The Federal Housing Finance Agency (FHFA) is substituting for Fannie Mae shareholders as the plaintiff in a lawsuit against accounting firm Deloitte & Touche accusing the company of negligent auditing practices that resulted in millions of dollars in losses to the shareholders, a move which may ultimately lead to the case’s dismissal.
A federal judge in the U.S. District Court for the Southern District of Florida ruled that the FHFA, as conservator of Fannie Mae since September 2008, owned all claims against Deloitte, citing a provision of the Housing and Economic Recovery Act (HERA) of 2008. At the same time, the court denied the motion of the Fannie Mae shareholders to remand the case.
“The FHFA moves to substitute as plaintiff, arguing that the FHFA succeeded to all the rights of Fannie Mae’s stockholders under HERA’s succession clause, including the plaintiffs’ rights to bring this suit,” Judge Robert N. Scola wrote in the decision, stating in the conclusion that “Because Deloitte had met its burden in establishing that one of the plaintiffs’ claims arise under federal law and the plaintiffs’ derivative claims belong to the FHFA under HERA, the Court denies the Plaintiffs’ Motion to Remand and grants the FHFA’s Motion to Substitute as Plaintiff.”
The FHFA declined to comment on the matter, and Deloitte did not immediately respond to a request for a comment. The Wall Street Journal reported that the FHFA is unlikely to continue with the suit now that the agency owns the Fannie Mae shareholders’ claims.
The Fannie Mae shareholders claim in their complaint that Deloitte failed to properly audit the GSE’s financial statements, accusing the accounting firm of giving its “seal of approval to Fannie Mae’s grossly misstated financial statements” and stating that “as a direct result of Deloitte’s negligent accounting and auditing and its role in assisting FHFA, Treasury, and Fannie Mae’s directors and officers in violating their fiduciary duties, plaintiffs suffered losses of hundreds of millions of dollars.”
Fannie Mae and fellow GSE Freddie Mac received a combined bailout of $187.5 billion from taxpayers in 2008 in order to remain solvent, at which time they were taken under conservatorship by the newly-created FHFA. In 2012, both Fannie Mae and Freddie Mac became profitable again, but the government amended the terms of the bailout to sweep all GSE profits into Treasury. The so-called “net worth sweep” has prompted no fewer than two dozen lawsuits by GSE shareholders who believe they are entitled to some of these profits. Some of the suits have gained traction in courts but none have been decided in the shareholders’ favor as of yet.
The Fannie Mae shareholder suit was not the first GSE suit against Deloitte. Freddie Mac sued the accounting firm in 2014 for $1.3 billion, accusing them of negligence regarding the representation of mortgage loans that Deloitte audited in the years leading up to the crisis. Freddie Mac purchased the toxic loans from now-defunct servicer Taylor Bean & Whitaker based on Deloitte’s audits and claims to have suffered millions of losses as a result. Both parties agreed to dismiss the suit without prejudice in January 2016, a month before the case was scheduled to go to trial.