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Aug. 30 (Bloomberg) -- A lawsuit alleging ex-Fannie Mae Chief Executive Officer Daniel Mudd and other former officials misled investors about the company’s exposure to subprime and Alt-A mortgages was narrowed by a federal judge in New York.

Investors who bought Fannie Mae shares from November 2006 to September 2008, including a Massachusetts pension board, sued the company as a group in Manhattan federal court. U.S. District Judge Paul Crotty today ruled they could pursue securities-fraud claims against Fannie Mae and its executives and dismissed state-law claims and some related lawsuits by individual investors. Crotty also allowed other aspects of the litigation to continue.

Fannie Mae bought mortgages from lenders and issued mortgage-backed securities. The U.S. government seized control of Fannie Mae and Freddie Mac, another mortgage-finance company, in September 2008 after the biggest surge in mortgage defaults in at least three decades threatened to topple the companies.

The judge also dismissed a suit against Goldman Sachs Group Inc. that had been consolidated with the Fannie Mae litigation. Liberty Mutual Insurance Co. alleged the bank misled investors in its capacity as lead underwriter for the Fannie Mae offerings, which Liberty purchased.

‘Actionable Misstatements’

“Since Liberty failed to allege any actionable misstatements contained in the offering circular, it cannot show that Goldman made or supplied false statements to Liberty,” Crotty said. The judge also dismissed claims against Citigroup Inc. that were consolidated with the Fannie Mae litigation.

The judge rejected bids by Fannie Mae, Mudd and Enrico Dallavecchia, Fannie Mae’s former chief risk officer, to dismiss securities-fraud claims against them stemming from statements about the company’s subprime exposure.

Michael DuVally, a spokesman for New York-based Goldman Sachs, declined to comment on the lawsuit. James Wareham, a lawyer for Mudd, didn’t immediately return a voice-mail message seeking comment on the ruling. Andrew Levander, a lawyer for Dallavecchia, didn’t immediately return a voice-mail left at his office after business hours. Andrew Wilson, a spokesman for Washington-based Fannie Mae, declined to comment.

Danielle Romero-Apsilos, a spokeswoman for New York-based Citigroup, declined to immediately comment on the lawsuit.

Crotty said that while Fannie Mae had argued the plaintiffs were improperly relying on a “fraud by hindsight theory,” he said it wouldn’t defeat the plaintiffs’ allegations of misrepresentation and omissions that were allegedly misleading at the time they were made.

‘Ultimate Authority’

The judge ruled that the plaintiffs in the case stated a claim for statements Mudd and Dallavecchia made in conference calls. He said a question of fact exists as to whether Dallavecchia had “ultimate authority” over misstatements or approved misstatements contained in company filings.

“Even if Dallavecchia’s statements were literally true (a proposition that may be doubted) he can still be found liable for the overall misleading impression his statements created,” Crotty said.

Crotty did grant a motion by Fannie Mae, Mudd and Dallavecchia to dismiss state-law claims, citing the federal Securities Litigation Uniform Standards Act of 1998.

Earlier this month, Crotty said Mudd and Dallavecchia must face a suit filed by the U.S. Securities and Exchange Commission that accuses him of misleading investors about the company’s exposure to risky loans.

The case is In Re Fannie Mae 2008 Securities Litigation, 09-mdl-2013, Southern District of New York, (Manhattan).

To contact the reporters on this story: Patricia Hurtado in New York at; Christie Smythe in New York at

To contact the editor responsible for this story: Michael Hytha at

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