Fannie Mae arbitrarily distributed current gains to subsequent quarters in a bid to keep its revenue and earnings growth steady; (4) that the Company deferred expenses to achieve bonus compensation targets; (5) that the Company had insufficient and inadequate internal controls; and (6) that as a result, the value of the Company's net income and financial results was materially understated at all relevant times.
More specifically, on September 22, 2004, Fannie Mae, prior to the opening of the market, disclosed, in brief, the findings of the Office of Federal Housing Enterprise Oversight ('OFHEO') report. The report revealed that Fannie Mae was engaged in inappropriate accounting practices. News of this shocked the market. Shares of Fannie Mae fell $4.96 per share, or 6.56 percent, to close at $70.69 per share on unusually high trading volume. After the market closed on September 22, 2004, OFHEO released the complete report detailing Fannie Mae's inappropriate accounting practices. The market reacted swiftly. The next trading day shares of Fannie Mae fell an additional $3.24 per share, or 4.58 percent, by noon on September 23, 2004.
On September 23, 2004, similar class action lawsuit was filed in the United States District Court for the Southern District of New York on behalf of purchasers of Federal National Mortgage Association common stock during the period between October 16, 2003 and September 22, 2004. The complaint charges Fannie Mae and certain of its officers and directors with violations of the Securities Exchange Act of 1934. Fannie Mae provides financing for home mortgages in the United States.
The complaint filed in the Southern District of New York alleges that during the Class Period, defendants issued materially false and misleading statements regarding Fannie Mae's financial results and growth rates. Specifically, the complaint alleges that the Company issued materially false and misleading statements in an effort to separate themselves from the scandal that occurred at the Federal Home Loan Mortgage Corporation (Freddie Mac.) The Freddie Mac’s accounting crisis brought the ouster of several top Freddie Mac executives, investigations by the Justice Department and the SEC, and a record $125 million fine in a settlement with the Office of Federal Housing Enterprise Oversight ('OFHEO'), the office that regulates both Fannie Mae and Freddie Mac and is responsible for ensuring that they are adequately capitalized and operating safely. Soon thereafter, OFHEO initiated an eight-month investigation of Fannie Mae's accounting practices in which the agency found a pattern of manipulation aimed at smoothing out volatility in profits from quarter to quarter similar to that which occurred at rival Freddie Mac.
All of the cases were consolidated and / or transferred to the U.S. District Court for the District of Columbia. A consolidated complaint was filed on March 4, 2005 against Fannie Mae and former officers. The court entered an order naming the Ohio Public Employees Retirement System and State Teachers Retirement System of Ohio as lead plaintiffs. The consolidated complaint generally made the same allegations as the individually-filed complaints. More specifically, the consolidated complaint alleged that the defendants made materially false and misleading statements in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and SEC Rule 10b-5 promulgated thereunder, largely with respect to accounting statements that were inconsistent with the GAAP requirements relating to hedge accounting and the amortization of premiums and discounts. Plaintiffs contend that the alleged fraud resulted in artificially inflated prices of defendants' common stock. Plaintiffs seek unspecified compensatory damages, attorneys’ fees, and other fees and costs. Discovery commenced in this action following the denial of the motions to dismiss filed by Fannie Mae and the former officer defendants on February 10, 2006.
On April 17, 2006, the plaintiffs in the consolidated class action filed an amended consolidated complaint that added purchasers of publicly traded call options and sellers of publicly traded put options to the putative class and sought to extend the end of the putative class period from September 21, 2004 to September 27, 2005. On August 14, 2006, the plaintiffs filed a second amended complaint adding KPMG LLP and Goldman, Sachs & Co. as additional defendants and adding allegations based on the May 2006 report issued by OFHEO and the February 2006 report issued by Paul, Weiss, Rifkind, Wharton & Garrison LLP. Fannie Mae's answer to the second amended complaint was filed on January 16, 2007. Plaintiffs filed a motion for class certification on May 17, 2006, and a hearing on that motion was held on June 21, 2007.
According to a press release dated January 7, 2008, Fannie Mae shareholders from April 2001 through December 2004 are the only ones eligible to join a class action lawsuit against the mortgage finance company related to a $6.3 billion accounting overstatement, a federal judge said. The class action can include buyers of Fannie Mae stock and call options and sellers of company put options from April 17, 2001, until Dec. 22, 2004, the date of Chief Executive Officer Franklin Raines's ouster, according to an order today by U.S. District Court Judge Richard Leon. Leon denied a request by Ohio Attorney General Marc Dann that investors who held the stock through Sept. 27, 2005, be included. Fraudulent accounting and misleading statements by Fannie Mae from April 17, 2001, until Sept. 27, 2005, affected 1.1 billion of the company's shares outstanding, according to the plaintiffs.
On October 17, 2008, FHFA, as conservator for Fannie Mae, intervened in the consolidated shareholder class action (as well as in the consolidated ERISA litigation and the shareholder derivative lawsuits pending in the U.S. District Court for the District of Columbia) and filed a motion to stay those cases. On October 20, 2008, the Court issued an order staying the cases until January 6, 2009. Upon expiration of the stay, discovery in those cases resumed.
On May 10, 2010, defendants Fannie Mae and KPMG filed a joint motion to dismiss with prejudice.
On August 16, 2011, the plaintiffs filed a motion for partial summary judgment against Defendant Fannie Mae.
II. In addition, two individual securities cases have been filed by institutional investor shareholders in the U.S. District Court for the District of Columbia. The first case was filed on January 17, 2006 by Evergreen Equity Trust, Evergreen Select Equity Trust, Evergreen Variable Annuity Trust, and Evergreen International Trust against Fannie Mae, current and former officers and directors.
The second individual securities case was filed on January 25, 2006 by 25 affiliates of Franklin Templeton Investments against Fannie Mae, KPMG LLP, and certain current and former officers and directors. On April 27, 2007, KPMG also filed cross-claims against Fannie Mae in this action that are essentially identical to those it alleges in the consolidated class action case.
The two related individual securities actions assert various federal and state securities law and common law claims against Fannie Mae and certain of its current and former officers and directors based upon essentially the same alleged conduct as that at issue in the consolidated shareholder class action, and also assert insider trading claims against certain former officers. Both cases seek unspecified compensatory and punitive damages, attorneys’ fees, and other fees and costs. In addition, the Evergreen plaintiffs seek an award of treble damages under state law.
On May 12, 2006, the individual securities plaintiffs voluntarily dismissed defendants Victor Ashe and Molly Bordonaro from both cases. On June 29, 2006 and then again on August 14 and 15, 2006, the individual securities plaintiffs filed first amended complaints and then second amended complaints adding additional allegations regarding improper accounting practices. The second amended complaints each added Radian Guaranty Inc. as a defendant. The court has consolidated these cases as part of the consolidated shareholder class action for pretrial purposes and possibly through final judgment. On July 31, 2007, the court dismissed all of the individual securities plaintiffs’ claims against several individual defendants and Radian Guaranty Inc. In addition, the court dismissed the individual securities plaintiffs’ state law claims and certain of their federal securities law claims against Fannie Mae and three individuals. It also limited the individual securities plaintiffs’ insider trading claims against those individual defendants.
On April 16, 2007, KPMG filed cross-claims against Fannie Mae in this action for breach of contract, fraudulent misrepresentation, fraudulent inducement, negligent misrepresentation, and contribution. KPMG is seeking unspecified compensatory, consequential, restitutionary, rescissory, and punitive damages, including purported damages related to injury to KPMG’s reputation, legal costs, exposure to legal liability, costs and expenses of responding to investigations related to the defendant's accounting, and lost fees. KPMG is also seeking attorneys’ fees, costs, and expenses. Fannie Mae filed a motion to dismiss certain of KPMG’s cross-claims. That motion was denied on June 27, 2007. The defendant has separately filed a case against KPMG.
On September 20, 2012, the Court issued an Order granting Franklin D. Raines's Motion for Summary Judgment. Raines is dismissed from this suit.
On October 16, 2012, the Court issued an Order granting J. Timothy Howard's Motion for Summary Judgment. Howard is dismissed from this suit.
On November 20, 2012, the Court issued an Order granting Leanne G. Spencer's Motion for Summary Judgment. Spencer is dismissed from this suit.
On May 7, 2013, the parties entered into a Stipulation of Settlement. This Settlement was preliminarily approved by the Court on June 7. The Court issued an Order and Final Judgment on December 6, 2013. Within that Order, the Court also approved attorneys' fees and expenses.