Federal National Mortgage Association ("Fannie Mae" or "Fannie") is a shareholder-owned, government-sponsored enterprise of the United States federal government that is authorized to make loans and loan guarantees. It is the leading market-maker in the U.S. secondary mortgage market, which helps to replenish the supply of money for mortgages and enables money to be available for housing purchases.
According to a law firm press release dated September 8, 2008, a class action was filed against certain of Fannie Mae's officers and/or directors with violations of the Securities Exchange Act of 1934. The Complaint alleges that during the Class Period, Defendants made materially false and misleading statements about Fannie Mae's business and prospects and misrepresented the Company's financial statements. These false and misleading statements cause Fannie Mae stock to trade at artificially inflated prices during the Class Period, reaching as high as $40.69 per share.
On July 7, 2008, a financial analyst at Lehman Brothers published a report suggesting that Fannie Mae might need to raise as much as $46 billion in capital, causing the Company's stock price to plummet 16% in a single trading day. Following that disclosure, former St. Louis Federal Reserve Board President, William Poole, suggested that Fannie Mae was nearly insolvent and The New York Times disclosed that the federal government was making plans to place the Company into a conservatorship. On July 13, 2008, the Treasury Department announced that it was making a temporary line of credit available to Fannie Mae and would purchase an equity stake if necessary to provide more capital. From July 7 through July 14, 2008, Fannie Mae's stock price declined over 48%. Finally, on Sunday, September 7, 2008, in the biggest government bail out in U.S. history, federal regulators seized control of Fannie Mae. On September 8, 2008, Fannie Mae stock opened at $1.91 per share, down from a close of $7.04 per share on September 5, 2008, a 72% decline.
According to the Complaint, the true facts, which were known by the Defendants but concealed from the investing public during the Class Period, were as follows: (a) the decline in the U.S. housing market rendered Fannie Mae undercapitalized; (b) Fannie Mae's December 2007 capital raise did not meet its capital needs; (c) Fannie Mae's May 2008 capital raise did not meet its capital needs; (d) although Fannie Mae had more capital than its regulator required, it did not have "surplus capital" as Defendants claimed; and (e) Fannie Mae's publicly disclosed financial results misrepresented the financial condition of the Company.
On September 16, 2008, a class action Complaint titled Crisafi, et al. v. Merrill Lynch, Pierce, Fenner & Smith Inc., et al, No. 08-CV-8008, was filed in the U.S. District Court for the Southern District of New York against the underwriters of Fannie Mae's May 13, 2008 offering of 8.25% Non-Cumulative Preferred Stock, Series T. Included in the named Defendants are Merrill Lynch, Citigroup, Morgan Stanley, UBS Securities and Wachovia Capital Markets, along with four senior executives of Fannie Mae. This is the second lawsuit filed in relation to the collapse of the government-sponsored mortgage giant.
The Offering involved the sale of approximately 80 million shares of non-cumulative, non-convertible, perpetual fixed-rate preferred stock, at an offering price of $25 per share. It was part of Fannie Mae's effort to raise at least $6 billion in new capital through public offerings of new securities during May, 2008. The new capital was to help shore up the Company's balance sheet so that capital requirements could continue to be satisfied, enhance shareholder value and provide stability to the secondary mortgage market. Fannie Mae's senior officers, Defendants here, repeatedly assured the marketplace that this round of capital-raising would put the Company on a sound financial footing and that they believed that additional infusions of cash would not be necessary for the foreseeable future.
The five Underwriter Defendants were the managing underwriters for the Offering. As such, they participated in the review and drafting of the Offering Circular, which was the official sales document for the Offering, solicited sales of the shares, and identified themselves, on the cover of the Offering Circular, as the underwriters for the Offering. The Underwriter Defendants purchased 14 million shares each of the Offering, delivered the Offering Circular to prospective investors, and resold those shares to investors in the Offering.
The Complaint alleges that the Underwriter Defendants' statements made in connection with the Offering were materially false and misleading because (a) they grossly overstated Fannie Mae's capitalization, claiming that the Company had a substantial capital surplus when, in fact, it was including on its balance sheet, at full value, about $36 billion in deferred tax assets that were, in fact, valueless; (b) they failed to disclose the serious risk that current account changes under consideration by the FASB could force the Company to bring over $2 trillion of currently off-balance-sheet obligations onto its financial statements, depleting its capital surplus even further; and (c) the individual Defendants falsely asserted that management believed that the current securities offerings of the Company would be adequate to see the Company through the end of the year.
On October 8, 2008, a class action Complaint titled Schweitzer, et al. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., et al., No. 08-CV-8609, was filed in the U.S. District Court for the Southern District of New York, alleging that the Defendants--including several former officers and directors of Fannie Mae and the underwriters responsible for the Series S preferred stock offering--knew or recklessly disregarded that Fannie Mae was grossly undercapitalized, in violation of Federal regulations, because of its overwhelming investments in subprime and Alt-A mortgages. These assets were not properly accounted for in violation of Generally Accepted Accounting Principles (GAAP). Fannie Mae's capital deficiency also was concealed because its deferred tax assets and guaranty obligations were not properly accounted for, in violation of GAAP.
On April 16, 2009, Judge Gerard E. Lynch consolidated all pending Fannie Mae Securities Action under In re Fannie Mae 2008 Securities Litigation, docket 1:08-cv-07831-GEL. Tennessee Consolidated Retirement System was appointed lead Plaintiff on behalf of the Preferred Shareholder Class. Massachusetts Pension Reserves Investment Management Board and the Boston Retirement Board were appointed lead Plaintiff on behalf of the Stockholder Class. The Court approved the Preferred Shareholder lead Plaintiffs selection of Kaplan Fox & Kilsheimer LLP as lead Counsel for the Preferred Shareholder Class. The Court approved the Stockholder lead Plaintiffs selection of Labaton Sucharow LLP and Berman DeValerio as lead Counsel for the Stockholder Class.
On June 22, 2009, the lead Plaintiffs filed a Joint Consolidated Amended Class Action Complaint.
By an Order from the U.S. Judicial Panel on Multidistrict Litiation, dated August 28, 2009, the case was coordinated under In Re: Fannie Mae Securities and Employee Retirement Income Securities Act (ERISA) Litigation, docket number 1:09-md-02013-GEL, and assigned to the Honorable Paul A. Crotty.
On September 18, 2009, the Defendants filed several motions to dismiss the Plaintiffs' Joint Consolidated Amended Class Action Complaint.
On September 30, 2010, Judge Paul A. Crotty granted in part and denied in part the Defendants’ motion to dismiss. According to the Order, specifically: (1) With respect to Plaintiffs' claim against Fannie Mae and the Individual Defendants for violations of Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5, the Court: (a) grants Defendants' motion to dismiss as to Plaintiffs' allegations regarding Fannies subprime and Alt-A mortgage exposure and financial reporting as to all Defendants;(b) denies Defendants' motion to dismiss as to Plaintiffs' allegations regarding Fannies internal controls and risk management as to Fannie, Mudd, and Dallavecchia; (c) grants Defendants' motion to dismiss as to Plaintiffs' allegations regarding Fannie's internal controls and risk management as to Swad and Blakely; and (2) With respect to Plaintiffs' claim against Deloitte for violations of Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5, the Court grants Defendants' motion to dismiss; and (3) With respect to Plaintiffs' claim against the individual Defendants for control person liability under Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), the Court: (a) grants Defendants' motion to dismiss as to Plaintiffs' allegations regarding Fannie's subprime and Alt-A mortgage exposure and financial reporting as to all the individual Defendants; (b) denies Defendants' motion to dismiss as to Plaintiffs' allegations regarding Fannie's internal controls and risk management as to Mudd and Dallavecchia; (c) grants Defendants' motion to dismiss as to Plaintiffs' allegations regarding Fannie's internal controls and risk management as to Swad and Blakely; and The Clerk of Court is directed to close the motions at docket numbers 155, 156, 161, 163, and 167.
On July 11, 2011, the Defendants filed several motions to dismiss. The Plaintiffs filed two motions to certify the class on July 18, 2011.
On March 2, 2012, the Plaintiffs filed a Second Amended Joint Consolidated Class Action Complaint.
On August 30, 2012, the Court issued an Order granting in part and denying in part the motions to dismiss of the Defendants.
On October 24, 2014, the parties entered into a Stipulation of Settlement. The Court granted preliminary approval of the Settlement on November 12. On March 3, 2015, the Court granted final approval of the Settlement, including an award of Attorneys’ Fees and Expenses, and entered Final Judgment.
On October 27, 2016, the Court issued an Order authorizing distribution of the net Settlement fund.
