A lawsuit has been filed against four former executives of Fannie Mae, claiming that they made false statements and failed to disclose material facts during the months leading up to the U.S. government’s seizure of the company last week. The Fannie Mae lawsuit seeks class action status on behalf of all investors who purchased securities between November 16, 2007, and September 5, 2008.
Fannie Mae is a government sponsored company that was privately owned and operated until last week when the federal government seized control to prevent the collapse of the mortgage industry. Along with Freddie Mac, another similar company, Fannie Mae owns or guarantees about half of the $12 trillion U.S. home loan market by providing mortgages for properties.
On Sunday, September 7, 2008, Fannie Mae was taken over and put under a conservatorship of the Federal Housing Finance Agency. Following the action, shares are now trading at less than $1, which is more than an 80% drop from Friday’s closing price.
The Fannie Mae class action suit, which was filed in the U.S. District Court for the Southern District of New York , alleges that the former chairman of the company, former chief executive officer, former chief financial officer and former chief business officer made false and misleading statements about the financial condition of Fannie Mae to create inflated stock prices and protect their substantial financial compensation packages.
According to the lawsuit, CEO Daniel Mudd received over $14 million in compensation in 2006 and $12 million in 2007; chief business officer Robert Levin received over $9.5 million in 2006 and over $8.4 million in 2007; CFO Stephen Swad received over $4.8 million in 2007; and chairman of the board Stephen Ashley received over $500,000 in 2007.
Fannie Mae was severely affected by the sub-prime mortgage crisis in late 2007 and early 2008. Borrowers with poor credit defaulted on mortgages, leading to a sharp fall in demand for mortgage-backed securities that were not backed by Fannie Mae or Freddie Mac. This led to the companies becoming responsible for nearly 80% of all new mortgages.
A decline in home prices resulted from increasing foreclosures on mortgaged homes and stricter lending requirements made borrowing money for housing purchases more difficult. Fannie Mae suffered huge financial losses as its stock value fell more than 90% in August 2008 from the one year previous level.
The class action Fannie Mae lawsuit alleges that the four executives made false statements about the company’s financial position and the capital raised in Fall 2007 and Spring 2008. It also claims that they failed to disclose adverse facts to the public, deceived investors about the company’s business and prospects and artificially raised the company’s publicly traded securities, causing investors to buy stock at the inflated prices.