Overview
On December 5, 2013, the Honorable Richard J. Leon for the United States District Court for the District of Columbia granted final approval of a $153 million settlement, ending this nearly decade-long certified securities fraud class action and multidistrict litigation against Federal National Mortgage Association (Fannie Mae) and its former accountant, KPMG, LLP.
In his opinion, Judge Leon stated, the settlement constitutes one of “the largest securities class action settlements in the history of our Circuit (since the Private Securities Litigation Reform Act (PSLRA) went into effect in 1996).”
The litigation and settlement are also significant given the risk investors faced in trying to hold Fannie Mae accountable since it is a public company that operates under a congressional charter. Specifically, during the course of the litigation, the government intervened and attempted to place Fannie Mae into receivership of the Federal Housing Finance Authority (FHFA), which could have blocked investors from any type of recovery.
Over the course of nearly ten years of litigation, more than five years included extensive discovery, producing more than 67 million pages of documents, deposing 123 fact witnesses, and 35 expert witnesses; multiple rounds of briefing on dispositive motions; several appeals; and a constitutional challenge to FHFA’s regulation of Fannie Mae.
Cohen Milstein served as local counsel for the Lead Plaintiffs, Ohio Public Employees Retirement System (OPERS) and the State Teachers Retirement System of Ohio (STRS).
Case Background
Fannie Mae was created by Congress and operates as for-profit corporation with private shareholders, with the mission of expanding the national home lending market by buying home loans from private lenders and repackaging them as mortgage-backed securities.
In September 2004, Fannie Mae shareholders filed multiple securities class actions alleging that Fannie Mae, its auditor KPMG, and three of Fannie Mae’s former senior executives violated SEC Rule 10(b) and SEC Rule 10b-5 by intentionally manipulating earnings and violating Generally Accepted Accounting Principles, causing significant losses to investors. Specifically, plaintiffs alleged that the defendants publicly issued materially false and misleading financial reports and other statements that artificially inflated the price of Fannie Mae’s securities between April 17, 2001 through December 22, 2004.
On January 13, 2005, the Court consolidated these class actions into a multi-district litigation action and appointed OPERS and STRS as Lead Plaintiffs.
On January 7, 2008, the Court certified a class composed of approximately one million purchasers of Fannie Mae common stock and call options, and sellers of Fannie Mae put options, during the class period.
In September 2008, while discovery was ongoing, the Federal Housing Finance Agency (FHFA) placed Fannie Mae into conservatorship, essentially converting plaintiffs’ case from one against a private company into a case against the U.S. government. Then, in July 2009, FHFA proposed a rule that 1) subordinated securities litigation claims to the lowest level of the statutory priority for unsecured claims in receivership, and 2) prohibited a regulated entity in conservatorship, such as Fannie Mae, from paying securities litigation claims or making capital distributions (redefined to include securities litigation claims) without the FHFA Director’s approval. Concerned that the rule might effectively block any recovery for their securities fraud claims, plaintiffs filed a separate action in this Court challenging the final rule, Conservatorship and Receivership, 76 Fed. Reg. 35,724 (June 20, 2011), on constitutional and other grounds.
Notwithstanding the parallel proceeding regarding the FHFA rule, the parties filed eight summary judgement motions in this litigation in August 2011 – two by Lead Plaintiffs, and six by the defendants. After hearing oral argument on the motions in June 20212, the Court granted the summary judgment motion of the three individual defendants and dismissed them from the case.
With the remaining five summary judgment motions still pending, the parties agreed to enter formal mediation in 2011. After more than two years of mediation, the parties reached an agreement in principle on March 20, 2013 and finalized the terms of the $153 million agreement and filed for preliminary approval on May 7, 2013.
Case name: In re Fannie Mae Securities Litigation, Case No. 04-1639, MDL No. 1668, United States District Court for the District of Columbia