Fannie Mae and KPMG settle class action

Posted on: January 15th, 2014 by Steve Larson
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Law and justice concept, gavelA D.C. federal judge approved a $153 million class action settlement for investors who accused housing giant Fannie Mae and accounting firm KPMG of putting out misleading financial reports.  It was the largest such settlement in the D.C. Circuit since 1996.

U.S. District Judge Richard J. Leon said the deal, “easily” cleared the bar for approval and was a better deal for the investors, who were led by two Ohio state pension funds, than were the risks of a trial after nearly nine years of litigation over accounting irregularities that came to light in 2004.

“I easily find this settlement to be fair, adequate and reasonable,” he said.

The investors estimated that the settlement represents between 4 and 8 percent of the potential “best case scenario” recovery if they’d won at trial, a figure comparable to similar cases, according to the judge’s opinion.

Judge Leon pointed out that settling the case also helped avoid an unusual risk. After the Federal Housing Finance Authority placed Fannie Mae into receivership, the FHFA proposed rules that might have blocked any recovery for the investors even if they took the case to trial and won, he said.

Judge Leon also rejected an objection by one investor, Cafco-Large Cap Funds LP, who claimed that the settlement’s plan of allocation, which is based on the economic losses suffered by class members as a result of Fannie Mae’s and KPMG’s alleged wrongdoing and not broader market forces, allegedly favors options investors over stockholders.

Allocation plans “need not be perfect”; they just have to have a “reasonable, rational basis,” the judge said. The way options are valued in the plan, by implied volatility rather than historical volatility, is a common method used in other securities cases, according to Judge Leon.

The judge noted that the deal is the largest securities class action settlement in the court’s circuit since the Private Securities Litigation Reform Act in 1996.

The settlement was reached after two years of mediation overseen by Fred Fielding of Morgan Lewis & Bockius LLP. The class includes about a million buyers of Fannie Mae stock and options from 2001 to 2004, according to the order.

Ohio Attorney General Mike DeWine said in a statement Friday that the judge’s order brings closure to the long-running litigation.

“I am pleased to see this litigation finally resolved on behalf of the Ohio pension funds and other members of this very large class,” he said.

Fannie Mae and KPMG representatives said they were pleased with the decision.

The case is In re: Fannie Mae Securities Litigation, case number 1:04-cv-01639, in the U.S. District Court for the District of Columbia.