Appeals court throws out suit against Freddie Mac

by Ryan Smith06 Nov 2013

A federal appeals court has upheld the dismissal of a lawsuit against Freddie Mac that alleged the mortgage finance giant had concealed its tottering financial position prior to the 2008 meltdown.

The 2nd U.S. Circuit Court of Appeals ruled Tuesday that shareholders suing Freddie had failed to connect their losses to the alleged faulty financial disclosures, according to a Reuters report. Freddie, along with Fannie Mae, suffered huge losses in the financial crisis and in 2008 was put into government conservatorship.

A coalition of shareholders, led by the Central States, Southeast and Southwest Areas Pension Fund, had alleged that Freddie hid its financial woes and its exposure to shoddy subprime mortgages, according to Reuters. But the circuit court’s three-judge panel disagreed, upholding a 2012 ruling by U.S. District Judge John Keenan, Reuters reported.

The panel ruled that Freddie had made “extensive disclosures” about its financial position, and that the shareholders hadn’t demonstrated that their losses stemmed from a failure of communication on Freddie’s part.

“Throughout its complaint, Central States alleges that before July 2008, speculation about Freddie's insolvency based on inadequate capitalization and insufficient internal controls caused the stock price to fluctuate,” the panel wrote. “As a result, Central States does not plausibly allege a causal connection between the drop of the share price and the information revealed in the corrective disclosures.”

The court also pointed out that the shareholders’ losses “coincided with a market-wide phenomenon -- the housing bubble burst.”


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