Leanne Spencer, the former controller for Fannie Mae, was dismissed yesterday from a federal securities class action in Washington against the mortgage giant, making her the third former executive to win summary judgment since September.
U.S District Judge Richard Leon found that the plaintiffs, former Fannie Mae shareholders, failed to present enough evidence that Spencer acted with the intent to deceive. Fannie Mae is accused of manipulating earnings and violating established accounting principles; Spencer individually was accused of making false statements about the company's practices and misleading investors.
"Plaintiffs' theories on Spencer's scienter are insufficient to withstand her summary judgment motion, particularly in light of the overwhelming evidence of Spencer's good faith," Leon said in his opinion (PDF).
A lead counsel for Spencer, BuckleySandler partner David Krakoff, said in a statement that the ruling ended an "eight year nightmare" for Spencer. "The court ruled that the plaintiffs were entitled to nothing because there was no proof that Ms. Spencer had manipulated earnings or violated federal securities laws," he said. "Today's ruling completely vindicates Ms. Spencer of any wrongdoing."
Ohio state pension plans have been serving as lead plaintiffs in the case. A lead attorney for the plaintiffs, W.B. Markovits of Markovits, Stock & DeMarco in Cincinnati, referred a request for comment to the Ohio attorney general's office, where a spokesman said that they don't comment on pending litigation.
Fannie Mae and its former auditor KPMG, along with former Fannie Mae officers such as Spencer who were sued individually, have been fighting the case since 2004. The investors alleged that the defendants should be held responsible for significant losses they suffered because of the purported accounting problems.
Scienter, or the intent to deceive, is a critical component of securities fraud cases, Leon wrote. He said that while the plaintiffs "stitched together a patchwork quilt of evidence" aimed at proving Spencer's intent, there were no witnesses who testified that Spencer intentionally misled investors.
Despite the fact that plaintiffs attempted to show that Spencer had deep knowledge of Fannie Mae's accounting practices, Leon wrote, her "familiarity with accounting policies and standards cannot imply scienter of accounting fraud if no evidence of fraud was ever brought to Spencer's attention. As such, plaintiffs do not put forth any evidence that Spencer was told during the class period that Fannie Mae committed fraud or material violations of [generally accepted accounting principles]" (emphasis in original.)
Leon cited similar reasons in granting summary judgment to former Fannie Mae Executive Vice Chairman and Chief Financial Officer J. Timothy Howard and Franklin Raines, the former chairman and chief executive officer.
Leon has yet to rule on the defendants' joint motion for summary judgment, KPMG's motion for summary judgment, and the plaintiffs' motion for summary judgment. He said in yesterday's opinion that he would address them "at a later time."