Fannie Mae 2008 Annual Report Download - page 71

On April 16, 2007, KPMG LLP, our former outside auditor and a co-defendant in the shareholder class action
suit, filed cross-claims against us in this action for breach of contract, fraudulent misrepresentation, fraudulent
inducement, negligent misrepresentation and contribution. KPMG amended these cross-claims on February 25,
2008. KPMG is seeking unspecified compensatory, consequential, restitutionary, rescissory and punitive
damages, including purported damages related to legal costs, exposure to legal liability, costs and expenses of
responding to investigations related to our accounting, lost fees, attorneys’ fees, costs and expenses.
We believe we have valid defenses to the claims in these lawsuits and intend to defend against these lawsuits
vigorously.
On October 17, 2008, FHFA, as conservator for Fannie Mae, intervened in the consolidated shareholder class
action (as well as in the consolidated ERISA litigation and the shareholder derivative lawsuits pending in the
U.S. District Court for the District of Columbia) and filed a motion to stay those cases. On October 20, 2008,
the Court issued an order staying the cases until January 6, 2009. Upon expiration of the stay, discovery in
those cases resumed.
Securities Class Action Lawsuits Pursuant to the Securities Act of 1933
Beginning on August 7, 2008, a series of shareholder lawsuits were filed under the Securities Act against
underwriters of issuances of certain Fannie Mae common and preferred stock. Two of these lawsuits were also
filed against us and one of those two was also filed against certain former Fannie Mae officers and directors.
While the factual allegations in these cases vary to some degree, these plaintiffs generally allege that
defendants misled investors by understating the company’s need for capital, causing putative class members to
purchase shares at artificially inflated prices. Their complaints allege similar violations of Section 12(a)(2) of
the Securities Act, and seek rescission, damages, interest, costs, attorneys’ and experts’ fees, and other
equitable and injunctive relief. On November 12, 2008, we filed a motion with the Judicial Panel on
Multidistrict Litigation to transfer and coordinate each of these actions with the other recently filed
section 10(b), section 12(a)(2) and ERISA actions. The Panel granted our motion on February 11, 2009, and
all of these cases are now pending before in the U.S. District Court for the Southern District of New York for
coordinated or consolidated pretrial proceedings. On February 13, 2009, the district court entered an order
appointing Tennessee Consolidated Retirement System as lead plaintiff on behalf of purchasers of preferred
stock, and appointing the Massachusetts Pension Reserves Investment Management Board and the Boston
Retirement Board as lead plaintiffs on behalf of common stockholders. Each individual case is described more
fully below. We believe we have valid defenses to the claims in these lawsuits and intend to defend against
these lawsuits vigorously.
Krausz v. Fannie Mae, et al.
On September 11, 2008, Malka Krausz filed a complaint in New York Supreme Court against Fannie Mae,
former officers Daniel H. Mudd and Stephen M. Swad, and underwriters Lehman Brothers, Inc., Merrill
Lynch, Pierce, Fenner & Smith Inc., Goldman Sachs & Co. and J.P. Morgan Securities, Inc. The complaint
was filed on behalf of purchasers of Fannie Mae’s Fixed-to-Floating Rate Non-Cumulative Preferred Stock,
Series S (referred to as the “Series S Preferred Stock”) pursuant to an offering that closed on December 11,
2007. The complaint alleges that defendants misled investors by understating our need for capital, causing
putative class members to purchase shares at artificially inflated prices. The complaint contends further that
the defendants violated Sections 12(a)(2) and 15 of the Securities Act. The complaint also asserts claims for
common law fraud and negligent misrepresentation. The plaintiff seeks rescission of the purchases, damages,
costs, including attorneys’, accountants’ and experts’ fees, and other unspecified relief. On October 6, 2008,
this case was removed to the U.S. District Court for the Southern District of New York, where it is currently
pending. On October 14, 2008, we, along with certain of the other defendants, filed a motion to dismiss this
case. That motion is fully briefed and remains pending.
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