In re Fed. Nat'l Mortg. Ass'n Sec., Derivative, & "Erisa" Litig.

• Decision Date: 20 September 2012
• Docket Number: MDL No. 1668.,Civil Action No. 04–1639(RJL).
• Citation: 892 F.Supp.2d 59
• Parties: In re FEDERAL NATIONAL MORTGAGE ASSOCIATION SECURITIES, DERIVATIVE, and “ERISA” LITIGATION. In re Fannie Mae Securities Litigation.
• Court: U.S. District Court — District of Columbia

892 F.Supp.2d 59

In re FEDERAL NATIONAL MORTGAGE ASSOCIATION SECURITIES, DERIVATIVE, and “ERISA” LITIGATION.

In re Fannie Mae Securities Litigation.

MDL No. 1668.

Civil Action No. 04–1639(RJL).

United States District Court,

District of Columbia.

Sept. 20, 2012.

Steven J. Toll, Joshua S. Devore, Daniel S. Sommers, Cohen Milstein Sellers & Toll PLLC, Robert W. Liles, Liles Parker PLLC, Washington, DC, Jeff A. Almeida, Christine M. MacKintosh, Megan D. McIntyre, Grant & Eisenhofer P.A., Wilmington, DE, James R. Cummins, Paul M. De Marco, Louise Malbin Roselle, Paul Michael De Marco, Waite, Schneider, Bayless & Chesley, Co., L.P.A., Phyllis E. Brown, Law Offices of Phyllis Brown, Cincinnati, OH, A. Allen Hobbs, Emily Kern, Jeffrey David Lerner, Tania T. Taveras, Bernstein Liebhard & Lifshitz LLP, Francis P. Karam, New York, NY, Jeffrey C. Block, Joseph C. Merschman, Kathleen M. Donovan–Maher, Berman Devalerio Pease Tabacco Burt & Pucillo, Boston, MA, Frank J. Johnson, Brett M. Weaver, Law Office of Frank J. Johnson, San Diego, CA, for Plaintiffs.

David W. Debruin, Jerome Louis Epstein, Larry Paul Ellsworth, Jenner & Block LLP, Jeffrey William Kilduff, Michael J. Walsh, Jr., O'Melveny & Myers LLP, Kevin Michael Downey, Alex Giscard Romain, Antony K. Haynes, Eun Young Choi, Jefferey Dee Bailey, Joseph Marshall Terry, Jr., Michelle D. Schwartz, Samuel Bryant Davidoff, Williams & Connolly LLP, Elizabeth G. Taylor, Logan Daniel Smith, Caroline Elizabeth Reynolds, Cory T. Way, Ellen D. Marcus, Richard Miles Clark, Steven Mark Salky, Zuckerman Spaeder, LLP, David Sidney Krakoff, Adam B. Miller, Christopher F. Regan, Lauren R. Randell, BuckleySandler LLP, Elizabeth G. Oyer, Mayer, Brown LLP, Heather H. Martin, Quinn Emanuel Urquhart & Sullivan, LLP, Andrew Santo Tulumello, Francis Joseph Warin, Lissa M. Percopo, Melanie L. Katsur, Michael Francis Flanagan, Andrew Santo Tulumello, Claudia M. Barrett, Gibson, Dunn & Crutcher, LLP, Jonathan K. Tycko, Tycko & Zavareei LLP, Charles William McIntyre, McGuireWoods LLP, James Hamilton, Bingham McCutchen LLP, David I. Ackerman, SNR Denton US LLP, Cristen Sikes Rose, James D. Wareham, DLA Piper LLP, Julia Evans Guttman, Baker Botts, LLP, Lawrence S. Sher, Reed Smith LLP, Jonathan Michael Stern, Schnader Harrison Segal & Lewis LLP, Daryl Andrew Libow, Sullivan & Cromwell, LLP, Charles Simon Davidson, Eric Robert Delinsky, Zuckerman Spaeder, LLP, Washington, DC, Seth Alben Aronson, O'Melveny & Myers, LLP, Los Angeles, CA, Laura E. Neish, Zuckerman Spaeder LLP, Jonathan C. Dickey, Gibson, Dunn & Crutcher LLP, Neil A Steiner, William K. Dodds, Dechert LLP, Jeremy C. Bates, Michael T. Tomaino, Patrice A. Rouse, Richard H. Klapper, Sullivan & Cromwell LLP, New York, NY, Darren William Stanhouse, McGuireWoods, LLP, Raleigh, NC, George Howard Brown, Gibson Dunn & Crutcher, L.L.P., Palo Alto, CA, M. Byron Wilder, Gibson, Dunn & Crutcher LLP, Dallas, TX, Monica K. Loseman–Barwind, Gibson, Dunn & Crutcher, LLP, Denver, CO, Scott A. Fink, Gibson Dunn & Crutcher LLP, San Francisco, CA, David Smith, Dionna K. Litvin, Jonathan S. Liss, Schnader Harrison Segal & Lewis, LLP, Philadelphia, PA, Brian E. Pumphrey, Christine Devey Mehfoud, J. William Boland, McGuireWoods LLP, Richmond, VA, for Defendants.

MEMORANDUM OPINION

RICHARD J. LEON, District Judge.

This is a class action securities fraud suit against Federal National Mortgage Association (“Fannie Mae”), its former accountant KPMG, LLP, and three of Fannie Mae's former senior executives (collectively, “defendants”), brought by a class of parties represented by lead plaintiffs Ohio Public Employees Retirement System (“OPERS”) and State Teachers Retirement System of Ohio (“STRS”) (collectively, “plaintiffs”). Before the Court are eight separate summary judgment motions.¹ This opinion addresses only one of those motions: defendant Franklin D. Raines's Motion for Summary Judgment. I will address the remaining individual defendants' motions forthwith,² and the companies' and plaintiffs' motions thereafter. Upon consideration of the pleadings, oral argument, and the entire record herein, defendant Raines's Motion for Summary Judgment is GRANTED.

BACKGROUND³

I. Factual Background

Fannie Mae, along with its cousin Freddie Mac, operates in the secondary mortgage market as a federally-chartered government-sponsored enterprise, buying home mortgages from banks and issuing debt and mortgage-backed securities. Formerly a private shareholder-owned company, Fannie Mae has been in a conservatorship under the Federal Housing Finance Agency (“FHFA”) since September 6, 2008. During the time period relevant to this litigation (April 17, 2001 through December 22, 2004), however, Fannie Mae's stock was traded on the New York Stock Exchange, and it was regulated by the Office of Federal Housing Enterprise Oversight (“OFHEO”).⁴ OFHEO's oversight responsibilities generally involved ensuring that Fannie Mae had adequate capital, a sound corporate structure, and financial stability. This, of course, was no small task: Fannie Mae was, and still is, one of the largest financial institutions in the country and had a balance sheet of mortgage loans and mortgage-backed securities worth hundreds of billions of dollars. Defs.' Reply Regarding their Statements of Undisputed Material Fact in Supp. of the Joint Mot. for Partial Summ. J. Based on FAS 133 Accounting Issues ¶ 1 [Dkt. # 1024–4] (“Defs.' Reply SUMF FAS 133”). From January 1999 until December 2004, Raines was Fannie Mae's Chairman of the Board and Chief Executive Officer. Fannie Mae's SGIMF ¶ 4.⁵

The narrative of plaintiffs' securities fraud claims against Raines, not surprisingly, flows directly from an OFHEO investigation of Fannie Mae. In June 2003, following the disclosure of certain accounting issues at Freddie Mac, OFHEO began examining Fannie Mae's accounting policies and internal controls. On September 22, 2004, Fannie Mae released a public statement, indicating that OFHEO had delivered the findings of that investigation to Fannie Mae's board of directors. Fannie Mae's SGIMF ¶ 13; Fannie Mae Form 8–K (Sept. 22, 2004), Decl. of W.B. Markovits in Supp. Of Lead Pls.' Mot. for Partial Summ. J. on Count I Against Def. Fannie Mae [Dkt. # 920] (“Markovits–Fannie Mae Decl.”), Ex. 5 [Dkt. # 920–6].⁶ The company added that the Securities and Exchange Commission (“SEC”) also had begun an inquiry and that Fannie Mae's board had retained former Senator Warren B. Rudman (“Senator Rudman”) and his law firm, Paul, Weiss, Rifkind, Wharton & Garrison LLP, to conduct an independent investigation of what happened. Fannie Mae's SGIMF ¶ 13. Later that day, OFHEO publicly released its interim report entitled “Report of Findings to Date, Special Examination Fannie Mae” (the “OFHEO Interim Report”). Id. ¶ 14; see also OFHEO Interim Report, Decl. of Adam B. Miller in Supp. of Def. Leanne G. Spencer's Mot. for Summ. J., Ex. 148 [Dkt. # 942–3] (“Miller Decl., Ex. 148”). According to the Interim Report, Fannie Mae had misapplied certain Generally Accepted Accounting Principles (“GAAP”), specifically two key standards known as FAS 91 and FAS 133, which relate to the company's amortization of price changes on securities and loans and to its use of hedge accounting. Miller Decl., Ex. 148 at i–vii.⁷ OFHEO also raised concerns over the company's internal controls and audit reviews. Fannie Mae's SGIMF ¶ 15.

Apparently surprised by these findings, Fannie Mae requested that the SEC's Office of the Chief Accountant review the company's accounting with respect to FAS 91 and FAS 133. Id. ¶ 24. Several months later, on December 15, 2004, the SEC's Chief Accountant, Donald Nicolaisen, issued a press release, stating that the SEC's accounting staff had determined that Fannie Mae's accounting did not comply in material respects with FAS 91 and FAS 133, and that he had advised the company to restate its financial statements after eliminating the use of hedge accounting and reevaluating its amortization of premiums and discounts. Id. ¶ 22 (quoting Markovits–Fannie Mae Decl., Ex. 16 [Dkt. # 922–8] ). Shortly thereafter, on December 21, 2004, Raines announced his retirement from Fannie Mae. Id. ¶ 26. The next day, in a Form 8–K, Fannie Mae declared its intention to restate its 2001 to mid–2004 financial results to comply with the SEC's Office of Chief Accountant's review and recommendations concerning its FAS 91 and FAS 133 accounting. Fannie Mae Form 8–K (Dec. 22, 2004), Markovits–Fannie Mae Decl., Ex. 18 [Dkt. # 922–10].

Over a year later, on February 23, 2006, Fannie Mae released the report of Senator Rudman and his team at Paul Weiss, “A Report to the Special Review Committee of the Board of Directors of Fannie Mae” (the “Rudman Report”), which reached similar findings as OFHEO's Interim Report.⁸ Fannie Mae's SGIMF ¶¶ 31–32. OFHEO released its final report on May 23, 2006. Report of the Special Examination of Fannie Mae, May 2006, Decl. of W.B. Markovits in Supp. of Lead Pls.' Mems. of Points and Authorities in Opp'n to Def. J. Timothy Howard's and Def. Leanne G. Spencer's Mots. for Summ. J. [Dkt. # 969–2] (“Markovits–Howard/Spencer Decl.”), Ex. 12 (“OFHEO Final Report”).⁹ Based on its findings, OFHEO brought administrative charges against Raines, Howard, and Spencer, alleging that they “knowingly and/or recklessly engaged in misconduct and safety and soundness violations that caused substantial and/or material harm and loss to [Fannie Mae]”. December 18, 2006 OFHEO News Release, Decl. of W.B. Markovits in Supp. of Pls.' Mem. in Opp'n to Franklin D. Raines's Mot. for Summ. J. [Dkt. # 967–2] (“Markovits–Raines Decl.”), Ex. 34 at 2; see also OFHEO's Notice of Charges, Notice No. 2006–1, Markovits–Raines Decl., Ex. 34.¹⁰

Finally, on December 6, 2006, Fannie Mae filed with the SEC its prior financial results in a Form 10–K (the “Restatement”). Id. ¶ 65. The Restatement resulted in a “total reduction in retained earnings of $6.3 billion...