It's a good thing for the former Freddie Mac officials Richard
Syron, Donald Bisenius and Patricia Cook that U.S. District
Judge Richard Sullivan of Manhattan isn't quite as speedy as his
colleague U.S. District Judge Paul Crotty. Sullivan is
overseeing the Securities and Exchange Commission's case against
the former Freddie officials; Crotty is in charge of the SEC's
similar case against a trio of former Fannie Mae executives.
Back in August, Crotty denied the execs' motion to dismiss,
ruling that the SEC had provided sufficient evidence that Fannie
deceived investors when it excluded from its subprime exposure
calculation mortgage loans that met its own definition of
subprime. But Sullivan is still mulling the Freddie execs'
motion to dismiss, in which he heard oral arguments on Aug. 20.
That means there's still time for him to consider a ruling
Tuesday by U.S. District Judge John Keenan in a securities class
action against Freddie Mac that raised just about the same
allegations -- against the same individual defendants -- as the
SEC.
Keenan dismissed the class action, and with words that
sounded as though they could have come from the execs' motion to
dismiss the SEC case. The judge said that Freddie had disclosed
copious information about the loans in its guaranteed portfolio,
including the credit ratings of borrowers and the loan-to-value
ratio of the mortgages. "Freddie Mac's broad disclosure (of) all
of its loan characteristics was an accurate way to relay
information to investors, given the confusion surrounding the
term 'subprime,'" Keenan wrote. "Freddie Mac's method of
disclosing information made it possible for a reasonable
investor to, with little effort, take his own measure of risk in
Freddie Mac's loan portfolio."
Nor was there evidence that ex-Freddie officials
deliberately misled investors, according to the judge. "It
defies logic to conclude that executives who are seeking to
perpetrate fraudulent information upon the market would make
such fulsome disclosures," Keenan wrote. "I f Freddie Mac
executives sought to shield its investors from 'learning the
truth of' its business, they needed to be measurably more
opaque."
Counsel for the execs in the SEC case -- Sidley Austin for
Syron; Paul, Weiss, Rifkind, Wharton & Garrison for Bisenius;
and Zuckerman Spaeder for Cook -- couldn't have said it any
better themselves, so it's no surprise that they sent a letter to Sullivan Tuesday, enclosing a copy of Keenan's ruling.
"Defendants believe that Judge Keenan's memorandum opinion
represents subsequently decided authority relevant to the
court's consideration of defendants' motion to dismiss the SEC's
complaint," they said in the joint letter. (Bingham McCutchen
represented Freddie Mac in the class action.)
Sullivan isn't bound by Keenan's findings, of course. And as
the SEC noted in its own letter to the judge Wednesday, private
class actions aren't enforcement actions. The commission pointed
out that in another securities class action against Freddie Mac,
this one in Ohio, U.S. District Judge John Adams denied a motion
to dismiss, ruling that he "remains convinced that discovery
needs to take place in this matter." (The Ohio case, unlike the
New York class action, does not name any of the three Freddie
Mac defendants sued by the SEC.) "We do not think the decisions
in either class action -- both of which were brought under the
Private Securities Litigation Reform Act -- are dispositive of
any issues before your honor but wanted your honor to be aware
of the rulings," wrote SEC assistant chief litigation counsel
Suzanne Romajas.
There's still a chance that lawyers for the Freddie
officials in the SEC case will move formally to incorporate
Keenan's ruling in the class action into the record before
Sullivan. Given Keenan's powerful language, that's probably a
good idea.
An SEC spokeman declined comment.
(Reporting by Alison Frankel)
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