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September 14, 2009 7:27 AM

Regulator Reveals Litigation Costs for Ex-Fannie Mae Execs

Posted by Brian Baxter

Recent disclosures from the Federal Housing Finance Agency reveal that lawyers representing former Fannie Mae executives Franklin Raines, J. Timothy Howard, and Leanne Spencer have received a total of $6.3 million for defending the trio in shareholder suits since Fannie Mae was placed into a conservatorship last year. A close look at court documents indicates that Williams & Connolly, Zuckerman Spaeder, and Mayer Brown are the firms representing the three executives.

The New York Times reported last weekend that the FHFA made the legal bills public in response to a request by Democratic congressman Alan Grayson from Florida. Grayson's office then provided those documents to The Am Law Daily. (The FHFA became Fannie Mae's new regulator after the passage of the Housing and Economic Recovery Act of 2008.)

Grayson asked the FHFA whether or not taxpayers were footing the legal tab for the three executives, all of whom were long gone by the time Fannie Mae was rescued by the government last year.

Former CEO Raines, former CFO Howard, and ex-senior vice president and controller Spencer resigned in December 2004 amidst allegations of accounting irregularities at Fannie Mae. In December 2006 the Office of Federal Housing and Enterprise Oversight (OFHEO), Fannie Mae's regulator at the time, sued the trio over their alleged roles in the accounting scandal.

The three agreed to a $31.4 million settlement with OFHEO in April 2008. But the settlement entailed virtually no out-of-pocket payments by the former executives, with the three relinquishing stock options and fines being paid by Fannie Mae's insurance.

The accounting scandal did spawn a series of shareholder suits against Fannie Mae's directors and officers, requiring the company to cover their legal costs. The securities litigation has been consolidated in federal court in Washington, D.C., before U.S. district court judge Richard Leon.

The litigation is distinct from multidistrict litigation in Manhattan before U.S. district court judge Paul Crotty that relates to suits filed against Fannie Mae for alleged financial misstatements from November 2006 through the financial crisis last year that forced the company into conservatorship.

O'Melveny & Myers partners Jeffrey Kilduff and Robert Stern are representing Fannie Mae in the securities cases consolidated in D.C. The firm is serving as cocounsel with Latham & Watkins partners James Brandt and Jeff Hammel in the MDL in New York. (Jenner & Block also is representing Fannie Mae in a separate suit against its former auditor, KPMG, related to the alleged accounting improprieties.)

As a point of comparison, lawyers familiar with both pieces of litigation say that the securities cases in D.C. deal with a drop in Fannie Mae's stock price from $72 to $62, whereas the more recent litigation in New York pertains to a drop in shareholder value from $50 to nearly zero.

The recent disclosures by the FHFA pertain only to fees for defense lawyers retained by Raines, Howard, and Spencer in cases related to the accounting controversy that came to light in 2004.

"The amounts include fees and expenses incurred in connection with the defense of derivative, securities, and ERISA claims pending in the U.S. district court for the District of Columbia," states an FHFA document released to Grayson's office. "The amounts . . . do not include invoices for expenses totaling $0.4 million incurred in connection with government investigations prior to the conservatorship."

The FHFA states that $23.1 million in invoices for defending Fannie Mae and its management in the shareholder actions in D.C. were received between September 6, 2008, the date Fannie Mae was placed into conservatorship, through July 21 of this year.

An examination of court documents shows that Williams & Connolly partners Kevin Downey, Joseph Terry, Jr., and Alex Romain are representing Raines in the litigation. The FHFA states that $2.43 million was spent defending Raines during the September 6 through July 21 time frame.

Zuckerman Spaeder partners Steven Salky and Eric Delinsky are representing Howard. FHFA disclosures show that $1.35 million has been spent on Howard's defense during the same time period.

Spencer has turned to a legal team from Mayer Brown led by global litigation practice coleader David Krakoff and partner Christopher Regan. The FHFA states that $2.52 million has been spent on Spencer's legal defense.

The legal costs for all three executives are not extraordinary nor unusual for a high-end securities litigation defense. If Fannie Mae didn't pay the legal fees for its current and former directors and officers, it might have some trouble finding individuals willing to take such a position.

Lawyers with knowledge of the litigation, who requested anonymity in order to speak freely, say the past year has been busy with motion practice, discovery, and depositions. (According to the FHFA, none of those depositions were of Raines, Howard, or Spencer.)

Lawyers say that the FHFA, the successor to OFHEO, has refused to produce documents in the case. Earlier this year the U.S. Court of Appeals for the D.C. Circuit upheld an order holding OFHEO in contempt for missing e-discovery deadlines. Officials from the regulator, which blessed many Fannie Mae disclosures before later changing their tune, could be critical witnesses in any case against the three former Fannie Mae executives.

When deducting the $6.3 million earmarked in defense costs for Raines, Howard, and Spencer from the FHFA's $23.1 million in total legal costs for the D.C. shareholder actions, $16.8 million remains to cover the legal bills for outside counsel representing the OFHEO and the FHFA.

Duane Morris partner Joseph Aronica, who served as lead counsel to OFHEO in its examination of Fannie Mae and the regulator's subsequent action against the three former executives several years ago, did not respond to a request for comment. Court records show that Aronica has recently become involved in the civil litigation on behalf of the FHFA.

Lead plaintiffs counsel in the shareholder litigation consolidated in D.C. is Waite, Schneider, Bayless & Chesley, the Cincinnati-based firm of noted trial lawyer Stanley Chesley. Cohen Milstein Sellers & Toll is serving as local counsel.

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