In re Federal National Mortg. Ass'n Securities
| Decision Date | 31 July 2007 |
| Docket Number | Civil Action No. 06-0139(RJL).,Civil Action No. 06-0082(RJL).,MDL No. 1668.,Civil Action No. 04-1639(RJL). |
| Citation | 503 F.Supp.2d 25 |
| Court | U.S. District Court — District of Columbia |
| Parties | In re FEDERAL NATIONAL MORTGAGE ASSOCIATION SECURITIES, DERIVATIVE, AND "ERISA" LITIGATION. In re Fannie Mae Securities Litigation Evergreen Equity Trust, et al., v. Federal National Mortgage Association, et al. and Franklin Managed Trust, et al. v. Federal National Mortgage Association, et al. |
Stuart Grant, Christine M. Mackintosh, Megan D. McIntyre, Grant & Eisenhofer, P.A., Wilmington, DE, for Plaintiff.
Michael J. Walsh, Jr., O'Melveny & Myers LLP, Michelle D. Schwartz, Williams & Connolly, LLP, Ellen D. Marcus, Eric R. Delinsky, Holly Ann Pal, Steven Mark Salky, Tammy Gershoni, Zuckerman Spaeder LLP, David I. Ackerman, Covington & Burling, LLP, Cristen E. Sikes, DLA Piper US LLP, Julia Evans Guttman, Nicholas Aldan Brady, Baker Botts, LLP, James D. Wareham, Paul, Hastings, Janofsky & Walker LLP, Rhonda D. Orin, Anderson Kill & Olick, LLP, Jonathan Michael Stern, Schnader Harrison Segal & Lewis, LLP, Washington, DC, William K. Dodds, Dechert LLP, New York, NY, David Smith, Dionna K. Litvin, Jonathan S. Liss, Schnader Harrison Segal & Lewis LLP, Philadelphia, PA, for Defendant.
Before the Court are motions to dismiss a myriad of claims in the Evergreen1 and Franklin2 plaintiffs' ("E & F plaintiffs") Second Amended Complaints ("E & F Complaints") against the Federal National Mortgage Association ("Fannie Mae"), its insurance company, Radian Guaranty, Inc. ("Radian"), and certain current and former officers and members of Fannie Mae's Board of Directors: defendants Stephen B. Ashley, Kenneth M. Duberstein, Thomas P. Gerrity, Jamie S. Gorelick, William R. Harvey, J. Timothy Howard, Manuel J. Justiz, Ann Korologos, Frederic V. Malek, Donald B. Marron, Daniel H. Mudd, Anne M. Mulcahy, Joe K. Pickett, Leslie Rahl, Franklin D. Raines, Taylor C. Segue III, Leanne Spencer, and H. Patrick Swygert. For the reasons set forth hereafter, the Court GRANTS defendants' motions to dismiss: (1) the state law claims against all defendants; (2) the Section 18 claims under the Securities Exchange Act of 1984 ("Exchange Act") against Fannie Mae and all individual defendants; (3) the Section 10(b) and 10b-5 claims against Radian, the outside directors, the Audit Committee directors, and Messrs. Raines and Howard; (4) the control person liability claims under Section 20(a) against the outside directors and Mr. Howard; and (5) the insider trading claims under Section 20A against Messrs. Raines, Howard, and Ms. Spencer as to trades that did not occur on the same day as plaintiffs' trades. The Court DENIES Mr. Howard's motion to dismiss the insider trading claims against him for trades that occurred on the same day as plaintiffs' trades.3
Fannie Mae is one of two (the other being Freddie Mac) federally-chartered government-sponsored enterprises that serve the public policy of expanding home ownership to moderate and low-income families, in part, by supplying capital and liquidity for residential mortgages. The additional capital and liquidity provided by Fannie Mae, in turn, increases the market for 30-year fixed-rate mortgages and frees up banks' limited capital, allowing them to make more loans. Fannie Mae was established in 1938 by the federal government as a public entity. In 1968, Congress amended Fannie Mae's charter to make it a shareholder-owned company that operates on a self-sustaining basis. Indeed, its Board of Directors is composed principally of outside directors who are elected by the shareholders. The Chairman and officers of the company have neither the power to dismiss the outside directors, nor set their compensation. To the contrary, it is the Board of Directors who set the compensation of the officers and have the authority to remove them from office.
Fannie Mae is regulated by various governmental agencies, including the Office of Federal Housing Enterprise Oversight ("OFHEO"), the United States Department of Housing and Urban Development, the United States Department of Treasury, and the General Accounting Office. OFHEO's "mission" is ensuring the safety and soundness of Fannie Mae. (See Federal Housing Enterprises Financial Safety and Soundness Act of 1992, 12 U.S.C. § 4501 et seq.; OFHEO Mission Statement, available at http://www.ofheo.gov/ Mission.asp (last visited July 24, 2007).) OFHEO's oversight involves reviewing the company's internal controls, corporate structure, financial solvency, capital reserves, and accounting policies. (See generally OFHEO Report to Congress, June 15, 2002 ("2002 OFHEO Report") at 22-42 () (attached as Ex. 3 to Stern Decl.).) OFHEO then reports annually to Congress on its findings. (Id.)
On September 22, 2004, OFHEO released an interim report concluding that Fannie Mae had misapplied FAS 91 and FAS 133, which are generally accepted accounting principles ("GAAP"), that Fannie Mae had inadequate internal controls, and that OFHEO no longer had confidence in certain members of Fannie Mae's management. (Am. Compl. ¶ 49.) Shortly thereafter, the Board expanded the authority of a Special Review Committee that had previously been created and vested it with the authority to investigate the allegations in the OFHEO Report. (See Fannie Mae, Form 8-K at 99.2 (Dec. 21, 2004) (attached as Ex. 7 to Stern Decl.).) The Committee retained former United States Senator Warren Rudman and his law firm (i.e. Paul, Weiss, Rifkind, Wharton & Garrison LLP) to carry out this investigation.4 (Id.)
After the Office of Federal Housing Enterprise Oversight ("OFHEO") issued its Report in September 2004 describing these various accounting issues, several shareholders Med various putative class actions beginning on September 23, 2004, under federal securities laws, alleging that the company and executives Franklin Raines, Timothy Howard, and Leanne Spencer had committed securities fraud. This Court entered a Stipulated Order on December 16, 2004 consolidating all cases brought pursuant to the federal securities laws under the caption In re Fannie Mae Securities Litigation, Civil Action No. 04-cv-01639. (See Order, Dec. 16, 2004 (approving Stipulated Order of Consolidation).)
Shortly after lead plaintiffs were named, and before a motion for class certification had even been filed, Evergreen and Franklin decided to "opt-out" of the class action. On January 17, 2006, and January 25, 2006, those two institutions brought direct actions of their own that named not only Fannie Mae, Raines, Howard, and Spencer, but also the company's Audit Committee members, Outside Directors, and an insurance company (Radian) asserting certain state law claims arising out of alleged errors in Fannie Mae's accounting (e.g. fraud and negligent misrepresentation). The E & F Complaints also assert claims for: (1) control person liability under Section 20(a) of the Exchange Act against the Outside Directors; (2) violations of Section 18 of the Exchange Act against all defendants except Radian; and (3) violations of Section 20A of the Exchange Act against Raines, Howard, and Spencer. Evergreen and Franklin filed Amended Complaints on June 29, 2006, and, on July 25, 2006, Evergreen and Franklin moved for leave to file another amended complaint. Leave was granted, and Second Amended Complaints were filed by Franklin on August 14, 2006 and by Evergreen on August 15, 2006. Defendants now move to dismiss many, if not most, of the claims contained in the Second Amended E & F Complaints.5
A motion to dismiss for failure to state a claim will not be granted unless the complaint does not contain "enough facts to state a claim to relief that is plausible on its face," Bell Atlantic Corp. v. Twombly, ___ U.S. ___, ___, 127 S.Ct. 1955, 1974, 167 L.Ed.2d 929 (2007), and there is no "`reasonably founded hope'" that the plaintiff can make a case, id. at 1969 (quoting Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 741, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975)). In considering a motion to dismiss for failure to state a claim upon which relief can be granted under Federal Rules of Civil Procedure 12(b)(6) and 9(b), this Court must view the factual allegations in the light most favorable to the plaintiff. EEOC v. St. Francis Xavier Parochial Sch., 117 F.3d 621, 624-25 (D.C.Cir.1997). However, even if the Court accepts as true all of the factual allegations set forth in the complaint, Doe v. U.S. DOJ, 753 F.2d 1092, 1102 (D.C.Cir. 1985), and construes the complaint liberally in favor of the plaintiff, Schuler v. United States, 617 F.2d 605, 608 (D.C.Cir.1979), it "need not accept inferences drawn by plaintiff[] if such inferences are unsupported by the facts set out in the complaint." Kowal v. MCI Commc'ns Corp., 16 F.3d 1271, 1276 (D.C.Cir.1994).
The E & F plaintiffs assert state law claims for fraud, negligent misrepresentation, violation of California Corporations Code § 25400, violation of Massachusetts General Law Chapter 93A § 2, and an unspecified common law claim for aiding and abetting against Radian. Defendants argue that all of Evergreen's and Franklin's state law claims must be dismissed because they are preempted under the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"). For the following reasons, the Court agrees that SLUSA preempts these state law claims.
The Private Securities Litigation Reform Act ("PSLRA"), codified in part at 15 U.S.C. §§ 77z-1 and 78u-4, was passed in 1995 "in response to an increase in securities fraud lawsuits perceived as frivolous." Newby v. Enron Corp., 338 F.3d 467, 471 (5th Cir.2003). SLUSA, on the other hand, was enacted in 1998 to close a loophole in the PSLRA through...
To continue reading
Request your trial
-
N. Sound Capital LLC v. Merck & Co.
...action was consolidated with a related class action for discovery purposes only); see also In re Fed. Nat'l Mortg. Ass'n Sec., Derivative, & ERISA Litig. , 503 F.Supp.2d 25, 32 (D.D.C. 2007) ("[T]he legislative history for SLUSA overwhelmingly demonstrates that although Congress recognized ......
-
In re Countrywide Financial Corp. Sec. Litigation
...CAC states a claim. The Court adopts a modified version of the contemporaneousness rule from In re Fed. Nat'l Mortgage Ass'n Sec., Deriv. and ERISA Litig., 503 F.Supp.2d 25, 46-48 (D.D.C.2007). The In re Fed. Nat'l Court relied on opinions from the Ninth Circuit and District Courts in Calif......
-
Sec. Action, 08 Ci v. 2793. SRM Global Master Fund Ltd. (In re Bear Stearns Cos.)
...rise to his claim.” In re Alstom SA Sec. Litig., 406 F.Supp.2d 402, 421 (S.D.N.Y.2005); see also In re Fed. Nat'l Mortgage Assoc. Sec., Deriv. & ERISA Litig., 503 F.Supp.2d 25, 35 (D.D.C.2007). Section 18 applies only to Exchange Act filings. See15 U.S.C. § 78r(a). As previously noted, SRM'......
-
Republic Property v. Republic Properties
...1171 n. 49 (D.C.Cir.1978) (describing split of authority without choosing sides); compare Evergreen Equity Trust v. Federal Nat. Mortgage Assn., 503 F.Supp.2d 25, 44 (D.D.C.2007) (Leon, J.) (requiring proof of culpable conduct "as consistent with the Supreme Court's analysis in" Ernst & Ern......