Risk Management

Judge Blocks Fannie Mae Suit

A federal judge dismisses a shareholder derivative lawsuit because the plaintiffs did not follow procedure.
Stephen TaubJune 1, 2007

A federal judge has ruled that shareholders may not pursue their derivative lawsuit against the board of directors of Fannie Mae following its $6.3 billion accounting scandal.

U.S. District Judge Richard J. Leon dismissed the lawsuit because the shareholders failed to take the required initial steps when starting their case. The Supreme Court has ruled in previous cases that shareholders must first ask directors to file suit on behalf of the company, Leon wrote in his opinion, which the Fannie Mae investors did not do.

The lawsuit, whereby shareholders sued in the company’s name, sought to hold the mortgage giant’s directors and former executives personally responsible for manipulating earnings to earn large bonuses. They hoped to force Fannie to change its governance policies and recover bonuses and severance packages from former CEO Franklin D. Raines and former CFO J. Timothy Howard. According to the Associated Press, shareholders also wanted the company to rotate auditing firms, limit stock selling by executives, and change the compensation structure.

The ruling has no bearing on a class-action shareholder lawsuit alleging that Fannie Mae executives violated securities laws or a federal agency’s attempt to recover money from Raines, Howard, and others, the AP noted.

“We are pleased that the court found that the board of directors acted responsibly, and was fully able to act independently to protect and make decisions on behalf of the company and was not compromised by any self-interest,” said Fannie Mae in a statement.