Updated at 3:33 p.m.
A sprawling securities fraud class action against Fannie Mae and its former auditor, KPMG LLP, is coming to a close. The parties filed notice with a Washington federal judge late yesterday that they had reached a settlement in the case.
Fannie Mae and KPMG agreed to pay $153 million to class members—former Fannie Mae shareholders from 2001 to 2004—according to a motion filed yesterday for preliminary court approval of the deal.
Fannie was accused of violating established accounting principles and publishing misleading financial reports and statements. The settlement comes on the heels of a string of losses for the plaintiffs, in which the judge dismissed several former Fannie executives as individual defendants in the case. U.S. District Judge Richard Leon had yet to rule on the defendants' joint motion for summary judgment.
"The Settlement is the culmination of more than eight years of litigation, and was reached at a time when the Parties to the Stipulation understood the strengths and weaknesses of their respective positions," the plaintiffs said in their motion for approval of the settlement.
If Leon gives preliminary approval to the deal, class members will be notified and the parties will set a date for a fairness hearing. Ohio Attorney General Mike DeWine, who served as lead plaintiff on behalf of state pension funds that held shares of Fannie, said in a statement he was pleased to resolve the case.
"The settlement brings closure to this matter and recovery for our Ohio pension funds and class members," he said.
W.B. Markovits of Markovits, Stock & DeMarco in Cincinnati, Ohio, served as lead counsel for the plaintiffs in recent years. He was not immediately available for comment. Famed plaintiffs' lawyer Stanley Chesley originally was lead counsel, but left the case in the summer of 2011 in light of a disciplinary matter in Kentucky; he was disbarred in Kentucky in March and announced his retirement soon after.
Fannie and KPMG didn't admit liability or wrongdoing in the settlement. In a statement, Fannie Executive Vice President and General Counsel Bradley Lerman said they were "satisfied with the outcome and pleased to put the matter behind us." A Fannie spokeswoman declined to comment further.
KPMG spokesman Manuel Goncalves said in an email that the company "determined that it was in the firm’s best interest to put this matter behind us and avoid the significant additional cost, and the distraction and inherent uncertainty, of protracted litigation."
Fannie and KPMG will split the settlement payment, according to the agreement.
Lead attorney for Fannie, O'Melveny & Myers' Jeffrey Kilduff, declined to comment. KPMG's lead counsel, F. Joseph Warin of Gibson, Dunn & Crutcher, could not be reached. Duane Morris' Joseph Aronica represented the Federal Housing Finance Agency, which has served as Fannie's congressionally appointed conservator since 2008; he declined to comment.
One issue left unresolved is attorney fees. Plaintiffs' lawyers will have to submit a request for a share of the $153 million settlement for consideration by Leon. According to yesterday's filings, the defendants will not take a position on fees. Besides Markovits' firm, Bernstein Liebhard and Cohen Millstein Sellers & Toll served as plaintiffs' counsel.
The settlement won't affect Leon’s orders last fall dismissing three former Fannie officials named as individual defendants: former controller Leanne Spencer; former executive vice chairman and Chief Financial Officer J. Timothy Howard; and former chairman and Chief Executive Officer Franklin Raines. In all three decisions, Leon found the plaintiffs failed to present enough evidence the executives acted with intent to deceive shareholders.
Spencer's lawyer, David Krakoff of BuckleySandler, said in a phone interview today that he couldn't speculate on what happened behind the scenes with settlement talks after his client left the case, but that Leon's decisions in the fall represented significant developments in the lengthy litigation.
"His opinion as to Spencer mirrored his opinion with regard to Frank Raines and Tim Howard," Krakoff said. "Whether that was a factor in the decisions made by Fannie Mae and the Ohio funds, again, I can't say, but I do think that that had a substantial impact, certainly at the time those opinions were issued."
Howard's lead counsel, Zuckerman Spaeder's Eric Delinsky, could not immediately be reached. Raines' lead counsel, Kevin Downey of Williams & Connolly, declined to comment.