Wall Street banks that helped Fannie Mae FNMA.OB sell stock won the dismissal of shareholder lawsuits accusing them of fraud or negligence for misleading them about the mortgage financier's exposure to risky home loans before the government seized it in 2008.
In a decision covering four lawsuits, U.S. District Judge Paul Crotty in Manhattan on Thursday also let Fannie Mae shareholders pursue new securities fraud claims against the company, former Chief Executive Daniel Mudd and former Chief Risk Officer Enrico Dallavecchia.
Crotty ruled 20 days after letting the U.S. Securities and Exchange Commission pursue its civil fraud lawsuit against Mudd, Dallavecchia and former Executive Vice President Thomas Lund.
The SEC accused them of misleading investors by not disclosing exposures to risky mortgages, including subprime and low-documentation "Alt-A" loans, totaling more than $440 billion.
In that decision, Crotty said those executives "must have known that Fannie Mae's disclosed subprime and Alt-A exposure calculations were materially misleading," and exhibited an "extreme departure from the standard of ordinary care."
The shareholder lawsuits covered investors who bought more than $14 billion of common and preferred stock that Fannie Mae had issued in the roughly two years prior to September 7, 2008, when U.S. regulators seized the company and the smaller Freddie Mac FMCC.OB, court papers show.
While one lawsuit led by the Massachusetts Pension Reserves Investment Management Board covers most shareholders, three sets of plaintiffs pursued their own cases: a group of insurers led by Liberty Mutual Insurance Co; Comprehensive Investment Services Inc ("CIS"), a Texas-based unit of American National Insurance Co; and Edward Smith, a San Diego resident.
Goldman Sachs Group Inc (GS.N) won the dismissal of the Liberty complaint, where it was the sole defendant, as Crotty found a lack of evidence that the bank schemed to defraud or made material misstatements in connection with two Fannie Mae preferred stock offerings it handled.
Crotty also rejected CIS' fraud and negligence claims under Texas law against Citigroup Inc (C.N) and a unit of Wachovia Corp, now part of Wells Fargo & Co (WFC.N). The judge dismissed Smith's negligence claim brought under California law against seven banks, including Goldman and Citigroup.
Fannie Mae, Mudd and Dallavecchia were however ordered to defend against claims by the main class, CIS and Smith over Fannie Mae's disclosures about subprime and Alt-A home loans, as well as claims over risk its management disclosures and capital strength. Crotty dismissed some other state law claims.
Following their seizure, Fannie Mae and Freddie Mac were put into a conservatorship, and are now overseen by the Federal Housing Finance Agency.
An FHFA spokeswoman had no immediate comment. Goldman spokesman Michael Duvally declined to comment.
Eric Kirkpatrick, a lawyer for CIS, said his client is reviewing the decision, and is "grateful that the court recognizes that Fannie Mae's actions were contrary to law and should be made transparent to the public."
Lawyers for Mudd, Dallavecchia, the remaining banks, Liberty and Smith did not immediately respond to requests for comment.
The case is In re: Fannie Mae 2008 Securities Litigation, U.S. District Court, Southern District of New York, No. 09-md-02013.
(Reporting By Jonathan Stempel in New York; Editing by Kenneth Barry)