MANHATTAN (CN) - Fannie Mae workers can try to recover retirement benefits that were allegedly whittled away with risky investments in toxic mortgages, a federal judge ruled.
Lead plaintiffs Mary Moore and David Gwyer brought their claims against the Federal National Mortgage Association, better known as Fannie Mae, in 2009.
Referring to the company as FNMA, U.S. District Judge Paul Crotty summarized the circumstances of the company's decline in a 13-page opinion and order.
"FNMA's decline in fortune has spawned a number of lawsuits, alleging that as FNMA moved from more conservative investments (i.e., 20% down, 30-year fixed-rate mortgages, prudently underwritten) to more exotic and risky investments (i.e., Alt-A, sub-prime, low documentation, no documentation, imprudently underwritten); FNMA ignored reports that the housing market was overheated; failed to recognize that the housing bubble was about to burst; failed to make adequate disclosures; failed to have adequate risk controls in place and made false and misleading representations in connection therewith," the ruling states.
This particular lawsuit against the company seeks compensation for losses to the company's Employee Stock Option Plan between April 17, 2007, and May 14, 2010.
Employees claim that dozens of the company's directors and benefits plan committee continued to invest in stock under "dire circumstances," and courted conflicts of interest by failing to engage independent fiduciaries about securities investments.
Judge Crotty let most of the case proceed Monday, while throwing out claims against seven of those executives and sidelining allegations of conflicts of interest.
"Defendants certainly knew of FNMA's publicly disclosed deteriorating financial condition," the 13-page opinion states. "FNMA itself was disclosing facts pertinent to the market-wide decline. ... Defendants also must have been aware of the decline in the value of the Plan's assets, which fell from approximately $116 million to $85 million in 2007 and dropped to $17.5 million by April 2008. ... By December 31, 2008, the Plan's assets were valued at approximately $1.29 million."
The judge also found that the executives did not investigate weakened risk controls, mounting risk to the housing market and increased leverage.
"Here, plaintiffs' allegations are sufficient to show that (1) defendants had actual or constructive knowledge of FNMA's dire circumstances, and/or (2) had defendants undertaken an investigation, they would have ascertained that continued investment in FNMA stock was imprudent," the order states.
The remaining directors include Daniel Mudd, Stephen Ashley, Louis Freeh, Brenda Gaines, Bridget Macaskill, Dennis Beresford and Greg Smith.
The benefits plan committee members still facing claims are David Hisey, Christina Wolf, David Benson, Brian Cobb, Anthony Marra, Betty Thompson and Brian McQuaid.
Read the Top 8
Sign up for the Top 8, a roundup of the day's top stories delivered directly to your inbox Monday through Friday.