United States District Court, District of Columbia
In re FEDERAL NATIONAL MORTGAGE ASSOCIATION SECURITIES, DERIVATIVE, AND
[Copyrighted Material Omitted]
Joshua S. Devore, Steven J. Toll, Cohen Milstein Sellers & Toll PLLC, Washington, DC, Jeff A. Almeida, Grant & Eisenhofer P.A., Wilmington, DE, for Plaintiffs.
Julia Evans Guttman, Baker Botts, LLP, Washington, DC, for Defendant.
RICHARD J. LEON, District Judge.
This is a class action securities fraud suit against Federal National Mortgage Association (" Fannie Mae" ), its former accountant, KPMG, LLP, and three of Fannie Mae's former senior executives (collectively, " defendants" ), brought by a class of parties represented by lead plaintiffs Ohio Public Employees Retirement System (" OPERS" ) and State Teachers Retirement System of Ohio (" STRS" ) (collectively, " plaintiffs" ). The parties filed eight separate summary judgment motions in this case. Recently, I granted defendant Franklin D. Raines's and J. Timothy Howard's Motions for Summary Judgment.  See Mem. Op., Oct. 16, 2012, 2012 WL 4920071, [Dkt. # 1056]; Order, Oct. 16, 2012 [Dkt. # 1057]; Mem. Op., Sept. 20,
2012 [Dkt. # 1053]; Order, Sept. 20, 2012 [Dkt. # 1054]. This opinion addresses defendant Leanne G. Spencer's Motion for Summary Judgment. I will address the defendants' joint motions, KPMG's motion, and the plaintiffs' motions at a later time. Upon consideration of the pleadings, oral argument, and the entire record herein, defendant Spencer's Motion for Summary Judgment is GRANTED.
I. Factual Background
Fannie Mae, along with its cousin Freddie Mac, operates in the secondary mortgage market as a federally-chartered government-sponsored enterprise, buying home mortgages from banks and issuing debt and mortgage-backed securities. Formerly a private shareholder-owned company, Fannie Mae has been in a conservatorship under the Federal Housing Finance Agency (" FHFA" ) since September 6, 2008. However, during this litigation's class period, beginning April 17, 2001 and ending December 22, 2004, Fannie Mae's stock was traded on the New York Stock Exchange, and it was regulated by the Office of Federal Housing Enterprise Oversight (" OFHEO" ). OFHEO's oversight responsibilities generally involved ensuring that Fannie Mae had adequate capital, a sound corporate structure, and financial stability. This, of course, was no small task: Fannie Mae was, and still is, one of the largest financial institutions in the country and had a balance sheet of mortgage loans and mortgage-backed securities worth hundreds of billions of dollars. Defs.' Reply Regarding their Statements of Undisputed Material Fact in Supp. of Their Joint Mot. for Partial Summ. J. Based on FAS 133 Accounting Issues ¶ 1 [Dkt. # 1024-4] (" Defs.' Reply SUMF FAS 133" ). Beginning in January 1999 and continuing through the class period, Spencer served as Senior Vice President and Controller of Fannie Mae. Fannie Mae's SGIMF ¶ 8; Lead Pls.' Mem. of P. & A. in Opp'n to Def. Leanne G. Spencer's Mot. for Summ. J. at 7 [Dkt. # 970] (" Pls.' Opp'n Spencer" ).
The narrative of plaintiffs' securities fraud claims against Spencer, not surprisingly, flows directly from an OFHEO investigation of Fannie Mae. In June 2003, following the disclosure of certain accounting issues at Freddie Mac, OFHEO began examining Fannie Mae's accounting policies and internal controls. On September 22, 2004, Fannie Mae released a public statement, indicating that OFHEO had delivered the findings of that investigation to Fannie Mae's board of directors. Fannie Mae's SGIMF ¶ 13; Fannie Mae Form 8-K (Sept. 22, 2004), Decl. of W.B. Markovits
in Supp. of Lead Pls.' Mot. for Partial Summ. J. on Count I Against Def. Fannie Mae [Dkt. # 920] (" Markovits-Fannie Mae Decl." ), Ex. 5 [Dkt. # 920-6]. The company added that the Securities and Exchange Commission (" SEC" ) also had begun an inquiry and that Fannie Mae's board had retained former Senator Warren B. Rudman (" Senator Rudman" ) and his law firm, Paul, Weiss, Rifkind, Wharton & Garrison LLP, to conduct an independent investigation of what happened. Fannie Mae's SGIMF ¶ 13. Later that day, OFHEO publicly released its interim report entitled " Report of Findings to Date, Special Examination Fannie Mae" (the " OFHEO Interim Report" ). Id. ¶ 14; see also OFHEO Interim Report, Decl. of Adam B. Miller in Supp. of Def. Leanne G. Spencer's Mot. for Summ. J. [Dkt. # 942-3] (" Miller Decl." ), Ex. 148. According to the Interim Report, Fannie Mae had misapplied certain Generally Accepted Accounting Principles (" GAAP" ), specifically two key standards known as FAS 91 and FAS 133, which relate to the company's amortization of price changes on securities and loans and to its use of hedge accounting. Miller Decl., Ex. 148 at i-vii.  OFHEO also raised concerns over the company's internal controls and audit reviews. Fannie Mae's SGIMF ¶ 15.
Apparently surprised by these findings, Fannie Mae requested that the SEC's Office of the Chief Accountant review the company's accounting with respect to FAS 91 and FAS 133. Id. ¶ 24. Several months later, on December 15, 2004, the SEC's Chief Accountant, Donald Nicolaisen, issued a press release, stating that the SEC's accounting staff had determined that Fannie Mae's accounting did not comply in material respects with FAS 91 and FAS 133, and that he had advised the company to restate its financial statements after eliminating the use of hedge accounting and reevaluating its amortization of premiums and discounts. Id. ¶ 22 (quoting Markovits-Fannie Mae Decl., Ex. 16 [Dkt. # 922-8] ). In its December 22, 2004 Form 8-K, Fannie Mae declared its intention to restate its 2001 to mid-2004 financial results to comply with the SEC's Office of Chief Accountant's review and
recommendations concerning its FAS 91 and FAS 133 accounting. Fannie Mae Form 8-K (Dec. 22, 2004), Markovits-Fannie Mae Decl., Ex. 18 [Dkt. # 922-10]. Less than a month later, on January 17, 2005, Spencer stepped down from her position as Controller. Fannie Mae's SGIMF ¶ 8.
On February 23, 2006, Fannie Mae released the report of Senator Rudman and his team at Paul Weiss, " A Report to the Special Review Committee of the Board of Directors of Fannie Mae" (the " Rudman Report" ), which reached similar findings as the OFHEO Interim Report. Id. ¶¶ 31-32. OFHEO released its final report on May 23, 2006. Report of the Special Examination of Fannie Mae, May 2006, Decl. of W.B. Markovits in Supp. of Lead Pls.' Mems. of P. & A. in Opp'n to Def. J. Timothy Howard's and Def. Leanne G. Spencer's Mots. for Summ. J. [Dkt. # 969-2] (" Markovits-Howard/Spencer Deck" ), Ex. 12 (" OFHEO Final Report" ). Based on its findings, OFHEO brought administrative charges against Raines, Howard, and Spencer, alleging that they " knowingly and/or recklessly engaged in misconduct and safety and soundness violations that caused substantial and/or material harm and loss to [Fannie Mae]." December 18, 2006 OFHEO News Release, Decl. of W.B. Markovits in Supp. of Pls.' Mem. in Opp'n to Franklin D. Raines's Mot. for Summ. J. [Dkt. # 967-2] (" Markovits-Raines Decl." ), Ex. 34 at 2; see also OFHEO's Notice of Charges, Notice No. 2006-1, Markovits-Raines Decl., Ex. 34.
Finally, on December 6, 2006, Fannie Mae filed with the SEC its Restatement of its prior financial results in a Form 10-K (the " Restatement" ). Fannie Mae's SGIMF ¶ 65. The Restatement resulted in a " total reduction in retained earnings of $6.3 billion through June 30, 2004." Fannie Mae's SGIMF ¶ 68 (citing Restatement).
II. This Litigation
After OFHEO issued its Interim Report, several Fannie Mae shareholders filed class action suits alleging that the company and its executives had violated the federal securities laws and committed securities fraud. Compl. [Dkt. # 1]. The first of these actions was filed on September 23, 2004. Id. After the other separately-filed cases were eventually consolidated into this multi-district litigation action, I appointed OPERS and STRS as lead plaintiffs
on January 13, 2005. Mem. Op. and Order, Jan. 13, 2005, 355 F.Supp.2d 261 (D.D.C.2005), [Dkt. # 52]. In January 2008, this Court certified a class generally composed of approximately one million investors in Fannie Mae stock during the class period. Order, Jan. 7, 2008 [Dkt. # 572]; Mem. Op., Jan. 7, 2008 [Dkt. # 571]. Thereafter, the parties engaged in extensive discovery until May 26, 2011. The volume of information exchanged in discovery was enormous; together, the parties produced nearly 67 million pages of documents, deposed 123 fact witnesses, and engaged 35 expert witnesses. See Pls.' Mem. of P. & A. in Supp. of Pls.' Mot. Fannie Mae at 4-5 [Dkt. # 918] (" Pls.' Mem. Fannie Mae" ). Unfortunately, however, the discovery process was unnecessarily prolonged by OFHEO's repeated and inappropriate assertion of privileges that had to be litigated up to the Court of Appeals. See Order, Jan. 22, 2008 [Dkt. # 580], aff'd, 552 F.3d 814 (D.C.Cir.2009).
In the end, plaintiffs allege that Fannie Mae and the individual defendants violated § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5 (2011), by intentionally manipulating earnings and violating GAAP, causing losses to investors. As to Spencer specifically, plaintiffs contend that she knowingly made false statements about the soundness of Fannie Mae's accounting, risk management, and internal controls. Pls.' Opp'n Spencer at 1. Plaintiffs also contend that Spencer misled investors about her participation in earnings ...