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Kuriakose v. Federal Home Loan Mortgage Co.

December 8, 2009

JINO KURIAKOSE, INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED, PLAINTIFF,
v.
FEDERAL HOME LOAN MORTGAGE CO., RICHARD SYRON, PATRICIA L. COOK, AND ANTHONY S. PISZEL, DEFENDANTS, INTERVENOR.



The opinion of the court was delivered by: John F. Keenan, United States District Judge

Opinion and Order

Lead Plaintiff Central States, Southeast and Southwest Areas Pension Fund brings two motions on behalf of a proposed class (collectively the "Plaintiffs") during the Private Securities Litigation Reform Act's ("PSLRA") discovery stay in an apparent attempt to obtain additional evidence with which to oppose Federal Home Loan Mortgage Co.'s ("Freddie Mac") anticipated motion to dismiss. First, Plaintiffs move to partially lift the PSLRA discovery stay to obtain documents produced by Freddie Mac in conjunction with several active government investigations. Plaintiffs also move to declare unenforceable a contractual provision allegedly contained within many Freddie Mac severance agreements which Plaintiffs contend has prevented them from interviewing former employees of Freddie Mac.

I. BACKGROUND

Freddie Mac is the publicly-traded government-sponsored enterprise chartered by Congress in 1970 to provide stability in the secondary market for residential mortgages, to increase the liquidity of mortgage investments, and to improve the distribution of investment capital available for residential mortgage financing. See 12 U.S.C. § 1451 Note. The value of Freddie Mac's common stock fell precipitously amidst the deterioration of the U.S. housing and sub-prime mortgage market. In September 2008, the Federal Housing Finance Agency ("FHFA") placed the company into conservatorship due to its inadequate capital base from losses in mortgage holdings.

This action is brought on behalf of all persons who purchased Freddie Mac equity securities between November 20, 2007, through and including September 7, 2008. The Amended Complaint in this action asserts that Freddie Mac and several of its directors and/or officers violated § 10(b) and § 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, by allegedly misrepresenting to investors the soundness of the company's mortgage portfolio, its underwriting standards, and the sufficiency of its capital. (Am. Compl. ¶¶ 1-2, 14-15.)

Freddie Mac also has been the subject of several government investigations regarding its role in the housing crisis. On December 9, 2008, the House Committee on Oversight and Government Reform (the "House Committee") held a hearing on "The Role of Fannie Mae and Freddie Mac in the Financial Crisis."

According to Plaintiffs, the House Committee obtained nearly 400,000 documents from Fannie Mae and Freddie Mac in connection with this hearing. Freddie Mac's public disclosures also reveal that it is being investigated by the Securities and Exchange Commission (the "SEC") and the United States Attorney's Offices (the "USAO") for the Southern District of New York and the Eastern District of Virginia.*fn1 To date, these entities have not filed actions against Freddie Mac.

Pursuant to the PSLRA, discovery has been stayed in this matter during the pendency of a motion to dismiss. In an attempt to fill the void created by this stay provision, after filing the Complaint, Plaintiffs' counsel has retained investigators to contact numerous former employees of Freddie Mac to solicit information relevant to Plaintiffs' claims, including the facts underlying the alleged fraud. Counsel contends that twenty-two former Freddie Mac employees have declined to speak with investigators because of a "non-participation" clause contained in their severance agreements with Freddie Mac. According to Plaintiffs' counsel, the clause states as follows:

You acknowledge that in the absence of this agreement you have the right voluntarily to assist others in bringing claims against the released parties. By signing below, you agree to waive this right. Therefore, except as otherwise provided in the agreement, you agree that you will not encourage, counsel, or assist any attorney, their clients, or any other person (including current or former Freddie Mac employees) in bringing or prosecuting any claim, charges, or complaints against the released parties, unless pursuant to a valid subpoena or court order to produce documents or testify, or unless you have been requested by an agency of the United States government or state or local government (collectively "government agency") to assist in a government agency investigation or proceeding. To the extent that you are requested by any government agency to participate or assist in a government agency investigation or proceeding, or to the extent that any law may prohibit you from waiving your right to bring or participate in the investigation of a claim, you nevertheless waive any right you otherwise might have to seek or accept any damages or release in any proceeding. Furthermore, to the extent that you file any claim against Freddie Mac or any claim is filed on your behalf against Freddie Mac, you agree not to seek or accept any damages or other relief as a result of such claims. (Pl. Non-Participation Mem. at 13.) Plaintiffs submit four affidavits of investigators with whom the twenty-two former Freddie Mac employees declined to speak. In their affidavits, the investigators (a) state that each of the twenty-two employees noted their severance agreement as a reason for declining an interview; and (b) set forth the specific topics on which they believe the former employees may have pertinent information.

II. THE INSTANT MOTIONS

Plaintiffs move to partially lift the PSLRA discovery stay, seeking to obtain all documents produced to the House Committee, SEC, and USAO in the course of their investigations, including transcripts of any interviews conducted in connection with such investigations. Plaintiffs argue that courts routinely modify the PSLRA discovery stay when defendants already have produced documents pursuant to government investigations and doing so would not frustrate the purposes of the PSLRA. (Pl. PSLRA Mem. at 7-9, 16-19.) Plaintiffs further argue that they would incur "undue prejudice" absent a lifting of the PSLRA discovery stay since there is much uncertainty surrounding the future of Freddie Mac and currently they are "the only major interested party in the criminal and civil proceedings . . . without access to the essential documents." (Pl. PSLRA Mem. at 11.)

Plaintiffs also seek a court order declaring unenforceable the non-participation clause contained within many Freddie Mac severance agreements. Plaintiffs contend that the provision is contrary to public policy in that it prohibits employees from disclosing the illegal activities of their former employer which "can be harmful to the public's ability to rein in improper behavior, and in some contexts ability of the United States to police violations of its laws." Chambers v. Capital Cities/ABC, 159 F.R.D. 441, 444 (S.D.N.Y. 1995).

A. Motion to Lift the PSLRA Discovery Stay

The PSLRA provides that "all discovery and other proceedings shall be stayed during the pendency of any motion to dismiss, unless the court finds upon the motion of any party that particularized discovery is necessary to preserve evidence or to prevent undue prejudice to that party." 15 U.S.C. § 78u-4(b)(3)(B).

Plaintiffs argue that the Court should lift the stay because the documents already have been produced to third parties - i.e., the House Committee, USAO, and SEC. That consideration certainly bears on whether the document request is adequately particularized. Plaintiffs request only this finite, identifiable set of materials that Freddie Mac most likely could produce at relatively little expense because they already have been compiled, reviewed, and produced. This consideration alone, however, is insufficient to lift the discovery stay. Contrary to Plaintiffs' assertion, courts do not routinely lift the PSLRA discovery stay when the requested documents have already been provided to government investigators. See, e.g., In re Refco, Inc., 05 Civ. 8626, 2006 WL 2337212, at *2 (S.D.N.Y. Aug. 8, 2006) ("As a generalized matter, the mere fact that documents have been provided to a third party does not entitle plaintiffs to a modification of the stay to obtain those documents."); In re Smith Barney Transfer Agent Litig., No. 05 Civ. 7583, 2006 WL 1738078, at *3 (S.D.N.Y. June 26, 2006) (holding that it is "irrelevant" whether requested material already had been produced to the government because the "proper inquiry under the PSLRA is whether the plaintiff would be unduly prejudiced by the stay, not whether the defendant would be burdened by lifting the stay"); In re Vivendi Universal ...


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