On Friday, US district Judge Paul Crotty in Manhattan say that the SEC had sufficient grounds to allege that former Chief Executive Daniel Mudd, former Chief Risk Officer Enricco Dallvecchia and former Executive Vice President Thomas Lund, had misled investors by not disclosing exposures to risky mortgages totaling more than $ 440 billion.
The judge said, “They must have known that Fannie Mae’s disclosed subprime and Alt-A exposure calculations were materially misleading … Defendants’ conduct in making, or aiding others that made, these misstatements constitutes an extreme departure from the standard of ordinary care.”
The executives had argued that Fanny Mae and accurately and explicitly disclosed its exposure to sub-prime and low-documentation “Alt-A” home loans before the government seized the mortgage finance enterprise in September 2008. James Wareham, a lawyer for the executives, wrote in an email, “The evidence establishing the adequacy of Fannie Mae’s disclosures (and the efforts by the many employees involved in making these disclosures to get it right) is overwhelming. Indeed, the company used the identical disclosures just this week. Discovery will reveal just how shameful this case truly is.”
Kevin Callahan, the SEC spokesman said: “We are pleased that the judge rejected the defendants’ arguments and we look forward to proving our claims in court.”
Daniel Mudd had been at the helm of Fannie Mae from 2005 until the company was seized by US regulators on September 7, 2008. Currently, the Federal Housing Finance Agency oversees the mortgage finance companies and has until now drawn down about $ 188 billion of taxpayer money, but has paid only about $ 46 billion.