Case Background and Status

This class action litigation arose after Fannie Mae publicly revealed on Sept. 22, 2004, that its regulator, the Office of Federal Housing Enterprise Oversight (“OFHEO”), had found that Fannie Mae and its three most senior officers had intentionally misapplied accounting rules and engaged in other misconduct to distort financial results and “smooth” earnings growth quarter over quarter. Fannie Mae’s common stock price fell from $75.65 per share on Sept. 21, 2004, to $70.69 per share on Sept. 22, 2004 on this news.

After the close of markets that same day, OFHEO released a 198-page report on the accounting irregularities at Fannie Mae, characterizing them as “pervasive” and “reinforced by management.”

As Fannie Mae officials publicly disputed OFHEO’s findings, the U.S. Department of Justice and the Securities and Exchange Commission (SEC) launched their own investigations into the Fannie Mae’s accounting practices. On Dec. 15, 2004, the SEC ordered Fannie Mae to restate earnings back to 2001 because Fannie Mae had not complied with Generally Accepted Accounting Principles in preparing its financial statements. Those corrections, contained in the restatement filed by Fannie Mae on Dec. 6, 2006, reduced previously reported earnings by $6.3 billion.

On Jan. 13, 2005, Judge Leon appointed the Ohio Public Employees Retirement System and the State Teachers Retirement System of Ohio as lead plaintiffs, and approved as Lead Counsel, the law firm of Waite, Schneider, Bayless & Chesley Co. L.P.A. and as Co-Lead Counsel the law firm of Berman DeValerio Pease Tabacco Burt & Pucillo. By order dated August 6, 2007, Bernstein Liebhard & Lifshitz, LLP replaced Berman DeValerio Pease Tabacco Burt & Pucillo as Co-Lead Counsel.

Lead plaintiffs filed their Consolidated Class Action Complaint on March 4, 2005, against Fannie Mae and three senior officers: Franklin Raines, former chairman of the board and chief executive officer; Timothy Howard, former vice chairman of the board and chief financial officer; and Leanne Spencer, former controller. These defendants filed their motions to dismiss two months later.

On Feb. 10, 2006, Judge Leon denied these defendants Motions to Dismiss, ruling that the plaintiffs’ complaint gave rise to a “strong inference” that Fannie Mae and its senior officers intended to deceive investors by violating accounting rules and manipulating earnings.

In related proceedings, the SEC filed a fraud complaint against Fannie Mae. On May 23, 2006, the SEC and OFHEO announced a joint settlement with Fannie Mae for $400 million in civil penalties to the U.S. government. On Dec. 18, 2006 OFHEO filed an action against Raines, Howard, and Spencer to recoup more than $115 million in improper bonuses paid to these former officers.

Plaintiffs filed a Second Amended Consolidated Class Action Complaint on Aug. 14, 2006, adding KPMG LLP and Goldman, Sachs & Co. as defendants in the Fannie Mae securities fraud case. KPMG had been Fannie Mae's outside auditor for 35 years. Goldman Sachs served as the architect and underwriter of a number of Fannie Mae real estate mortgage investment conduit, or REMIC, transactions. The additions follow the release of the final OFHEO report on its special examination of Fannie Mae, which outlines the two firms' roles in the fraud.

On Dec. 6, 2006, Fannie Mae announced the company had completed its restatement and filed its 2004 Form 10-K. The cumulative impact of the restatement was a total reduction in retained earnings of $6.3 billion through June 30, 2004.

Both KPMG and Goldman Sachs have filed motions to dismiss. Judge Leon denied KPMG's motion to dismiss on Jan. 24, 2007 and on May 8, 2007, he granted Goldman Sachs' motion to dismiss.

Lead plaintiffs filed a motion for class certification on May 17, 2006. Judge Leon certified this action as a Class Action and established the class period to run from April 17, 2001 to December 22, 2004.

On June 1, 2007, Judge Leon dismissed a related derivative action against Fannie Mae's board of directors. The derivitive suit sought to tighten internal controls at Fannie Mae while concurrently bringing claims against current and former executives for losses from the alleged accounting scandal. This dismissed action does not change or have any impact upon the ongoing securities class action against Fannie Mae and other defendents discussed on this website.