Capital Markets

Accounting-Rule Change Spurs Lawsuit

A shareholder is suing five banks for not warning her about an accounting proposal that she says precipitated a massive stock price drop.
Marie LeoneSeptember 5, 2008

A shareholder is suing five banks, claiming they did not warn her or other investors about a proposed accounting-rule change that lowered the value of Fannie Mae stocks she bought, Bloomberg News reported.

The proposed rule is FAS 140, the accounting standard that specifies the conditions for keeping securitized assets off the balance sheet. If the proposal is issued in its current form and takes effect in November 2009 as expected, it could force companies like Fannie Mae to bring some special-purpose entities back on their balance sheet.

Plaintiff Karen Orkin, who bought 600 shares of class B Fannie Mae shares, filed the suit in New York State Supreme Court in Manhattan this week as a proposed class action, according to Bloomberg. The complaint reportedly says 89 million shares of the stock were sold, and the share price sunk by 44 percent in value in four months.

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The five banks — Citigroup, Merrill Lynch, Wachovia, Morgan Stanley, and UBS — formed a syndicate to underwrite the stocks. Wachovia, Morgan Stanley, and UBS declined to comment on the suit. The other two banks did not immediately return phone calls from

Orkin’s complaint alleges that if the FAS 140 change is issued, Fannie Mae would have to raise up to $46 billion of capital to maintain its current financial position, noted Bloomberg. The wire service calculated that the revised rule may force Fannie Mae and sister mortgage lender Freddie Mac to post an aggregate $3.7 trillion in off-balance-sheet assets on their balance sheet. In the past four quarters, Fannie and Freddie have recorded combined losses of $14.9 billion.