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In this high-stakes litigation against mortgage giant Fannie Mae, the chances of surviving the motion to dismiss stage appeared bleak after the Court of Appeals affirmed the dismissal of a similar case against Fannie Mae’s sibling company, Freddie Mac. But after Labaton Sucharow reshaped lead plaintiffs’ argument, investors of Fannie Mae lived a different fate and were awarded $170 million in recoveries.
Fannie Mae, popularly known as a low risk financial institution and chartered by the U.S. government to bring stability to the housing market, initially did not participate in the mid-2000’s mortgage market’s new direction of high-risk subprime mortgage loans. But the company’s market share was dropping rapidly. Fannie Mae eventually decided to meet the market and secretly switched from its usual “plain vanilla” investments to subprime and Alt-A loans.
To the public, Fannie Mae continued to tout its image as the model of safety in the mortgage industry. On the books, however, the company was ramping up on high-risk loans without a risk control infrastructure in place. The U.S. government shocked the public when it announced that it would place Fannie Mae under conservatorship on September 6, 2008, finally revealing the company’s shady investment practices.
In December 2011, the SEC filed a civil action against Fannie Mae and entered into a non-prosecution agreement with the company, in which Fannie Mae, without admitting or denying liability, accepted responsibility for its conduct and agreed to cooperate with the SEC action. Following the SEC development, lead plaintiff further alleged that Fannie Mae misclassified certain types of mortgages as prime when the company had information showing that those mortgages performed as bad or worse than subprime and Alt-A loans.
After producing more than 75 million pages of documents in discovery, reviewing transcripts for 60 Fannie Mae witnesses, and conducting 18 additional fact depositions, Labaton Sucharow achieved a $170 million settlement. Partner Thomas A. Dubbs noted the “risks were indeed substantial, and knowing the outcome in the Freddie Mac case makes this recovery even more significant to us. We’re very happy with the result achieved for the class.”