By Mike DeWine
Friday, February 18, 2011; 12:00 AM
In November 2004, the state of Ohio - on behalf of more than a million teachers and public employees - filed a securities fraud class-action lawsuit against Fannie Mae, three former senior executives of the housing giant, and its auditor, KPMG. The suit contends that the defendants defrauded more than 30 million Americans - mostly public service employees such as teachers, firefighters and police officers - costing them nearly $9 billion in lost pension funds.
Six-plus years later, the case continues. Fannie and its former executives have been using U.S. taxpayer dollars to over-lawyer the case and delay justice. Fannie Mae admits to spending at least $132 million so far on legal fees, and continued apace, the total cost to taxpayers could reach $410 million.
Amazingly, Fannie Mae has already admitted most of the factual allegations. A 2006 examination conducted by the Office of Federal Housing Enterprise Oversight (OFHEO) concluded that Fannie Mae portrayed itself "as one of the lowest-risk financial institutions in the world and as 'best in class' in terms of risk management, financial reporting, internal control, and corporate governance" - all while it was cooking the books, smoothing out earnings and violating 30 generally accepted accounting principles.
Did those fraudulent actions, which created the illusion of market stability and the false premise from which executives received millions of dollars in bonuses, lead Fannie Mae to overstate its earnings by $10.3 billion, which in turn led to its 2003 restatement of profits, the largest financial restatement in U.S. history? Undoubtedly.
Did Fannie Mae's two government regulators, the Securities and Exchange Commission and OFHEO, make the same fraud allegations in 2006 as in our complaint, and did Fannie Mae settle those allegations the very same day that they were alleged, agreeing to pay the SEC a $350 million civil penalty and to pay OFHEO a $50 million civil penalty? Without question.
And did Fannie Mae, in the SEC consent order settling the commission's fraud claims, agree "not to take any action or to make or permit to be made any public statement denying, directly or indirectly, any allegation in the Complaint or creating the impression that the Complaint is without factual basis?" Absolutely.
Yet Fannie Mae and its former leaders continue to drag this out.
As the fourth Ohio attorney general to oversee this litigation, I am perplexed and frustrated. Fannie Mae and the executives it is indemnifying are lawyering this case to death and impeding justice while swindling U.S. taxpayers, since the federal government, which took control of the company in 2008, is ultimately footing the bill.
It's as if the millions of public and private pensioners whom Fannie Mae and its officers defrauded are up against the richest guy in the world and he doesn't care how much it costs to keep this thing going. In "The Godfather," Don Corleone said that "a lawyer with his briefcase can steal more than a hundred men with guns." Without question, Fannie Mae and its former executives have a lot of lawyers with a lot of briefcases.
Richard J. Leon, a U.S. district judge for the District of Columbia, has tried to keep the case moving forward. He commented on the huge expense incurred by having so many defense attorneys - the Fannie team has typically brought 35 to 40 lawyers and paralegals to each of the monthly status conferences and about 13 lawyers to the 123 fact depositions - even saying at a June 2009 hearing that "the lawyers are doing pretty well. . . . I am not so sure the taxpayers are doing pretty well, but the lawyers are doing pretty well in this deal."
When we deposed former chief executive Franklin Raines in April 2010, he brought 13 lawyers - none of whom asked a question. He also now has nine experts, two of whom argued that his $91 million in compensation was justified.
Frankly, I'm wondering why a former chief executive paid more than $90 million isn't footing his own legal bills.
The judge has also admonished the defendants for their excessive number of experts - 25 at last count, each costing taxpayers $600 to $1,500 an hour. As Leon put it last June, "You don't need to have five experts say the same damn thing. If one good one says it the right way from your perspective, that's going to be more than enough. . . . The costs are just staggering."
This case has turned into a three-ring circus, and it is time for the big top to come down. The evidence of liability is clear. While an argument certainly can be made that Fannie Mae has to defend itself and its former officers, the amount they are spending at taxpayers' expense is egregious.
The writer, a Republican, is attorney general of Ohio.