Attorneys on both sides of a securities class action against Fannie Mae made their case today for summary judgment, with plaintiffs' counsel arguing that the mortgage giant clearly admitted to fraud and defense counsel arguing that the evidence proved Fannie Mae acted in good faith.
Fannie Mae and its auditor, KPMG, were sued in 2005 by the attorney general of Ohio on behalf of that state's pension plans, after the federal agency regulating Fannie Mae found that the company had overstated profits and failed to comply with other generally accepted accounting principles.
The plaintiffs have moved for summary judgment on Fannie Mae's liability for losses suffered by people who bought stock between 2001 and 2004. If U.S. District Judge Richard Leon rules in their favor, a jury would be tasked with deciding damages. The defendants have moved for summary judgment on the claims related to their accounting practices. If they win, Scott Fink of Gibson, Dunn & Crutcher told Leon that the defense thought it would be a "case ender."
W.B. “Bill” Markovitz of Waite, Schneider, Bayless & Chesley acknowledged in his arguments on behalf of the plaintiffs’ motion that it was unusual for plaintiffs to move for summary judgment on liability. Still, he said, it was appropriate because the evidence showed Fannie Mae had already admitted to the alleged fraud in its filings with the U.S. Securities and Exchange Commission and public statements made by Fannie Mae officials about its accounting problems.
Markovitz focused on a 2006 report by former Senator Warren Rudman and Paul, Weiss, Rifkind, Wharton & Garrison, which found that Fannie Mae not only departed from generally accepted accounting principles, but also that officials did so to avoid making costly changes to its business model. He cited a public statement issued in 2006 by then-chairman of Fannie Mae’s board of directors, Stephen Ashley, that the board “accepts and embraces” the report.
Leon pressed Markovitz on the issue of whether there was fraudulent intent, asking him why he should look to the report when Rudman wasn’t tasked with deciding whether Fannie Mae had actually committed fraud. Markovitz said the report presented the elements of the fraud, even if Rudman didn’t come to that formal conclusion.
Robert Stern of O’Melveny & Myers, arguing against the plaintiffs’ motion, said the voluminous case record, which included testimony from more than a hundred witnesses, trumped the plaintiffs’ reliance on the Rudman report. The report was never formally adopted by the board, Stern said, meaning it wasn’t an admission of liability by Fannie Mae.
Stern argued that no witness testified that Fannie Mae officials knew they were acting contrary to generally accepted accounting principles at the time. If there was an error, he said, it was only that. “This simply is not the stuff of fraud,” he said.
Whether there was any evidence of fraudulent intent is also at the heart of the defendants’ motion for summary judgment. Gibson Dunn's Fink, arguing today on behalf of the defendants, told Leon that the case boiled down to a difference of opinion between Fannie Mae and the SEC over how to interpret the accounting regulations at issue. There was no evidence that Fannie Mae officials intentionally advocated an interpretation of those rules that they knew was wrong, he said.
Fink argued that the regulations in question are extraordinarily complex and have been the subject of debate for years, and that the SEC even changed its own opinion on how to interpret them in 2007.
Today was the first of three days of oral arguments on motions for summary judgment in the case. Today’s arguments involved the core joint motions filed by both sides, while most of the remaining motions involve individual defendants.