Giant Bodies and Evil Minds

Summary judgment decisions are usually fact specific and do not provide a lot of insight into how other cases will be decided. The recent decision in In re Federal National Mortgage Association Sec., Derivative, and “ERISA” Lit., 2012 WL 4888506 (D.D.C. Oct. 16, 2012), however, contains some interesting lessons.

The case against Fannie Mae is one of the longest-running securities class actions in the country, with the first complaint having been filed in Sept. 2004. The case arises out of accounting issues that ultimately resulted in a massive restatement. As detailed in the court’s decision, there have been numerous reports and findings of regulators relating to the events in question. During the relevant period, J. Timothy Howard was the CFO of Fannie Mae.

Following prolonged discovery in the case, Howard moved for summary judgment, arguing that the plaintiffs had failed to establish he acted with scienter. The court agreed, finding that despite all of the smoke around Howard’s activities as CFO, there was no evidence of an actual fire. A few key points:

(1) Stretching the Evidence – The court appeared annoyed at what it viewed as the plaintiffs’ attempt to “stich[] together a patchwork quilt of evidence that they allege presents a disputed issue of material facts as to Howard’s scienter.” The plaintiffs had no direct evidence of Howard’s knowledge of any accounting fraud and, in the court’s view, frequently resorted to overstating the circumstantial evidence.

(2) Outside Reports – The court rejected the plaintiffs’ use of “post-hoc reports and litigation documents, which were uniformly prepared after the relevant events in this case, and some of which were explicitly prepared in preparation for litigation, as ‘evidence’ of Howard’s scienter.” Not only were these materials likely inadmissible, but none of them specifically demonstrated how Howard had acted with scienter.

(3) Relying on Motion to Dismiss Arguments – The plaintiffs argued that the magnitude and duration of the accounting fraud was evidence of Howard’s scienter. The court’s response was (a) “as Shakespeare might have noted: a giant body doth not portend an evil mind,” and (b) “the time for simply presenting allegations that give rise to a strong inference of scienter has long since passed.”

Holding: Individual defendant’s motion for summary judgment granted.

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