Freddie Mac 2008 Annual Report Download - page 242

NOTE 13: LEGAL CONTINGENCIES
We are 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 our business. We are frequently involved, directly or indirectly, in litigation involving mortgage
foreclosures. From time to time, we are also involved in proceedings arising from our termination of a seller/servicer’s
eligibility to sell mortgages to, and/or service mortgages for, us. In these cases, the former seller/servicer sometimes seeks
damages against us for wrongful termination under a variety of legal theories. In addition, we are sometimes sued in
connection with the origination or servicing of mortgages. These suits typically involve claims alleging wrongful actions of
seller/servicers. Our contracts with our seller/servicers generally provide for indemnification against liability arising from
their wrongful actions.
Litigation and claims resolution are subject to many uncertainties and are not susceptible to accurate prediction. In
accordance with SFAS 5 we reserve for litigation claims and assessments asserted or threatened against us when a loss is
probable and the amount of the loss can be reasonably estimated.
Putative Securities Class Action Lawsuits. Reimer vs. Freddie Mac, Syron, Cook, Piszel and McQuade, or Reimer.
and Ohio Public Employees Retirement System vs. Freddie Mac, Syron, et al, or OPERS. Two virtually identical putative
securities class action lawsuits were filed against Freddie Mac and certain former officers alleging that the defendants
violated federal securities laws by making “false and misleading statements concerning our business, risk management and
the procedures we put into place to protect the company from problems in the mortgage industry.” Reimer was filed on
November 21, 2007 in the U.S. District Court for the Southern District of New York and OPERS was filed on January 18,
2008 in the U.S. District Court for the Northern District of Ohio. On March 10, 2008, the Court in Reimer granted the
plaintiff’s request to voluntarily dismiss the case, and the case was dismissed. In OPERS, on April 10, 2008, the court
appointed OPERS as lead plaintiff and approved its choice of counsel. On September 2, 2008, defendants filed a motion to
dismiss plaintiff’s amended complaint, which purportedly asserted claims on behalf of a class of purchasers of Freddie Mac
stock between August 1, 2006 and November 20, 2007. On November 7, 2008, the plaintiff filed a second amended
complaint, which removed certain allegations against Richard Syron, Anthony Piszel, and Eugene McQuade, thereby leaving
insider-trading allegations against only Patricia Cook. The second amended complaint also extends the damages period, but
not the class period, to allow the plaintiff to rely on statements made leading up to and following FHFA’s appointment as
Conservator. The complaint seeks unspecified damages and interest, and reasonable costs and expenses, including attorney
and expert fees. On November 19, 2008, the Court granted FHFA’s motion to intervene in its capacity as Conservator. The
Court subsequently granted FHFA a 90-day stay of the case effective January 4, 2009, with the response to the complaint to
be submitted by April 6, 2009. At present, it is not possible for us to predict the probable outcome of the OPERS lawsuit or
any potential impact on our business, financial condition, or results of operations.
Kuriakose vs. Freddie Mac, Syron, Piszel and Cook. Another putative class action lawsuit was filed against Freddie
Mac and certain former officers on August 15, 2008 in the U.S. District Court for the Southern District of New York for
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. 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. FHFA has instructed the counsel
engaged by the former SLC to continue the investigation.
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