A federal court judge has ruled that the core allegations of a securities fraud lawsuit against mortgage giant Fannie Mae can move forward.
In a Sept. 30 order, the Hon. Paul A. Crotty of the Southern District of New York granted in part and denied in part defendants’ motions to dismiss the complaint. The Court denied the motion to dismiss allegations that the company, Fannie Mae’s Chief Executive Officer Daniel H. Mudd and Chief Risk Officer Enricho Dallavecchia failed to disclose that they knew Fannie had inadequate internal controls to manage the significant risks created by the rapid expansion of purchases of subprime mortgages.
Berman DeValerio is acting as co-lead counsel on behalf of the Massachusetts Pension Reserves Investment Management (PRIM) Board. The case is one of two securities class actions pending against Fannie Mae.
In denying the defense motion to dismiss, Judge Crotty cited three emails between Dallavecchia and Mudd that the judge said demonstrate that “Defendants’ statements to the market [concerning Fannie’s strong risk-management program] were inconsistent at best and perhaps worse.” The emails, he said, “highlight the alleged misstatements and show that Fannie may have been saying one thing while believing another.”
In one email from Oct. 28, 2006, for example, Dallavecchia complained to Mudd that “[he had] a seri[ous] problem with the control process around subprime limits” and that “[t]here is a pattern emerging of inadequate regard for the control process.” On July 16, 2007, Dallavecchia wrote that Fannie “has one of the weakest control processes I ever witness[ed] in my career . . .”
These emails were in sharp contrast to public statements concerning Fannie’s “appropriate and prudent engagement” in the subprime market, close monitoring of credit risk, and that it had “vastly reduced material control weaknesses.”
Judge Crotty, however, granted defense motions to dismiss other portions of the case, including allegations that Fannie Mae failed to adequately disclose its exposure to subprime and Alt-A mortgage markets, and that the company and its auditors misrepresented Fannie’s core capital by violating generally accepted accounting principles (GAAP) and generally accepted auditing standards (GAAS).
“While we are disappointed that the judge granted parts of the defense motions, we’re very pleased that we can now prosecute the central allegations of the plaintiffs’ case,” said Glen DeValerio, managing partner of the firm’s Boston office. “As the emails between the two executives demonstrate, Fannie Mae materially misrepresented the quality of its internal risk management and controls, and caused substantial losses to our clients and class members.”
*In August 2017, our firm name changed to Berman Tabacco. Case references and content published before that date may refer to the firm under our prior name, Berman DeValerio.