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Fannie Mae shareholders filed a securities lawsuit against Deloitte & Touche LLP alleging they were misled about Fannie Mae's subprime mortgage risk. The judge dismissed the case, finding Fannie Mae had disclosed subprime risks and there was no evidence of fraudulent intent by Deloitte. The primary cause of the lawsuit was that shareholders claimed Deloitte negligently audited Fannie Mae and approved materially misstated financial reports. The downfall of Fannie Mae was attributed to recklessly investing in risky mortgages without properly assessing the volatile housing market.

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172 views

Case Study

Fannie Mae shareholders filed a securities lawsuit against Deloitte & Touche LLP alleging they were misled about Fannie Mae's subprime mortgage risk. The judge dismissed the case, finding Fannie Mae had disclosed subprime risks and there was no evidence of fraudulent intent by Deloitte. The primary cause of the lawsuit was that shareholders claimed Deloitte negligently audited Fannie Mae and approved materially misstated financial reports. The downfall of Fannie Mae was attributed to recklessly investing in risky mortgages without properly assessing the volatile housing market.

Uploaded by

mae tuazon
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© © All Rights Reserved
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FANNIE MAE 2008 SECURITIES LITIGATION

CASE: Deloitte & Touche LLP in September 2010 won dismissal of a federal securities lawsuit brought by
Fannie Mae stock investors alleging they were misled about the mortgage financier’s subprime mortgage
risk. The judged ruled Fannie Mae had made many disclosures about its subprime risks and found no
fraudulent intent by Deloitte. The case is In re: Fannie Mae 2008 Securities Litigation, U.S. District Court,
Southern District of New York, No. 09-md-02013

ENGAGEMENT:

The Federal National Mortgage Association or which is typically known as Fannie Mae was formed
in 1938 as part of the new deal encouraging banks to underwrite mortgage and increase homeownerships.
Fannie Mae does not provide mortgages to borrowers, hence, it provides stability, liquidity, and affordability
in the U.S. housing market by investing exclusively in the secondary residential mortgage market,

Fannie’s business is comprised of two components: The Credit Guaranty Business, and the Portfolio
Investment Business. In credit guaranty business, Fannie purchases mortgages from primary lenders and
resells those mortgages as MBSs (Mortgaged Back Securities), guaranteeing its mortgages if the initial
borrower defaults. Fannie generates income through fees it charges in their guarantees. In portfolio
investment business, Fannie holds mortgage loans and other securities, that it purchases from commercial
banks for its own investment purposes. Fannie generates profit when the income from mortgage assets and
other investments in its portfolio exceeds the interest Fannie pays its debt holders.

During year 2005, Fannie Mae selected the Deloitte & Touche LLP to succeed the KPMG LLP as its
independent auditor. The Office of Federal Housing Enterprise Oversight hired Deloitte to assist Fannie’s
accounting practices, their findings uncovered numerous examples of violations by Fannie, particularly in its
accounting for derivative financial instruments. The SEC staffs said to Fannie to make a restatement of their
financial reports from mid-2001 to 2004 which would result to $9 billion loss.

Fannie Mae has been publicly traded since 1968. Until 2010, it traded on the New York Stock
Exchange (NYSE). It was delisted following the mortgage, housing, and financial crisis after its stock
plummeted below the minimum capital requirements mandated by the New York Stock Exchange. Unethical
lending practices led to the crisis. During the housing boom of the mid-2000s, lenders lowered their standards
and offered home loans to borrowers with poor credit. In 2007, the housing bubble burst and hundreds of
thousands of these borrowers went into default, which led to what was known as the subprime meltdown

ROOT CAUSE:

The primary cause of Fannie Mae’s downfall is they recklessly disregarded the housing market’s increasing
volatility and continued to invest in risky mortgages that causes the investors of a materially misleading report
about the Fannie Mae’s exposure in the market.

The primary cause of why Fannie Mae’s shareholders filed a lawsuit against the Deloitte & Touche LLP is
because they claimed that Deloitte performed negligence in performing the audit of Fannie Mae. Also, by
accusing the Deloitte that they gave approval on a materially misstated financial report of Fannie Mae.

RECCOMENDATION:

Pursuant to this case – Fannie Mae Securities Litigation, I recommend, based on what I have read, is to
monitor and assess the flow of financial credit risk and financial credit market. For the reason that, if they
continually invest on risky mortgages like what they did, without assessing clearly the situation in the market,
they could experience unstable performance or worse. Moreover, is to comply on all rules and regulations,
principles, guidelines and retain the ethical standards that a company must obey to preserve the integrity and
trust of the internal and external factors affecting your company.

SOURCES:

https://www.courtlistener.com/opinion/2477301/in-re-fannie-mae-2008-securities-litigation/

https://dsnews.com/daily-dose/01-23-2017/court-deals-blow-fannie-mae-shareholder-hopes

https://www.wsj.com/articles/SB110487570043316843

https://www.investopedia.com/articles/investing/091814/fannie-mae-what-it-does-and-how-it-operates.asp

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