UPDATE 2-Fannie Mae settles shareholder lawsuit for $170 million

(Adds Fannie Mae statement, market value loss)

NEW YORK, Oct 24 (Reuters) - Fannie Mae has reached a $170 million settlement of a lawsuit accusing it of misleading shareholders about its finances, risk management and mortgage exposure before it was seized by the U.S. government during the 2008 financial crisis.

The settlement, which requires court approval, was disclosed in a Friday filing with the U.S. District Court in Manhattan.

It resolves shareholder allegations that Fannie Mae defrauded shareholders and inflated its stock by issuing false and misleading statements about its internal controls, capitalization, accounting, and exposure to subprime and low-documentation “Alt-A” mortgages.

The settlement allocates $123.8 million to common stockholders and $46.2 million to preferred stockholders between Nov. 8, 2006 and Sept. 5, 2008.

Fannie Mae’s market value peaked during that period at more than $60 billion. It is now $2.71 billion.

“We are pleased to put this matter behind us,” Joseph Grassi, Fannie Mae’s interim general counsel, said in a statement. “This is another sign of progress as Fannie Mae continues our focus on serving the market and helping lenders make mortgage credit available to qualified borrowers.”

The government seized Fannie Mae and the smaller Freddie Mac on Sept. 7, 2008, and put them into a conservatorship under the Federal Housing Finance Agency, where they remain.

Fannie Mae and Freddie Mac together drew about $187.5 billion of bailout funds, but have returned roughly $218.7 billion to taxpayers in the form of dividends.

The lead plaintiffs suing Fannie Mae are the Massachusetts Pension Reserves Investment Management Board, the State-Boston Retirement Board and the Tennessee Consolidated Retirement System, and are seeking class-action status.

They said the settlement averts potential “numerous and substantial risks” of continuing the lawsuit after similar litigation against Freddie Mac was dismissed last year.

“We’re extremely pleased with the results, particularly in light of the dismissal of a similar lawsuit against Fannie Mae’s sibling company, Freddie Mac,” Daniel Greene, the chairman of State-Boston, said in a statement.

The law firms Labaton Sucharow and Berman DeValerio, which represent common stockholders, and Kaplan Fox & Kilsheimer, which represents preferred stockholders, plan to seek fees of as much as 20 percent of the settlement fund, court papers show.

A separate lawsuit over Fannie Mae’s disclosures was brought in 2011 by the U.S. Securities and Exchange Commission against former Chief Executive Officer Daniel Mudd and former Chief Risk Officer Enrico Dallavecchia, and remains pending.

The SEC filed a similar lawsuit against former Freddie Mac officials, including onetime Chief Executive Officer Richard Syron.

The case is In re: Fannie Mae 2008 Securities Litigation, U.S. District Court, Southern District of New York, No. 08-07831. (Reporting by Jonathan Stempel in New York; Editing by Chris Reese and Alan Crosby)