UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
In re Federal National
Mortgage Association MDL No.1668
Securities, Derivative, and
"ERISA" Litigation
In re Fannie Mae Securities Consolidated Civil Action No. 04-1639 (RJL)
Litigation
~
MEMORANDUM OPINION
(October lk_, 2012) [#938]
This is a class action securities fraud suit against Federal National Mortgage
Association ("Fannie Mae"), its former accountant, KPMG, LLP, and three of Fannie
Mae's former senior executives (collectively, "defendants"), brought by a class of parties
represented by lead plaintiffs Ohio Public Employees Retirement System ("OPERS") and
State Teachers Retirement System of Ohio ("STRS") (collectively, "plaintiffs"). The
parties filed eight separate summary judgment motions in this case. 1 On September 20,
Plaintiffs filed two summary judgment motions: one against Fannie Mae, Lead
Plaintiffs' Motion for Partial Summary Judgment on Count I Against Defendant Federal
National Mortgage Association [Dkt. # 916] ("Pis.' Mot. Fannie Mae"), and another
against KPMG, Lead Plaintiffs' Motion for Partial Summary Judgment on Count III
Against Defendant KPMG LLP [Dkt. # 936] ("Pls.' Mot. KPMG").
In tum, the defendants filed six separate summary judgment motions. Of those, all
of the defendants joined in filing two of the motions, which focus, respectively, on the
loss causation element of the securities fraud claims and on plaintiffs' claims related to
Statements ofFinancial Accounting Standards ("FAS") 133. Defs.' Joint Mot. for
Summ. J. for Failure to Prove Loss Causation [Dkt. # 939] ("Defs.' Mot. Loss
Causation"); Defs.' Joint Mot. for Partial Summ. J. Based on FAS 133 Accounting Issues
[Dkt. # 941] ("Defs.' Mot. FAS 133"). Finally, the individual defendants and KPMG
have each separately moved for summary judgment. KPMG LLP's Mot. for Summ. J.
[Dkt. # 937] ("KPMG's Mot."); Def. J. Timothy Howard's Mot. for Summ. J. [Dkt. #
the Court granted defendant Franklin D. Raines's Motion for Summary Judgment. Mem.
Op., Sept. 20, 2012 [Dkt. # 1053]; Order, Sept. 20, 2012 [Dkt. # 1054]. This opinion
addresses defendant J. Timothy Howard's Motion for Summary Judgment. 2 I will
address defendant Leanne G. Spencer's motion forthwith, and the defendants' joint
motions, KPMG's motion, and the plaintiffs' motions thereafter. Upon consideration of
the pleadings, oral argument, and the entire record herein, defendant Howard's Motion
for Summary Judgment is GRANTED.
BACKGROUND 3
I. Factual Background
Fannie Mae, along with its cousin Freddie Mac, operates in the secondary
mortgage market as a federally-chartered government-sponsored enterprise, buying home
mortgages from banks and issuing debt and mortgage-backed securities. Formerly a
private shareholder-owned company, Fannie Mae has been in a conservatorship under the
Federal Housing Finance Agency ("FHFA") since September 6, 2008. However, during
938] ("Howard's Mot."); Def. Franklin D. Raines's Mot. for Summ. J. [Dkt. # 940]
("Raines's Mot."); Def. Leanne G. Spencer's Mot. for Summ. J. [Dkt. # 942] ("Spencer's
Mot.").
2
The other defendants in this case are Fannie Mae, Franklin D. Raines, Leanne
Spencer, and KPMG. Raines was Fannie Mae's Chairman of the Board and Chief
Executive Officer from January 1999 until December 2004, and Spencer was Vice
President and Controller of Fannie Mae during the class period. Def. Fannie Mae's
Statement of Genuine Issues ofMaterial Fact~~ 4, 8 [Dkt. # 973-1] ("Fannie Mae's
SGIMF"). For approximately 35 years prior to December 2004, KPMG served as Fannie
Mae's outside auditor. !d. ~ 11.
3
For additional background information concerning this litigation, see the Court's
Memorandum Opinions in In re Fannie Mae Sec. Litig., 503 F. Supp. 2d 25, 29-30
(D.D.C. 2007), and In re Fannie Mae Sec. Litig., 247 F.R.D. 32, 34-36 (D.D.C. 2008).
2
this litigation's class period, beginning April 17, 2001 and ending December 22, 2004,
Fannie Mae's stock was traded on the New York Stock Exchange, and it was regulated
by the Office of Federal Housing Enterprise Oversight ("OFHE0"). 4 OFHEO's
oversight responsibilities generally involved ensuring that Fannie Mae had adequate
capital, a sound corporate structure, and financial stability. This, of course, was no small
task: Fannie Mae was, and still is, one of the largest financial institutions in the country
and had a balance sheet of mortgage loans and mortgage-backed securities worth
hundreds of billions of dollars. Defs.' Reply Regarding their Statements of Undisputed
Material Fact in Supp. of Their Joint Mot. for Partial Summ. J. Based on FAS 133
Accounting Issues ,-r 1 [Dkt. # 1024-4] ("Defs.' Reply SUMF FAS 133"). During the
class period, Howard served as Fannie Mae's Chief Financial Officer and Vice Chairman.
Def. J. Timothy Howard's Reply to Pls.' Statement of Genuine Issues of Material Fact~
1 [Dkt. # 995-1] ("Howard's Reply to Pls.' SGIMF").
The narrative of plaintiffs' securities fraud claims against Howard, not
surprisingly, flows directly from an OFHEO investigation of Fannie Mae. In June 2003,
following the disclosure of certain accounting issues at Freddie Mac, OFHEO began
examining Fannie Mae's accounting policies and internal controls. On September 22,
2004, Fannie Mae released a public statement, indicating that OFHEO had delivered the
findings of that investigation to Fannie Mae's board of directors. Fannie Mae's SGIMF ,-r
4
Amidst the financial crisis of 2008, Congress established FHFA to replace
OFHEO as Fannie Mae and Freddie Mac's independent regulator, and granted FHFA
additional powers over those held by OFHEO, including the ability to place the mortgage
giants in conservatorship or receivership under FHFA's control. Housing and Economic
Recovery Act of2008 ("HERA"), Pub. L. No. 110-289, 122 Stat. 2654.
3
13; Fannie Mae Form 8-K (Sept. 22, 2004), Decl. ofW.B. Markovits in Supp. of Lead
Pls.' Mot. for Partial Summ. J. on Count I Against Def. Fannie Mae [Dkt. #920]
("Markovits-Fannie Mae Decl."), Ex. 5 [Dkt. # 920-6]. 5 The statement also noted that
the Securities and Exchange Commission ("SEC") also had begun an inquiry and that
Fannie Mae's board had retained former Senator Warren B. Rudman ("Senator Rudman")
and his law firm, Paul, Weiss, Rifkind, Wharton & Garrison LLP, to conduct an
independent investigation of what happened. Fannie Mae's SGIMF ~ 13. Later that day,
OFHEO publicly released its interim report entitled "Report of Findings to Date, Special
Examination Fannie Mae" (the "OFHEO Interim Report"). !d. ~ 14; see also OFHEO
Interim Report, Decl. of Adam B. Miller in Supp. ofDef. Leanne G. Spencer's Mot. for
Summ. J., [Dkt. # 942-3] ("Miller Decl."), Ex. 148. According to the Interim Report,
Fannie Mae had misapplied certain Generally Accepted Accounting Principles
("GAAP"), specifically two key standards known as FAS 91 and FAS 133, which relate
to the company's amortization of price changes on securities and loans and to its use of
hedge accounting. Miller Decl., Ex. 148 at i- vii. 6 OFHEO also raised concerns over the
5
According to the public statement, OFHEO summarized its findings to the Board
by stating that "Fannie Mae (1) applied accounting methods and practices that do not
comply with GAAP in accounting for the enterprise's derivatives transactions and
hedging activities, (2) employed an improper 'cookie jar' reserve in accounting for
amortization of deferred price adjustments under GAAP, (3) tolerated related internal
control deficiencies, (4) in at least one instance deferred expenses apparently to achieve
bonus compensation targets, and ( 5) maintained a corporate culture that emphasized
stable earnings at the expense of accurate financial disclosures." Fannie Mae Form 8-K
(Sept. 22, 2004), Markovits-Fannie Mae Decl., Ex. 5 at 7.
6
Generally Accepted Accounting Principles are defined by the Financial
Accounting Standards Board, a private organization designated for this task by the SEC
4
company's internal controls and audit reviews. Fannie Mae's SGIMF ~ 15.
Apparently surprised by these findings, Fannie Mae requested that the SEC's
Office of the Chief Accountant review the company's accounting with respect to FAS 91
and FAS 133. !d.~ 24. Several months later, on December 15, 2004, the SEC's Chief
Accountant, Donald Nicolaisen, issued a press release, stating that the SEC's accounting
staff had determined that Fannie Mae's accounting did not comply in material respects
with FAS 91 and FAS 133, and that he had advised the company to restate its financial
statements after eliminating the use of hedge accounting and reevaluating its amortization
of premiums and discounts. !d.~ 22 (quoting Markovits-Fannie Mae Decl., Ex. 16 [Dkt.
# 922-8]). Shortly thereafter, on December 21, 2004, Howard resigned from his positions
as CFO and Vice Chairman of the Board of Directors. Fannie Mae's SGIMF ~ 26. The
next day, in a Form 8-K, Fannie Mae declared its intention to restate its 2001 to mid-2004
financial results to comply with the SEC's Office of Chief Accountant's
recommendations concerning its FAS 91 and FAS 133 accounting. Fannie Mae Form 8-
K (Dec. 22, 2004), Markovits-Fannie Mae Decl., Ex. 18 [Dkt. # 922-10]. On December
and the private sector. Defs.' Reply SUMF FAS 133 ~ 13. FAS 91 and FAS 133 are two
of the many GAAP standards defined by this organization.
Briefly, FAS 91, or "Accounting for Nonrefundable Fees and Costs Associated
with Originating or Acquiring Loans and Initial Direct Costs of Leases," instructs
companies on how to account for premiums and discounts on securities and loans-in
Fannie Mae's case, mortgages. Pis.' Responses to Fannie Mae's Statements of
Additional Material Facts [Dkt. # 990-1] ("Pis. Responses to Fannie Mae's SAUMF") ~~
24,30 (Ex. 30, FAS 91, ~~ 4, 15, 18). And, FAS 133, or "Accounting for Derivative
Instruments and Hedging Activities," addresses a company's hedge accounting, or its
recording of the value of derivative transactions in its earnings. See OFHEO Interim
Report at iv. Fannie Mae used derivatives transactions, particularly interest-rate swaps,
to hedge (protect) against interest rate changes in its issued debt and the mortgage loans it
owned. See Defs.' Reply SUMF FAS 133 ~~ 1-12.
5
30, 2004, Howard resigned entirely from Fannie Mae's board of directors. Fannie Mae's
SGIMF ~ 7.
Over a year later, on February 23, 2006, Fannie Mae released the report of Senator
Rudman and his team at Paul Weiss, "A Report to the Special Review Committee of the
Board of Directors of Fannie Mae" (the "Rudman Report"), which reached similar
findings as the OFHEO Interim Report. 7 !d.~~ 31-32. OFHEO released its final report
on May 23, 2006. Report of the Special Examination of Fannie Mae, May 2006, Decl. of
W.B. Markovits in Supp. ofLead Pls.' Mems. ofP. & A. in Opp'n to Def. J. Timothy
Howard's and Def. Leanne G. Spencer's Mots. for Summ. J. [Dkt. # 969-2] ("Markovits-
Howard/Spencer Decl."), Ex. 12 ("OFHEO Final Report"). 8 Based on its findings,
OFHEO brought administrative charges against Raines, Howard, and Spencer, alleging
that they "knowingly and/or recklessly engaged in misconduct and safety and soundness
violations that caused substantial and/or material harm and loss to [Fannie Mae]."
December 18, 2006 OFHEO News Release, Decl. ofW.B. Markovits in Supp. ofPls.'
Mem. in Opp'n to Franklin D. Raines's Mot. for Summ. J. [Dkt. # 967-2] ("Markovits-
7
Curiously, the defendants refer to the Rudman Report as the Paul Weiss Report.
See, e.g., Supplemental Mem. in Supp. ofDef. J. Timothy Howard's Mot. for Summ. J. at
12 [Dkt. # 1045] ("Howard's Supp'l Mem."). Go figure!
8
The SEC also filed a civil complaint against Fannie Mae on that date, alleging that
Fannie Mae violated Section IO(b) of the Exchange Act and SEC Rule 10b-5. Compl.,
SEC v. Fannie Mae, No. 1:06-cv-00959 (D.D.C. May 23, 2006). OFHEO filed a similar
enforcement action. That day, Fannie Mae agreed to settle those cases and pay a $400
million civil penalty. Fannie Mae Form 8-K (May 30, 2006), Markovits-Fannie Mae
Decl., Ex. 25 [Dkt. # 924-3].
6
Raines Decl."), Ex. 34 at 2; see also OFHEO's Notice of Charges, Notice No. 2006-1,
Markovits-Raines Decl., Ex. 34. 9
Finally, on December 6, 2006, Fannie Mae filed with the SEC its Restatement of
its prior financial results in a Form 10-K (the "Restatement"). Fannie Mae's SGIMF ~
65. The Restatement resulted in a "total reduction in retained earnings of$6.3 billion
through June 30, 2004." Restatement at 2; see also Fannie Mae's SGIMF ~ 68.
II. This Litigation
After OFHEO issued its Interim Report in September 2004, several Fannie Mae
shareholders filed class action suits alleging that the company and its executives had
violated the federal securities laws and committed securities fraud. Compl. [Dkt. #1].
The first of these actions was filed on September 24, 2004. Id. After the other
separately-filed cases were eventually consolidated into this multi-district litigation
action, I appointed OPERS and STRS as lead plaintiffs on January 13, 2005. Mem. Op.
and Order, Jan. 13, 2005 [Dkt. # 52]. 10 In January 2008, this Court certified a class
9
OFHEO alleged the individuals committed violations including "[i]nappropriate
earnings management and manipulation; [d]eliberately misleading financial reporting and
disclosures; [f]ailure to establish a sound internal controls process ... ; [m]isleading and
deficient reporting from the important Internal Audit function; and [p ]ermitting known
deficient systems to continue to operate while recognizing that such systems facilitated
the ongoing manipulations sought by the individuals charged." December 18, 2006
OFHEO News Release, Markovits-Raines Decl., Ex. 34 at 2. Howard, Raines, and
Spencer later settled these charges in April of2008. Apri118, 2008 OFHEO News
Release, Markovits-Raines Decl., Ex. 58.
10 On March 4, 2005, plaintiffs filed a Consolidated Class Action Complaint for
Violations of Federal Securities Laws [Dkt. # 64] on behalf of purchasers of Fannie Mae
common stock during the period from Apri117, 2001, through September 21, 2004. On
August 14, 2006, plaintiffs filed a Second Amended Consolidated Class Action
Complaint for Violations of Federal Securities Laws [Dkt. # 204] ("SAC").
7
generally composed of approximately one million investors in Fannie Mae stock during
the class period. Order, Jan. 7, 2008 [Dkt. # 572]; Mem. Op., Jan. 7, 2008 [Dkt. # 571].
Thereafter, the parties engaged in an extensive discovery period until May 26, 2011. The
volume of information exchanged in discovery was enormous; together, the parties
produced nearly 67 million pages of documents, deposed 123 fact witnesses, and engaged
35 expert witnesses. See Pls.' Mem. in Supp. ofPls.' Mot. Fannie Mae at 4-5 [Dkt. #
918] (Pls.' Mem. Fannie Mae"). Unfortunately, however, the discovery process was
unnecessarily prolonged by OFHEO's repeated and inappropriate assertion of privileges
that had to be litigated up to the Court of Appeals. See Order, Jan. 22, 2008 [Dkt. # 580],
a.ff'd, 552 F.3d 814 (D.C. Cir. 2009).
In the end, plaintiffs allege that Fannie Mae and the individual defendants violated
§ 10(b) ofthe Securities Exchange Act of 1934, 15 U.S.C. § 78j, and SEC Rule 10b-5, 17
C.P.R. § 240.10b-5 (2011), by intentionally manipulating earnings and violating GAAP,
causing losses to investors. 11 As to Howard specifically, plaintiffs contend that he
knowingly made false statements about the soundness of Fannie Mae's accounting, risk
management, and internal controls. Lead Pls.' Mem. ofP. & A. in Opp'n to Def. J.
Timothy Howard's Mot. for Summ. J. at 1 [Dkt. # 969] ("Pls.' Opp'n Howard").
Plaintiffs also contend that Howard misled investors about his participation in earnings
management strategies designed to meet quarterly earnings-per-share targets to maximize
bonuses, in violation of GAAP and various accounting standards. !d.
11
Plaintiffs also claim that the individual defendants violated§ 20(a) of the
Securities Exchange Act of 1934, 15 U.S.C. § 78t(a) (2006).
8
On August 22, 20 11, Howard moved for summary judgment on all claims against
him, arguing that plaintiffs have failed to prove that he acted with the necessary scienter
under the securities laws. Mem. in Supp. ofDef. J. Timothy Howard's Mot. for Summ. J.
at 1 [Dkt. # 938-1] ("Howard's Mem."). 12 On June 5-7 and June 13,2012, I heard oral
argument on the pending summary judgment motions, including Howard's motion. 13
Because I agree with the defendant that plaintiffs have failed to put forth sufficient
evidence of scienter, Howard is entitled to summary judgment.
STANDARD OF REVIEW
Summary judgment is appropriate when the movant demonstrates that no genuine
issue of material fact is in dispute and that the moving party is entitled to judgment as a
matter oflaw. Fed. R. Civ. P. 56( a). The moving party bears the burden, and the court
will draw "all justifiable inferences" in favor of the non-moving party. Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 255-56 (1986). Nevertheless, the non-moving party
"may not rest upon the mere allegations or denials of his pleading, but ... must set forth
specific facts showing that there is a genuine issue for trial." !d. at 248 (internal
quotation marks and citation omitted). "Thus, if the evidence presented by the opposing
party is 'merely colorable' or 'not significantly probative,' summary judgment may be
granted." Burke v. Gould, 286 F.3d 513,519 (D.C. Cir. 2002) (quoting Anderson, 477
12
Howard also joined the defendants' motion for summary judgment based on loss
causation, Defs.' Mot. Loss Causation, and the defendants' motion for partial summary
judgment with regard to claims arising from FAS 13 3 accounting issues, Defs.' Mot. FAS
133. This opinion addresses only Howard's scienter arguments.
13
This Court heard oral argument specifically on Howard's motion on June 13,
2012. Tr. ofMots. Hr'g, June 13, 2012 [Dkt. # 1050] ("Tr.").
9
U.S. at 249-50); see also Montgomery v. Chao, 546 F.3d 703, 708 (D.C. Cir. 2008) ("The
possibility that a jury might speculate in the plaintiffs favor ... is simply insufficient to
defeat summary judgment."). Factual assertions in the moving party's affidavits may be
accepted as true unless the opposing party submits its own affidavits, declarations, or
documentary evidence to the contrary. Neal v. Kelly, 963 F.2d 453, 456 (D.C. Cir. 1992).
DISCUSSION
The elements of a securities fraud claim and the requirements of a summary
judgment motion remain constant, regardless of the enormity and novelty of the facts in
question. Securities fraud claims under Section 1O(b) and Rule 1Ob-5 require proof of the
following elements: "(1) a material misrepresentation or omission by the defendant; (2)
scienter; (3) a connection between the misrepresentation or omission and the purchase or
sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss;
and (6) loss causation." Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, 552 U.S.
148, 157 (2008). Howard's summary judgment motion, however, focuses on only one of
these elements: scienter. To establish scienter in a securities fraud case, a plaintiff must
prove that the defendant acted "with an intent to deceive-not merely innocently or
negligently." Merck & Co. v. Reynolds, 130 S. Ct. 1784, 1796 (2010). Thus, plaintiffs
must put forth proof of intentional wrongdoing or extreme recklessness. Liberty Prop.
Trust v. Republic Props. Corp., 577 F.3d 335, 342 (D.C. Cir. 2009). Our Circuit has
defined extreme recklessness as an "extreme departure from the standards of ordinary
care, ... which presents a danger of misleading buyers or sellers that is either known to
the defendant or is so obvious that the actor must have been aware of it." Dolphin &
10
Bradbury, Inc. v. SEC, 512 F.3d 634, 639 (D.C. Cir. 2008) (internal citations and
quotation marks omitted). For extreme recklessness, the danger of deception must be
such that the "actor was aware of it and consciously disregarded it." !d.
Unfortunately, for plaintiffs, they have not established a genuine issue of material
fact as to Howard's alleged scienter. There is no direct evidence that Howard intended to
deceive Fannie Mae's investors. Indeed, plaintiffs conceded this very point at oral
argument. Tr. at 62:4-14. And while proof of scienter may sometimes be inferred from
circumstantial evidence, see In re Baan, 103 F. Supp. 2d 1, 20 (D.D.C. 2000), this is not
the case here. In essence, plaintiffs, as they did with Raines, have stitched together a
patchwork quilt of evidence that they allege presents a disputed issue of material fact as
to Howard's scienter. I disagree. Plaintiffs' cited evidence simply does not rise to an
inference of scienter. Although scienter is generally a question of fact for a jury, see,
e.g., SEC v. Pace, 173 F. Supp. 2d 30, 33 (D.D.C. 2001) ("In the ordinary securities fraud
case, scienter is a genuine issue of material fact."); see also Wechsler v. Steinberg, 733
F.2d 1054, 1058-59 (2d Cir. 1984) ("Issues of motive and intent are usually inappropriate
for disposition on summary judgment."), summary judgment is appropriate if plaintiffs
present no concrete evidence of scienter, see Anderson, 477 U.S. at 256-57 (recognizing
that resolving defendant's "state of mind" may be appropriate on summary judgment and
that plaintiff may not defeat "a defendant's properly supported motion for summary
judgment ... without offering any concrete evidence from which a reasonable juror could
return a verdict in his favor"); see also In re Worlds of Wonder Sec. Litig., 35 F.3d 1407,
11
1425 (9th Cir. 1994) (finding defendants had "conclusively rebutted" plaintiffs'
"speculative inferences" of fraud).
Plaintiffs' theories on Howard's scienter are insufficient to withstand his summary
judgment motion, particularly in light of the overwhelming evidence of Howard's good
faith. No witnesses testified that Howard knew that Fannie Mae's financial statements
were materially inaccurate or not GAAP compliant. Further, no witnesses testified that
Howard sought to misrepresent Fannie Mae's earnings or mislead investors. Throughout
the class period, Howard relied on internal and external accounting experts to ensure that
the company's financial statements complied with GAAP, and these experts universally
assured Howard that Fannie Mae's financial statements were accurate in all material
respects. 14 See Howard's Reply to Pls.' SGIMF ,-r 26; Lead Pis.' Supp'l Mem. ofP. & A.
in Supp. of Lead Pls.' Mem. in Opp'n to Def. J. Timothy Howard's Mot. for Summ. J. at
I4 [Dkt. # I042] ("Pis.' Supp'l Mem. Howard"); Tr. at 48-51; Howard's Mem. at 10-I5.
14
Plaintiffs contend that Howard's reliance on KPMG, Spencer, and Spencer's
subordinates was not reasonable, credible, or in good faith because he knew that Spencer
and her subordinates were intentionally hiding information from KPMG. Pis.' Opp'n
Howard at 34; see also Lead Pis.' Statement of Genuine Issues ofMaterial Fact
Precluding Summ. J. for De f. J. Timothy Howard ,-r,-r 66-70 [Dkt. # 969-I] ("Pis.' SGIMF
Howard"). In support, plaintiffs rely upon only one class-period document: an email
from Spencer to Howard observing that KPMG was not aware that Fannie Mae and
Freddie Mac employed different accounting methods. Email from Spencer to Howard re:
"KPMG and Freddie," January 28, 2002, Markovits-Howard/Spencer Decl., Ex. 23. This
email says absolutely nothing about intentionally "hiding ... IO/PO GAAP violations
from KPMG," as plaintiffs misleadingly suggest. Pis.' SGIMF Howard ,-r 67. Plaintiffs
also cite two documents predating the class period, which plaintiffs again
mischaracterize. See Reply Mem. in Supp. ofDef. J. Timothy Howard's Mot. for Summ.
J. at 17-I8 [Dkt. # 995] ("Howard's Reply"). These documents are certainly not
evidence that Howard knew that anyone at Fannie Mae was concealing accounting
violations from KPMG.
12
And Howard himself testified that he believed that Fannie Mae was in compliance with
GAAP and had accurate financial statements. See Howard's Mem. at 18-19. Of course,
such evidence of good faith is generally insufficient to grant summary judgment,
especially if a plaintiff identifies admissible evidence supporting a reasonable inference
of scienter. But where, as here, that is not the case, such substantial evidence of good
faith negates any possible inference of scienter.
Moreover, the parties' dispute as to whether Howard possessed the requisite
education, experience, and accounting acumen to personally understand the nuances of
Fannie Mae's accounting policies does not reveal any evidence of scienter. Howard's
Mem. at 2-4; Pis.' Opp'n Howard at 6-10. The Court has no doubt that, as plaintiffs
state, Howard "gained an in-depth understanding of Fannie Mae's accounting policies
and the accounting standards applicable to the company during his 22-year tenure there."
Pis. Opp'n Howard at 7. Nor does the Court doubt that Howard was deeply involved in
developing Fannie Mae's accounting policies. See Pis.' Opp'n Howard at 8-10; Pis.'
SGIMF Howard ,-r,-r 19-20. But Howard's familiarity with accounting policies cannot
imply scienter of accounting fraud if no evidence of such fraud was ever brought to
Howard's attention. As such, plaintiffs do not put forth any evidence, direct or
circumstantial, that Howard was told during the class period that Fannie Mae violated
GAAP or committed fraud.
In sum, plaintiffs offer no evidence from which a reasonable juror could conclude
that any of Howard's statements concerning Fannie Mae's accounting practices or
13
internal controls were made with an intent to deceive, or were otherwise made without
any reasonable basis.
I. Internal Controls Weaknesses
When asked during oral argument to present the three best examples of evidence
of Howard's scienter, plaintiffs began with what they characterized as "one of the best
examples": a 2004 email describing a conversation with Sampath Rajappa, Fannie Mae's
Senior Vice President for Operations Risk and head of the Office of Auditing. Tr. at
62:4-24; see also Pis.' Opp'n Howard at 12, 30. In the email, Howard tells Spencer that
he "made it 'blisteringly clear' to [Rajappa] that on any future calls he gets from the
Chairman of our Audit Committee on accounting-related issues he must run the question
or issue by you before he or anyone else gets back to [the Audit Committee Chairman]."
Pis.' Opp'n Howard at 30. According to plaintiffs, this email demonstrates that "Howard
was trying to keep the internal audit from acting independently," Tr. at 65:24-25, and
"demand[ing] control over all information given by the internal auditor to the Audit
Committee," Pls.' Opp'n Howard at 30. But plaintiffs point to absolutely no evidence
that supports their nefarious interpretation of this email. And conversely, defendants
present evidence that Howard did not intend to-and never did-censor Rajappa's
communications with the Audit Committee Chairman. 15 Thus, even if plaintiffs'
15
See Dep. ofSampath Rajappa, Decl. of Eric Delinsky in Supp. ofDef. J. Timothy
Howard's Reply in Supp. of his Mot. for Summ. J. [Dkt. # 995-2] ("Delinsky Decl."), Ex.
79 at 132-33 (conversation referenced in email involved Howard asking Rajappa to
"make sure [he] gets all the relevant latest data from accounting ... so that it will give a
full picture to [the Audit Committee Chairman]"); id. at 394 (Rajappa agreeing that he
was not "required to go through anyone else" to talk to the Audit Committee Chairman);
14
interpretation of the email was credible, the email is devoid of any connection to
accounting misbehavior or harm to investors. This is simply not evidence of scienter of
securities fraud.
Plaintiffs then attempt to muster other evidence that Howard "was aware of ...
material internal control weaknesses." Pis.' Opp 'n Howard at 31. This evidence
consists of descriptions of Fannie Mae's organizational structure that allegedly created
"clear conflicts of interests." !d. Yet again, plaintiffs provide no evidence that Howard
knew that Fannie Mae's organizational structure possessed conflicts or weaknesses. 16
Ignoring what Howard did or did not know, plaintiffs state that "Howard had no
reasonable basis for believing that [Rajappa] was competent" because he was not a
Dep. of Timothy Howard, Delinsky Decl., Ex. 75 at 79 (purpose of the conversation with
Rajappa was to "reinforce to him the importance of getting your facts in order before you
do your analysis and report it to the chairman of the audit committee .... "); id. at 73
(Howard did not "take any steps to inhibit Mr. Rajappa's communication to the audit
committee chair ... "); id. at 74-75 (use ofphrase "blisteringly clear" was an inside joke
between Howard and Spencer); Dep. of Thomas Gerrity (Audit Committee Chairman),
Delinsky Decl., Ex. 80 at 318-23 (testifying that communications with Rajappa appeared
to be candid, forthright, and uncensored both before and after the 2004 email).
16
To further their argument, plaintiffs point to two memoranda from Rajappa to
Howard and Spencer. In the first memorandum from October 2003, Rajappa describes
Fannie Mae's Internal Audit department as "bleeding from inside and outside
recruitment," which was "seriously undermining" the ability of internal audit to complete
financial certifications and Sarbanes Oxley 302 certifications. Pis.' SGIMF Howard~
130 (citing Email from Rajappa to Howard dated October 24, 2003, Markovits-
Howard/Spencer Decl., Ex. 57). In the second memorandum from June 18, 2004,
Rajappa highlights "high attrition rates in the audit department ... which results in fewer
experienced auditors, challenges in cross training staff, and difficulties in transition
responsibilities to existing staff." Pis.' SGIMF Howard~ 132 (citing Memorandum from
Rajappa to Howard dated June 18, 2004, Markovits-Howard/Spencer Decl., Ex. 59).
Plaintiffs cite no evidence, however, that Howard read these memoranda or that Howard
would have interpreted such comments as signs of weaknesses in internal controls.
15
Certified Public Accountant and had no prior auditing experience. Again, plaintiffs cite
no evidence that Howard knew that such qualities were critical to Rajappa's competency
or that the lack of such qualities created an internal control weakness. To prove scienter,
plaintiffs cannot merely present evidence of alleged weaknesses without also presenting
evidence that Howard knew, or should have known, about these weaknesses.
II. FAS 91
Next, plaintiffs detail the events leading up to a 1998 audit difference related to
FAS 91 and the deferral of$199 million in expenses to future periods. Pls.' Opp'n
Howard at 17, 21-25. Plaintiffs argue that, prior to the 1998 audit difference, Fannie
Mae's Financial Standards Group chief Jonathan Boyles "specifically informed Howard
that Fannie Mae was violating FAS 91 during this period," Pls.' Opp'n Howard at 22, and
"Boyles fully explained to Howard ... how Fannie Mae was violating [GAAP]
requirements ... "with respect to 10 and PO securities, id. at 17. To support these
accusations, plaintiffs cite two unpersuasive documents. The first appears to be a 1995
memo from Boyles to "Distribution," Markovits-Howard/Spencer Decl., Ex. 43, but
plaintiffs provide no evidence that Howard ever received this memo. The second is
entitled "10/REMIC Package Briefing for Tim Howard" and, despite plaintiffs'
allegation, contains no references to GAAP violations or Howard's knowledge of
purported violations. Markovits-Howard/Spencer Decl., Ex. 22. 17 Plaintiffs even go one
step further, citing this document as support for the assertion that "Howard allowed
17
Nor does the document indicate that Boyles authored it, despite plaintiffs'
unsupported statement to that effect. !d.; see also Pls.' SGIMF Howard ,-r 74.
16
[GAAP violations with respect to 10/PO accounting] because of the 'operational
difficulties' involved in complying." Pls.' Opp'n Howard at 36 (citing Pls.' SGIMF
Howard~~ 73-76). In fact, the document appears to be a briefing designed for Howard
and contains no information about what Howard did or why. See Markovits-
Howard/Spencer Decl., Ex. 22 at 3. Neither of plaintiffs' documents demonstrates that
Howard knew anything about alleged GAAP or FAS 91 violations, despite plaintiffs'
deceptive suggestions to the contrary. 18
As further evidence related to FAS 91, plaintiffs cite another document predating
the class period: a September 23, 1999 memorandum to Howard from Janet Pennewell,
Fannie Mae's Vice President for Financial Reporting and Planning. Pls.' Supp'l Mem.
Howard at 4; Tr. at 74:15-75:15; Pls.' SGIMF Howard~~ 17, 113; Markovits-
Howard/Spencer Decl., Ex. 51. The memorandum discusses a recommended
amortization policy. Markovits-Howard/Spencer Decl., Ex. 51. Plaintiffs allege that this
memorandum "warned Howard that FAS 91 required Fannie Mae to record catch-up to
adjust prior period amortization in the current period, and that percentage thresholds do
not conform to GAAP." Pls.' Supp'l Mem. Howard at 4. What the memo actually states,
however, is:
18
Plaintiffs also seize upon the language in this document that suggests that Fannie
Mae attempted to "keep [its] analysis confidential" from KPMG and did not bring "these
issues to [KPMG's] attention." !d. Again, plaintiffs provide no evidence that Howard
saw this document. Even if he had seen this document, Howard testified that, upon
learning that "KPMG had not been apprised" of Fannie Mae's 10 REMIC package
accounting policy, he asked Fannie Mae's Controller to "share [that policy] with
KPMG." Delinsky Decl., Ex. 75 at 271-72.
17
Our intention is to [change amortization speeds] in a manner which
accurately reflects our financial results .... Accounting policy requires us
to record any catch-up to adjust prior period amortization in the current
period. However, we believe that it may be appropriate to adjust the
catch-up over time if the amount is not material.
Markovits-Howard/Spencer Decl., Ex. 51 at 1, 3. Thus, while the memorandum
addresses what "[a]ccounting policy requires," it does not go on to conclude that Fannie
Mae's current or proposed policy violates GAAP. Instead, the memorandum states that
"we believe that it may be appropriate"-not inappropriate or contrary to GAAP-to
adjust immaterial catch-up over time. Even if the memorandum implied concerns about
the company's amortization policy, plaintiffs present no evidence that Howard ever read
the memorandum. 19 To the contrary, defendants present evidence suggesting that the
memorandum was a draft20 and that Howard did not recall reading the memorandum. 21
And evidence indicates that Fannie Mae never even used the amortization option
discussed in the memorandum. Howard's Supp'l Mem. at 8-9 (citing Delinsky Decl., Ex.
62 ~ 23; Miller Decl., Ex. 183 at 244 ). Simply put, plaintiffs cannot claim evidence of
Howard's scienter lies in a document that does not identify a GAAP violation, that
Howard may have never read, and that discusses a practice that was never implemented.
19
Indeed, plaintiffs admit that they failed to confront Howard with this very
memorandum. Tr. at 80:4-10.
20
See Howard's Supp'l Mem. at 7 (citing Pennewell deposition, Supplemental Decl.
of Adam B. Miller in Supp. ofDef. Leanne G. Spencer's Mot. for Summ. J. [Dkt. # 996-
3], Ex. 224 at 101).
21
See Howard's Supp'l Mem. at 7-8 (citing OFHEO Sworn Interview with Howard,
Markovits-Howard/Spencer Decl., Ex. 65 at 181, 184).
18
More importantly, plaintiffs fail to demonstrate that this pre-class-period evidence
would be admissible as evidence of"what the defendant knew during the class period."
Pis.' Supp'l Mem. Howard at 2 (citations omitted). Since plaintiffs fail to demonstrate
that Howard knew of any GAAP or FAS violations before the class period, plaintiffs'
evidence cannot be probative of Howard's scienter during the class period itself. 22
III. FAS 133 and Alleged Earnings Manipulation
Plaintiffs did not address FAS 133 in their portions of oral argument or
supplemental briefing related to Howard. However, in their original summary judgment
motion, plaintiffs did cite two pieces of evidence that they alleged demonstrates
Howard's knowledge ofF AS 133 violations. First, plaintiffs pointed to an email from
Boyles in which plaintiffs say that Boyles "specifically told Howard that Fannie Mae's
policy was 'aggressive' and 'not one we would want to flash in front of the [Financial
Accounting Standards Bureau] for comment or the treatment could get worse."' Pis.'
Opp'n Howard at 20 (emphasis omitted); see Markovits-Howard/Spencer Decl., Ex. 66 at
1-2. Plaintiffs, however, conveniently omit the middle of the sentence: "we have
KPMG 's approval." See Markovits-Howard/Spencer Decl., Ex. 66 at 1. With this phrase
included, this sentence no longer implies that the accounting policy was somehow
improper. To the contrary, the sentence stands as evidence supporting the defendant's
assertion that Howard was told that Fannie Mae's accounting policies were acceptable.
22
See Novakv. Kasaks, 216 F.3d 300,309 (2d. Cir. 2000) ("[A]llegations ofGAAP
violations or accounting irregularities, standing alone, are insufficient to state a securities
fraud claim. Only where such allegations are coupled with evidence of corresponding
fraudulent intent, might they be sufficient.") (internal citations and quotation marks
omitted).
19
Plaintiffs also omit Howard's response to this email, in which Howard rejects
"attempting to work behind the scenes" in favor of "mak[ing] our argument forcibly to
FASB." Delinsky Decl., Ex. 64 at 1. In no way does this email demonstrate that Howard
knew about improper accounting practices or supported keeping any accounting practices
a secret. 23
Second, plaintiffs cite a July 2000 email from Mehmood Nathani from Fannie
Mae's Treasurer's Office, stating that Howard "can no longer feel even somewhat
assured that the analysts and external folks will not misinterpret FAS 133's impact when
we go live. Therefore, reduction of earnings volatility is still our numero uno objective."
Pis.' Opp'n Howard at 20; see Markovits-Howard/Spencer Decl., Ex. 67. Based upon
this quotation alone, plaintiffs conclude that "Howard's standing instruction was that
minimizing earnings volatility trumped compliance with FAS 133." Pis.' Opp'n Howard
at 20. Please! Plaintiffs once again misconstrue the evidence. This "numero uno
objective" quotation is not only not attributed to Howard, the email contains no
instruction from Howard to disregard FAS 133. 24
IV. Earnings Management
Plaintiffs next allege that "Howard directed Fannie Mae's pervasive and improper
earnings management over the entire class period." Pls.' Opp'n Howard at 14. In
23
In fact, both Boyles' email and Howard's reply were sent to eleven other
recipients. See Markovits-Howard/Spencer Decl., Ex. 66; Delinsky Decl., Ex. 64.
24
To the contrary, the defendant presents deposition testimony in which Nathani
states that he believed Howard wanted FAS 133 implemented faithfully. See Howard's
Reply at 10 (citing Decl. of Miles Clark in Supp. ofDef. J. Timothy Howard's Mot. for
Summ. J. [Dkt. # 938-3] ("Miles Decl."), Ex. 55 at 323).
20
support, plaintiffs point to Fannie Mae's 10/PO accounting, debt repurchases, and on-top
adjustments, which they conclude represent "instances where Howard was specifically
informed of and tolerated ... GAAP violations .... " Pis.' Opp'n Howard at 17-19. At
most, plaintiffs' evidence indicates that Howard was involved with certain transactions
that affected earnings. Plaintiffs fail to point to any evidence from which a reasonable
jury could infer that Howard believed any of these transactions were improper or sought
to conceal them from the public. Indeed, plaintiffs' own expert recognized that earnings
management does not necessarily show an improper purpose. See Fierstein Report at 5-5,
September 14, 2010, Delinsky DecI., Ex. 69 ("Certain transactions may be executed to
manage earnings (i.e., change the pattern of earnings) without violating GAAP. At
Fannie Mae, an example of this was its debt buyback program."). With respect to debt
buy-backs, the record shows that Fannie Mae disclosed the buy-backs in their public
filings. Delinsky Decl., Ex. 71 (2001, 2002, and 2003 disclosures). As to the on-top
adjustments, plaintiffs only evidence is an email describing an on-top adjustment
"[b]ased on discussions with" Howard. Pis.' Opp 'n Howard at 19 (citing Markovits-
Howard/Spencer Decl., Ex. 41 ). The email, however, contains no reference to GAAP
violations, Howard's knowledge ofGAAP violations, or Howard's knowledge of the on-
top adjustment. 25
Plaintiffs also present evidence of alleged "warn[ings]" Howard received about
earnings manipulation. Pis.' Supp'l Mem. Howard at 4. For example, plaintiffs state that
25
For a discussion of the only piece of contemporaneous evidence plaintiffs cite in
support of their 10/PO earnings management allegations, see the discussion of the 1998
10/REMIC package briefing supra at 16-17.
21
KPMG "specifically warned Howard on three separate occasions that earnings
manipulations to meet specific goals were impermissible .... " !d. The three occasions
they cite, however, consist of general communications from the SEC about "earnings
management"-not linked to any Fannie Mae practice or any GAAP violation. Pls.'
SGIMF Howard~~ 60-62. Further, all three of these alleged warnings predate the class
period and do not provide insight into Howard's class-period scienter. !d.
V. Alleged Efforts to Hide Information from KPMG and SEC
Plaintiffs claim that "Howard was informed on several occasions that senior
management was hiding certain GAAP violations and other important information from
KPMG, but did nothing." Pls.' Opp'n Howard at 15. In addition to citing the IO/REMIC
package briefing discussed above, 26 plaintiffs cite another pre-class-period document: a
summary of a 1998 meeting that Howard attended. !d. at 16 (citing Markovits-
Howard/Spencer Decl., Ex. 24 ). The summary mentions the proposed implementation of
an "internal (not public to KPMG) policy," leading plaintiffs to conclude that "Spencer
told Howard she was hiding Fannie Mae's FAS 91 violations from KPMG .... " !d. But
plaintiffs identify no evidence that Spencer wrote this summary or that Howard read it.
Nor do plaintiffs identify evidence that Howard was told that the proposed policy
violated FAS 91. In short, this summary says nothing about Howard's state of mind,
despite plaintiffs' contrary assertion.
Nor does plaintiffs' class-period evidence indicate that Howard knew that Fannie
Mae was hiding information from KPMG. Plaintiffs single piece of class-period
26 See supra at 16-17.
22
evidence is a 2002 email from Spencer to Howard and Boyles. See Pis.' Opp'n Howard
at 16; Markovits-Howard/Spencer Decl., Ex. 23. In this email, Spencer remarked that
"[t]here is at least one thing that we know of where we have a favorable accounting
treatment and that is on the IO's we have on our books. Freddie [Mac] is doing IO
accounting and we are not. KPMG hasn't figured that out .... " Markovits-
Howard/Spencer Decl., Ex. 23. This comment does not suggest that Fannie Mae was
concealing improper accounting practices from KPMG. Rather, Spencer simply observed
that KPMG was not aware that Fannie Mae's accounting practices differed from those of
Freddie Mac. No mention is made of either company's accounting practices violating
GAAP or being otherwise improper. Even if plaintiffs pointed to evidence that Howard
read this email, this email could not have tipped off Howard to the presence of
accounting fraud.
Plaintiffs also fail to show that Howard was aware of any attempts to conceal
information from the SEC. In this regard, plaintiffs present merely a memorandum from
Jonathan Boyles, in which he states that "the process we have in place is not exactly what
we showed the SEC though it gets close." Pis.' Opp 'n Howard at 16 (citing Markovits-
Howard/Spencer Decl., Ex. 26 at 2). Putting aside the questionable value of this
statement, the memorandum's distribution list does not even include Howard. Without
evidence that Howard read the memorandum, plaintiffs cannot credibly argue that this
memorandum is evidence that Howard intended to deceive anyone. See Novak, 216 F .3d
at 309 ("[A]llegations ofGAAP violations or accounting irregularities, standing alone,
are insufficient to state a securities fraud claim. Only where such allegations are coupled
23
with evidence of corresponding fraudulent intent, might they be sufficient.") (internal
citations and quotation marks omitted).
VI. Howard's Financial Motivation
Plaintiffs again fail to establish Howard's scienter by observing that "Howard had
substantial financial motivation to improperly manipulate [earnings per share]." Pls.'
Opp'n Howard at 12. Plaintiffs claim that Howard designed a compensation program
that rewarded Howard and other Fannie Mae employees when Fannie Mae met targeted
earnings per share. !d. at 12-13. What plaintiffs fail to mention, however, is that Fannie
Mae's board of directors developed its executive compensation plan, including the
earnings-per-share metric, before Howard became CFO. Def. Franklin D. Raines's Reply
to Lead Pls.' Responses to Def. Raines's Statement ofUndisputed Material Facts and
Statement of Additional Undisputed Material Facts in Supp. ofDef. Franklin D. Raines's
Mot. for Summ. J. ~ 252-54 [Dkt. #979] ("Raines Reply SUMF and SAUMF"). 27
Moreover, this compensation program, standing alone, cannot constitute evidence of
scienter. See Novak, 216 FJd at 307 (noting that scienter requires a showing of more
than "motives possessed by virtually all corporate insiders" such as maintaining credit
rating, sustaining profitability, and maintaining stock price to increase executive
compensation).
27
Fannie Mae's Congressionally drafted charter also dictates a significant portion of
executive compensation is to be based on corporate performance. See Fannie Mae
Charter Act, Decl. ofEun Young Choi in Supp. ofDef. Franklin D. Raines's Mot. for
Summ. J. [Dkt. # 979] ("Choi Decl."), Ex. 227 at 27.
24
Notably, Howard increased his ownership of Fannie Mae stock and vested stock
options by more than 20 percent during the class period. Howard's Reply to Pls.' SGIMF
~~ 136-38. Such behavior is, to say the least, inconsistent with a fraudulent intent. See In
re KeySpan Corp. Sec. Litig., 383 F. Supp. 2d 358, 383-84 (E.D.N.Y. 2003) ("The net
acquisition of shares cuts against the notion that defendants sought to unload their
holdings ofKeySpan stock before their likely diminution in value following the
disclosure of negative insider information.").
VII. Reports and Findings of Regulators and Outside Counsel
Throughout their opposition brief, plaintiffs lean heavily on the post-hoc reports
and litigation documents, which were uniformly prepared after the relevant events in this
case, and some of which were explicitly prepared in preparation for litigation, as
"evidence" ofHoward's scienter. See, e.g., Pis.' Opp'n Howard at 16 (citing OFHEO
Report); id. at 9, 17, 21, 28, 29, 30, 39 (citing Fannie Mae's Restatement); id. at 21, 23
(citing Rudman Report); id. at 9, 31 (citing SEC complaint against Fannie Mae); id. at 32
(citing OFHEO's Notice of Charges and Issuance of Consent Orders). Putting aside the
obvious and substantial admissibility questions concerning these documents, 28 plaintiffs
28
The conclusions and opinions in these documents are clearly hearsay. Plaintiffs
contend that the OFHEO and Rudman reports are admissible under Fed. R. Evid. 803(8)
as public records. Pis.' Opp'n Howard at 5 n.7. But, the OFHEO reports were part of an
effort to prepare administrative charges against the individual defendants and raise
substantial questions of trustworthiness. See Fed. R. Evid. 803(8). The Rudman Report
certainly does not fall within the 803(8) exception, which is limited to records or
statements "of a public office." !d.
Moreover, the prejudicial effect of these documents substantially outweighs their
probative value; these documents, after all, were undoubtedly fashioned with multiple
considerations in mind. Plaintiffs argue that inadmissible evidence can be used to defeat
25
face a much larger challenge in relying on these documents: they do not contain any
evidence of Howard's scienter. See Pls.' SGIMF Howard '1!125 (citing OFHEO report as
"evidence ofHoward's knowing and intentional violations ofF AS 91). With the
exception of the administrative charges, these documents uniformly reached no
conclusions as to Howard's state of mind, and, in many cases, referred only indefinitely
to "senior management" or "executives." See, e.g., Markovits-Howard/Spencer Decl.,
Ex. 12 (summarizing OFHEO report findings); Pls.' Opp'n Howard at 16 ("OFHEO
stated that, 'Fannie Mae senior management systematically withheld information about
the Enterprise's operations and financial condition from ... OFHEO .... "'). Here, by
comparison, the key inquiry as to scienter is whether Howard knew, or consciously
disregarded, the potential falseness of his statements. As such, the after-the-fact and
non-specific conclusions of regulators and investigators, contained in this myriad of
reports, fail to shed any light on this inquiry. 29
VIII. Magnitude of the Fraud
Finally, plaintiffs attempt to shore up their case against Howard by pointing to the
"sheer scope and magnitude of the fraud." Pls.' Opp'n Howard at 38. But as
Shakespeare might have noted: a giant body doth not portend an evil mind. Indeed, at the
summary judgment "so long as it is capable of being converted into admissible
evidence," but plaintiffs do not demonstrate that the reports contain "underlying
admissible evidence" that could be used at trial. Pls.' Opp'n Howard at 5 n.7.
29 Plaintiffs also note that, "[i]n December 2006, OFHEO brought charges against
Raines, Howard, and Spencer for intentional and knowing misconduct." Pls.' Opp'n
Howard at 32. Yet plaintiffs fail to explain how these charges, which were settled with a
denial of liability, can be considered evidence of scienter.
26
motion-to-dismiss stage, I warned plaintiffs' counsel that a fraud's magnitude alone was
insufficient to establish an inference of scienter. See In re Fannie Mae Sec. Litig., 503 F.
Supp. 2d at 41. That principle is stronger now at the summary-judgment stage, and the
time for simply presenting allegations that give rise to a strong inference of scienter has
long since passed. Without any actual evidence supporting a conclusion of Howard's
scienter, the magnitude of Fannie Mae's earnings restatement alone is insufficient to
preclude summary judgment. 30
CONCLUSION
Sustaining claims for securities fraud requires a showing of scienter-either an
intent to deceive or an extreme departure from the standard of ordinary care-for each
individual or entity claimed to have committed such fraud. Put simply, the securities
fraud laws are not a means for shareholders to recover for all losses, no matter how
sizable or sudden. Upon review of all plaintiffs' evidence, this Court concludes that
plaintiffs have failed to put forth sufficient evidence from which a reasonable jury could
find that Howard had such an intent. A failure to understand, or even negligent behavior,
30
Moreover, plaintiffs do not dispute that the factor responsible for the largest
amount ofFannie Mae's earnings restatement was its FAS 133 application. See Lead
Pls.' Mem. ofP. & A. in Opp'n to Defs.' Mot. FAS 133 at 30-31 [Dkt. # 968]. Because
that change in Fannie Mae's hedge accounting so significantly affected Fannie Mae's
reported earnings, this case is simply distinct from cases involving fake transactions,
hidden liabilities, or the distortion of the economics of Fannie Mae's business. See In re
Atlas Air Worldwide Holdings, Inc. Sec. Litig., 324 F. Supp. 2d 474, 496 (S.D.N.Y.
2004). See also Defs.' Reply SUMF FAS 133 ~ 76 (discussing disclosure ofFAS 133
accounting to public and analysts' ability to calculate earnings impact).
27
is not the equivalent of the necessary intent to deceive or conscious disregard of obvious
risks. Therefore, Howard is entitled to summary judgment on all claims against him. 31
For all of the foregoing reasons, the Court GRANTS defendant J. Timothy
Howard's Motion for Summary Judgment. An Order consistent with this decision
accompanies this Memorandum Opinion.
/
~
RICHARD E N
United States District Judge
31
Because I conclude that there is no evidence that Howard "culpably participated"
in any underlying securities law violation, Howard is also entitled to summary judgment
on plaintiffs' claims against him under Section 20(a) of the Exchange Act, 15 U.S.C. §
78t(a). See In re Fannie Mae Sec. Litig., 503 F. Supp. 2d at 42-46 (dismissing§ 20(a)
claim due to failure of plaintiffs to plead culpable conduct as to defendants); see also
Ganino v. Citizens Utils. Co., 228 F.3d 154, 170 (2d Cir. 2000) ("To make out a prima
facie case under§ 20(a) ... a plaintiff must show ... that the controlling person was in
some meaningful sense a culpable participant in the fraud perpetrated by the controlled
person." (internal quotation marks omitted)). As discussed above, plaintiffs have not put
forth any admissible evidence that Howard acted without good faith or induced any
securities fraud.
28