Insider's Game

Corporations may be people in the eyes of Mitt Romney, but in order to proceed to trial on a claim of securities fraud, or accounting fraud, the plaintiff needs to show that a bona fide human being, acting on behalf of the corporation,  knew he was intentionally deceiving investors.  The legal word for this intent to deceive is called, “scienter.”  In his three summary judgement dismissals Judge Leon was emphatic.  He ruled that there was no evidence, none whatsoever, of scienter on the part of the former Fannie executives.  See excerpts from his decisions here. He left himself no latitude to rule differently with regard to Fannie Mae itself.

Also, it would be overly gentle to say that Judge Leon’s rulings were a slap in the face of two appointees of George W. Bush, SEC Chairman Christopher Cox, and the director of the Office of Federal Enterprise Oversight, or OFHEO, James Lockhart.  It’s impossible to read court documents and not infer that Cox and Lockhart lied to the public, to Congress and to Leon’s colleague, Judge Reggie Walton, who in 2006 accepted  a $400 million settlement agreement between Fannie Mae and the SEC, based on on the dishonest claim that Fannie “concealed,” $10.6 billion in hedging losses.

Which is why  Mike DeWine, Ohio’s Republican Attorney General, moved so quickly. Representing the plaintiffs, after the first crooked plaintiffs attorney was disbarred,  DeWine immediately filed secret a motion, under seal, calling for a timeout. He sought a stay of proceedings while the parties entered into settlement negotiations.

Because three of the four parties at the negotiating table were highly conflicted–they had every motivation to conceal all the Bush Administration dirty laundry uncovered during the litigation process–the process became less about protecting the taxpayers, who retain all of Fannie’s profits, than it was about maintaining the facade of plausibility for past government actions.

The assigned mediator was Fred Fielding, who, as White House Counsel under the G.W. Bush, asserted that Executive Privilege has no limit. There was the successor agency to OFHEO, the Federal Housing Finance Agency, Fannie’s conservator, which  consistently stonewalled litigants and the Court, in order to conceal past misdeeds (see some sample filings here). There were the outside lawyers working for DeWine, who wanted to get paid for pursuing this nine-year fiasco, and there was Fannie’s former accounting firm, KPMG, which does a lot of business with federal and state agencies.

And for the next six months, negotiations dragged on, until an announcement last week that the parties had settled for about $153 million, or $76.5 million paid by Fannie and $76.5 million paid by KPMG. Given the size of both of those entities, it’s relative drop in the bucket, a small fraction of what they paid out in legal fees over the past eight years.

And it works to obscure the fact that the famous Fannie Mae accounting “scandal,” was always a sham perpetrated by the Bush Administration.

Word around Washington is the House Financial Services Chairman Jeb Hensarling wants to conduct hearings on the Fannie Mae litigation after the case is wrapped up. He might start by issuing  subpoenas to these guys:

Former OFHEO Deputy Director Steven Blumenthal 

Pertinent Questions:

Why exactly, did you tell others that, “Fannie and Freddie are the axis of evil and must be destroyed,”?

Why did you compare OFHEO’s role as a regulator to Eddie Adams’ Pulitzer Prize winning Vietnam War photograph of a point blank execution of a Vietcong prisoner?

Former HUD Inspector General 

Pertinent Questions:

Why do you believe that your criminal referral of OFHEO Director Armando Falcon was not acted upon by the Bush Justice Department?

What was your reaction that Falcon had lied to the media, when he claimed that, “I am pleased that a determination has been made that I followed the law, acted wholly within my authority as director,”?

Former Chief SEC Accountant Donald Nicolaisen 

Pertinent Questions:

When you testified before Congress you asserted that Fannie Mae’s accounting  FAS 133 was “outside professional accounting standards.” later,   during your deposition  questioning you stated:

“What I expressed was my view and professional judgment. There’s no question that it was a professional judgment . . .and, in my opinion, it was outside the professional bounds. But that is an opinion. I mean, I’ll be very clear also in saying a lot of other people concluded otherwise.”

Before you testified before Congress in 2004, had you consulted with any other accounting firm to get a reality check on you opinion? Were you aware at the time that the top four accounting firms took the opposite view? Were you aware at the time that your predecessor at the SEC, Walter Scheutze, took the opposite view? Can you point to any accounting firm that holds a similar opinion to yours?

Why do you think the SEC insisted to the Court that you should not be allowed to testify?