Freddie Mac defeats lawsuit over pre-crisis disclosures

Tue Nov 5, 2013 11:16am EST
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By Jonathan Stempel

NEW YORK (Reuters) - A federal appeals court on Tuesday upheld the dismissal of a shareholder lawsuit accusing Freddie Mac FMCC.OB of concealing its precarious finances and its subprime mortgage exposure prior to the 2008 financial crisis.

The 2nd U.S. Circuit Court of Appeals in New York said shareholders failed to connect their losses to the alleged inadequate disclosures by the government-controlled mortgage company and its officials, including former Chief Executive Richard Syron.

Freddie Mac lost most of its stock market value when, along with the larger Fannie Mae FNMA.OB, it was seized by U.S. regulators in September 2008, and put into a conservatorship under the Federal Housing Finance Agency.

Shareholders led by the Illinois-based Central States, Southeast and Southwest Areas Pension Fund accused Freddie Mac of hiding its potential insolvency even after revealing a $2 billion quarterly loss on November 20, 2007.

But a three-judge 2nd Circuit panel said Freddie Mac had made "extensive disclosures" during the class period, and that the shareholders did not show that their losses stemmed from the additional revelations.

"Throughout its complaint, Central States alleges that before July 2008, speculation about Freddie's insolvency based on inadequate capitalization and insufficient internal controls caused the stock price to fluctuate," the panel wrote.

"As a result," it added, "Central States does not plausibly allege a causal connection between the drop of the share price and the information revealed in the corrective disclosures."

The court added that the shareholder losses also "coincided with a marketwide phenomenon - the housing bubble burst," and were not shown to be linked to any concealing of "hundreds of billions of dollars" of subprime mortgage exposure.   Continued...