Freddie Mac 2010 Annual Report Download - page 283

Mac’s business that artificially inflated the price of Freddie Mac’s common stock, and seeks unspecified damages, costs, and
attorneys’ fees. On February 6, 2009, the Court granted FHFA’s motion to intervene in its capacity as Conservator. 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 filed a motion to dismiss the complaint on
February 24, 2010, which motion remains pending.
At present, it is not possible for us to predict the probable outcome of these lawsuits 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. Collectively, the letters
demanded that the board commence an independent investigation into the alleged conduct, institute legal proceedings to
recover damages and unjust enrichment from board members, senior officers, Freddie Mac’s outside auditors, and other
parties who allegedly aided or abetted the improper conduct, and implement corporate governance initiatives to ensure that
the alleged problems do not recur. 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
On July 24, 2008 and August 15, 2008, purported shareholders, The Adams Family Trust, Kevin Tashjian and the
Louisiana Municipal Police Employees Retirement System, or LMPERS, filed two derivative lawsuits 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 actions. On October 15, 2008, the U.S. District Court for the Eastern
District of Virginia consolidated these two cases. Previously, on March 10, 2008, a purported shareholder, Robert Bassman,
had filed a similar shareholder derivative lawsuit in the U.S. District Court for the Southern District of New York, which was
subsequently transferred to the Eastern District of Virginia and then, on December 12, 2008, consolidated with the cases filed
by The Adams Family Trust, Kevin Tashjian, and LMPERS. While no consolidated complaint has yet been filed, the
complaints collectively assert claims for breach of fiduciary duty, negligence, violations of federal securities laws, violations
of the Sarbanes-Oxley Act of 2002 and unjust enrichment. Those claims are based on allegations that defendants failed to
implement and/or maintain sufficient risk management and other controls; failed to adequately reserve for uncollectible loans
and other risks of loss; and made 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 market. The plaintiffs also allege that certain of the defendants breached their fiduciary
duties and unjustly enriched themselves through their salaries, bonuses, benefits and other compensation, and sale of stock
based on material non-public information. The complaints seek unspecified damages, equitable relief, the imposition of a
constructive trust for the proceeds of alleged insider stock sales, an accounting, restitution, disgorgement, declaratory relief,
an order requiring reform and improvement of corporate governance, punitive damages, costs, interest, and attorneys’,
accountants’ and experts’ fees.
After FHFA successfully intervened in these consolidated actions in its capacity as Conservator, it filed a motion to
substitute for plaintiffs. On July 27, 2009, the District Court entered an order granting FHFA’s motion, and on August 20,
2009, the plaintiffs filed an appeal of that order. On October 29, 2009, FHFA filed a motion to dismiss the appeal for lack of
appellate jurisdiction, which motion remains pending. On November 16, 2009, the District Court issued an order granting the
parties’ consent motion to stay all proceedings, including the deadlines for the defendants to answer or otherwise respond to
the complaints, which stay was extended by the District Court until February 1, 2011. On February 1, 2011, FHFA filed a
status report with the District Court requesting that it extend the stay until March 2, 2011. The District Court granted this
request on February 16, 2011.
On June 6, 2008, a purported shareholder, the Esther Sadowsky Testamentary Trust, filed a shareholder derivative
complaint 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. Plaintiff asserts claims for alleged breach of fiduciary duty and declaratory and injunctive
relief, based on allegations that defendants caused the company to violate its charter by engaging in “unsafe, unsound and
improper speculation in high risk mortgages to boost near term profits, report growth in the company’s mortgage-related
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