Freddie Mac 2009 Annual Report Download - page 281

alleged violations of federal securities laws purportedly on behalf of a class of purchasers of Freddie Mac stock from
November 21, 2007 through August 5, 2008. The plaintiff claims that defendants made false and misleading statements
about Freddie Mac’s business that artificially inflated the price of Freddie Mac’s common stock, and seeks unspecified
damages, costs, and attorneys’ fees. On January 20, 2009, FHFA filed a motion to intervene and stay the proceedings. On
February 6, 2009, the court granted FHFA’s motion to intervene and stayed the case for 45 days. On May 19, 2009, plaintiffs
filed an amended consolidated complaint, purportedly on behalf of a class of purchasers of Freddie Mac stock from
November 30, 2007 through September 7, 2008. Freddie Mac served a motion to dismiss the complaint on all parties on
September 23, 2009, which motion remains pending. At present, it is not possible for us to predict the probable outcome of
the lawsuit or any potential impact on our business, financial condition, or results of operations.
Shareholder Demand Letters. In late 2007 and early 2008, the Board of Directors received three letters from
purported shareholders of Freddie Mac, which together contain allegations of corporate mismanagement and breaches of
fiduciary duty in connection with the company’s risk management, alleged false and misleading financial disclosures, and the
alleged sale of stock based on material non-public information by certain current and former officers and directors of Freddie
Mac. One letter demands that the board commence an independent investigation into the alleged conduct, institute legal
proceedings to recover damages from the responsible individuals, and implement corporate governance initiatives to ensure
that the alleged problems do not recur. The second letter demands that Freddie Mac commence legal proceedings to recover
damages from responsible board members, senior officers, Freddie Mac’s outside auditors, and other parties who allegedly
aided or abetted the improper conduct. The third letter demands relief similar to that of the second letter, as well as recovery
for unjust enrichment. Prior to the conservatorship, the Board of Directors formed a Special Litigation Committee, or SLC,
to investigate the purported shareholders’ allegations, and engaged counsel for that purpose. Pursuant to the conservatorship,
FHFA, as the Conservator, has succeeded to the powers of the Board of Directors, including the power to conduct
investigations such as the one conducted by the SLC of the prior Board of Directors. The counsel engaged by the former
SLC is continuing the investigation pursuant to instructions from FHFA. As described below, each of these purported
shareholders subsequently filed lawsuits against Freddie Mac.
Shareholder Derivative Lawsuits. A shareholder derivative complaint, purportedly on behalf of Freddie Mac, was
filed on March 10, 2008, in the U.S. District Court for the Southern District of New York against certain former officers and
current and former directors of Freddie Mac and a number of third parties. An amended complaint was filed on August 21,
2008. The complaint, which was filed by Robert Bassman, an individual who had submitted a shareholder demand letter to
the Board of Directors in late 2007, alleges breach of fiduciary duty, negligence, violations of the Sarbanes-Oxley Act of
2002 and unjust enrichment in connection with various alleged business and risk management failures. It also alleges
“insider selling” and false assurances by the company regarding our financial exposure in the subprime financing market, our
risk management and our internal controls. The plaintiff seeks unspecified damages, declaratory relief, an accounting,
injunctive relief, disgorgement, punitive damages, attorneys’ fees, interest and costs. On November 20, 2008, the court
transferred the case to the Eastern District of Virginia.
On July 24, 2008, The Adams Family Trust and Kevin Tashjian filed a purported derivative lawsuit in the U.S. District
Court for the Eastern District of Virginia against certain current and former officers and directors of Freddie Mac, with
Freddie Mac named as a nominal defendant in the action. The Adams Family Trust and Kevin Tashjian had previously sent a
derivative demand letter to the Board of Directors in early 2008 requesting that it commence legal proceedings against senior
management and certain directors to recover damages for their alleged wrongdoing. Similar to the Bassman case described
above, this complaint alleges that the defendants breached their fiduciary duties by failing to implement and/or maintain
sufficient risk management and other controls; failing to adequately reserve for uncollectible loans and other risks of loss;
and making false and misleading statements regarding the company’s exposure to the subprime market, the strength of the
company’s risk management and internal controls, and the company’s underwriting standards in response to alleged abuses in
the subprime industry. The plaintiffs also allege that certain of the defendants breached their fiduciary duties and unjustly
enriched themselves through their sale of stock based on material non-public information. The complaint seeks the
imposition of a constructive trust for the proceeds of alleged insider stock sales, unspecified damages and equitable relief,
disgorgement of proceeds of alleged insider stock sales, costs, and attorneys’, accountants’ and experts’ fees.
On August 15, 2008, a purported shareholder derivative lawsuit was filed by the Louisiana Municipal Police Employees
Retirement System, or LMPERS, in the U.S. District Court for the Eastern District of Virginia against certain current and
former officers and directors of Freddie Mac. The plaintiff alleges that the defendants breached their fiduciary duties and
violated federal securities laws in connection with the company’s recent losses, including by unjustly enriching themselves
with salaries, bonuses, benefits and other compensation, and through their sale of stock based on material non-public
information. The plaintiff seeks unspecified damages, constructive trusts on proceeds associated with insider trading and
improper payments made to defendants, restitution and disgorgement, an order requiring reform and improvement of
corporate governance, costs and attorneys’ fees.
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