Fannie Mae 2005 Annual Report Download - page 311

Legal Contingencies
Litigation, claims and proceedings of all types are subject to many uncertain factors that generally cannot be
predicted with assurance. The following describes the material legal proceedings, examinations and other
matters that: (1) were pending as of December 31, 2005; (2) were terminated during the period from January 1,
2005 through the filing of this report; or (3) are pending as of the filing of this report. An unfavorable
outcome in any of these legal proceedings could have a material adverse effect on our business, financial
condition, results of operations and cash flows. However, we are unable to reasonably estimate a range of
possible losses at this time. Accordingly, we have not recorded a reserve for any litigation exposures discussed
herein. We believe we have defenses to the claims in these lawsuits described below and intend to defend
these lawsuits vigorously.
We are involved in a number of legal and regulatory proceedings that arise in the ordinary course of business
related to our operations, relationships with our sellers and servicers, or administrative functions, which
include contractual disputes and employment-related claims. These cases include legal proceedings that arise
in connection with properties acquired either through foreclosure on properties securing delinquent mortgage
loans we own or through our receipt of deeds to those properties in lieu of foreclosure, as well as claims
related to possible tort liability. In addition, these cases include litigation resulting from disputes with lenders
concerning their loan origination or servicing obligations to us, or can result from disputes concerning
termination by us (for a variety of reasons) of a lender’s authority to do business with us as a seller and/or
servicer.
Pursuant to the provisions of our bylaws and indemnification agreements, directors and officers have a right to
have their reasonable legal fees and expenses incurred in connection with any investigation, claim, action, suit
or proceeding, indemnified to the fullest extent permitted by applicable law, by reason of the fact that such
person is or was serving as a director or officer of Fannie Mae. Until such time as an indemnification
determination is made, we are under an obligation to advance those fees and expenses. During and subsequent
to 2005, we advanced the expenses of certain current and former officers and directors for the reasonable costs
and fees incurred by them, as they relate to the OFHEO special examination, the Paul, Weiss, Rifkind,
Wharton & Garrison LLP (“Paul Weiss”) investigation, the U.S. Attorney’s Office and SEC investigations, and
several shareholder and derivative lawsuits. None of these amounts were material.
Restatement-Related Matters
In re Fannie Mae Securities Litigation
Beginning on September 23, 2004, 13 separate complaints were filed by holders of our securities against us, as
well as certain of our former officers, in the U.S. District Court for the District of Columbia, the U.S. District
Court for the Southern District of New York and the U.S. District Court for the Southern District of Ohio. The
complaints in these lawsuits purport to have been made on behalf of a class of plaintiffs consisting of
purchasers of Fannie Mae securities between April 17, 2001 and September 21, 2004. The complaints alleged
that we and certain of our officers, including Franklin D. Raines, J. Timothy Howard and Leanne Spencer,
made material misrepresentations and/or omissions of material fact in violation of the federal securities laws.
Plaintiffs’ claims were based on findings contained in OFHEO’s September 2004 interim report regarding its
findings to that date in its special examination of our accounting policies, practices and controls.
All of the cases were consolidated and/or transferred to the U.S. District Court for the District of Columbia. A
consolidated complaint was filed on March 4, 2005 against us and former officers Franklin D. Raines, J.
Timothy Howard and Leanne Spencer. The court entered an order naming the Ohio Public Employees
Retirement System and State Teachers Retirement System of Ohio as lead plaintiffs. The consolidated
complaint generally made the same allegations as the individually-filed complaints, which is that we and
certain of our former officers made false and misleading statements in violation of the federal securities laws
in connection with certain accounting policies and practices. More specifically, the consolidated complaint
alleged that the defendants made materially false and misleading statements in violation of Sections 10(b) and
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FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)