Fannie Mae Summary Judgement Hearing

Case 1:04-cv-01639-RJL Document 1049 Filed 09/04/12 Page 1 of 53
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA
IN RE: FANNIE MAE SECURITIES LITIGATION . . . . . . . . . . . . . . . .
: Docket No. CV04-1639 (RJL) : : June 6, 2012 : 10:00 a.m.
TRANSCRIPT OF MOTIONS HEARING BEFORE THE HONORABLE RICHARD J. LEON UNITED STATES DISTRICT JUDGE APPEARANCES: For the Class Plaintiffs: WILLIAM MARKOVITS MELANIE CORWIN CHRISTOPHER STOCK PAUL DEMARCO Waite Schneider Bayless & Chesley 1513 Fourth & Vine Tower One West Fourth Street Cincinnati, Ohio 45202 DANIEL S. SOMMERS Cohen Milstein Sellers & Toll, PLLC 1000 New York Avenue, NW Washington, DC 20005
For Fannie Mae:
JEFFREY KILDUFF ROBERT STERN O'Melveny & Myers, LLP 1625 I Street, N.W. Washington, D.C. 20006
For Franklin Raines:
KEVIN DOWNEY, ESQ. ALEX ROMAIN JOSEPH TERRY Williams & Connolly, LLP 725 12th Street, N.W. Washington, D.C. 20005
For Leanne Spencer:
DAVID KRAKOFF CHRISTOPHER F. REGAN ESQ. ADAM MILLER Buckley Sandler, LLP 1250 24th Street, N.W. Washington, D.C. 20037 ERIC DELINSKY STEVEN SALKY CAROLYN REYNOLDS MILES CLARK Zuckerman, Spaeder, LLP 1800 M Street, N.W. Suite 1000 Washington, D.C. 20006
For J. Timothy Howard:
For KPMG:
JOSEPH WARIN SCOTT FINK Gibson, Dunn & Crutcher, LLP 1050 Connecticut Avenue, N.W. Washington, D.C. 20036 JOSEPH ARONICA, ESQ. Duane Morris, LLP 505 9th Street, NW Washington, DC 20004 Kevin Lewis Carl Reed Franklin Raines Leanne Spencer Timothy Howard Adam Goldstein Evan Stolov Steve Georgian James Goldsmith
For FHFA:
Also Present:
Steve Carlin
Court Reporter:
PATTY ARTRIP GELS, RMR Official Court Reporter Room 4700-A, U.S. Courthouse Washington, D.C. 20001 (202) 962-0200
Proceedings reported by machine shorthand, transcript produced by computer-aided transcription
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P R O C E E D I N G S COURTROOM DEPUTY: Calling civil case 04-1639, In Re:
Fannie Mae Securities Litigation. Counsel, please approach the podium and identify yourself for the record. MR. DEMARCO: THE COURT: Paul DeMarco for the Plaintiffs.
Good morning. Good morning.
MR. DEMARCO: MR. STERN:
Good morning, your Honor, Robert Stern of With me is Mr.
O'Melveny & Myers on behalf of Fannie Mae.
Robertson of Fannie Mae, Associate General Counsel. THE COURT: Welcome back. Bill Markovits on behalf of Lead With me today are Paul DeMarco,
MR. MARKOVITS:
Plaintiffs OPERS and STRS.
Chris Stock and Melanie Corwin of the Waite Schneider firm. Also at counsel table are Kevin Lewis our technical consultant and Dan Sommers of Cohen Milstein. THE COURT: MR. DOWNEY: Welcome back. Good morning, your Honor, Kevin Downey
from Williams & Connolly on behalf of the Defendant Frank Raines. With me today are my partners Alex Romain and Joe
Terry, and Mr. Raines is also present in the Court today. THE COURT: Welcome back. Good morning Eric Delinsky on behalf of I am here today with my partners
MR. DELINSKY:
Defendant J. Timothy Howard.
Steve Salky, Carolyn Reynolds, and Miles Clark and my client
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Mr. Howard is present as well in the courtroom. THE COURT: Welcome back. Good morning, your Honor.
MR. KRAKOFF: THE COURT:
Good morning. David Krakoff from Buckley Sandler with
MR. KRAKOFF:
my partners Chris Regan and with Adam Miller on behalf of Leanne Spencer. courtroom. THE COURT: Welcome. Thank you, your Honor. Ms. Spencer is here today, your Honor, in the
MR. KRAKOFF: MR. WARIN:
Good morning, your Honor, Joseph Warin
representing KPMG of the Gibson, Dunn & Crutcher firm with my colleague and partner Scott Fink, and two of our clients are present. I expect that they will be here moment their. James
Goldsmith and Steve Georgian of the Law Department of KPMG. Thank you. THE COURT: Welcome back. Good morning, Judge. Joe Aronica from
MR. ARONICA:
Duane Morris on behalf of FHFA as conservative of Fannie Mae. THE COURT: Welcome back. All right. Mr. Downey, I
think you are making the argument. MR. DOWNEY: THE COURT: That's correct, your Honor. So you have got 45 minutes. You can split
I it up if you would like. MR. DOWNEY: I would like to reserve 15 minutes for
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rebuttal. THE COURT: MR. DOWNEY: Okeydoke. May it please the Court, Kevin Downey on
behalf of Frank Raines.
I would like to begin, your Honor, by
reorienting the Court to the elements of a securities claim using one of the charts that was used in various forms by both sides yesterday. are here -THE COURT: question to start. Wait a second there. Let me ask you a So let me put that up. As the Court knows, we
If the Court would rule in favor
hypothetically the Motion we were arguing yesterday afternoon, what would be the effect be on your client? Would that this Motion? MR. DOWNEY: It effectively moots the Motion, your moot
Honor. I think there is a formal answer and a practical answer. I think the formal answer is there are allegations in Plaintiffs' complaint about other accounting violations. If the
Court entered judgment on the Motion, those would remain and would be pending. That's the formal answer. First of all, with
The practical answer is two-fold.
regard to Mr. Raines, the evidence is no different with regard to FAS 133 or those other accounting violations. THE COURT: I was trying to remember any discussion by
Plaintiffs' counsel yesterday that was specific to Mr. Raines and I don't remember that.
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Honor.
MR. DOWNEY: THE COURT: MR. DOWNEY:
That's correct. Did you hear any? You were here.
I was watching more closely than probably
the Court for the mention of his name. THE COURT: MR. DOWNEY: I will take judicial notice of that. And it was mentioned, his name was
mentioned in passing a handful of times but not in association with these events. THE COURT: I certainly don't remember a specific
event that was referenced or a specific transcription reference or a specific document reference to him. it. MR. DOWNEY: That's correct. I agree with that, your I just don't remember
THE COURT: This is today's. MR. DOWNEY:
Okay.
But that was yesterday's argument.
I understand so I want to anticipate what
I think the Plaintiffs will say by telling the Court what I understand the allegations against Mr. Raines to be. THE COURT: MR. DOWNEY: All right. I think if I might do that, I will just
focus on the element of material misrepresentation because while that's not at issue on today's Motion, what are -THE COURT: issue here. Hold on a second. We have got a technical
Ken, my screen is not working here.
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Go ahead.
MR. DOWNEY: THE COURT:
I knew I should have brought the boards. All right. We got them both working now.
MR. DOWNEY:
Focusing on the material misrepresentation
element, the question is what material misrepresentations did Mr. Raines make? And I think the answer is very straight forward. The Plaintiffs say that when he signed eight financial
statements of Fannie Mae that were disclosed to the public, the accounting in those financial statements was erroneous. THE COURT: MR. DOWNEY: Right. And they allege with regard to scienter
that he knew the accounting was erroneous and then they identified three statements that he made publicly which were in essence in support of the company's accounting and they say, well, since he knew the company's accounting was wrong, he made false statements in connection with the accounting. It all comes back to the accounting. It leaves us as I
think your Honor's question anticipates in an odd position. Mr. Raines, a non accountant, who asked accountants both internally and externally many, many times in every reporting period whether the accounting conformed to GAAP is answering as a Defendant in a fraud case on the theory that he should have known despite what he was told about the accounting that the accounting was wrong. THE COURT: Let me ask you to pause a second. Assuming
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for the sake of discussion that his inquiries were always about is this in conformance with GAAP, okay, if the answer he was getting was yes hypothetically, all right, does that from your point of view, and obviously I want to hear the Plaintiffs' point of view in a second, in a few minutes, does that override, for lack of a better way of putting, any situation where it was not in compliance with FAS 133? MR. DOWNEY: It would, your Honor. As I understand it
as I think what the record says about the question he is asking and the question he is supposed to ask is -THE COURT: MR. DOWNEY: Right. -- are the financial statements presented
in conformity with GAAP taken as a whole; and when he asked that question, the record is uniform and undisputed that he was told, yes, every time he signed a financial statement, that is what he was told. Hypothetically there could be a situation where there was within the financial statements some departure from one accounting standard or another that was deemed to be -- not render the financial statements not in conformity with GAAP either because it was immaterial or because the accountants considered there to be ambiguity in the accounting standards. With regard to FAS 133, it was never brought to Mr. Raines' attention because I don't think it is the case that the accountants ever thought there was a deviation from GAAP in
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any respect.
They believed they were construing a standard and
interpreting it correctly both internally and externally, and I think you got some sense of that yesterday. THE COURT: So the violation that Senator Rudman's
report unearthed with regard -- and that the company accepted, Mr. Ashley was the chairman at that point, that the company accepted have been unearthed were violations of FAS 133, it is your position that this record as it stands today has no evidence in it that those violations of FAS 133 had ever been brought to your client's attention? MR. DOWNEY: That's my argument today and that's what As I think the Court knows,
Senator Rudman concluded as well.
our position is despite the fact that Senator Rudman concluded that Mr. Raines had no knowledge of deviations from GAAP, the report for several reasons is clearly not admissible as to him. THE COURT: I don't want to parse these words too parse them, deviations of FAS 133,
carefully but we do need to violations of FAS 133. MR. DOWNEY: No.
Whatever the language is, no
deviations from 133 were brought to Mr. Raines' attention. THE COURT: MR. DOWNEY: Okay. To make sure my answer is clear, let me The Court saw yesterday documents
answer it yet another way.
which involved discussions largely between accounting personnel where there were departures from GAAP, known departures from
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GAAP, that type of language in discussions between the accountants. Mr. Fink explained to you what they meant and
that that language is not significant. THE COURT: MR. DOWNEY: Right. And I think Mr. Fink is right with regard
with regard to that, but that kind of language was never used with Mr. Raines. In other words, Mr. Raines was never told
there is a known departure from GAAP but it is okay for the reasons Mr. Fink said yesterday. The representations to him
were that it was in conformity with GAAP. And the reason the Court can be so confident and quickly confident about what I am saying is you can look in the middle of Plaintiffs' opposition brief to see is there any admissible evidence in this case which suggests that Mr. Raines was told about deviations from GAAP in any respect, immaterial interpretations et cetera. They cite one document, your Honor,
one document which is an e-mail which Mr. Raines is not on which is Exhibit 199 to our papers. What happened -- I am sorry. It
is not Exhibit 199. It is to their papers and I will give you the exhibit number in a moment. THE COURT: MR. DOWNEY: Okay. Mr. Argires was deposed and the gist of Mr. Argiers says using language
the discussion in the e-mail is
similar to yesterday we should inform Mr. Raines and Mr. Howard that there are some known departures from GAAP.
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Now, you would expect and I think the Court's expectation was clear from the exchanges yesterday that the Plaintiffs would depose Mr. Argiers and they would ask him did this happen? Well, the Plaintiffs did depose Mr. Argiers but they didn't ask him: Mr. Raines and they Did you provide that information to didn't ask him because as Exhibit 199
shows, which is a declaration from Mr. Argiers, he never told Mr. Raines that there was a departure at any level from GAAP or a violation of FAS 133; and he certainly doesn't believe there was a deviation from 133. What he represents in that declaration and which a lot of the record reflects is he like other KPMG personnel told Mr. Raines that the company was acting in compliance with FAS 133 because that's what they believed and that's what they believe today, and yet we are here in this case answering in a fraud claim. One document after eight years on FAS 133 related
to Mr. Raines, one document. THE COURT: sent to your client? MR. DOWNEY: THE COURT: MR. DOWNEY: No. No. No. The reason we went to the trouble of Now, was that e-mail, a copy of that e-mail
getting a Sworn Statement from him was the document on its face would clearly not be admissible. It would be hearsay as to
Mr. Raines, but the question is, well, did any such conversation
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take place?
No such conversation took place. Okay. So in the absence of -- and I should say,
THE COURT: MR. DOWNEY:
your Honor, consistent with I think the discussion yesterday and I could talk about this in whatever detail the Court would like, Mr. Raines' involvement in this process was to participate in meetings in every financial reporting period and to gather around him the internal accounting experts and KPMG and to go through the financial statements with them and ask them what are the important things in here? compliant with GAAP? Are you comfortable that they are
Is there any reason I shouldn't sign a
certification that these statements are in compliance with GAAP? And by the time the financial statements were signed, the answer was uniformly yes. There is absolutely not a shred When he asked is the
of dispute about that in the record.
accounting being done in compliance with GAAP, the answer was always yes. So what do the Plaintiffs do? I mean what is their case built on? Well, I think they have what is effectively a motive case. They try to take e-mails which do not reflect anything
about accounting or a knowledge of a violation of accounting and they say, well, they reflect bad motive or bad thinking and as a result the Court should infer there were accounting violations because there were these kinds of motives. Now, I could address that at many levels, but let me
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just say taking them one at time the record is undisputed those motives didn't exist. I can explain this I think , your Honor,
very simply referring the Court to very few documents within the record. So let me take each of their themes or theories or
motives or however you want to characterize it, their theories of the case. I think they are three-fold.
One is that there was a desire to minimize earnings volatility. Mr. Fink talked about that yesterday. THE COURT: MR. DOWNEY: Mr. Boyles prepared. THE COURT: MR. DOWNEY: Right. And, your Honor, with regard to that That's the tenets? That's within the tenets of the memo that
issue, and I do not in any sense want to imply that minimizing earnings volatility is a bad thing. It is a good thing if it is
done consistently with GAAP and appropriately. THE COURT: I think Mr. Fink made that point. But let me show you what
MR DOWNEY: He did.
Mr. Raines' relationship was with regard to that goal in particular because as to Mr. Raines, there is particular evidence in the record as to whether he cared about that goal or directed people to comply with that goal. The author of that
memo as the Court will recall was Jonathan Boyles, the company's director of accounting policy. THE COURT: Right.
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MR. DOWNEY:
And he had a conversation with Mr. Raines
about the subject of minimizing earnings volatility, and you will get a sense of what Mr. Raines said. video so I just have -THE COURT: MR. DOWNEY: That was pretty fancy, wasn't it. Yes, that was. I feel kind of still old I don't have the
school even though I thought I was going to look good with the -THE COURT: O'Melveny. MR. DOWNEY: This is testimony that Mr. Boyles gave. Well, your's is small firm compared to
He was asked what did Mr. Raines say at that meeting about volatility? He answered: That the purpose of the exercise of He
getting a fresh look wasn't around reducing volatility. didn't seem to care about that. He seemed
focused on the
business practice of hedging and whether there were any other hedging strategies that the business should be looking at. So even if that's a motive that you want to evaluate according to what Mr. Fink said, and I think you should and you would come to the conclusion Mr. Fink suggested, as to Mr. Raines, the evidence is undisputed it is not a goal that he was seeking to advance within the company. motive. The biggest motive that the Plaintiffs talk about as part of their presentation is compensation and if you read their So that's one
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brief, it is all over their brief. THE COURT: MR. DOWNEY: I have read it. They say in a variety of ways Mr. Raines
was, however you want to say it, attempting to enrich himself, was using the compensation system to line his pockets and that he was doing this essentially in two ways. One, with regard to
the bonus program and then, second, with regard to a program affecting options. Let me take each in turn and make sure that
I articulate what we understand the Plaintiffs' theory to be. With regard to the bonus program, here is what the Plaintiffs say, and I am not characterizing it, I am reading from their brief. At age nine of their brief, they say that
Fannie had the uncanny ability to narrowly exceed the maximum bonus target year after year, the uncanny ability to narrowly exceed the maximum bonus target. Then at page 27 they say the goal was simple, consistently meet and narrowly exceed quarterly earnings targets and thereby max out senior management bonuses. That's their
allegation. Let me show you graphically what that allegation would look like if it were true. I have shown you the three years of the class period -2001, 2002, 2003. What the Plaintiffs say the earnings
performance of the company was a very narrow exceeding of this blue line which is the bonus target to make it look like the company was either right at the target or slightly above the
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target and they got there by accounting manipulation, your Honor. That's the Plaintiffs' theory. Now, what actually happened? What are the undisputed facts as to what the company did in terms of earnings during the three years of the class period? This is what happened. why I am not using the boards any more. this right in front of you. THE COURT: MR. DOWNEY: the company. happened. That's pretty fancy. Yes. This is the actual performance of and what the record shows This is
You can actually change
This is the real world
In 2001, they did exceed the bonus target but not by And what
a few cents, by $0.28 which is an enormous amount.
happened at 2003? They didn't meet the maximum bonus target. They missed it by two or $0.03. Now, if the Plaintiffs' view of the world were true, everyone within Fannie would act at Mr. Raines's direction to undertake some accounting manipulation to get this number to the target level or lightly above and you don't need in any respect
to dig through the record that's in front of you to see what I am saying. These numbers are in the Plaintiffs' brief. They are in the You
don't even have to go to the appendix.
Opposition Motion to Ms. Spencer's Summary Judgment Motion. Right there. They lay out the numbers. Look around
how they present the situation but look at the years during the class period. This is what it shows.
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Now, let me turn to the other compensation program that's a significant focus of the Plaintiffs. This is the This is
so-called $6.46 program or the challenge grant program.
a program that was initiated early in Mr. Raines' tenure where Mr. Raines set a goal for the company to double its earnings within five years. And you didn't get additional compensation
as a Fannie employee if the company doubled earnings. What you got was the options you were already getting would vest more quickly. Now, the suggestion of Plaintiffs over and over and over again is that the company manipulated its earnings in order to get to that $6.46 target because all of the employees were trying to get there so their options would vest more quickly. In other words, let me show you what the Plaintiffs' allegations would like look on a graph. The company did get to the $6.46 target so the black column which is the pre-restatement EPS are the actual earnings of the company and far from being close to $6.46, the company was at $7.91. $6.46. Now, I have arbitrarily picked a number below
I have picked $5.25 but whatever the number is, the gist
of Plaintiff' allegation is if you didn't engage in accounting manipulation, the company would have ended up well before the $6.46 target. Well, let's see what actually happened when the
restatement was done and all the accounting misapplications were corrected.
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The employees at Fannie earned more, $8.08.
In other
words, if every error that the restatement suggested exists had been done the way the restatement suggested it should have been done, employees would have been $0.17 more above the $6.46 target. Again, the Court doesn't need to labor through the This is
record in order to find whether or not this is true.
possible just by comparing the restatement to the financial statement for the 10-K for the 2003 period. So the core implication that they try to create or the inference they ask the Court to draw is the compensation was being manipulated. Now, knowing that this is what the record
was going to show, the Plaintiffs use rhetoric to the effect that, well, even if we can't link compensation to a particular accounting misapplication, let's say the compensation system incentivized people in the wrong way, that it was a bad compensation system. And what happened at Fannie Mae is because employees had these incentives, they manipulated the accounting. That's the gist of the rhetoric in Plaintiffs' brief. What is the
evidence that's undisputed in the record with regard to that? Well, the evidence that's in the record is the expert testimony and report of defense expert Wayne Gay of the Wharton School. He reviewed all of the relevant evidence in the record One is that the compensation system
and concluded two things.
at Fannie Mae exceeded the standard of care for companies of
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comparable size and business practice and, number two, the compensation system actually acted to disincentivize fraud. won't go through all the reasons that's true, but at a high level, your Honor, the reason he comes to that conclusion is in addition to cash compensation, there was lots of equity compensation. Employees got stock and they got options so their I
interest was in the long term value of the company, not in some short term reward. Now, that's obviously a matter for expert testimony because Plaintiffs' claim, after all, is that Mr. Raines' compensation system or the compensation system when he was at Fannie Mae created unusually strong incentives. Now, you would
expect the Plaintiffs' expert to say the opposite, but the Plaintiffs don't have an expert. They did have an expert who
was going to proffer a basis for the rhetoric that's in their brief, Professor Bebchuk of the Harvard Law School. THE COURT: MR. DOWNEY: Bebchuk? That's right. He submitted a report that
which I made some of the claims that are now in Plaintiffs' brief. Professor Gay submitted his report and he pointed out
six major conceptual errors in the report and a host of minor errors. Professor Bebchuck withdrew his report, did not appear
for his deposition and did not file a reply or rebuttal report in response to the Professor Bebchuk. So the only be evidence in the record is the opinion of
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Professor Gay.
The only evidence in the record, in other words,
your Honor, is that it is undisputed that the compensation system at Fannie Mae did not create unusually strong incentives. In fact, it disincentivized fraud. So, your Honor, it really comes down to what the Court could view as a legal question, and I would say it is two-fold. The Plaintiffs can't link compensation systems, compensation decisions to accounting decisions because in fact the scheme that they say existed with compensation didn't exist; and they don't have an expert who says that the way in which Fannie compensated people was different from other companies or that it incentivized fraud. On those kinds of facts, there is voluminous authority within the Courts to say you can't allow a securities fraud case to go to the jury because there is a compensation system that rewards performance in some form. And we have cited those cases
in our reply brief, but they include, for example, the Metras case from Minnesota involving a CEO and a CFO where Summary Judgment was granted and there is a host of second authority to that effect. Now, passing the compensation theory, there is a general discussion which I think we will hear a lot about during Mr. DeMarco's presentation which is that the company was engaged in improper earnings management, and that relates to some respects to compensation; but let me take it as a distinct
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theory because I anticipate he will put up a number of e-mails where the company is talking about either performance targets or compensation targets and he will say to you this proves there was a fraud. Well, as Mr. Krakoff will discuss, therefore I won't, the Plaintiffs own expert conceded that paying attention to compensation targets and earnings targets is entirely appropriate as long as you doing it in a manner that's not designed to defraud people. But let me take the one transaction that they focused on the most in their opposition brief to give the Court a sense of what I think ultimately is the hollowness of Plaintiffs' case and that's debt buy-backs, your Honor. And a debt buy-back is a transaction in which the company decides that it can buy-back debt at a price that it finds attractive. Now, here is what true about those transactions at Fannie Mae. They all happened. They are not phoney
transactions that didn't happened, but the Plaintiffs say, well, we know they happened, we know they are not phoney transactions but you were making people think the performance of the company was different than it was because you were buying back that debt in an amount that implied your earnings were something but your earnings in fact would have been much more if you hadn't bought the debt back. In other words, these were furtive secret perception of what
transactions that distorted the public's
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was goings on.
That's an odd allegation your Honor, because
those transactions are publicly disclosed in the financial statements of Fannie Mae. what's conveyed there. This is directly from Fannie Mae's 10-K for the year 2003, a disclosure about debt buy-backs. The company says we Let me give you a sense of part of
recognized the pre-tax loss, they describe another transaction, but they also say from the repurchase That's in 2003. Then they say in 2002 we recognized another loss from the repurchase of $8 billion of debt. Not only do they disclose of $20 billion of debt.
the fact that those transactions are occurring, they also disclose the effect on the financial statements by disclosing the pre-tax loss. So far from being a furtive or concealed transaction, these are right in the publicly disclosed financial statements. Moreover, what is particularly hard to imagine Plaintiffs' allegations in light of this fact is after all the company has been through, multiple restatements and investigations with which the Court is well familiar, no one has ever questioned the accounting for these transactions. There isn't any question the accounting for
ever raised by any external audience that
these things was not only done in good faith, but was in conformity with GAAP. Let me spend a moment if I might just on directing the
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Court's attention to what's in the record about what Mr. Raines knew and what Mr. Raines did not know about accounting because I think if the Court looks again at a relatively few paragraphs of our statement of material fact, you will get a sense of Mr. Raines' participation in the process. Those are our statements of material facts paragraphs 82 to 84. And you should look at Plaintiffs' responses as well
and the bases on which they purport to create a dispute, but they describe, your Honor, in detail these meetings that I described. Who participated? All the individuals you saw on What was said? Representations made
video yesterday and more.
to Mr. Raines about GAAP compliance. I mention it now only to say it is a rebuttal to what I would almost call a parody contained in Plaintiffs' opposition where they say, well, Mr. Raines now says he wasn't involved. He
Mr. Raines was involved exactly as a CEO should be involved. checked and checked with the appropriate people.
He sought to
have the right policies and procedures in place and today the people involved in that accounting -- I should say yesterday -the people involved in that accounting came to you and told you they still think it was right. That's the evidence during the class period of what Mr. Raines was told about accounting. Let me show you some of
the direct evidence about what Mr. Raines said during the class period because I think it is unusual to have this kind of direct
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evidence in a securities fraud case. I am going to show to you, your Honor, two examples of an accounting issue coming up that was brought to Mr. Raines' attention and what the direct evidence showed his reaction was. Now, remember the Plaintiffs' case would be if Mr. Raines knew there was an accounting judgment which might affect the financial statements or might fake the company's practices, he would try to suppress it because his interest was in manipulating these things for compensation and earnings target. Let me take two of many vignettes that I could show you, but I will take two to give you a flavor of it. First, the Court is well familiar with the Plaintiffs' allegations regarding Roger Barnes coming forward and making -- raising concerns that he had about the -- certain aspects of Fannie Mae's accounting and you would think from Plaintiffs' allegations Mr. Raines tried to suppress that. I am going to show you testimony from the internal auditor who brought those concerns to Mr. Raines' attention and what Mr. Raines' reaction was when he brought them to Mr. Raines' attention. the Court saw briefly. This is the testimony of Sam Rajappa who He was asked: Do you recall what Yes. He was on
Mr. Raines told on you this call? And he said: a conference call.
I briefly described what he, referring to
Mr. Barnes, had alleged and Frank's comment was to tell me go ahead and do the work, meaning the work to investigate, and go
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where the facts take you.
That's exactly what he said.
This is a direct evidence of what happens when there is an accounting issue. Mr. Raines said not suppress this or let's hope it is not too bad. He said go where the facts take you.
Let me show you another vignette which relates to a concern that arose in the accounting department in 2002 about
changes with regard to the interpretation and application of FAS 91. This is the testimony of Janet Pennewell who the Court saw Ms. Pennewell is talking about an
on video yesterday as well.
interaction she had with Mr. Raines where she brought this to this attention. She says he, referring to Mr. Raines, was very didn't
definitive in making it very clear that he absolutely
care or was even interested in seeing the impact on the financial statements of this change. He just wanted me to
proceed with doing whatever the right thing was and the strong way that he said that I thought was an important thing to communicate to my staff in terms of setting the tone at the top for the overall corporation. This, your Honor, is the direct evidence in the record of the state of mind of Frank Raines during the class period. think before we hear in great detail about Plaintiffs' theory about this e-mail and that e-mail that has nothing do with accounting, the Plaintiffs should answer what evidence do they have to dispute this direct evidence? What evidence do they have which suggest Mr. Raines was told the company's accounting was I
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not in compliance?
What evidence do they have that what they
say about compensation is even true in the class period? And if I may unless the Court has further questions, I will reserve for rebuttal. THE COURT: That's fine. Thank you, sir. Mr. DeMarco.
MR. DEMARCO: THE COURT:
Good morning again, your Honor.
Good morning. Paul DeMarco for the Lead Plaintiffs. I
MR. DEMARCO:
forgot to hit my button. MR. DOWNEY: MR. DEMARCO: It is up here. Thank you. After listening to Mr.
Downey's argument, I feel as though I should be looking for another button, the reset button, the one that reminds us we are here on Summary Judgment, your Honor. Mr. Downey has talked a lot about what the witnesses who have testified in support of Mr. Raines say. What I intend
to show today is that based on his reply memorandum and his argument today Raines actually ignored key evidence and expert testimony that Plaintiffs puts forward in their opposition and I want to pose this proposition. The moving party who skips blindly past key evidence on a dispositive issue like scienter should not get to first base on Summary Judgment let alone all the way home. I also intend to show that even where he hasn't ignored other evidence bearing on scienter, the gist of his argument is
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that your Honor should construe it in the light favorable to Raines. When the key evidence pertaining to Raines' scienter is
construed as it must be in Plaintiffs' favor and the fair inferences are drawn as they also must be in Plaintiffs' favor, there are more than enough fact questions as to Raines' scienter to warrant Summary Judgment and letting the jury resolve scienter. Your Honor, if I may draw an analogy. At dog shows and
beauty contests the contestants get judged looking their absolute best in the most flattering light possible. You might
say therein lies the difference between those contests and a Motion for Summary Judgment because the movants' case doesn't get evaluated looking its best at this stage. contrary. Quite the
Supreme Court precedence tell us it is mandatory for
a District Court to view the movants' case not in the most flattering light but basically in the least flattering light. The whole question posed by a Defendant's Motion for Summary Judgment is whether the evidence for or against that Defendant is worthy of the give and take of trial and the serious consideration of a jury. To make that call a District
Court must construe all of the evidence and draw all of the justifiable inferences therefrom not in favor of the moving party but actually against him. And the Supreme Court has been very clear, of course, on that since even before the 1986 trilogy. Mr. Raines is no
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different from a lot of Defendants moving for Summary Judgment. They sort of use the upside down approach to Summary Judgment where they want the inferences to be slanted in their favor where they want to be able to disregard evidence that is not favorable to them, and I think you could see that from the way his attorneys have presented and argued the evidence in their initial memorandum and their reply memorandum in Court today. They slant all of the evidence toward Mr. Raines. They interpret every relevant document, and I am going to talk about many of them, they interpret every relevant document that Mr. Raines ever saw and every relevant statement that he ever made or that was made to him exclusively in a way that benefits Mr. Raines where a piece of evidence could be interpreted one way for Mr. Raines and another way against Mr. Raines. Raines' counsel insists that your Honor interpret
it only in the way that helps Raines, never in the way that hurts his case. So my second proposition is if the evidence presented on a dispositive issue is subject to reasonable conflicting interpretations, Summary Judgment is improper because it is up to the jury to interpret the evidence and draw those inferences. The case against Raines is full of evidence mainly documentary evidence that is subject to conflicting interpretations. Some
of that evidence, as I said at the outset, Raines has out and out ignored in the briefs in an argument today; and I would like
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to walk the Court through that evidence. Before doing that, I feel the need briefly to review what we are talking about in terms of the law of scienter. Generally Courts have stated that scienter should not be resolved by Summary Judgment. It is, of course, a mental state
embracing intent to deceive, manipulate or defraud but as was talked about yesterday, knowing or reckless conduct can meet the scienter requirement at this point. THE COURT: that I also want to make --
Is there any direct evidence on the record
he had intent to defraud? MR. DEMARCO: That he had direct evidence of intent
to -THE COURT: Is there any direct evidence on this
record, any, one document, any statement by him attributed to him, is there any in this record? MR. DEMARCO: THE COURT: Yes.
There is? No,no. I am just saying I understand your
MR. DEMARCO: question.
Let me answer your question the way I understand it. did he come out with --
Direct evidence of fraud, THE COURT:
Intent to defraud. Intent to defraud. Did he express an
MR. DEMARCO:
intent to defraud to anyone?
Did anyone express the intent to No, there is no
defraud to him specifically in those terms? direct evidence.
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THE COURT:
Okay.
MR. DEMARCO: But circumstantial -THE COURT: Let me finish. MR. DEMARCO: Sure. THE COURT: The way this works is when I start, you
MR. DEMARCO: Yes, sir. THE COURT: It makes it much simpler for her. Believe
me, you want a clear record of what happens in this room. MR. DEMARCO: THE COURT: Thank you.
Now, so there is no direct evidence? Right.
All right. So at most there is indirect
That's right.
All right. Or what can we call
circumstantial evidence, right? MR. DEMARCO: THE COURT: Correct.
What's your best single piece of
circumstantial evidence that Franklin Raines intended to defraud the public, the investing public? What's your single best strongest piece of evidence of that during the time period? MR. DEMARCO: I think the best evidence is the -- is a
piece of evidence that Mr. Downey didn't talk about in his reply.
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THE COURT:
He did not talk about it? Did not talk about it in his reply.
Did not talk about. That was a statement made on the Kudlow
MR. DEMARCO:
and Cramer show on CNBC on July 24. THE COURT: On a TV show? A statement on a TV show?
To the investing public, right.
Go ahead. I do need to set this up because --
Go ahead. -- I need to show what he knew prior to
MR. DEMARCO: making that statement. THE COURT:
That's fine. And if I may, can we call up, Kevin,
MR. DEMARCO: slide 160, please?
This is a memo to Mr. Raines dated
November 4, 2001, from Ms. Spencer in which she explains to him management's plans for managing earnings and smoothing income out of 2002 and eventually into 2003. His knowledge -- so his knowledge of the plans of management and the smoothing ideas come originally from this document. Kevin, would you call up 161? I want to read some of He learns that
the passages from it, what Mr. Raines learns. earnings have been managed. part of them. THE COURT: Who authored this?
We have been managing such a big
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MR. DEMARCO: November 4, 2001. THE COURT:
This is Ms. Spencer to Mr. Raines
Okay. It talks about smoothing ideas to move
MR. DEMARCO:
It talks about Tim, that is Tim Howard, has Peter That is to manage earnings and move income.
working on ideas.
And it says quarter four assumes that we will do what are called special actions to bring it down, earnings down. So the take
home for this for Mr. Raines was that management needed to move a lot of income in earnings -- I am sorry -- a lot of earnings out of 2002 and into 2003. In fact, she uses the figure -- would you call up, Kevin, 163, please? You will see at the bottom that Ms. Spencer uses the figure which she is telling him we have to move $850 million of income in order to hit what she calls -- can I have 162, please -- what she calls the glide path, the glide path to the pre-set EPS targets. Now, I want to stop for a second and explain why all of this is significant. THE COURT: I want to do it in the context of -That would be helpful because on its face
it doesn't in any way suggest to me anything, anything that suggests an intent to defraud anyone. MR. DEMARCO: THE COURT: Okay. So I need your help.
And actually what I would prefer since Do you have an expert's
lawyers can't testify is an expert.
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opinion -MR. DEMARCO: THE COURT: I was about to give you --
-- who says that that kind of language
constitutes an intent to defraud someone? Do you have an expert who said that? MR. DEMARCO: expert Fierstein. THE COURT: Fierstein. And it is slide 169 please, Kevin. This Let me call up the expert who is our
MR. DEMARCO:
is the opinion of our accounting expert, Sharon Fierstein, in rebuttal and what she characterizes -- can I have 169, please? Oh, that's it. I am sorry. She characterizes -- first she
talks about the warnings that were -- had been made public prior to that point. SEC Chief Account Lynn Turner clarified the
issue by indicating that misapplication of GAAP and stretching the rules to achieve desired targets are fraudulent accounting practices that would be targeted by the SEC. She goes on to conclude in her report: It is clear
from these examples that abusive earnings management was the subject of frequent discussion by the public and, in particular, by the SEC before, during and after the restatement period. Documentary evidence regarding Fannie Mae's violations of GAAP and its obsession with earnings management is cited throughout my report. References to earnings management minimizing
volatility of earnings and smoothing of income losses are
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plentiful in support that this mindset was woven through the fabric of the organization. And she goes to say that
transactions were enter into -- as transactions were entered into, Fannie Mae's desire to manage earnings helped to shape its accounting decision process which ultimately resulted in numerous GAAP violations. Now, what did OFHEO/the OFHEO report have to say on the same topic? Kevin, would you call up slide 152, please? It said that Mr. Raines, Mr. Howard and others engaged in improper earnings management to generate unjustified levels of compensation for themselves and other executives. These
actions are highly inappropriate -- set a highly inappropriate tone at the top that was itself an unsafe and unsound practice. You were told Mr. Downey that we had no expert opining even though he said this is a matter for expert testimony. I
would also cite the Court to another expert, Mr. Berliner and -THE COURT: Hold on a second. Sure.
This excerpt that you have just put up here
from the Rudman Report? MR. DEMARCO: sorry. THE COURT: This is OFHEO report? Yes. So who is it that is giving this Yes. No, that's the OFHEO report. I am
Okay.
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opinion? MR. DEMARCO: THE COURT: The author of the report.
Who is that? I don't know the author of the report,
MR. DEMARCO:
but it is a public record that would fit under the 8038 exception and would be admissible against Mr. Raines. Could I have slide 151, Kevin? It also characterizes Mr. Raines' fixation on EPS results saying that EPS results mattered, not how they were achieved. Now, I think this answers the question that was raised Mr. Downey: Where is the expert testimony that says this sort But I want to go then
of management of earnings is not proper? to the next step because -THE COURT:
Did the OFHEO report cite any documents or
testimony indicating that Mr. Raines had an intent to defraud anyone? MR. DEMARCO: THE COURT: Yes.
He did?
MR. DEMARCO: Yes, in followup to this -THE COURT: The OFHEO report you just cited? Yes. Let me call up number 149. By
MR. DEMARCO:
deliberately and intentionally manipulating accounting to hit earnings targets, senior management maximized the bonuses and other executive compensation they received at the expense of shareholders. Earnings management made a significant
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contribution to the compensation of Fannie Mae chairman and CEO Franklin Raines which totaled over $90 million from 1998 through 2003. Of that total, over $52 million was directly tied to
achieving earnings per share targets. And going back to Ms. Fierstein's reference to this, she characterizes that as the -THE COURT: to defraud. MR. DEMARCO: and -THE COURT: managing. MR. DEMARCO: Right. I am sorry. So in terms of where It says manipulating. It doesn't say Well, it says intentionally managing I am looking for where that says an intent
this, the evidence of -THE COURT: Was that OFHEO investigation done with an
intent to discern whether or not securities fraud had occurred here? MR. DEMARCO: your Honor. THE COURT: Indeed they never do that, do they? No. I don't think with that specific intent,
That's not their job? I wouldn't think so.
You know it is not their job.
MR. DEMARCO: Except that --
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THE COURT: Be at least candid about the limitations on OFHEO's responsibilities. MR. DEMARCO: Be candid. absolutely, but that's not
Absolutely,
THE COURT: Commission.
This is not the Securities and Exchange
MR. DEMARCO:
I understand.
It is not to say that the
evidence that they disgorge cannot go to that issue and your Honor I will asked where did they -- what did they point to in terms of an intent to deceive? Well, the next place that I think we have to go because we have covered how Mr. Raines was obsessed with smoothing earnings, let's go to what I originally talked about which is the Kudlow and Cramer statement. THE COURT: It is not your position that smoothing that's not
earnings is per se evidence of an intent to defraud, your position? MR. DEMARCO: THE COURT: position to take. MR. DEMARCO: No. No.
Indeed, that would be a very difficult
That's not my position because, as
Ms. Fierstein made clear, the problem with earnings management is when it is intended to meet preset targets, that's the problem. And the fraud comes in when Mr. Raines denies that
that's what's happening and that's what happened on the Kudlow and Cramer show which is slide 1727.
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He is asked:
You have no smoothing techniques in
your -- and, by the way, this is July 2003 so it is a couple years after the memo that he first received -- you have no smoothing techniques in your earning and revenue management? Mr. Raines says: We looked at each and every one of those
things included in that report that Freddie Mac did, and we have done none of those, absolutely none. Now, in our view it is a fair inference that his statement to the investing public that you say see there -THE COURT: Wait a minute. What is it that was going
on in the report about Freddie Mac? MR. DEMARCO: Freddie Mac. THE COURT: Right. And nine days earlier Fannie Mae had been There was also earnings management at
MR. DEMARCO:
asked whether or not it was doing any of that sort of earnings management. Its spokesperson said, no, we don't do any of it. That's why there was this
This is the followup to it. discussion in the air. THE COURT:
Hold on.
I am confused.
Is it your
position that the kinds of practices that were going on at Fannie Mae at the time were exactly the same as the ones that were going on at Freddie Mac and that were contained in that Freddie Mac report? MR. DEMARCO: Not exactly the same.
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THE COURT:
Not exactly the same. No.
So how could an answer of that kind there
that you have just referenced me to constitute in some way deception if the accounting practices being used -- I assume you mean the FAS 133 policy? MR. DEMARCO: No. I am talking about the earnings and
revenue management which is what the question asks. THE COURT: Okay. Are you doing any improper earnings --
Well, I thought from yesterday's argument
the point that your colleagues were making was that they were misusing the FAS 133 policy as a vehicle to smooth out the earnings? Maybe I am misunderstood them. MR. DEMARCO: In general, manipulating accounting to
smooth out the earnings, yes. THE COURT: Yes. I mean the impression I got certainly
was that they had a FAS 133 policy that OFHEO blessed, but they didn't apply it the way it was drafted or they applied it in ways that was inconsistent with it and the reason why they did that was in order to manipulate the earnings over the period in question and thereby maximize their bonuses. MR. DEMARCO: Right. THE COURT: That was kind of the -- I don't know if it was stated quite in that solgistic manner, but that was in
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essence the argument. MR. DEMARCO:
Does that sound right to you? Except that what we are talking about
here, the accounting manipulations we are talking about here do not necessarily all implicate FAS 133. THE COURT: on now? MR. DEMARCO: Well, we were talking about the debt We were talking about Okay. What beyond FAS 133 are you focusing
buy-back situation which I can get into.
the accounting for interest only securities; the -- a number of manipulations that I will get into that did not -- the amortization that did not implicate FAS 133, but I think a fair inference from this is that his statement is contrary to what he learned from Ms. Spencer's smoothing memo. THE COURT: Two years earlier.
MR. DEMARCO: Two years earlier and just to be -THE COURT: Did she testify about having any, in her
deposition, did she testify about having any discussions with him about the contents of that memo? MR. DEMARCO: content of this memo. THE COURT: What was she asked about it? I do not know, your Honor. I don't recall any discussion about the
You haven't looked at that deposition? I haven't looked at it for that question.
Well, then I will take that as there is no
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evidence from her deposition that she ever discussed that memo, the contents of it with Mr. Raines. MR. DEMARCO: But what I think the Court should note
about that memo and about the Kudlow and Cramer statement that we see there -THE COURT: Do you know if he read it?
MR. DEMARCO: I am sorry. THE COURT: Do you know if Mr. Raines even read the memo? Do you have any evidence that he read it? MR. DEMARCO: I think it is an inference that he -I don't have
from receiving the memo two years will earlier.
any direct evidence that he put his eyes on it and read it. THE COURT: Was he deposed in this case? Yes.
Was he confronted? I don't believe so.
With that memo? I don't believe so.
You don't believe so or you are not sure? I am not sure. Okay. I will take that
You are not sure.
as there is no evidence that he was confronted with it and acknowledged having read it. MR. DEMARCO: So in the reply memorandum that was filed
by Mr. Raines, he does not mention the smoothing memo even
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though Plaintiffs cited it as -THE COURT: to Do you think he should have mentioned that
Mr. Kudlow on that TV show? MR. DEMARCO: THE COURT: The smoothing memo?
Yes. No, I am not saying he should have
MR. DEMARCO:
mentioned the smoothing memo. I am saying in the reply memorandum as the party that was seeking Summary Judgment that he should have at least mentioned the memo and why it doesn't go to the issue of scienter. THE COURT: Well, if he wasn't confronted with it, if
he wasn't questioned about it, if he was never asked if he even read it or if there was ever any discussion about it, if there
is no evidence that Ms. Spencer ever discussed it with him, then why would they raise it -MR. DEMARCO: THE COURT: Well, I think --
-- in the reply? -- as the moving party they are bound to
MR. DEMARCO:
respond to the evidence that we cite. THE COURT: Okay. And they did not do that.
MR. DEMARCO: THE COURT: response to that. MR. DEMARCO: THE COURT:
Well, we will see if Mr. Downey has a
I am sorry.
We will see if he has got a response today
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when he gets up. MR. DEMARCO: Okay. I am assuming that the first time
we hear about the smoothing memo is the -(Attorney DeMarco collapses.) (Whereupon, a recess was taken at 12:03 p.m.) (Resumed at 12:03 p.m.) THE COURT: Well, welcome back, everyone. Obviously He is
the Court's paramount concern is the health of counsel.
in good hands I am told and being taken care of and hopefully it is going to be turn out to be nothing of any consequence; but I have spoken with the counsel for the case that's being argued, and I think everyone is in agreement that unless, and I stress unless, the doctors give him a completely clean bill of health and unless he feels up to it, we will not be resuming this argument what's left in it. There is only about roughly
45 minutes left in it, not even quite that. We will not be resuming it today unless both of those things happen, both the doctors say he is completely fine to proceed and he feels completely fine to proceed. It is not
going to be good enough just for doctors to say he can proceed. So I will tentatively set a resumption of the argument for 3:30, but it is subject to both of those hurdles being crossed. I will expect counsel to just update Mr. Cockrell
sometime maybe around 3:00, 3:15 as to how it is progressing or maybe earlier. I don't know. But I want to emphasize there is
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zero pressure on him to resume today at all.
None.
As to the other two arguments, there is just no way we are going to get those in today, the ones that were scheduled for today. We will have to -- the game plan tentatively because
of my existing schedule is to get the remainder of this argument and the other two in next week. Why do I say that? Because the
week after next I have a trial for a whole week and the week after that is the judicial conference for a whole week; and then we are in July and the month of July I have two trials scheduled and sentencings in other hearings and other cases. So it could, if we don't get this done next week, it could be August or later before it gets done and the year is slipping, you know, the summer slipping away as a minimum. So I
have assured counsel for Mr. Raines and Plaintiffs' counsel that we can find a day next week. around. We will get it in I will move existing hearings preferably towards the end of the
week so that if it is necessary for Plaintiffs' counsel to have someone else get up to speed, he or she will have extra days to get up to speed. next week. So we will try to shoot for Thursday or Friday
I don't have my calendar right in front of me, but
we will work that out today, this afternoon as to what day next week. So if Plaintiffs' -- excuse me -- well, if Plaintiffs' counsel or defense counsel know already that there is a day certain next week that they have to be in Istanbul on some FCPA
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case or they have to be on trial in the Eastern District of Virginia and I don't want to get crossways with one of my breathren across the river or whatever, make sure that Ken knows that those days are just sacrosanct and they won't be around or available or whatever. But I really want to do it next week and I would prefer to do it Wednesday, Thursday or Friday so that if additional
counsel has to get up to speed, they will have time to get up to speed. As far as tomorrow goes, I don't think it has any effect on tomorrow. We will proceed the way we are scheduled to We won't change any of the times for
proceed for tomorrow.
tomorrow, and we will just move forward with our schedule. Is that agreeable to Plaintiffs' counsel? MS. CORWIN: THE COURT: MR. DOWNEY: THE COURT: Yes. Is that agreeable to defense counsel? It is, your Honor. Thank you. Mr. Delinsky, is that agreeable to you? In concept, yes, your Honor. Could I
MR. DELINSKY:
take a -- with a member of Plaintiffs' counsel -- a ten-second side bar with your Honor? THE COURT: With me? Just to explain a quick issue which I
MR. DELINSKY:
think is very solvable for next week. THE COURT: Okay.
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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 you okay?
(Bench conference on the record.) MR. DELINSKY: can be put off, but I THE COURT: I have jury duty here. So I think it
may need to -- I will check. In this Court? In this Court. I was this week and I
MR. DELINSKY:
put it off because of this other thing. THE COURT: We can help you put that off. So I will try myself. If there is an
MR. DELINSKY:
issue, can I contact chambers? THE COURT: Yes. You let the jury folks know. I can
go to the Chief Judge if necessary to get you a new date. MR. DELINSKY: MR. STOCK: THE COURT: MR. STOCK: you, your Honor. Okay. That's all. Thanks.
Nothing from me.
Jury duty is sacrosanct in Ohio too. It is. We will take our direction from
Thank you. Thank you, Judge.
MR. DELINSKY:
(End of bench conference.) THE COURT: Mr. Krakoff, do you have any issues or are
MR. KRAKOFF: THE COURT:
I am fine, your Honor.
Is that all right with you for next week,
try to do it next week? MR. KRAKOFF: Absolutely. We can confer and let Mr.
Cockrell know as to the particular days.
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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 counsel.
THE COURT:
Yes.
Do that.
Very good.
All right,
Thank you for your cooperation and your flexibility
and we will do our best to see if we can finish today, we will. If not, we won't and I emphasize that it is totally up to the doctors and how he feels. grail. It is not -- this is not the holy We will
If we don't do it today, we don't do it today. We will stand in recess will until 3:30.
get it done.
(Whereupon, a recess was taken at 12:11 p.m.) (Resumed at 3:39 p.m.) COURTROOM DEPUTY: Recalling civil case 04-1639 In Re: Counsel, please come forward
Fannie Mae Securities Litigation.
and identify yourself for the record. MR. MARKOVITS: Bill Markovits and with me is Melanie
Corwin on behalf of Lead Plaintiffs OPERS and STRS. THE COURT: MR. DOWNEY: Welcome back. Kevin Downey from Williams & Connolly on
behalf of Frank Raines. THE COURT: Welcome back.
MR. DELINSKY: Eric Delinsky from Zuckerman Spaeder on behalf of Defendant Tim Howard. THE COURT: Welcome back. David Krakoff from Buckley & Sandler for
MR. KRAKOFF: Leanne Spencer. THE COURT:
Well, I understand through Mr. Cockrell
tells me that counsel for Plaintiff is having some tests at the
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hospital and resting comfortably and not in any distress which I am happy to hear but that obviously today isn't an option. I thought what we would do is just take a look at next week's options, schedule it, the completion of this argument hopefully with the counsel for the Plaintiff who took ill. with whoever else could step in in his behalf. Then, of course, we have to schedule the arguments the same day for the other two individual Defendants. So I asked If not, then So
you all to at least give some thought to that and then look at your calendars and I gather Mr. Downey had a conflict on one of the days, Thursday I think it might have been? Are you in court That day somewhere, Mr. Downey? MR. DOWNEY: The issue is counsel can be available any
of the three days, but Mr. Raines' youngest daughter is graduating from high school at noon on Thursday of next week and I think that's right in the middle of almost any schedule we could set for that day. THE COURT: Yes. Well, okay. I hear you. Well,
obviously I would like to accommodate him to the extent it is his case, it is his Motion that's being litigated by you; but I also need to take into consideration counsel's -- is it realistic that counsel could be ready as early as Wednesday? MR. MARKOVITS: I am sure that's possible, your Honor.
He is -- I just left him at the hospital -- he is being kept overnight for observation but he is doing much better, and I
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talked to him about his schedule and I believe he would be available Wednesday of next week. until later in the month. THE COURT: If God forbid he couldn't do it physically, His conflicts don't arise
so to speak, would you be in a position, your firm be in a position to have a lawyer available next Wednesday to argue the Plaintiffs' position as to these three Motions? MR. MARKOVITS: THE COURT: Yes, we would, your Honor. So if worse came to worse, you could
Okay.
have another lawyer ready to go? MR. MARKOVITS: THE COURT: Absolutely. So counsel why don't we pick it
All right.
back up on Wednesday morning.
Basically let me get my -- let's I think he had about
say we need basically about an hour.
roughly 20 minutes, 25 minutes into the 45 minutes so there were about, to round it off, let's say he had about 25 minutes left. Of course, you have 15 minutes of rebuttal time. that an hour essentially. So let's say we start at 10:30 with the picking it back up and go to until 11:30, then take a little break and get set up. And then I think you were next, Mr. Delinsky. Your client So let's call
was next, right? MR. DELINSKY: THE COURT: That's correct, your Honor.
Right. So maybe we will pick it back up
with your client at noon and then go for an hour and a half and
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then have the lunch break and then pick it back up with Mr. Krakoff's client after lunch. It is basically the same schedule Does that
we had today except it is just starting at 10:30. work for you? MR. DELINSKY: MR. MARKOVITS: THE COURT: It does, your Honor. That's fine, your Honor.
All right.
So we will obviously go forward
tomorrow with tomorrow's arguments as planned and then we will leave it in next Wednesday to complete this argument and to do the other two arguments. MR. DOWNEY: THE COURT: Thank you, your Honor. I want to stress, again, that you make sure
that you express to your colleague, you know, that the Court doesn't want him to feel any pressure to be back here until -unless and until he is really physically able to do that and if there is any doubt in his mind or his doctors' minds, I don't wants there to be any doubt so have someone else getting ready, so to speak. MR. MARKOVITS: THE COURT: too. MR. MARKOVITS: THE COURT: We will, thank you. We will, your Honor. Send him my best wishes
In the bullpen.
So are there any other questions, counsel? I just have one question. For my
MR. KRAKOFF:
client's planning purposes, I think we were the afternoon
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session. We had figured that the morning session would go a little late. THE COURT: 12:00 to 1:30. Yes. I think we did it until like maybe
Then we will take the luncheon break from 1:30
to like 3:30 and then your argument would be like 3:30 to 5:00 basically. MR. KRAKOFF: Okay. I just wanted to know in case she
has a work conflict or something to make sure that she can -she is here on time. THE COURT: be ready to go. MR. KRAKOFF: Honor, all day. something. THE COURT: Yes. We will leave the equipment basically Okay. It could be that she is here, your So say she is back here by 3:00, she should
I just wanted to in the case she has got
where it is between now and then so to the extent you were going to use this same equipment, it will be ready to go. coordinate with you. MR. KRAKOFF: THE COURT: Ken will
There shouldn't be any issue there. Thank you, your Honor.
Anything else for the Plaintiffs? No. Thank you, your Honor. We will see you in the morning,
MR. MARKOVITS: THE COURT: counsel.
All right.
Whereupon, at 3:46 p.m., the proceedings were concluded.)
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CERTIFICATE OF REPORTER
I, Patty A. Gels, certify that the foregoing is a correct transcript from the record of proceedings in the above-entitled matter.
_________________________

Fannie Mae Summary Judgement Hearing

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Case 1:04-cv-01639-RJL Document 1049 Filed 09/04/12 Page 1 of 53

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA

IN RE: FANNIE MAE SECURITIES LITIGATION . . . . . . . . . . . . . . . .

: Docket No. CV04-1639 (RJL) : : June 6, 2012 : 10:00 a.m.

For Fannie Mae:

Case 1:04-cv-01639-RJL Document 1049 Filed 09/04/12 Page 2 of 53

For Franklin Raines:

For Leanne Spencer:

For J. Timothy Howard:

Case 1:04-cv-01639-RJL Document 1049 Filed 09/04/12 Page 3 of 53

Proceedings reported by machine shorthand, transcript produced by computer-aided transcription

Case 1:04-cv-01639-RJL Document 1049 Filed 09/04/12 Page 4 of 53

P R O C E E D I N G S COURTROOM DEPUTY: Calling civil case 04-1639, In Re:

Good morning. Good morning.

MR. DEMARCO: MR. STERN:

Good morning, your Honor, Robert Stern of With me is Mr.

O'Melveny & Myers on behalf of Fannie Mae.

Plaintiffs OPERS and STRS.

Defendant J. Timothy Howard.

Steve Salky, Carolyn Reynolds, and Miles Clark and my client

Case 1:04-cv-01639-RJL Document 1049 Filed 09/04/12 Page 5 of 53

MR. KRAKOFF: THE COURT:

Good morning. David Krakoff from Buckley Sandler with

MR. KRAKOFF: MR. WARIN:

Good morning, your Honor, Joseph Warin

Case 1:04-cv-01639-RJL Document 1049 Filed 09/04/12 Page 6 of 53

behalf of Frank Raines.

I would like to begin, your Honor, by

If the Court would rule in favor

The practical answer is two-fold.

Case 1:04-cv-01639-RJL Document 1049 Filed 09/04/12 Page 7 of 53

MR. DOWNEY: THE COURT: MR. DOWNEY:

That's correct. Did you hear any? You were here.

I was watching more closely than probably

THE COURT: This is today's. MR. DOWNEY:

But that was yesterday's argument.

I understand so I want to anticipate what

Ken, my screen is not working here.

Case 1:04-cv-01639-RJL Document 1049 Filed 09/04/12 Page 8 of 53

MR. DOWNEY: THE COURT:

Focusing on the material misrepresentation

Case 1:04-cv-01639-RJL Document 1049 Filed 09/04/12 Page 9 of 53

Case 1:04-cv-01639-RJL Document 1049 Filed 09/04/12 Page 10 of 53

They believed they were construing a standard and

Senator Rudman concluded as well.

carefully but we do need to violations of FAS 133. MR. DOWNEY: No.

Whatever the language is, no

answer it yet another way.

Case 1:04-cv-01639-RJL Document 1049 Filed 09/04/12 Page 11 of 53

the discussion in the e-mail is

Case 1:04-cv-01639-RJL Document 1049 Filed 09/04/12 Page 12 of 53

Case 1:04-cv-01639-RJL Document 1049 Filed 09/04/12 Page 13 of 53

THE COURT: MR. DOWNEY:

Is there any reason I shouldn't sign a

of dispute about that in the record.

Case 1:04-cv-01639-RJL Document 1049 Filed 09/04/12 Page 14 of 53

Case 1:04-cv-01639-RJL Document 1049 Filed 09/04/12 Page 15 of 53

And he had a conversation with Mr. Raines

Case 1:04-cv-01639-RJL Document 1049 Filed 09/04/12 Page 16 of 53

Case 1:04-cv-01639-RJL Document 1049 Filed 09/04/12 Page 17 of 53

You can actually change

This is the real world

a few cents, by $0.28 which is an enormous amount.

don't even have to go to the appendix.