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DC Circuit dismisses Fannie Mae shareholder suit

[JURIST] The US Court of Appeals for the DC Circuit [official website] on Friday dismissed [decision, PDF] a shareholder suit against government-sponsored lender Fannie Mae [corporate website] for alleged wrongdoing by the board of directors. Shareholders accused the board of failing to take appropriate steps in 2004 to prevent accounting violations, and also asserted that the board should not have approved $31 million in severance benefits for two officers who resigned as a result of the violations. Upholding the district court's decision [JURIST report], the DC Circuit held that it had the authority [US Code § 1723] to hear claims against Fannie Mae, but that the appellants were not excused from making demand on the board [FRCP Rule 23.1 text] prior to filing suit. Judge Kavanaugh commented, "The story of Fannie Mae told by these reports is disturbing." Later in the opinion, he wrote:

According to plaintiffs, the complaint alleges that the directors crossed that line by failing to adequately respond to several “red flags”: (1) a $200 million audit difference originating in 1998; (2) a whistleblower’s complaints that Fannie Mae was improperly manipulating earnings; (3) signs that Fannie Mae management was using improper hedge accounting practices; and (4) sister company Freddie Mac’s disclosure in 2003 that it had understated profits. We disagree that these allegations create a“substantial likelihood” of personal liability for the directors. On each claim, the Board or its relevant committee looked into the matter and relied on internal or external accounting experts and officials responsible for those matters. [citations omitted]
Also Friday, Fannie Mae announced a second quarter loss in excess of $2 billion [New York Times report], prompting careful evaluation of recent legislative action [JURIST report] and leading to increased speculation about a government "bailout" [Forbes report].

In October 2004, the US Department of Justice (DOJ) began an investigation into whether Fannie Mae broke accounting rules to boost earnings and executive bonuses, but dropped [JURIST reports] the investigation in August 2006. In May 2005, Fannie Mae agreed to pay $400 million [JURIST report] as part of a settlement with regulators at the Securities and Exchange Commission. In April of this year, former CEO Franklin Raines agreed to pay $24.7 million [press release; JURIST report] to settle a related civil lawsuit [JURIST report] brought by the Office of Federal Housing Enterprise Oversight (OFHEO) [official website].

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