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Federal court dismisses Fannie Mae shareholders lawsuit

[JURIST] The US District Court for the District of Colombia Thursday dismissed [opinion, PDF] a derivative lawsuit filed by shareholders of home financial services corporation Fannie Mae [corporate website] to force former CEO Franklin D. Raines, former CFO J. Timothy Howard, and other former board members and executives involved in a major accounting scandal [JURIST report] to repay their bonuses and severance packages to the corporation. Judge Richard Leon [official profile] found the shareholders should first have petitioned the corporation, asking it to sue its board members, before they themselves sued the board members on the corporation's behalf. The shareholders failed to do this, instead proceeding directly to a shareholder lawsuit. The judge also ruled that the shareholders failed to meet

their burden of raising a reasonable doubt that the Board is not entitled to the benefit of the presumption that in making a business decision, the directors acted on an informed basis [with] good faith and in the honest belief that the action taken was in the best interest of the company.
The shareholders sought to force the company to vary its independent auditing firms, restrict executives' power to sell stocks, and also restructure the company's compensation schemes. Stephen Ashley, Chairman of Fannie Mae's Board of Directors, issued a statement [text], saying he was "pleased" with the decision.

In October 2004, the US Department of Justice (DOJ) began an investigation into whether Fannie Mae broke accounting rules to smooth earnings and boost executive bonuses; the DOJ dropped the investigation in August 2006 [JURIST reports]. Also in 2004, the Securities and Exchange Commission (SEC) [official website, JURIST report] and the Office of the Federal Housing Enterprise Oversight (OFHEO) [official website, JURIST report] launched investigations into the company's accounting practices. Last May, Fannie Mae settled for $400 million [JURIST report] with regulators at the SEC and OFHEO for fraudulently reporting future earnings so that top executives would receive maximum performance bonuses. Three former executives are still facing OFHEO civil charges [JURIST report] seeking over $100 million in fines and disgorgement of bonuses, among other penalties. AP has more.

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