Freddie Mac 2004 Annual Report Download - page 214

NOTE 13: LEGAL CONTINGENCIES
Freddie Mac is involved as a party to a variety of legal proceedings arising from time to time in the
ordinary course of business including, among other things, contractual disputes, personal injury claims,
employment-related litigation and other legal proceedings incidental to the company's business. Freddie Mac
is frequently involved, directly or indirectly, in litigation involving mortgage foreclosures. Freddie Mac is also
involved in proceedings arising from its termination of a seller/servicer's eligibility to sell mortgages to, and
service mortgages for, the company. In these cases, the former seller/servicer sometimes seeks damages
against Freddie Mac for wrongful termination under a variety of legal theories. In addition, Freddie Mac is
sometimes sued in connection with the origination or servicing of mortgages. These suits generally involve
claims alleging wrongful actions of seller/servicers. Freddie Mac's contracts with its seller/servicers generally
provide for them to indemnify the company against liability arising from their wrongful actions.
Freddie Mac is now subject to various legal proceedings, including regulatory investigations and
administrative and civil litigation, arising from the restatement of its previously issued consolidated Ñnancial
statements for the years 2000 and 2001 and the Ñrst three quarters of 2002 and the revision of fourth quarter
and full-year consolidated Ñnancial statements for 2002 (collectively referred to as the ""restatement'').
Freddie Mac believes that a loss in connection with the proceedings arising from the restatement is probable
and currently estimates the range of minimum loss to be from $75 million to $100 million. Freddie Mac has
established a reserve of $75 million for this loss contingency in the second quarter of 2003, the period in which
many of the legal proceedings were initiated. The ultimate resolution of these proceedings could result in
losses lower than or in excess of the estimated range of minimum loss. Litigation and claims resolution are
subject to many uncertainties and are not susceptible to accurate prediction. It is not possible for the company
to reasonably estimate the upper end of the range of any additional losses that might result from the adverse
resolution of any of these legal proceedings, or their potential eÅect on the company's Ñnancial condition or
results of operations.
Securities Class Action Lawsuits. In June 2003, and thereafter, securities class action lawsuits were
brought in three separate federal district courts against Freddie Mac and certain former executive oÇcers in
connection with the restatement. While most of the cases were voluntarily dismissed by the plaintiÅs, the two
remaining ones were consolidated and are now pending in the U.S. District Court for the Southern District of
New York.
In essence, the plaintiÅs in the consolidated action, claim that the defendants improperly managed
earnings to create a misleading impression of steady earnings by Freddie Mac. PlaintiÅs further allege that
defendants engaged in a number of improper transactions that violated GAAP and that they made false and
misleading statements regarding Freddie Mac's Ñnancial status. The complaint, which covers the period from
June 15, 1999 through June 6, 2003, seeks unspeciÑed compensatory damages, costs and expenses.
In March 2004, the plaintiÅs in one of the cases, the Ohio Public Employees Retirement System and the
State Teachers Retirement System, were appointed lead plaintiÅs for the consolidated action. Freddie Mac
Ñled a motion to dismiss the action in April, which was denied by the court on July 19, 2004. The case is now
in the discovery phase.
Shareholder Derivative Lawsuits. Two shareholder derivative lawsuits were Ñled during 2003 against
Freddie Mac and certain former and current executives and, in one of the suits, members of Freddie Mac's
Board of Directors alleging breach of Ñduciary duty and seeking indemniÑcation in connection with the
restatement. Both cases were ultimately assigned to the same judge in New York who is handling the
securities class action lawsuits described above. In July 2003, all of the then current Board members were
dismissed from the lawsuits in which they were named with the consent of the plaintiÅ. On January 16, 2004,
Freddie Mac moved to dismiss one of the lawsuits brought by the Ester Sadowsky Testamentary Trust
because of the plaintiÅ's failure to make a pre-suit demand. The court dismissed the case without prejudice on
July 19, 2004. The other lawsuit is still pending, awaiting a response to the plaintiÅ's pre-suit demand notice
by a Special Litigation Committee of Freddie Mac's Board of Directors. Subsequently, the Sadowsky plaintiÅ
sent a demand notice to Freddie Mac and on March 4, 2005, Ñled a new complaint in an action in the same
court.
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