Fannie Mae Investors Can't Sue Over Some Securities Fraud Claims, Losses

Investors can’t pursue some of their securities-fraud claims against Fannie Mae in a lawsuit accusing the government-controlled mortgage financier of recklessly disregarding the deterioration of the U.S. housing market.

U.S. District Judge Paul A. Crotty in New York yesterday granted Fannie Mae’s request to dismiss claims that it misrepresented its exposure to subprime and Alt-A mortgages, two types of home loans that contributed to more than $1.8 trillion in worldwide financial losses and asset writedowns. Shareholders are allowed to proceed with allegations that Fannie Mae misled them about its internal controls and risk management practices.

“E-mails suggest that Fannie was conscious of its internal inability to manage the risks associated with subprime loans,” the judge said.

Shareholders sued Fannie Mae and its former executives in 2008 after the U.S. government took control of the company. Fannie Mae fell 3 percent to 27 cents in over the counter trading yesterday, compared with $69.49 on June 18, 2007.

The plaintiffs, including common and preferred stock investors who bought shares from Nov. 8, 2006, to Sept. 5, 2008, claim the company and its executives continued to invest in risky mortgages without regard for the housing market’s growing volatility.

Lied About Risk

The complaint also says Fannie Mae lied about its market exposure and its ability to handle the risk.

Prices of existing U.S. homes fell 11 percent during the period the plaintiffs bought shares in Fannie Mae, which owns or guarantees U.S. residential mortgages. Declines were driven in part by rising foreclosures on subprime loans to borrowers with weak or spotty credit histories.

Defaults also climbed on so-called Alt-A mortgages, which carry higher interest rates and required little documentation of the homeowner’s finances.

Janis Smith, a spokeswoman for Fannie Mae in Washington, declined to comment on the ruling. Donald Hall and Glen DeValerio, lawyers for the investors in the case, didn’t immediately return calls seeking comment yesterday.

The case is In re Fannie Mae 2008 Securities Litigation, 08-7831, U.S. District Court, Southern District of New York.

To contact the reporters on this story: Edvard Pettersson in Los Angeles at epettersson@bloomberg.net; Andrew M. Harris in Chicago at aharris16@bloomberg.net.

To contact the editor responsible for this story: David E. Rovella at drovella@bloomberg.net.

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