Court Opinion

ID: 2661501
Source: CourtListenerOpinion
Date Created: 2014-04-03 11:00:32.503379+00
Date Added: 2024-06-11T12:19:29.015996
License: Public Domain

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA

In re Federal National mm l £
Mortgage Ass0ciati0n MDL No. 1668 _< w.    l _
Securities, Derivative, and C~';»::rt: :\>.? :m  =,  if :';_,:.i',},`.§f,,
"ERISA" Litigation

In re Fannie Mae Securities C0ns0lidated Civil Action No. 04-1639 (RJL)

Litigation
MEMORANDU OPINION

(N@vemb@rgg, 2012) [# 942]

This is a class action securities fraud suit against F ederal Nati0nal Mortgage
Association ("Fannie Mae"), its former accountant, KPMG, LLP, and three of F annie
Mae’s former senior executives (collectively, "defendants"), brought by a class of parties
represented by lead plaintiffs Ohio Public Employees Retirement System ("OPERS") and
State Teachers Retirement System of Ohio ("STRS") (collectively_, "plaintiffs"). The

parties filed eight separate summary judgment motions in this case.l Recently, I granted

l Plaintiffs filed two summary judgment motions: one against Fannie Mae, Lead

Plaintiffs’ Motion for Partial Summary Judgment on Count I Against Defendant Federal
National Mortgage Association [Dkt. # 9l6] ("Pls.’ Mot. Fannie Mae"), and another
against KPMG, Lead Plaintiffs’ Motion for Partial Summary Judgment on Count III
Against Defendant KPMG LLP [Dkt. # 936] ("Pls.’ Mot. KPMG").
ln turn, the defendants filed six separate summary judgment motions. Of those, all

of the defendants joined in filing two of the motions, which focus, respectively, on the
loss causation element of the securities fraud claims and on plaintiffs’ claims related to
Statements of Financial Accounting Standards ("FAS") l33. Defs.’ Joint Mot. for
Summ. J. for Failure to Prove Loss Causation [Dkt. # 939] ("Defs.’ Mot. Loss
Causation"); Defs.’ Joint Mot. for Partial Summ. J. Based on FAS 133 Accounting Issues
[Dkt. # 941] ("Defs.’ Mot. FAS 133"). Finally, the individual defendants and KPMG
each separately moved for summary judgment. KPMG LLP’s Mot. for Summ. J. [Dkt. #
937] ("KPl\/IG’s l\/[ot."); Def. J. Timothy Howard’s Mot. for Summ. J. [Dkt. # 93 8]

defendant Franklin D. Raines’s and J. Timothy Howard’s Motions for Summary
Judgment.z See Mem. Op., Oct. 16, 2012 [Dkt. # 1056]; Order, Oct. 16, 2012 [Dkt. #
1057]; Mem. Op., Sept. 20, 2012 [Dkt. # 1053]; Order, Sept. 20, 2012 [Dkt. # 1054].
This opinion addresses defendant Leanne G. Spencer’s Motion for Summary Judgment.3
1 will address the defendants’ joint motions, KPMG’s motion, and the plaintiffs’ motions
at a later time. Upon consideration of the pleadings, oral argument, and the entire record
herein, defendant Spencer’s Motion for Summary Judgment is GRANTED.
BAcKGRoUND4
I. Factual Background
Fannie Mae, along with its cousin Freddie Mac, operates in the secondary

mortgage market as a federally-chartered government-sponsored enterprise, buying home
mortgages from banks and issuing debt and mortgage-backed Securities, Formerly a

private shareholder-owned company, F annie Mae has been in a conservatorship under the

("Howard’s Mot."); Def. Franklin D. Raines’s Mot. for Summ. J. [Dkt. # 940] ("Raines’s
Mot."); Def. Leanne G. Spencer’s Mot. for Summ. J. [Dkt. # 942] ("Spencer’s Mot.").

2 Raines was Fannie Mae’s Chairman of the Board and Chief Executive Officer

from January 1999 until December 2004. Def. Fannie Mae’s Statement of Genuine
Issues of Material Fact 111 4, 8 [Dkt. # 973-1] ("Fannie Mae’s SGIMF"). Howard served
as Fannie Mae’s ChiefFinancial Ofticer and Vice Chairman. Def. J. Timothy Howard’s
Reply to Pls.’ Statement of Genuine Issues of Material F act 11 1 [Dkt. # 995-1]
("Howard’s Reply to Pls.’ SGIMF").

3 The remaining defendants in this case are Fannie Mae and KPMG. For

approximately 35 years prior to December 2004, KPMG served as Fannie Mae’s outside

auditor. Fannie Mae’s SGIMF 11 11.

4 For additional background information concerning this litigation, see the Court’s

Memorandum Opinions in In re F annie Mae Sec. Lz`tig., 503 F. Supp. 2d 25, 29-30
(D.D.C. 2007), and 111 re Fannie Mae Sec. Litz`g., 247 F.R.D. 32, 34-36 (D.D.C. 2008).

Federal Housing Finance Agency ("FHFA") since September 6, 2008. However, during
this litigation’s class period, beginning April 17, 2001 and ending December 22, 2004,
Fannie Mae’s stock was traded on the New York Stock Exchange, and it was regulated
by the Office of Federal Housing Enterprise Oversight ("OFHEO").S OFHEO’S
oversight responsibilities generally involved ensuring that Fannie Mae had adequate
capital, a sound corporate structure, and financial stability. This, of course, was no small
task: F annie Mae was, and still is, one of the largest financial institutions in the country
and had a balance sheet of mortgage loans and mortgage-backed securities worth
hundreds of billions of dollars. Defs.’ Reply Regarding their Statements of Undisputed
Material Fact in Supp. of Their Joint Mot. for Partial Summ. J. Based on FAS 133
Accounting Issues 11 1 [Dkt. # 1024-4] ("Defs.’ Reply SUMF FAS 133"). Beginning in
January 1999 and continuing through the class period, Spencer served as Senior Vice
President and Controller of Fannie Mae. Fannie Mae’s SGIMF 11 8; Lead Pls.’ Mem. of
P. & A. in Opp’n to Def. Leanne G. Spencer’s Mot. for Summ. J. at 7 [Dkt. # 970] ("Pls.’
Opp’n Spencer").
The narrative of plaintiffs’ securities fraud claims against Spencer, not

surprisingly, flows directly from an OFHEO investigation of Fannie Mae. In June 2003,
following the disclosure of certain accounting issues at Freddie Mac, OFHEO began

examining Fannie Mae’s accounting policies and internal controls. On September 22,

5 Amidst the financial crisis of 2008, Congress established FHFA to replace
OFHEO as Fannie Mae and Freddie l\/Iac’s independent regulator and granted FHFA
additional powers over those held by OFHEO, including the ability to place the mortgage
giants in conservatorship or receivership under FHFA’s control. Housing and Economic
Recovery Act of 2008 ("HERA"), Pub. L. No. 110-289, 122 Stat. 2654.

2004, Fannie Mae released a public statement, indicating that OFHEO had delivered the
findings of that investigation to Fannie Mae’s board of directors. Fannie Mae’s SGIMF 11
13; Fannie Mae Form S-K (Sept. 22, 2004), Decl. of W.B. Markovits in Supp. of Lead
Pls.’ Mot. for Partial Su1nm. J. on Count l Against Def. Fannie Mae [Dkt. # 920]
("Markovits-Fannie Mae Decl."), Ex. 5 [Dkt. # 920-6].6 The company added that the
Securities and Exchange Commission ("SEC") also had begun an inquiry and that Fannie
Mae’s board had retained former Senator Warren B. Rudman ("Senator Rudman") and
his law firm, Paul, Weiss, Rifkind, Wharton & Gar“rison LLP, to conduct an independent
investigation of what happened. Fannie Mae’s SGlMF jj 13. Later that day, OFHEO
publicly released its interim report entitled "Report of F indings to Date, Special
Examination Fannie Mae" (the "OFHEO Interim Report"). Ia’. 11 14; see also OFHEO
Interim Report, Decl. of Adam B. Miller in Supp. of Def. Leanne G. Spencer’s Mot. for
Summ. J. [Dkt. # 942-3] ("Miller Decl."), Ex. 148. According to the Interim Report,
Fannie Mae had misapplied certain Generally Accepted Accounting Principles
("GAAP"), specifically two key standards known as FAS 91 and FAS 133, which relate

to the company’s amortization of price changes on securities and loans and to its use of

6 According to the public statement, OFHEO summarized its findings to the Board

by stating that "Fannie Mae (1) applied accounting methods and practices that do not
comply with GAAP in accounting for the enterprise’s derivatives transactions and
hedging activities, (2) employed an improper ‘cookie jar’ reserve in accounting for
amortization of deferred price adjustments under GAAP, (3) tolerated related internal
control deficiencies, (4) in at least one instance deferred expenses apparently to achieve
bonus compensation targets, and (5) maintained a corporate culture that emphasized
stable earnings at the expense of accurate financial disclosures." Fannie Mae Form 8-K
(Sept. 22, 2004), l\/[arkovits-F annie Mae Decl., Ex. 5 at 7.

hedge accounting. Miller Decl., Ex. 148 at i- vii.7 OFHEO also raised concerns over the
company’s internal controls and audit reviews. Fannie Mae’s SGIMF 11 15.

Apparently surprised by these findings, Fannie Mae requested that the SEC’S
Office of the Chief Accountant review the company’s accounting with respect to FAS 91
and FAS 133. Ia’. 11 24. Several months later, on December 15, 2004, the SEC’s Chief
Accountant, Donald Nicolaisen, issued a press release, stating that the SEC’s accounting
staff had determined that F annie Mae’s accounting did not comply in material respects
with FAS 91 and FAS 133, and that he had advised the company to restate its financial
statements after eliminating the use of hedge accounting and reevaluating its amortization
of premiums and discounts. Ia'. 11 22 (quoting Markovits-Fannie Mae Decl., Ex. 16 [Dkt.
# 922-8]). In its December 22, 2004 Form 8-K, Fannie Mae declared its intention to
restate its 2001 to mid-2004 financial results to comply with the SEC’s Office of Chief
Accountant’s review and recommendations concerning its FAS 91 and FAS 133

accounting. Fannie Mae Form 8-K (Dec. 22, 2004), Markovits-Fannie Mae Decl., Ex. 18

7 Generally Accepted Accounting Principles are defined by the Financial

Accounting Standards Board, a private organization designated for this task by the SEC
and the private sector. Defs.’ Reply SUMF FAS 133 11 13. FAS 91 and FAS 133 are two
of the many GAAP standards defined by this organization.

Briefly, FAS 91, or "Accounting for Nonrefundable Fees and Costs Associated
with Originating or Acquiring Loans and lnitial Direct Costs of Leases," instructs
companies on how to account for premiums and discounts on securities and loans-in
Fannie Mae’s case, mortgages. Pls.’ Responses to Fannie Mae’s Statement of Additional
Undisputed Material F acts [Dkt. # 990-1] ("Pls.’ Responses to Fannie Mae’s SAUMF")
1111 24, 30 (Ex. 30, FAS 91,1111 4, 15, 18). And, FAS 133, or "Accounting for Derivative
lnstruments and Hedging Activities," addresses a company’s hedge accounting, or its
recording of the value of derivative transactions in its earnings. See OFHEO Interim
Report at iv. Fannie Mae used derivatives transactions, particularly interest-rate swaps,
to hedge (protect) against interest rate changes in its issued debt and the mortgage loans it
owned. See Defs.’ Reply SUMF FAS 133 1111 1-12.

[Dkt. # 922-10]. Less than a month later, on January 17, 2005, Spencer stepped down
from her position as Controller. Fannie Mae’s SGIMF 11 8.

On February 23, 2006, Fannie Mae released the report of Senator Rudman and his
team at Paul Weiss, "A Report to the Special Review Committee of the Board of
Directors of F annie Mae" (the "Rudman Report"), which reached similar findings as the
OFHEO Interim Report.g Ia’. 111 31-32. OFHEO released its final report on May 23,
2006. Report of the Special Examination of Fannie Mae, May 2006, Decl. of W.B.
Markovits in Supp. of Lead Pls.’ Mems. of P. & A. in Opp’n to Def. J. Timothy
Howard’s and Def`. Leanne G. Spencer’s Mots. for Summ. J. [Dkt. # 969-2] ("Markovits-
Howard/Spencer Decl."), Ex. 12 ("OFHEO Final Report").g Based on its findings,
OFHEO brought administrative charges against Raines, Howard, and Spencer, alleging
that they "knowingly and/or recklessly engaged in misconduct and safety and soundness
violations that caused substantial and/or material harm and loss to [Fannie Mae]."
December 18, 2006 OFHEO News Release, Decl. of W.B. Markovits in Supp. of Pls.’

Mem. in Opp’n to Franklin D. Raines’s Mot. for Summ. J. [Dkt. # 967-2] ("Markovits-

8 Curiously, the defendants refer to the Rudman Report as the Paul Weiss Report.

See, e.g., Reply Mem. in Supp. of Def. Leanne G. Spencer’s Mot. for Summ. J. at 4, 12,
15, 18 [Dkt. # 996] ("Spencer’s Reply Mem."). Go figure!

9 The SEC also filed a civil complaint against Fannie Mae on that date, alleging that

Fannie Mae violated Section 10(b) of the Exchange Act and SEC Rule l0b-5. Compl.,
SEC v. Fannie Mae, No. 1:06-cv-00959 (D.D.C. May 23, 2006). OFHEO filed a similar
enforcement action. That day, Fannie Mae agreed to settle those cases and pay a $400
million civil penalty. Fannie Mae Form 8-K (May 30, 2006), Markovits-Fannie Mae
Decl., Ex. 25 [Dkt. # 924-3].

Raines Decl."), Ex. 34 at 2; see also OFHEO’s Notice of Charges, Notice No. 2006-1,
Markovits-Raines Decl., Ex. 34.10

Finally, on December 6, 2006, Fannie Mae filed with the SEC its Restatement of
its prior financial results in a Form 10-K (the "Restatement"). Fannie Mae’s SGIMF 11
65. The Restatement resulted in a "total reduction in retained earnings of $6.3 billion
through June 30, 2004." F annie Mae’s SGIMF 1168 (citing Restatement).

II. This Litigati0n

After OFHEO issued its Interim Report, several Fannie Mae shareholders filed
class action suits alleging that the company and its executives had violated the federal
securities laws and committed securities fraud. Compl. [Dkt. #1]. The first of these
actions was filed on September 23, 2004. Ia'. After the other separately-filed cases were
eventually consolidated into this multi-district litigation action, 1 appointed OPERS and
STRS as lead plaintiffs on January 13, 2005. Mem. Op. and Order, Jan. 13, 2005 [Dkt. #

52].11 In January 2008, this Court certified a class generally composed of approximately

10 OFHEO alleged the individuals committed violations including "[i]nappropriate

eamings management and manipulation; [d]eliberately misleading financial reporting and
disclosures; [f]ailure to establish a sound internal controls process . . . ; [m]isleading and
deficient reporting from the important internal Audit function; and [p]ermitting known
deficient systems to continue to operate while recognizing that such systems facilitated
the ongoing manipulations sought by the individuals charged." December 18, 2006
OFHEO News Release, Markovits-Raines Decl., Ex. 34 at 2. Howard, Raines, and
Spencer settled these charges in April 2008. April 18, 2008 OFHEO News Release,
Markovits-Raines Decl., Ex. 35.

ll On March 4, 2005, plaintiffs filed a Consolidated Class Action Complaint for
Violations of Federal Securities Laws [Dkt. # 64] on behalf of purchasers of Fannie Mae
common stock during the period from April 17, 2001, through September 21, 2004. On
August 14, 2006, plaintiffs filed a Second Amended Consolidated Class Action
Complaint for Violations of Federal Securities Laws [Dkt. # 204].

one million investors in Fannie Mae stock during the class period. Order, Jan. 7, 2008
[Dkt. # 572]; Mem. Op., Jan. 7, 2008 [Dkt. # 571]. Thereafter, the parties engaged in
extensive discovery until May 26, 2011. The volume of information exchanged in
discovery was enormous; together, the parties produced nearly 67 million pages of
documents, deposed 123 fact witnesses, and engaged 35 expert witnesses. See Pls.’
Mem. ofP. & A. in Supp. ofPls.’ Mot. Fannie Mae at 4-5 [Dkt. # 918] (Pls.’ Meln.

F annie Mae"). Unfortunately, however, the discovery process was unnecessarily
prolonged by OFHEO’s repeated and inappropriate assertion of privileges that had to be
litigated up to the Court of Appeals. See Order, Jan. 22, 2008 [Dkt. # 580], ajj"d, 552
F.3d 814 (D.C. Cir. 2009).

ln the end, plaintiffs allege that Fannie Mae and the individual defendants violated

§ 10(b) ofthe Securities Exchange Act of 1934, 15 U.S.C. § 78j, and SEC Rule 10b-5, 17
C.F.R. § 240.10b-5 (2011), by intentionally manipulating eamings and violating GAAP,
causing losses to investors.lz As to Spencer specifically, plaintiffs contend that she
knowingly made false statements about the soundness of F annie Mae’s accounting, risk
management, and internal controls. Pls.’ Opp’n Spencer at l. Plaintiffs also contend
that Spencer misled investors about her participation in earnings management strategies
designed to meet quarterly earnings-per-share targets to maximize bonuses, in violation

of GAAP and various accounting standards. Ia’.

‘2 Plaintiffs alan elaini that the individual defendants violated § zt)ta) nt‘tlie
Securities Exchange Act of 1934, 15 U.S.C. § 78t(a) (2006).

On August 22, 2011, Spencer moved for summary judgment on all claims against
her, arguing that plaintiffs have failed to prove that she acted with the necessary scienter
under the securities laws. Mem. in Supp. of Def. Leanne G. Spencer’s Mot. for Summ. J.
at 1 [Dkt. 942-1] ("Spencer’s Mem.").w On June 5-7 and June 13, 2012, 1 heard oral
argument on the pending summary judgment motions, including Spencer’s motion.m
Because 1 agree with the defendant that plaintiffs have failed to put forth sufficient
evidence of scienter, Spencer is entitled to summary judgment.

STANDARD OF REVIEW

Summary judgment is appropriate when the movant demonstrates that no genuine
issue of material fact is in dispute and that the moving party is entitled to judgment as a
matter of law. Fed. R. Civ. P. 56(a). The moving party bears the burden, and the court
will draw "all justifiable inferences" in favor of the non-moving party. Ana’erson v.
Lz`berzy Lobby, Irzc., 477 U.S. 242, 255-56 (1986). Nevertheless, the non-moving party
"may not rest upon the mere allegations or denials of his pleading, but . . . must set forth
specific facts showing that there is a genuine issue for trial." Id. at 248 (intemal
quotation marks and citation omitted). "Thus, if the evidence presented by the opposing
party is ‘merely colorable’ or ‘not significantly probative,’ summary judgment may be

granted." Burke v. Gould, 286 F.3d 513, 520 (D.C. Cir. 2002) (quoting Anderson, 477

'3 Spencer also joined the defendants’ motion for summary judgment based on loss

causation, Defs.’ Mot. Loss Causation, and the defendants’ motion for partial summary
judgment with regard to claims arising from FAS 133 accounting issues, Defs.’ Mot. FAS
133. This opinion addresses only Spencer’s scienter arguments.

14 This Court heard oral argument specifically on Spencer’s motion on June 13,

2012. Tr. ofMots. Hr’g, June 13, 2012, at 96-165 [Dkt. # 1050] ("Tr.").

U.S. at 249-50); see also Mom‘gomery v. Chao, 546 F.3d 703, 708 (D.C. Cir. 2008) ("The
possibility that a jury might speculate in the plaintiff’s favor . . . is simply insufficient to
defeat summary judgment."). Factual assertions in the moving party’s affidavits may be
accepted as true unless the opposing party submits its own affidavits, declarations, or
documentary evidence to the contrary. Neal v. Kelly, 963 F.2d 453, 456 (D.C. Cir. 1992).
DISCUSSION
The elements of a securities fraud claim and the requirements of a summary

judgment motion remain constant, regardless of the enormity and novelty of the facts in
question. Securities fraud claims under Section 10(b) and Rule 10b-5 require proof of the
following elements: "(1) a material misrepresentation or omission by the defendant; (2)
scienter; (3) a connection between the misrepresentation or omission and the purchase or
sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss;
and (6) loss causation." Stoneridge Inv. Parmers, LLC v. Scierztl`fz`c-Atlanta, 552 U.S.
148, 157 (2008). Plaintiffs’ claims regarding Spencer, however, can be foreclosed by
addressing only one of these elements: scienter.w To establish scienter in a securities

fraud case, a plaintiff must prove that a defendant acted "with an intent to deceive_not

15 Because 1 conclude that there is no evidence that Spencer "culpably participated"

in any underlying securities law violation, she also is entitled to summary judgment on
plaintiffs’ claims against her under Section 20(a) of the Exchange Act, 15 U.S.C. §
78t(a). See In re Fannie Mae Sec. Litl'g., 503 F. Supp. 2d 25, 42-47 (D.D.C. 2007)
(dismissing Section 20(a) claim due to plaintiffs’ failure to plead culpable conduct as to
defendants); see also Gam'no v. Citizens Ulz`ls. Co., 228 F.3d 154, 170 (2d Cir. 2000)
("To make out a prima facie case under § 20(a) . . . a plaintiff must show . . . that the
controlling person was in some meaningful sense a culpable participant in the fraud
perpetrated by the controlled person." (citation and intemal quotation marks omitted)).
As discussed hereafter, plaintiffs have not put forth any admissible evidence that Spencer
acted without good faith or possessed scienter of securities fraud.

10

merely innocently or negligently." Merck & Co. v. Reynolds, 130 S. Ct. 1784, 1796
(2010). Thus, plaintiffs must put forth proof of intentional wrongdoing or extreme
recklessness. Lz`berty Prop. T rust v. Republic Props. Corp., 577 F.3d 335, 342 (D.C. Cir.
2009). Our Circuit has defined extreme recklessness as an "extreme departure from the
standards of ordinary care . . . which presents a danger of misleading buyers or sellers
that is either known to the defendant or is so obvious that the actor must have been aware
oft`t." Dolpht'n & Bradbury, Inc. v. SEC, 512 F.3d 634, 639 (D.C. Cir. 2008) (intemal
citations and quotation marks omitted). For extreme recklessness, the danger of
deception must be such that the "actor was aware of it and consciously disregarded it."
Id.

Unfortunately, for plaintiffs, they have not established a genuine issue of material
fact, either direct or circumstantial, as to Spencer’s alleged scienter. In essence,
plaintiffs, as they did with Raines and Howard, have stitched together a patchwork quilt
of evidence that they allege demonstrates Spencer’s intent to deceive Fannie Mae’s
investors. 1 disagree. Plaintiffs’ cited evidence simply does not rise to an inference of
scienter. Although scienter is generally a question of fact for a jury, see, e.g., SEC v.
Pace, 173 F. Supp. 2d 30, 33 (D.D.C. 2001) ("In the ordinary securities fraud case,
scienter is a genuine issue of material fact."); see also Wechsler v. Steinberg, 733 F.2d
1054, 105 8-59 (2d Cir. 1984) ("Issues of motive and intent are usually inappropriate for
disposition on summary judgment."), summary judgment is appropriate if plaintiffs
present no concrete evidence of scienter. See Anderson, 477 U.S. at 256-57 (recognizing

that resolving defendant’s "state of mind" may be appropriate on summary judgment and

ll

that plaintiff may not defeat "a defendant’s properly supported motion for summary
judgment . . . without offering any concrete evidence from which a reasonable juror could
return a verdict in his favor"); see also In re Worlds of Wonder Sec, Litl`g., 35 F.3d 1407,
1425 (9th Cir. 1994) (finding defendants had "conclusively rebutted" plaintiffs’
"speculative inferences" of fraud).

Plaintiffs’ theories on Spencer’s scienter are insufficient to withstand her summary
judgment motion, particularly in light of the overwhelming evidence of Spencer’s good
faith. See Def. Leanne G. Spencer’s Reply Statement of Undisputed Material F acts in
Supp. of Her Mot. for Summ. J. 1111 26-64 [Dkt. # 981] ("Spencer’s Reply SUMF"). No
witnesses testified that Spencer knew that Fannie Mae’s financial statements were
materially inaccurate or not GAAP compliant. Def. Leanne G. Spencer’s Statement of
Undisputed Material Facts in Supp. of Her Mot. for Summ. 111 8 [Dkt. # 942-2]
("Spencer’s SUMF"). Further, no witnesses testified that Spencer sought to misrepresent
Fannie Mae’s eamings or mislead investors. See id. 1111 6-8. Throughout the class period,
Spencer relied on internal and external accounting experts to ensure that the company’s
financial statements complied with GAAP, and these experts universally assured Spencer
that Fannie Mae’s financial statements were accurate in all material respects. Id. 11 12.
And Spencer herself testified that she believed that F annie Mae was in compliance with

GAAP in all material respects.‘é Id. 11 10. Of course, such evidence of good faith is

16 Plaintiffs dispute each of these statements of fact simply by citing 90 paragraphs

of their statements of fact and the entirety of the Rudman and OFHEO reports. See Part
112 Response to Spencer’s Statement 1111 6-12, Lead Pls.’ Statement of Genuine Issues of
Material Fact Precluding Sulnm. J. for Def. Leanne G. Spencer [Dkt. # 970-1] ("Pls.’

12

generally insufficient to grant summary judgment, especially if a plaintiff identifies
admissible evidence supporting a reasonable inference of scienter. But where, as here,
that is not the case, such substantial evidence of good faith negates any possible inference
of scienter. See Howard v. SEC, 376 F.3d 1136, 1147 (D.C. Cir. 2004); In re Dt'gz' 1nt’l
Sec. Lz`tz`g., 14 F. App’x 714, 717 (8th Cir. 2001).

Moreover, the parties’ dispute as to whether Spencer possessed the requisite
education, expertise, and managerial responsibility to personally understand the nuances
of Fannie Mae’s accounting policies does not reveal any evidence of scienter. Spencer’s
Mem. at 4-5; Pls.’ Opp’n Spencer at 7-8. The Court has no doubt that, as plaintiffs state,
Spencer "had [an] in-depth understanding and knowledge of Fannie Mae’s accounting
policies and the accounting standards applicable to the company . . . ." Pls.’ Opp’n
Spencer at 7. But Spencer’s familiarity with accounting policies and standards cannot
imply scienter of accounting fraud if no evidence of such fraud was ever brought to
Spencer’s attention. As such, plaintiffs do not put forth any evidence that Spencer was
told during the class period that Fannie Mae committed fraud or material violations of
GAAP.

In sum, plaintiffs offer no evidence from which a reasonable juror could conclude

that any of Spencer’s statements concerning Fannie Mae’s accounting practices or

SGIMF Spencer"). Even if the Rudman and OFHEO reports were admissible, plaintiffs
cannot expect the Court to rulnmage through these voluminous documents to find their
alleged factual disputes. See Glass v. Lahood, 786 F. Supp. 2d 189, 199 (D.D.C. 2011);
see also Fed. R. Civ. P. 56(0)(1) (a party supporting or opposing a summary judgment
motion must cite "partl`cular parts of materials in the record”). More importantly, the
Court has not found any facts creating a genuine dispute as to Spencer’s good faith in
plaintiffs’ briefs, statements of facts, or exhibits.

13

intemal controls were made with an intent to deceive or were otherwise made without
any reasonable basis.
I. Earnings Management and Accounting Standards
The heart of plaintiffs’ case against Spencer is that she engaged in improper
earnings management to increase executive bonuses, in violation of various accounting
standards. See Pls.’ Opp’n Spencer at 1, 12-25. At most, plaintiffs’ evidence indicates
that Spencer was involved with certain transactions that affected earnings.17 Plaintiffs
fail to point to any evidence from which a reasonable jury could infer that Spencer
believed any of these transactions were improper or sought to conceal them from the
public. lndeed, plaintiffs’ own expert recognized that earnings management does not
necessarily show an improper purpose. See Fierstein Report, Sept. 14, 2010, Delinsky
Decl., Ex. 69 at 5-5 ("Certain transactions may be executed to manage eamings (i.e.,
change the pattern of earnings) without violating GAAP."); Fierstein Rebuttal Report,
Miller Decl., Ex. 230 at 4 ("earnings management activities that involve discretionary
choices by management" are distinguishable from other, impermissible forms of eamings
management).
As an example of improper eamings management, plaintiffs cite Spencer’s

participation in certain debt repurchases. See Pls.’ Opp’n Spencer at 16-18. According
to plaintiffs, "[d]ebt repurchases is [a] clear example where Spencer improperly managed

eamings and specifically misled investors." Id. at 16. But plaintiffs cite to no evidence

17 See, e.g., Plaintiffs’ citation to a November 4, 2001 memorandum from Spencer to

Raines, in which Spencer discusses "managing" and "smoothing" earnings. Pls.’ Opp’n
Spencer at 12-13 (citing Markovits-Howard/Spencer Decl., Ex. 69).

14

that these debt repurchases violated GAAP or that Spencer believed that the debt
repurchases violated GAAP. 1n fact, plaintiffs’ expert used Fannie Mae’s debt
repurchases as an example of an earnings management strategy that did not violate
GAAP. See Fierstein Report, Sept. 14, 2010, Delinsky Decl., Ex. 69 at 5-5. Moreover,
F annie Mae disclosed debt repurchases in their public filings. Delinsky Decl., Ex. 71
(2001, 2002, and 2003 disclosures).

Plaintiffs again fail to muster sufficient evidence of scienter when they discuss on-
top adjustments. In a vain attempt to demonstrate Spencer’s knowledge, plaintiffs cite an
email from accounting manager Roger Barnes that was not sent to Spencer and does not
even mention her name. See Pls.’ Opp’n Spencer at 18 (citing Markovits-
Howard/Spencer Decl., Ex. 36). Plaintiffs’ other "evidence" is two emails: the first
conveys a purported instruction from Spencer to "book the whole 19 million in
[O]ctober," Pls.’ Opp’n Spencer at 18, and the second reports that Spencer and others
"will be making a decision on how much to post [as an on-top adjustment] and whether to
post after reviewing operating results for 11/2002," t`d. at 19. Neither email suggests that
Spencer believed that the on-top adjustments were improper. However, even if such
behavior were improper, evidence of improper behavior alone does not demonstrate
scienter. See Novak v. Kasaks, 216 F.3d 300, 309 (2d. Cir. 2000) ("[A]llegations of
GAAP violations or accounting irregularities, standing alone, are insufficient to state a
securities fraud claim. Only where such allegations are coupled with evidence of
corresponding fraudulent intent, might they be sufficient.") (intemal citations and

quotation marks omitted).

15

As to catch-up adjustments, plaintiffs misconstrue their evidence. Plaintiffs rely
on a document that predates the class period by several years, alleging that the document
represents "Spencer’s strategy notes of [a risk review] meeting" and "clearly show[s] that
she intentionally manipulated earnings, ignored GAAP violations, and hid material
information from KPMG." Pls.’ Opp’n Spencer at 20-21 (citing Markovits-
Howard/Spencer Decl., Ex. 24). But as plaintiffs admitted in oral argument, Spencer did
not even know who wrote the document, Tr. at 134:22-23, much less recognize it as her
"strategy notes." More importantly, the document says nothing about violating
accounting standards or Spencer’s state of mind during the class period. Later in their
brief, plaintiffs describe how certain catch-up adjustments purportedly violated Fannie
Mae’s amortization policy, but they cite no evidence that Spencer knew about,
authorized, or planned these catch-up adjustments. Pls.’ Opp’n Spencer at 25, 32.

With respect to hedging transactions, plaintiffs allege that Boyles alerted Spencer
to improper accounting practices. See Lead Pls.’ Supp’l Mem. of P. & A. in Opp’n to
Spencer Mot. at 8-9 [Dkt. # 103 8] ("Pls.’ Supp’l Mem. Spencer"); see also Pls.’ SGIMF
Spencer 11 109 (citing Markovits-Howard/Spencer Decl., Ex. 66 at 1-2). Plaintiffs
highlight a 2001 email from Boyles in which Boyles allegedly "warned" Spencer that its
"accounting treatment for certain hedging transactions was so ‘aggressive’ [and] ‘not one
we would want to flash in front of the FASB [Financial Accounting Standards Bureau]
for comment or the treatment could get worse . . . ."’ Pls.’ Supp’l Mem. Spencer at 8-9.
Plaintiffs, however, conveniently omit the middle of the sentence: "we have KPMG ’s

approval." Markovits-Howard/Spencer Decl., Ex. 66 at l. With this phrase included,

16

this sentence no longer implies that the accounting policy was somehow improper. To
the contrary, the sentence stands as evidence supporting the defendant’s assertion that
Spencer was told that F annie Mae’s accounting policies were acceptable. Plaintiffs also
omit Howard’s response to this email, sent to Spencer and Boyles, in which Howard
rejects "attempting to work behind the scenes" in favor of "mak[ing] our argument
forcibly to FASB." Delinsky Decl., Ex. 64 at 1. 1n no way does this email demonstrate
that Spencer knew about improper accounting practices or made any effort to hide
improper accounting practices.111
Plaintiffs also focus on the development-prior to the class period-of Fannie

Mae’s amortization policy. Plaintiffs cite a 1999 memo, in which Spencer and Janet
Pennewell, Fannie Mae’s Vice President for Financial Reporting and Planning,
"recommend[ed] a policy for managing the amortization of purchase discount/premium
and buyup/buydown fees," with the goal of "accurately reflect[ing] our financial results .
. . ." Pls.’ Opp’n Spencer at 22-23 (citing Markovits-Howard/Spencer Decl., Ex. 50).
Plaintiffs also cite a 2000 email from Howard to Pennewell and Spencer describing how a
proposed amortization policy would give them "a fair amount of leeway." ]d. at 23
(citing Markovits-Howard/Spencer Decl., Ex. 6). Plaintiffs allege that these
recommended policies violated FAS 91, but they cite no support for this allegation. Id. at
22-23. Finally, plaintiffs also allege that Pennewell "testified that both she and Spencer

were concerned that certain elements of . . . the amortization policy were inconsistent

111 ln fact, both Boyles’ email and Howard’s reply were sent to eleven other

recipients. See Markovits-Howard/Spencer Decl., Ex. 66; Delinsky Decl., Ex. 64.

17

with FAS 91 and . . . shared those concerns with Howard." Id. at 24. How misleading!
What plaintiffs characterize as Pennewell’s "testi[mony]" is, in fact, an interview
memorandum prepared in connection with the Rudman Report by a Paul Weiss attorney
three weeks after the interview. And while the memorandum states that Spencer may
have communicated her "discomfort" with Howard’s policy to Howard, it does not state
that this discomfort was based on a contemporaneous belief that the policy violated FAS
91. See Markovits-Howard/Spencer Decl., Ex. 54 at 26-27. Moreover, according to the
memorandum, Fannie Mae never put the policy at issue into practice. Id. at 27.
Plaintiffs continually rely upon evidence predating the class period, but do not

demonstrate how that evidence sheds light on Spencer’s class-period scienter. ln addition
to highlighting the pre-class-period evidence discussed above, plaintiffs highlight a 1999
email from Fannie Mae’s Financial Standards Group chief Jonathan Boyles to Spencer, in
which they allege that "Spencer told Boyles to keep Fannie Mae’s non-compliant lO/PO
accounting close to the vest." Def. Leanne G. Spencer’s Response to Lead Pls.’
Statement of Genuine Issues of Material Fact ‘ll 46 [Dkt. # 996-2] ("Spencer’s Reply to
Pls.’ SGIMF"); see also Pls.’ Opp’n Spencer at 15. Plaintiffs must somehow expect this
Court to take their nefarious interpretation of this email on faith, since they neglected to
ask Spencer or Boyles about this email in their depositions. Spencer’s Reply to Pls.’
SGIMF 11 46. However, even if plaintiffs’ interpretation of this email were correct, they
do not describe how this behavior in 1999 is relevant to Spencer’s scienter during the
class period. Plaintiffs also point to two "manipulations" that Spencer purportedly

undertook to manage earnings prior to the class period. Pls.’ Opp’n Spencer at 21-22.

18

Not only do plaintiffs fail to identify how this evidence is relevant to Spencer’s class-
period scienter, but they also fail to identify any evidence that Spencer believed these
"manipulations" violated GAAP. 1n short, plaintiffs point to a lot of things that Spencer
said or did-but nothing that proves that she knew what she was saying or doing was
wrong.
II. Alleged Efforts to Hide Information from KPMG and Regulators
Plaintiffs claim that "Spencer participated in intentionally hiding GAAP violations

and material information from KPMG, the SEC, and OFHEO." Pls.’ Opp’n Spencer at
13. To allege that Spencer concealed information from KPMG, plaintiffs cite four
documents that predate both the class period and Spencer’s promotion to Controller.
Pls.’ SGIMF Spencer 1111 36, 38-39, 74. For one of the documents, plaintiffs point to no
evidence that Spencer even read it, id. 11 36, and for another document, plaintiffs allege
that Spencer wrote it, but fail to cite any evidence of her authorship, id. 11 74. The only
evidence plaintiffs provide on this subject that is within the class period is a 2002 email
from Spencer to Howard, in which Spencer notes that "[t]here is at least one thing that we
know of where we have a favorable accounting treatment and that is on the IO’s we have
on our books. Freddie [Mac] is doing 10 accounting and we are not. KPMG hasn’t
figured that out . . . ." Id. 11 37 (citing Markovits-Howard/Spencer Decl., Ex. 23). This
email says absolutely nothing about intentionally "hiding . . . lO/PO GAAP violations
from KPl\/IG," as plaintiffs misleadingly suggest. Pls.’ SGIMF Spencer 11 37; see also
Supp’l Mem. in Supp. of Def. Leanne G. Spencer’s Mot. for Summ. J. at 4 [Dkt. # 1034]

("Spencer’s Supp’l Mem."). And in fact, plaintiffs admitted during oral argument that

19

they neglected to confront Spencer with this document during her deposition. Tr. at
130:2-15. 1n short, plaintiffs do not put forth any evidence that Spencer intentionally or
knowingly concealed material information from KPMG.

1n addition to alleging that Spencer hid information from KPMG, plaintiffs allege
that Spencer ignored KPMG’S multiple warnings that Fannie Mae was violating GAAP.
Pls’ Opp’n Spencer at 29. As a result, plaintiffs argue that Spencer’s reliance on KPMG
was not in good faith.19 Id. Three of the "warn[ings]" plaintiffs cite, however, consist of
general communications from the SEC about "earnings management"-not linked to any
Fannie Mae practice or any GAAP violation. Id. (citing Pls.’ SGIMF Spencer 1111 30-32).
Further, all three of these alleged warnings predate the class period and do not provide
insight into Spencer’s class-period scienter. Id. More discouragingly, plaintiffs
inaccurately allege that Spencer received one such warning at a meeting that evidence
indicates she did not attend. Pls.’ SGIMF Spencerjl 30 (citing Markovits-
Howard/Spencer Decl., Ex. 16 to show that "KPMG specifically advised Howard and
Spencer . . . ."); Markovits-Howard/Spencer Decl., Ex. 16 (summarizing a meeting with

Howard, not Spencer).

19 Plaintiffs also allege that Spencer failed to satisfy her duty to familiarize herself

with Fannie Mae’s core operations and financial reporting because she engaged in "blind
reliance on others" to determine that Fannie Mae’s financial reporting was accurate. Pls.’
Opp’n Spencer at 28. But beyond this assertion, plaintiffs cite no evidence that Spencer
failed to familiarize herself with Fannie Mae’s core operations and financial reporting.
Spencer’s reliance on others is not "blind" simply because plaintiffs say it is so-and the
Court has not seen any evidence that leads it to believe such reliance was blind or
otherwise improper.

20

As another example of a supposed "warn[ing]” from KPMG, plaintiffs point to an
email between two KPMG employees describing a conversation with Spencer, in which
employee Harry Argires said, "1 told her that there are probably things that they do that
are not in strict compliance with GAAP and we need to make sure that Tim and F rank
understand those items and that there is a mechanism in place that measures how material
the departure from GAAP is." See Pls.’ Opp’n Spencer at 29 (citing Markovits-
Howard/Spencer Decl., Ex. 68 at l). Yet again, plaintiffs admit that they failed to
confront Spencer with this email during her deposition. Tr. at 153:5. As a result,
plaintiffs lack any evidence about whether Spencer recalled such a conversation, and if
so, how she responded to it. Further, the email, as such, does not say that Argires told
Spencer that F annie Mae engaged in a material GAAP violation. See Spencer’s Reply to
Pls.’ SGIMF 11 113 (citing Argires deposition as evidence that Argires was referring only
to immaterial itenis). And with respect to each year of the class period, KPMG did not
identify any material weaknesses in Fannie Mae’s intemal accounting controls.
Spencer’s Reply SUMF 1111 128, 138. For all of these reasons, 1 cannot conclude that a
jury could find this document to be evidence of Spencer’s scienter of GAAP violations.

Next, in an effort to allege that Spencer hid information from the SEC, plaintiffs
present a memorandum from Jonathan Boyles, in which he states that "the process we
have in place is not exactly what we showed the SEC though it gets very close." Pls.’
Opp’n Spencer at 15 (citing Markovits-Howard/Spencer Decl., Ex. 26 at 2); see also Tr.
at 124:16-128:4. While Spencer was on the memorandum’s distribution list, Markovits-

Howard/Spencer Decl., Ex. 26 at 3, plaintiffs once again never asked Spencer if she read

21

this memorandum, Tr. at 1241 18-24. But even if she had, when read in the light most
favorable to plaintiffS-that Boyles had not described the process with full accuracy to
the SEC-the memorandum goes on to state thereafter that Fannie Mae informed the
SEC that it had been accounting for the transaction "incorrectly" and aimed to ensure
"that the entries are booked as described to the SEC." l\/larkovits-Howard/Spencer Decl.,
Ex. 26 at 2; see also Spencer’s Supp’l Mem. at 2-3. Such conduct does not evince an
intent to deceive either shareholders or the SEC; rather, this represents a good-faith effort
to achieve accurate accounting and comply with the SEC’s expectations.

Regarding efforts to conceal information from OFHEO, plaintiffs cite only one
source: the OFHEO report.zo Pls.’ Opp’n Spencer at 14-15. Contrary to plaintiffs’
assertion, the cited portion of the report does not say that "Spencer . . . misled Fannie
Mae’s regulators." Id. at l4. lt says that "senz`or management systematically withheld
inforrnation" from OFHEO. Id. (emphasis added). However, suggesting that OFHEO’s
non-specific and after-the-fact conclusions were related to Spencer is elevating wishful
thinking into advocacy.

III. Internal Controls Weaknesses

As they did with defendants Raines and Howard, plaintiffs allege that Spencer
misrepresented Fannie Mae’s inadequate internal controls to investors. Pls.’ Opp’n
Spencer at 25-28. Plaintiffs cite the Restatement, OFHEO, and Rudman reports as

evidence that Fannie Mae had or "admitted" to having various intemal controls

20 See the discussion of the admissibility of the OFHEO report and similar sources
inj‘ra at 27-28.

22

deficiencies during the class period. Id. at 26-28. But these reports, even if actually
admissible,21 could not serve as post hoc evidence of Spencer’s scienter. See Tellabs,
Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 320 (2007) (recognizing rule that there
is no "fraud by hindsight").
lndeed, during oral argument, plaintiffs pointed to a 2001 memorandum from

Pennewell to Spencer that allegedly showed Spencer’s knowledge of intemal controls
weaknesses. Tr. at 144:1-152:8 (discussing Markovits-Howard/Spencer Decl., Ex. 93).
1n this memorandum, Pennewell tells Spencer that an internal review identified "serious
control issues" in the securities accounting area. Markovits-Howard/Spencer Decl., Ex.
93 at 3. Plaintiffs insisted that no evidence in the record suggests that Spencer or F annie
Mae took appropriate action to fix these issues. Tr. at 151 :20, 154:19-21; see also Pls.’
Supp’l Mem. Spencer at 3-4. However, plaintiffs barely acknowledged Spencer’s
lengthy cover letter to this memorandum, Tr. at 148:22-25, in which she stated that she
did not intend to allow these issues to continue and that Fannie Mae was in the process of
addressing these issues. Markovits-Howard/Spencer Decl., Ex. 93 at 1-2. Plaintiffs also
failed to account for_or conveniently ignored-the follow-up memorandum one year
later, which stated that "the Securities Accounting group . . . made significant progress in
strengthening internal controls." Second Supp’l Decl. of Adam B. Miller in Supp. of
Def. Leanne G. Spencer’s Mot. for Summ. J., Ex. 237 at 1 [Dkt. # 1034-1] ("Miller

Second Supp’l Decl."). lndeed, Sampath Rajappa, Senior Vice President for 0perations

21 See the discussion of the admissibility of the Restatement and similar sources infra

at 27-28.

23

Risk and head of Fannie Mae’s Office of Auditing, specifically credited Spencer for the
progress described in this follow-up memorandum, Miller Second Supp’l Decl., Ex. 238
at 8 ("Frank [Raines], a lot of good work has been done since last audit; significant
progress by Leanne."). And throughout the class period, KPMG certified that Fannie
Mae’s internal controls were effective. Spencer’s Reply SUMF 11 170. To characterize
Spencer’s conduct as disregarding clear evidence of internal controls weaknesses is
disingenuous, at best. 1n short, this is evidence of good faith, not evidence of securities
fraud.

Plaintiffs also allege that Spencer "had no reasonable basis for believing that
[Raj appa] was competent" or "independent" because he was not a certified public
accountant, did not have prior auditing experience, and reported on a "dotted line" basis
to Howard. Pls.’ Opp’n Spencer at 26. But once again plaintiffs provide no evidence
that Spencer knew these facts about Rajappa or believed these facts to be problematic.zz
To prove scienter, plaintiffs cannot merely present evidence of alleged weaknesses
without also presenting evidence that Spencer knew or should have known about these

weaknesses.

22 To allege that "Rajappa had informed Spencer about the personnel deficiencies in

the [auditing] department," Pls.’ Opp’n Spencer at 26, plaintiffs point to three
memoranda from Rajappa. Pls.’ SGIMF Spencer 1111 101-103. Two of the three
memoranda were not even sent to Spencer. Id. at 1111 101-102. To the extent Spencer was
aware of the contents of the memoranda, plaintiffs cite no evidence that Spencer would
have interpreted such comments as signs of weaknesses in intemal controls. lndeed,
when Rajappa was asked in his deposition about the Office of Auditing’s staffing and
budget, he agreed that the staffing and budget were adequate for the office to perform its
job. See Dep. of Sampath Rajappa ("Rajappa Dep."), Miller Decl., Ex. 207 at 225-26.

24

Additionally, plaintiffs claim that "Howard and Spencer demanded control over

all information given by [Rajappa] to the Audit Committee." Pls.’ Opp’n Spencer at 27.
1n support thereof, they point to a 2004 email, in which Howard told Spencer that he
"made it ‘blisteringly clear’ to [Rajappa] that on any future calls he gets from the
Chairman of our Audit Committee on accounting-related issues he must run the question
or issue by you before he or anyone else gets back to [the Audit Committee Chairman]."
Id. According to plaintiffs, this email demonstrates that "Howard [was] telling [Spencer
to not] let Rajappa go to the audit committee with any accounting related issues." Tr. at
156:6-8. But plaintiffs point to absolutely no evidence that supports this allegation. And
conversely, other evidence suggests that Spencer and Howard did not intend to_and
never did-censor Rajappa’s communications with the Audit Committee Chairman.B
Thus, even if plaintiffs’ interpretation of the email was reasonable, the email is devoid of

any connection to accounting misbehavior or harm to investors. Once again, this is not

evidence of scienter of securities fraud.

23 See Rajappa Dep., Miller Decl., Ex. 207 at 132-33 (conversation referenced in

email involved Howard asking Rajappa to "make sure [he] get[s] all the relevant latest
data from . . . accounting . . . so that it will give a full picture to [the Audit Committee
Chairman]"); id. at 394 (Rajappa agreeing that he was not "required to go through anyone
else" to talk to the Audit Committee Chairman); Dep. of Timothy Howard, Decl. of Eric
Delinsky in Supp. of Def. J. Timothy Howard’s Reply in Supp. of his Mot. for Summ. J.
[Dkt. # 995-21 ("Delinsky Decl."), Ex. 75 at 79 (purpose of the conversation with
Rajappa was to "reinforce to him the importance of getting your facts in order before you
do your analysis and report it to the chairman of the audit committee . . . ."); id. at 73
(Howard did not "take any steps to inhibit Mr. Rajappa’s communication to the audit
committee chair . . . "); id. at 74-75 (use of phrase "blisteringly clear" was an inside joke
between Howard and Spencer); Dep. of Thomas Gerrity (Audit Colnmittee Chairman),
Delinsky Decl., Ex. 80 at 318-23 (testifying that communications with Rajappa appeared
to be candid, forthright, and uncensored both before and after the 2004 email).

25

IV. Spencer’s Financial Motivation

Plaintiffs again fail to establish Spencer’s scienter by observing that Spencer "had
substantial financial motivation to improperly manipulate [eamings per share]," Pls.’
Opp’n Spencer at 8, and "reaped huge financial rewards from the fraud," id. at 33.
Plaintiffs claim that Spencer designed a compensation program that rewarded Spencer
and other Fannie Mae employees when Fannie Mae met targeted earnings per share. Id.
at 9-11. What plaintiffs fail to mention, however, is that Fannie Mae’s board of directors
developed its executive compensation plan, including the eamings-per-share metric,
before Spencer became Senior Vice President and Controller. Def. Franklin D. Raines’s
Reply to Lead Pls.’ Responses to Def. Raines’s Statement of Undisputed Material Facts
and Statement of Additional Undisputed Material Facts in Supp. of Def. Franklin D.
Raines’s Mot. for Summ. J. 1111 252-54 [Dkt. # 979] ("Raines Reply SUMF and
SAUMF").24 And evidence suggests that Fannie Mae’s eamings-per-share performance
was not the dominant incentive underlying Spencer’s compensation. Spencer’s Reply to
Pls.’ SGIMF 11 8 (citing Miller Decl., Ex. 170 at 35). Moreover, this compensation
program, standing alone, cannot constitute evidence of scienter. See Novak v. Kasaks,
216 F.3d 300, 307 (2d. Cir. 2000) (noting that scienter requires a showing of more than
"motives possessed by virtually all corporate insiders" such as maintaining credit rating,

sustaining profitability, and maintaining stock price to increase executive compensation).

24 Fannie Mae’s Congressionally-drafted charter also dictates a significant portion of

executive compensation is to be based on corporate performance. See F annie Mae
Charter Act, Decl. of Eun Young Choi in Supp. of Def. Franklin D. Raines’s Mot. for
Summ. J. [Dkt. # 979] ("Choi Decl."), Ex. 227 at 27.

26

Notably, Spencer substantially increased her ownership of Fannie Mae stock and
vested stock options throughout the class period. Spencer’s Reply Mem. at 12; see also
Spencer’s Reply SUMF 1111 74-76. Such behavior is, to say the least, inconsistent with a
fraudulent intent. See In re KeySpan Corp. Sec. Litig., 383 F. Supp. 2d 358, 383-84
(E.D.N.Y. 2003) ("The net acquisition of shares cuts against the notion that defendants
sought to unload their holdings of KeySpan stock before their likely diminution in value
following the disclosure of negative insider information.").

V. Reports and Findings of Regulators and Outside Counsel

Throughout their opposition brief, plaintiffs lean heavily on the post-hoc reports
and litigation documents, which were uniformly prepared after the relevant events in this
case, and some of which were explicitly prepared in preparation for litigation, as
"evidence" or "admissions” of Spencer’s scienter. See, e.g, Pls.’ Opp’n Spencer at 2 n.3,
3 n.4, 5 n. 16, 15 n.50 (citing OFHEO reports or press releases); id. at 4 n.10, 20 n.70, 25
n.95, 26 n.97, 27 n.10l, 33 n.128 (citing Fannie Mae’s Restatement); id. at 2 n.l, 5 n.16,
17 n.59, 20 nn.70 & 75, 25 n.95, 27 n.10l (citing Rudman Report); id. at 3 n.7, 24 n.91
(citing SEC complaint against Fannie Mae); Pls.’ Supp’l Mem. Spencer at 6 n.12 (citing
Fannie Mae’s Restatement). Putting aside the obvious and substantial admissibility

questions concerning these documents,z§ plaintiffs face a much larger challenge in relying

25 The conclusions and opinions in these documents are clearly hearsay and thus

cannot be considered as evidence of Spencer’s scienter. See Wilkerson v. Wackenhut
Protective Servs., Inc., 813 F. Supp. 2d 61, 67 n.9 (D.D.C. 2011) (inadmissible evidence
"cannot be considered at summary judgment").

Plaintiffs contend that the OFHEO and Rudman reports are admissible under Fed.
R. Evid. 803(8) as public records. Pls.’ Opp’n Spencer at 5 n.16. But, the OFHEO

27

on these documents: they do not contain any evidence of Spencer’s scienter. See, e.g.,
Part 11: Response to Spencer’s Statement1111 6-12, Pls.’ SGIMF Spencer (citing Rudman
and OFHEO reports as "evidence . . . that Spencer knowingly and intentionally engaged
in pervasive improper earnings management and GAAP violations . . . ."). With the
exception of the administrative charges, these documents uniformly reached no
conclusions as to Spencer’s state of mind. Here, by comparison, the key inquiry as to
scienter is whether Spencer knew, or consciously disregarded, the potential falseness of
her statements. As such, the after-the-fact and non-specific conclusions of regulators and
investigators, contained in this myriad of reports, fail to shed any light on this inquiry.%
VI. Magnitude of the Fraud
Finally, plaintiffs attempt to shore up their case against Spencer by pointing to the

"sheer scope and magnitude of the fraud." Pls.’ Opp’n Spencer at 32. But as
Shakespeare might have said, a giant body doth not portend an evil mind. lndeed, at the

motion-to-dismiss stage, 1 warned plaintiffs’ counsel that a fraud’s magnitude alone was

reports were part of an effort to prepare administrative charges against the individual
defendants and raise substantial questions of trustworthiness. See Fed. R. Evid. 803(8).
The Rudman Report certainly does not fall within the 803(8) exception, which is limited
to records or statements "of a public office." Id.

Moreover, the prejudicial effect of these documents substantially outweighs their
probative value; these documents, after all, were undoubtedly fashioned with multiple
considerations in mind. Plaintiffs argue that inadmissible evidence can be used to defeat
summary judgment "so long as it is capable of being converted into admissible
evidence," Pls.’ Opp’n Spencer at 5 n.16, but plaintiffs do not demonstrate that the
reports contain "underlying admissible evidence" that could be used at trial.

26 Plaintiffs also note that "OFHEO . . . brought charges against Raines, Howard, and

Spencer for intentional and knowing misconduct and reckless[] misconduct." Pls.’ Opp’n
Spencer at 2. Yet plaintiffs fail to explain how these charges, which were settled with a
denial of liability, can be considered evidence of scienter.

28

insufficient to establish an inference of scienter. See In re Fannie Mae Sec. Litig., 503 F.
Supp. 2d at 41. That principle is stronger now at the summary-judgment stage, and the
time for simply presenting allegations that give rise to a strong inference of scienter has
long since passed. Without any actual evidence supporting a conclusion of Spencer’s
scienter, the magnitude of Fannie Mae’s earnings restatement alone is insufficient to
preclude summary judgment.”
CONCLUSION
Sustaining claims for securities fraud requires a showing of scienter_either an

intent to deceive or an extreme departure from the standard of ordinary care-for each
individual or entity claimed to have committed such fraud. Put simply, the securities
fraud laws are not a means for shareholders to recover for all losses, no matter how
sizable or sudden. Upon review of plaintiffs’ evidence, this Court concludes that
plaintiffs have failed to put forth sufficient evidence from which a reasonable jury could
find that Spencer had such an intent. A failure to understand, or even negligent behavior,
is not the equivalent of the necessary intent to deceive or conscious disregard of obvious

risks. Therefore, Spencer is entitled to summary judgment on all claims against her.

27 Moreover, plaintiffs do not dispute that the factor responsible for the largest

amount of F annie Mae’s eamings restatement was its FAS 133 application. See Lead
Pls.’ Mem. ofP. & A. in Opp’n to Defs.’ Mot. FAS 133 at 30-31 [Dkt. # 968]. Because
that change in Fannie Mae’s hedge accounting so significantly affected Fannie Mae’s
reported earnings, this case is simply distinct from cases involving fake transactions,
hidden liabilities, or the distortion of the economics of Fannie Mae’s business. See In re
Atlas Air Worldwz`de Holdings, [nc. Sec. Ll`tig., 324 F. Supp. 2d 474, 496 (S.D.N.Y.
2004). See also Defs.’ Reply SUMF FAS 133 11 76 (discussing disclosure of FAS 133
accounting to public and analysts’ ability to calculate earnings impact).

29

For all of the foregoing reasons, the Court GRANTS defendant Leanne G.
Spencer’s Motion for Summary Judgment. An Order consistent with this decision

accompanies this Memorandum Opinion.

/

R1CHARDJ. E
United States District Judge

30