Bankruptcy

New Lawsuit Puts Fannie Mae Regulator in Awkward Position

By J. Michael McBride

Despite the enormous drop in their stock value, Fannie Mae shareholders might just yet receive a silver lining to their cloud. Currently a class action lawsuit alleging securities fraud is underway in the U.S. District Court in Washington. A similar lawsuit was filed against Freddie Mac that in 2006 yielded the eighth largest settlement in a corporate securities fraud case in United States history with a payout of $1.20 per share. Although the different situation will merit different settlements, this is a positive outlook for current Fannie Mae shareholders that currently hold stock valued at $0.79 at the closing bell on October 22, 2008.

This turn of events places the new government regulator in charge of the mortgage giant in an awkward position. Exhibit A of the lawsuit is a critical report about Fannie Mae written in May 2006 by James Lockhart, the director of the government agency currently in control of the company. “The regulator’s 340-page report found Fannie’s board and management responsible for a corporate culture that allowed managers to manipulate accounting in order to alter earnings and trigger millions of dollars in bonuses.” As a result, if the agency chooses to defend Fannie Mae it will have to rebut its own report. Moreover, if the agency agrees with the previous report it will mean admitting wrongdoing within the company and thereby most probably lead to an even larger payout at the expense of the taxpayers who now own the company. ‘”The regulator is between a rock and a hard place,” said Tom Ajamie, a securities lawyer at Ajamie LLP in Houston....”The report so strongly describes the misbehavior and supports the case. It’s hard to get a better piece of evidence than this.”’

Here is the link to the article:
http://online.wsj.com/article/SB122428804156146581.html?mod=googlenews_wsj

Chris

Full post as published by Texas Lawyer Blog on October 23, 2008 (boomark / email).