A Washington federal trial judge today approved a $153 million settlement between Fannie Mae and shareholders who sued the mortgage giant for securities fraud.
U.S. District Judge Richard Leon found the settlement and plan for distributing it among the more than one million class members was "fair, reasonable and adequate." The case is the largest securities class action settlement in the D.C. federal courts since modern securities litigation laws went into effect in 1996.
The order ends nearly a decade of litigation against Fannie Mae and its auditor, KPMG LLP. The class members, led by the Ohio Public Employees Retirement System and the State Teachers Retirement System of Ohio, accused Fannie Mae and KPMG of defrauding shareholders by manipulating earning and violating guidelines known as generally accepted accounting principles.
The plaintiffs suffered a string of losses shortly before reaching the settlement. In 2012, Leon dismissed three former Fannie Mae executives as defendants, finding the plaintiffs failed to present enough evidence they intended to deceive shareholders. Other motions for summary judgment filed by Fannie Mae and KPMG were pending when the parties announced the settlement in May.
Under the terms of the settlement, plaintiffs lawyers will receive 22 percent of the settlement fund in fees-approximately $29.1 million, after certain costs and expenses were subtracted-plus an additional $15 million in expense reimbursements. Markovits, Stock & DeMarco in Cincinnati, Ohio served as lead class counsel, along with Bernstein Liebhard and Cohen Millstein Sellers & Toll.
Until 2011, prominent lawyer Stanley Chesley led the plaintiffs' legal team, but he stepped down in the face of disciplinary proceedings in Kentucky. He was disbarred in Kentucky in March.
Bradley Lerman, executive vice president and general counsel of Fannie Mae, said in a statement that the "agreement is positive for taxpayers and Fannie Mae, and we are pleased that the matter is now fully resolved."
Markovits and a spokesman for the Ohio attorney general's office could not immediately be reached for comment. A spokeswoman for Fannie Mae's conservator the Federal Housing Finance Agency declined to comment.
A spokesman for KPMG said in a statement that the company "is pleased that this long running litigation, related to matters at Fannie Mae occurring more than a decade ago, has been resolved."
The $153 million settlement represented between 4 to 8 percent of the $2 to $4 billion the plaintiffs estimated as their "best case scenario" recovery at trial. Leon wrote that this percentage fit with previous securities class action settlements approved by the court.
Given the complexity of the case and the risks the plaintiffs faced if the case went forward, Leon said the settlement was a "very positive outcome" for the class. The recent dismissal of the three former Fannie Mae executives created uncertainty about whether the plaintiffs could survive the still-pending motions for summary judgment, he said.
The settlement made even more sense, the judge said, given the obstacles the plaintiffs might encounter even if they won.
Fannie Mae was placed in conservatorship in 2008 during the financial crisis. The congressionally appointed conservator, the Federal Housing Finance Agency, adopted a rule that would have allowed the agency's director to bar Fannie Mae from paying securities fraud claims. The plaintiffs were in the process of challenging that rule when they reached the settlement. If the rule stood, Leon said, the plaintiffs wouldn't get anything even if they prevailed at trial.
"I find that this unusual circumstance tilts this factor further in support of approval here," the judge wrote.
Leon found the settlement was the product of good-faith negotiations. The parties began mediation in 2011, with Morgan, Lewis & Bockius partner Fred Fielding serving as the mediator. The judge noted the plaintiffs got a "bargain" for the mediation, paying $71,776 for Fielding's services over the past two years.
The class reaction to the settlement was almost overwhelmingly positive, Leon said. There were four objections filed. Only one of the objectors addressed the substance of the settlement—the others challenged the attorney fees and the plan to divide the money—and Leon found he lacked standing.
The 22 percent award of attorney fees, Leon said, was appropriate. "In the Court's view…the lawyering in this case has been, by any standard, exceptional," he wrote.
"Plaintiffs' counsel wrestled with highly complex accounting issues and Fannie Mae's placement into conservatorship, as well as initiated a parallel proceeding challenging an FHFA rule that compounded their risks by potentially cutting off any recovery even in the event they succeeded at trial—all while facing off against skilled defense lawyers," he wrote. "In the Court's view, this case was extraordinary in many respects and merits a substantial fee award."
O'Melveny & Myers served as lead counsel for Fannie Mae. Duane Morris represented the Federal Housing Finance Agency. Gibson, Dunn & Crutcher served as lead counsel for KPMG.
Updated at 2:42 p.m.
National Law Journal photo by Diego M. Radzinschi.