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In re Fannie Mae 2008 Securities Litigation

November 24, 2009

IN RE FANNIE MAE 2008 SECURITIES LITIGATION


The opinion of the court was delivered by: Honorable Paul A. Crotty, United States District Judge

ORDER

Upon the filing of 19 class actions against Federal National Mortgage Association ("Fannie Mae"), its officers and directors, together with securities underwriters, alleging various violations of the federal securities laws, the Judicial Panel on Multidistrict Litigation consolidated these matters here in the United States District Court for the Southern District of New York. (Order of April 16, 2009, In re Fannie Mae 2008 Securities Litigation, Case No. 1:08-cv-07831-GEL (Dkt. No. 94)) (the "April 16 Order"). When Judge Lynch was elevated to the Second Circuit, the cases were reassigned to this Court on August 28, 2009.

In the April 16 Order, Judge Lynch also appointed Lead Plaintiffs, approved their selection of counsel, and directed Lead Plaintiffs to file an amended complaint. On June 22, 2009, Lead Plaintiffs filed a Joint Consolidated Amended Class Action Complaint alleging, inter alia, violations of Sections 12(a)(2) and 15 of the 1933 Securities Act (the "1933 Act") based on five securities offerings made by Fannie Mae in 2007 and 2008:

(1) November 16, 2007, 7.625% Non-Cumulative Preferred Stock, Series R;

(2) December 6, 2007, fixed to floating rate Non-Cumulative Preferred Stock, Series S;

(3) May 8, 2008, 8.75% Non-Cumulative Mandatory Convertible Preferred Stock, Series 2008;

(4) May 8, 2008, Common Stock; and

(5) May 13, 2008, 8.25% Non-Cumulative Preferred Stock, Series T.

These offering totaled more than $14 billion. Plaintiffs allege that Fannie Mae's Offering Circulars for these securities made untrue statements of material facts and omitted material facts. Essentially, Plaintiffs contend that Fannie Mae Circulars failed to accurately report the bursting of the housing bubble. In accounting terms, there was a material understatement of combined "loss reserves" and "other than temporary impairments," and an overstatement of "deferred tax reserves."

On July 13, 2009, Defendants Fannie Mae, Merrill Lynch, Pierce, Fenner & Smith, Inc., Citigroup Global Markets, Inc., Morgan Stanley & Co. Inc., UBS Securities, LLC, Wachovia Capital Markets, LLC, Wachovia Securities, LLC, Goldman, Sachs & Co., Banc of America Securities LLC, Barclays Capital Inc., Deutsche Bank Securities Inc., Wells Fargo Securities LLC, J.P. Morgan Securities Inc., E* Trade Securities LLC, and Bear, Stearns & Co., Inc. (n/k/a J.P. Morgan Securities Inc., Daniel H. Mudd, Stephen M. Swad, Robert T. Blakely, and David C. Hisey (collectively, the "Defendants"), moved, pursuant to Fed. R. Civ. P. 12(b)(6), to dismiss the Sections 12(a)(2) and 15 claims under the Securities Act of 1933, 15 U.S.C. §§ 77-l(a)(2) and 77-o in the Joint Consolidated Amended Class Action Complaint.

Defendants argue that they are exempt from 1933 Act liability under the governmental charter that created Fannie Mae and because Fannie Mae is a government instrumentality.

RELEVANT STATUTORY PROVISIONS 1933 Securities Act: Section 3(a) -- Except as hereinafter expressly provided, the provisions of this title shall not apply to any of the following classes of securities:

(2) Any security issued or guaranteed by the United States . . . or by any person controlled or supervised by and acting as an instrumentality of the Government of the United States, pursuant to authority granted ...


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