Case: Fannie Mae 2008 Securities Litigation, No. 08 Civ. 7831 (PAC)
Court: Southern District of New York
Class Period: November 8, 2006 – September 5, 2008
Attorneys: Frederic S. Fox, Donald R. Hall, Hae Sung Nam, Jeffrey P. Campisi, Melinda D. Campbell

Kaplan Fox is the court-appointed co-lead counsel in the case against Federal National Mortgage Association (“Fannie Mae” or “Fannie”). The Massachusetts Pension Reserves Investment Management Board, the Boston Retirement Board, and the Tennessee Consolidated Retirement System are the court-appointed co-lead plaintiffs in this securities fraud action arising out of the financial collapse of Fannie Mae.

On June 22, 2009, co-lead plaintiffs filed their Joint Consolidated Amended Class Action Complaint (the “Complaint”). The allegations in the Complaint stem from Fannie’s shift in focus from safe, conventional fixed-rate mortgages to high-risk, subprime and Alt-A mortgages thus materially impairing its risk profile without establishing the risk controls necessary to guard against that heightened risk. The Complaint alleges that defendants violated the federal securities laws by making false and misleading statements that Fannie was well-equipped to manage its foray into the risky subprime/Alt-A market, despite being keenly aware that the risk controls in place at Fannie were insufficient. Defendants also made misleading statements about the amount of subprime/Alt-A mortgages on Fannie’s books. Due to these misrepresentations, the investing public believed that Fannie’s exposure to subprime/Alt-A was minimal and that its portfolio remained conservative and safe. However, by early in the Class Period, the detrimental effects of Fannie’s build up of subprime/Alt-A mortgages with little to no risk controls in place began to take shape as the value of Fannie’s subprime and Alt-A holdings began to decline. This decline—another fact that defendants withheld from investors until the end of the Class Period—placed the Company’s financial stability in jeopardy. Additionally, defendants manipulated the Company’s accounting results so as to give the appearance that Fannie met minimum core capital requirements mandated by federal regulators.

On September 7, 2008, Fannie’s regulator, the Federal Housing Finance Agency (“FHFA”), issued a statement announcing that it had placed Fannie into conservatorship, in large part based upon Fannie’s failure to manage its credit risk or meet its core capital requirements.

The prices of Fannie securities plunged as a result of the fraud alleged in the Complaint and have never recovered. The day after Fannie was placed into conservatorship—September 8, 2008, which was the next trading day—Fannie common stock plunged nearly 90% from $7.04 to $0.73, on heavy trading volume of more than 585,000,000 shares—a massive increase over the previous days’ trading volume of approximately 83,000,000. Similarly, the preferred shares plummeted by between approximately 63% and 92% over the previous day’s closing price.

Defendants moved to dismiss the Securities Act claims on July 13, 2009 and the Exchange Act claims on September 18, 2009.

After full briefing and oral argument on the motions, U.S. District Judge Paul A. Crotty upheld Lead Plaintiffs’ core Exchange Act claim concerning the inadequacy of Fannie’s internal controls and risk management procedures. The case will now proceed to discovery.