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In Re Fannie Mae 2008 Erisa Litigation

October 22, 2012


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




This action arises out of the financial reversals experienced by Federal National Mortgage Association (FNMA). FNMA's decline in fortune has spawned a number of lawsuits, alleging that as FNMA moved from more conservative investments (i.e., 20% down, 30-year fixed-rate mortgages, prudently underwritten) to more exotic and risky investments (i.e., Alt-A, sub-prime, low documentation, no documentation, imprudently underwritten); FNMA ignored reports that the housing market was overheated; failed to recognize that the housing bubble was about to burst; failed to make adequate disclosures; failed to have adequate risk controls in place and made false and misleading representations in connection therewith. See, e.g., In re Fannie Mae 2008 Sec. Litig., No. 09 MDL 2013 (PAC), 2012 U.S. Dist. LEXIS 124008 (S.D.N.Y. Aug. 30, 2012); SEC v. Mudd, No. 11-cv-09202 (PAC), 2012 U.S. Dist. LEXIS 115087 (S.D.N.Y. Aug. 10, 2012).

Mary P. Moore and David Gwyer bring this action on behalf of all current and former FNMA employees who are or were plan participants in FNMA's Employee Stock Option Plan ("ESOP") during the period from April 17, 2007 to May 14, 2010. The Plan called for investment in FNMA stock, which the Plan fiduciaries continued to hold as the stock fell from $56.97 on April 17, 2010 to $1.01 on May 14, 2010. (Am. Compl. ¶ 72.) Plaintiffs allege that Defendants breached their fiduciary duty under the Employee Retirement Income Security Act (ERISA) by continuing to hold and failing to convert to cash FNMA stock in the ESOP.

The Plaintiffs' complaint alleges three claims: (1) Defendants breached their duty, under ERISA §§ 404 and 405 and 29 C.F.R. § 2550.404e-1(b)(B)(i)(ii), to prudently and loyally manage FNMA's ESOP, by continuing to invest in and failing to divest of FNMA's common stock when FNMA faced dire circumstances; and violated their co-fiduciary obligations by knowing of and failing to remedy other fiduciaries' breaches; (2) Defendants breached their duty to avoid conflicts of interest, in violation of ERISA §§ 404 and 405, by failing to engage independent fiduciaries who could make independent judgments concerning the Plan's investment in FNMA's securities; and (3) FNMA and the Director Defendants failed to adequately monitor the BPC Defendants, in violation of ERISA § 404.

The Defendants are Daniel H. Mudd, Herbert M. Allison, Stephen B. Ashley, Louis J. Freeh, Brenda J. Gaines, Bridget A. Macaskill, Dennis R. Beresford, David H. Sidwell, Greg C. Smith, Egbert L.J. Perry, Jonathan Plutzik, and Michael J. Williams ("Director Defendants") who had primary oversight of the ESOP; David C. Hisey, Christina A. Wolf, David C. Benson, Brian Cobb, Judith C. Dunn, Anthony F. Marra, Betty Thompson, Linda K. Knight, Brian P. McQuaid (Benefits Plan Committee ("BPC Defendants") who had fiduciary responsibilities covering the administration and management of the Plan and the Plan's assets) and John Doe Defendants 1-10. On April 4, 2012, Defendants filed three motions to dismiss.*fn1

For the reasons that follow, the Court GRANTS IN PART and DENIES IN PART Defendants' motions to dismiss. Specifically, the Court dismisses Plaintiffs' second claim (breach of duty to avoid conflicts by failing to engage independent fiduciaries), and all claims against the Director Defendants who became board members after FNMA was placed into conservatorship, but otherwise denies Defendants' motions to dismiss.*fn2


The funds for FNMA's Plan come exclusively through contributions made by FNMA; and, with two limited exceptions, "all amounts contributed under the Plan shall be held by the Trustee under the Trust Agreement, to be managed, invested and reinvested in [FNMA] Stock." (Am. Comp. Ex. B §§ 4.1, 5.1.)*fn3 The BPC is the Plan's named fiduciary, and had the authority to direct the Trustee as to which investments, in which proportions, the Plan should invest. (Am. Compl. Ex. D § 4(b); Exs. A, C.)*fn4 The Board had the authority to appoint, evaluate, and monitor members of the BPC. (Am. Compl. ¶ 397.) The Board also had the authority to determine the extent of FNMA's annual contribution to the Plan and whether contributions would be made in cash or stock. (Am. Compl. Ex. B §§ 4.1-4.2.) Notwithstanding the increasingly deteriorated state of the housing market generally and FNMA in particular, Plaintiffs allege that Defendants let the ESOP's assets fall into the cellar without paying attention to their value.


A. Whether Defendants Acted In A Fiduciary Capacity "A person is only subject to these fiduciary duties 'to the extent' that the person, among

other things, 'exercises any discretionary authority or discretionary control respecting management of such plan' or 'has any discretionary authority or discretionary responsibility in the administration of such plan.'" In re Citigroup ERISA Litig., 662 F.3d 128, 135 (2d Cir. Oct. 19, 2011) (quoting 29 U.S.C. § 1002(21)(A)).

BPC members are the named Plan fiduciaries, charged with "overseeing and administering the operation" of the Plan (BPC Charter Am. Compl. Ex. A; Am. Compl. ΒΆ 101) and, therefore, acted in a fiduciary capacity with respect to the alleged conduct. See In re Lehman ...

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