Motion for Summary Judgement Memo KMPG

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UNITED STATES DISTRICT COURT

DISTRICT OF COLUMBIA

In re Federal National Mortgage

Association Securities, Derivative, andERISA Litigation

MDL No. 1668

In re Fannie Mae Securities Litigation Consolidated Civil Action No. 1:04-cv-01639

Judge Richard J. Leon

MEMORANDUM OF LAW IN SUPPORT OF DEFENDANTS JOINT MOTION

FOR SUMMARY JUDGMENT FOR FAILURE TO PROVE LOSS CAUSATION

Case 1:04-cv-01639-RJL Document 939-1 Filed 08/22/11 Page 1 of 48


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TABLE OF CONTENTS

i

I. INTRODUCTION ............................................................................................................. 1

II. STATEMENT OF UNDISPUTED MATERIAL FACTS ................................................ 3

A. JARRELLS OPINIONS FOR THE PERIOD APRIL 17, 2001

THROUGH SEPTEMBER 30, 2004..................................................................... 4B. JARRELLS OPINIONS FOR THE PERIOD OCTOBER 1, 2004

THROUGH DECEMBER 23, 2004 ...................................................................... 6

III. LEGAL STANDARDS ..................................................................................................... 8

A. SUMMARY JUDGMENT .................................................................................... 8

B. LOSS CAUSATION IN SECURITIES FRAUD CASES..................................... 9

IV. ARGUMENT................................................................................................................... 12

A. PLAINTIFFS CANNOT ESTABLISH THAT THE ALLEGEDMISSTATEMENTS OR OMISSIONS CONCERNING FANNIE MAESACCOUNTING PRACTICES INFLATED FANNIE MAES STOCKPRICE .................................................................................................................. 12

1. Plaintiffs concede that Fannie Maes financial statements andearnings announcements did not inflate Fannie Maes stock price ......... 12

2. Even where he specifically identifies Inflationary Days, ProfessorJarrell Fails to Prove that Any Allegedly Fraudulent StatementsCreated Inflation on June 16, 2003 and July 30, 2003............................. 14

a. June 16, 2003 ............................................................................... 15

b. July 30, 2003................................................................................ 17

B. PLAINTIFFS FAILED TO PROVE THAT THE ECONOMIC LOSSTHEY SUFFERED WHEN THE STOCK PRICE DECLINED INSEPTEMBER 2004 WAS CAUSED BY THE REVELATION OF THEALLEGED FRAUD............................................................................................. 18

1. Professor Jarrell fails to disentangle declines caused by non-corrective disclosures due to his erroneous application of a self-defined foreseeable consequences standard ......................................... 20

a. The decline in Fannie Maes stock price was drenched inpolitics and influenced by other non-corrective disclosures...... 20

b. Plaintiffs cannot recover for declines caused by the politicaldevelopments or the other company-specific events simplyby calling them direct and foreseeable consequences of afraud ............................................................................................. 24

c. Plaintiffs new theory demands damages unavailable in aprivate securities action................................................................ 30



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TABLE OF CONTENTS

(continued)

ii

2. Professor Jarrell fails to disentangle declines caused by allegationsconcerning events prior to the beginning of the class period................... 32

3. Professor Jarrell fails to disentangle declines caused by allegationsthat proved untrue .................................................................................... 33

C. PLAINTIFFS ALSO FAIL TO PROVE THAT ANY ALLEGEDLYFRAUDULENT STATEMENTS IN OCTOBER 2004 CAUSEDPLAINTIFFS LOSSES IN DECEMBER 2004.................................................. 34

1. Professor Jarrell fails to show new inflation was created bystatements made on October 6 and 7, 2004 ............................................. 34

2. Professor Jarrell fails to show that the stock price declines onDecember 16 and 23, 2004, were causally connected to the allegedinflation in October 2004 ......................................................................... 36

V. CONCLUSION................................................................................................................ 40



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iii

TABLE OF AUTHORITIES

Page(s)

CASES

Anderson v. Liberty Lobby, Inc.,477 U.S. 242 (1986).................................................................................................................8, 9

Bender v. Jordan,570 F. Supp. 2d 37 (D.D.C. 2008)...........................................................................................8, 9

Celotex Corp. v. Catrett,477 U.S. 317 (1986).....................................................................................................................9

Cheeks v. Fort Myer Constr. Co.,722 F. Supp. 2d 93 (D.D.C. 2010).............................................................................................31

Cowin v. Bresler,741 F.2d 410 (D.C. Cir. 1984)...................................................................................................31

Diamond v. Atwood,43 F.3d 1538 (D.C. Cir. 1995).....................................................................................................8

* Dura Pharmaceuticals, Inc. v. Broudo,544 U.S. 336 (2005)........................................................................................................... passim

Erica P. John Fund, Inc v. Halliburton, Co.,131 S. Ct. 2179 (2011).........................................................................................................10, 18

Fener v. Operating Engrs Constr. Indus. & Miscellaneous Pension Fund,579 F.3d 401 (5th Cir. 2009) .....................................................................................................19

Green v. Occidental Petroleum Corp.,541 F.2d 1335 (9th Cir. 1976) ..................................................................................................10

Greene v. Dalton,164 F.3d 671 (D.C. Cir. 1999).....................................................................................................9

Harpole Architects, P.C. v. Barlow,668 F. Supp. 2d 68 (D.D.C. 2009).............................................................................................31

In re Avista Corp. Sec. Litig.,415 F. Supp. 2d 1214 (E.D. Wash. 2005)..................................................................................28

In re BankAtlantic Bancorp. Inc. Sec. Litig.,No. 07-61542-CIV, 2011 WL 1585605 (S.D. Fla. April 25, 2011) ..............................11, 18, 20

In re Bridgestone Sec. Litig.,430 F. Supp. 2d 728 (M.D. Tenn. 2006)....................................................................................10

In re Cigna Corp. Sec. Litig.,459 F. Supp. 2d 338 (E.D. Pa. 2006).........................................................................................10

In re Dell Inc. Sec. Litig.,591 F. Supp. 2d 877 (W.D. Tex. 2008) .....................................................................................28



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(continued)

iv

In re DVIInc. Sec. Litig.,No 2:03-cv-05336, 2010 U.S. Dist. LEXIS 92888 (E.D. Pa. Sept. 3, 2010).......................16, 39

In re IBM Corporate Sec. Litig.,163 F.3d 102 (2nd Cir. 1998) ..............................................................................................14, 32

In re Ikon Office Solutions, Inc. Sec. Litig.,131 F. Supp. 2d 680 (E.D. Pa. 2001).............................................................................10, 20, 33

In reImperial Credit Indus., Inc. Sec. Litig.,252 F. Supp. 2d 1005 (C.D. Cal. 2003) .....................................................................................10

In re IPO Sec. Litig.,383 F. Supp. 2d 566 (S.D.N.Y. 2005) .................................................................................10, 13

In re IPO Sec. Litig.,399 F. Supp. 2d 261 (S.D.N.Y. 2005) .......................................................................................26

In re MIVA, Inc. Sec. Litig.,No. 2:05-cv-201-FtM-29DNF, 2009 U.S. Dist. LEXIS 127748(M.D. Fla. Aug. 25, 2009) .............................................................................................10, 13, 20

* In re Moodys Corp. Sec. Litig.,No. 07-cv-8375 (GBD),2011 U.S. Dist. LEXIS 36023 (S.D.N.Y. March. 31, 2011) ...................................10, 13, 27, 28

In re Mutual Sav. Bank Sec. Litig.,166 F.R.D. 377 (E.D. Mich. 1996) ............................................................................................10

In re Nuveen Funds/City of Alameda Sec. Litig.,

No. C 08-4575 SI, 2011 WL 1842819 (N.D. Cal. May 16, 2011) ............................................20* In re Omnicom Group, Inc. Sec. Litig.,

597 F.3d 501 (2nd Cir. 2010) ..................................................................................12, 15, 25, 39

In re Oracle Corp. Sec. Litig.,t627 F.3d 376 (9th Cir. 2010) ....................................................................................................26

In re REMEC Inc. Sec. Litig.,702 F. Supp. 2d 1202 (S.D. Cal. 2010)......................................................................................39

In re The Warnaco Grp.,Inc. Sec. Litig.,388 F. Supp. 2d 307 (S.D.N.Y. 2005) .................................................................................14, 32

In re Williams Sec. Litig.,496 F. Supp. 2d 1275 (N.D. Okla. 2007)...................................................................................37

* In re Williams Sec. Litig.,558 F.3d 1130 (10th Cir. 2009) ......................................................................................... passim

Janus Capital Group, Inc. vs First Derivative Traders,131 S.Ct. 2296 (2011)................................................................................................................15



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(continued)

v

Labovitz v. Wash. Times Corp.,172 F.3d 897 (D.C. Cir. 1999)...................................................................................................30

LaSala v. Bordier et Cie,519 F.3d 12 (3d Cir. 2008) ........................................................................................................30

* Lattanzio v. Deloitte & Touche LLP,476 F.3d 147 (2nd Cir. 2007) ..................................................................................14, 19, 32, 33

Metzler Inv. Gmbh v. Corinthian Colls., Inc.,540 F.3d 1049 (9th Cir. 2008) ...................................................................................................28

Oscar Private Equity Invs. v. Allegiance Telecom, Inc.,487 F.3d 261 (5th Cir. 2007) ...............................................................................................11, 19

Parisi v. Sinclair,No. 10-897 (RJL), 2011 U.S. Dist. LEXIS 34710 (D.D.C. Mar. 31, 2011)................................9

Berks Cnty. Emps. Ret. Fund v. First Am. Corp.,734 F. Supp. 2d 533 (S.D.N.Y. 2010) ...........................................................................19, 26, 28

Robbins v. Koger Props., Inc.,116 F.3d 1441 (11th Cir. 1997) .................................................................................................30

Rudolph v. Utstarcom,560 F. Supp. 2d 880 (N.D. Cal. 2008).......................................................................................28

Semerenko v. Cendant Corp.,223 F.3d 165 (3d Cir. 2000) ................................................................................................10, 13

Siegel v. Ridgewells, Inc.,

511 F. Supp. 2d 188 (D.D.C. 2007).............................................................................................9

Stoneridge Inv. Partners, LLC, v. Scientific Atlanta, Inc.,552 U.S. 148 (2008)...................................................................................................................15

Teachers Ret. Sys. of La. v. Hunter,477 F.3d 162 (4th Cir. 2007) ...............................................................................................25, 26

Tooley v. Donaldson, Lufkin, & Jenrette, Inc.,845 A.2d 1031 (Del. 2004) ........................................................................................................30

STATUTES

12 U.S.C. 4616............................................................................................................................4015 U.S.C. 78u-4(b)(4) ...................................................................................................................9

RULES

Fed. R. Civ. P. 56(c) ........................................................................................................................8



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(continued)

vi

OTHER AUTHORITIES

Bradford Cornell and R. Gregory Morgan, Using Finance Theory to Measure Damages

in Fraud on the Market Cases, 37 UCLA L. Rev. 883 (1990)..................................................10



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I. INTRODUCTIONInDura Pharmaceuticals, Inc. v. Broudo, the Supreme Court held that the loss causation

element of a private securities fraud claim requires the plaintiff to prove that the defendants

misrepresentation . . . proximately caused the plaintiffs economic loss. 544 U.S. 336, 346

(2005). To do this, a plaintiff must prove two fundamental facts, neither of which Plaintiffs do

here. First, a plaintiff must show that the defendants misrepresentations caused the stock price

to be artificially inflated. Second, a plaintiff must show that the correction of the

misrepresentation caused the artificial inflation to be removed from the stock price. If the

correction of the misrepresentation did not cause the stock price to fall, then the plaintiff cannot

show that it was harmed by the misrepresentation. In this case, Plaintiffs have utterly failed to

come forward with the evidence needed to establish either aspect of loss causation. In fact, the

testimony of their expert, Professor Gregg A. Jarrell, affirmatively disproves their case.

First, Professor Jarrell admitted that he could not affirmatively link any artificial inflation

in Fannie Maes stock price to any of the Defendants allegedly false financial statements.

Rather than identifying particular false statements and measuring the amount of inflation in the

companys stock price created by those statements, he simply assumed that the stock price was

artificially inflated by the amount that the price dropped following the release in September 2004

of an interim report by Fannie Maes primary regulator, the Office of Federal Housing Enterprise

Oversight (OFHEO), regarding Fannie Maes accounting (OFHEO Report). In other words,

he began his analysis by assuming the very answer he wanted to reach (i.e., that the stock drops

in September must represent inflation in the stock caused by the alleged fraud), and then worked

backward to attempt to determine the amount of inflation in the stock at various times throughout

the class period. However, other than two dates on which the stock price increasedneither of

which involved the release of a financial statement by Fannie MaeJarrell cannot identify the



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source of the inflation. Instead, he simply concludes, without explanation as to the source of the

inflation, that the inflation already existed at the beginning of the class period. This approach

has no basis in law or logic.

Second, Professor Jarrell assumed, without any factual or legal basis, that the entirety of

the stock price declines following the release of the OFHEO Report was attributable to Fannie

Maes supposed misapplication of certain complex accounting policies.1 But it is undisputed

that many other pieces of relevant information were released to the market at the same time,

most notably information concerning the highly charged political and regulatory environment

facing Fannie Mae. Whatever impact the disclosure of Fannie Maes alleged failure to comply

with technical accounting standards had on the stock price, it is undisputed that these other

factors contributed significantly to the decline, but Professor Jarrell did not even attempt to

disentangle the negative price impacts. Therefore, Plaintiffs have not met their burden of

proving that the losses suffered by investors were caused by any revelation that Defendants

prior statements about Fannie Maes accounting practices were false as opposed to the release of

other negative information unrelated to the alleged fraud.

Because Professor Jarrell fails to show both that the alleged misstatements created the

artificial inflation and that the revelation of the falsity of those statements caused the stock price

to decline, Plaintiffs cannot prove loss causation underDura and summary judgment is required.

1 For purposes of this motion, the Court need not determine whether Defendants were in fact compliant with thegenerally accepted accounting principles (GAAP). In any event, the Fannie Mae executives dispute theallegations by OFHEO concerning Fannie Maes accounting.



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4

As described more fully below, Professor Jarrells report claims two distinct periods of

alleged inflation: April 17, 2001 to September 30, 2004, and October 6, 2004 to December 23,

2004.2 SUMF 3 (Ex. 1, Jarrell Report 239-45).3

A. JARRELLS OPINIONS FOR THE PERIOD APRIL 17, 2001 THROUGHSEPTEMBER 30, 2004.

Professor Jarrells analysis of inflation and loss causation begins at the end, with four

dates in September 2004September 30, 24, 23, and 22on which Fannie Maes stock price

declined after the announcement of the OFHEO Report. SUMF 4 (Ex. 1, Jarrell Report 127-

28, 143-44, 153, 169). Professor Jarrell assumes that the entire residual decline he calculates for

each of those dates$2.08 on September 30, $1.80 on September 24, $2.23 on September 23,

and $3.03 on September 22represents the total amount of inflation in the stock price caused by

the alleged fraud. Thus, as of the day before the first decline on September 22, Professor Jarrell

opines that the stock price was inflated by a total of $9.10. SUMF 4-5 (Ex. 1, Jarrell Report

127-28, 143-44, 153, 169, 243-45).

Professor Jarrell then moves backward in time, attempting to identify a statistically

significant stock price increase that could account for the inflation he calculated in September

2004. When he could not determine when or how the inflation was created, he simply assumed

the inflation previously existed and continued to move backward in search of a cause for the

inflation. Professor Jarrell finds no evidence of the creation of inflation from September 22,

2004 through the summer of 2003. SUMF 21 (Ex. 1, Jarrell Report 95, 245). Then on July

2 To analyze these periods, Professor Jarrell conducts an event study, which attempts to isolate, through the use ofa regression model, the changes in daily stock prices that are related to company-specific information from changesrelated to market- and industry-related events. The remaining portion of the actual stock price movement representsonly that movement caused by the release of the company-specific information and is called the residual pricemovement or residual stock price return. When that residual return is statistically significant, it suggests that theprice movement is not due to chance but is instead causally related to the release of the company-specificinformation. SUMF 2 (Ex. 1, Jarrell Report 32-38).3 All citations to exhibits refer to the exhibits identified in the accompanying Declaration of Michael J. Walsh,Jr., dated August 16, 2011.



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30, 2003, and earlier on June 16, 2003, Professor Jarrell identifies two stock price increases,

which he opines contributed to the inflation. SUMF 21, 23 (Ex. 1, Jarrell Report 92, 95,

245). Professor Jarrell attributes the entire residual stock price increase he calculates on those

two dates to the allegedly fraudulent statements reportedly made by Raines rather than to any

other company-specific information. SUMF 22, 24 (Ex. 1, Jarrell Report 91-95, 245). As

a result, he deducts his residual stock price increase on those dates from the prior amount of

inflation he had calculated from the September 2004 declines to determine the inflation in the

stock price before those two statements were made. SUMF 21, 23 (Ex. 1, Jarrell Report

92, 95, 245). These statements reduce his alleged inflation to $7.99 (prior to July 30) and then to

$5.52 (prior to June 16). Id.

Professor Jarrell does not find any other inflationary dates during the class period,

including those dates on which Fannie Mae released its financial statements or other earnings

announcements. He therefore concludes not only that the inflation remained at $5.52 prior to

June 16, 2003 but that $5.52 in inflation must have existed on the first day of the class period,

April 17, 2001 (or before). SUMF 25 (Ex. 1, Jarrell Report 245). Professor Jarrell does not

identify any statement causing the $5.52 of inflation on the first day of the period and testified

that some portion of this amount existed prior to that time. SUMF 26 (Ex. 4, Jarrell Dep.

270:10-272:11). These movements are represented in the following graph.



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due to the allegedly fraudulent statementsto conclude that the stock price was inflated by

$3.09 after October 7, 2004. SUMF 31 (Ex. 1, Jarrell Report 174-76, 180-82, 241-42).

For this period, instead of working backward, Professor Jarrell chooses to move forward

in time, opining that the $3.09 of inflation remained in the stock price until December 16, 2004,

at which time Professor Jarrell concludes that an announcement by the SEC requiring Fannie

Mae to restate removed a portion of that inflation. SUMF 36-37 (Ex. 1, Jarrell Report 186-

93). According to Professor Jarrell, the remainder of the inflation from the October 2004

statements was removed from the stock price by a second allegedly corrective disclosure on

December 23, 2004. SUMF 41-42 (Ex. 1, Jarrell Report 215-23). As with the September

2004 declines, Professor Jarrell attributes the entire declines on these dates to the allegedly

corrective disclosures. The cumulative residual stock price declines on those two disclosure

dates, however, was slightly higher than the total amount of inflation Professor Jarrell measured

on October 6 and 7, 2004. SUMF 47 (Ex. 1, Jarrell Report 240-42 and n.204). As a result,

Professor Jarrell assumes that only that portion of the December declines equal to the October

increases (roughly 82% of the December declines) was the correction of inflation, leaving the

remainder of the residual declines on those dates unexplained. Id. At his deposition, Professor

Jarrell admitted that this calculation was just a plug intended to reduce[] the amount of the

corrective decline so that those two numbers match up. SUMF 48 (Ex. 4, Jarrell Dep. 76:1-

18). The following graph depicts this second period of inflation.



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Jarrells Asserted Per-Share Inflation 9/30/04 12/23/04

III. LEGAL STANDARDSA.

SUMMARY JUDGMENT

Under Rule 56 of the Federal Rules of Civil Procedure, summary judgment must be

granted when the pleadings, depositions, answers to interrogatories, and admissions on file,

together with the affidavits, if any, show that there is no genuine issue as to any material fact and

that the moving party is entitled to a judgment as a matter of law. Fed. R. Civ. P. 56(c);

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986); see also Diamond v. Atwood, 43 F.3d

1538, 1540 (D.C. Cir. 1995);Bender v. Jordan, 570 F. Supp. 2d 37, 42 (D.D.C. 2008).

Moreover, summary judgment is properly granted against a party that, after adequate time for

discovery and upon motion . . . fails to make a showing sufficient to establish the existence of an

Source: Ex. 2 (Jarrell Rep. Exhibit 8)

$0

$1

$2

$3

$4

9/30/04 10/30/04 11/30/04 12/31/04

Asserted

Inflation

10/6/04

Change:$1.29

12/16/04

Change:$1.49

12/23/04

Change:$1.60

10/7/04

Change:$1.80

10/31/04

Actual Residual

Stock Price

Decline

$1.82

Actual Residual

Stock Price

Decline

$1.96

Inflation as of Market Close

82%

82%



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element essential to that partys case, and on which that party will bear the burden of proof at

trial. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986);Bender, 570 F. Supp. 2d at 42.

In ruling on a motion for summary judgment, the court must draw all justifiable

inferences in the nonmoving partys favor and accept the nonmoving partys evidence as true.

Anderson, 477 U.S. at 255; Parisi v. Sinclair, No. 10-897 (RJL), 2011 U.S. Dist. LEXIS 34710,

at *11 (D.D.C. Mar. 31, 2011). A nonmoving party, however, must establish more than the

mere existence of a scintilla of evidence in support of its position. Anderson,477 U.S. at 252;

Parisi, 2011 U.S. Dist. LEXIS 34710, at *11. Rather, the nonmoving party must present specific

facts that would enable a reasonable jury to find in its favor. Greene v. Dalton, 164 F.3d 671,

675 (D.C. Cir. 1999); Siegel v. Ridgewells, Inc.,511 F. Supp. 2d 188, 193 (D.D.C. 2007). If the

evidence is merely colorable, or is not significantly probative, summary judgment may be

granted. Anderson, 477 U.S. at 249-50 (citations omitted);Bender, 570 F. Supp. 2d at 42;

Parisi, 2011 U.S. Dist. LEXIS 34710, at *11.

B. LOSS CAUSATION IN SECURITIES FRAUD CASESThe Private Securities Litigation Reform Act of 1995 requires that [i]n any private

action arising under this title, the plaintiff shall have the burden of proving that the act or

omission of the defendant alleged to violate this title caused the loss for which the plaintiff seeks

to recover damages. 15 U.S.C. 78u-4(b)(4); see Dura,544 U.S. at 342. To satisfy the burden

of proving loss causation, a plaintiff must show both that the alleged misrepresentation caused

the stock price to be artificially inflated at the time of purchase andthat the same inflation was

removed from the price when the truth about the misrepresentation became known to investors,

thus causing a loss to investors. See Dura,544 U.S. at 342-43. Indeed, last term the Supreme

Court unanimously affirmed that loss causation requires a plaintiff to show that a

misrepresentation both affected the integrity of the market price for a stock and also caused a



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subsequent economic loss. Erica P. John Fund, Inc v. Halliburton, Co., 131 S. Ct. 2179, 2186

(2011) (emphasis in original).

With respect to the first aspect of loss causation, courts have consistently held that to

establish loss causation a plaintiff must show that she purchased a security at a market price that

was artificially inflated due to a fraudulent misrepresentation. Semerenko v. Cendant Corp.,

223 F.3d 165, 184 (3d Cir. 2000).4 Artificial inflation is defined as the difference between the

actual share price and the true value that would have prevailed absent the alleged

misrepresentations. SeeGreen v. Occidental Petroleum Corp., 541 F.2d 1335, 1344 (9th Cir.

1976) (Sneed, J., concurring); In reImperial Credit Indus., Inc. Sec. Litig., 252 F. Supp. 2d 1005,

1014 (C.D. Cal. 2003);In re Bridgestone Sec. Litig., 430 F. Supp. 2d 728, 738 (M.D. Tenn.

2006);In re Mutual Sav. Bank Sec. Litig., 166 F.R.D. 377, 383 n.10 (E.D. Mich. 1996); Bradford

Cornell and R. Gregory Morgan, Using Finance Theory to Measure Damages in Fraud on the

Market Cases, 37 UCLA L. Rev. 883, 885 (1990).

For the second aspect of loss causation, a plaintiff cannot prove the inflation was

removed from the stock price due to the truth being released to the market merely by pointing to

a stock price decline on the corrective disclosure dates. InDura, the Supreme Court also made

clear that an inflated purchase price will not itself constitute or proximately cause the relevant

economic loss. 544 U.S. at 342.

4 See alsoIn re Moodys Corp. Sec. Litig., No. 07-cv-8375 (GBD), 2011 U.S. Dist. LEXIS 36023, at *34(S.D.N.Y. March. 31, 2011) (The fraud on the market presumption is based upon the notion that the market was fed

misinformation, absorbed that information and the stock price increased because of that misinformation.);In reCigna Corp. Sec. Litig., 459 F. Supp. 2d 338, 349 (E.D. Pa. 2006) (holding a plaintiff may establish loss causationby showing that he or she purchased a security at a market price that was artificially inflated due to a fraudulentmisrepresentation);In re IPO Sec. Litig., 383 F. Supp. 2d 566, 580 (S.D.N.Y. 2005) (requiring proof of artificialinflation in addition to dissipation as a result of disclosing events);In re Ikon Office Solutions, Inc. Sec. Litig., 131F. Supp. 2d 680, 687 (E.D. Pa. 2001) (plaintiff must show that he or she purchased a security at market price thatwas artificially inflated due to a fraudulent misrepresentation) (citation omitted), affd, 277 F.3d 658 (3d Cir.2002);In re MIVA, Inc. Sec. Litig., No. 2:05-cv-201-FtM-29DNF, 2009 U.S. Dist. LEXIS 127748, at *20-22 (M.D.Fla. Aug. 25, 2009) (Plaintiffs must offer evidence showing that the challenged conduct artificially maintained orinflated the companys stock price.).



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If the purchaser sells later after the truth makes its way into the marketplace, aninitially inflated purchase price mightmean a later loss. But that is far frominevitably so. When the purchaser subsequently resells such shares, even at alower price, that lower price may reflect, not the earlier misrepresentation, butchanged economic circumstances, changed investor expectations, new industry-

specific or firm-specific facts, conditions, or other events, which taken separatelyor together account for some or all of that lower price. To touch upon a lossis not to cause a loss, and it is the latter that the law requires.

Id. at 343-44 (emphasis in original). Thus,Dura also requires plaintiffs to show that the

correction of the fraud, rather than some other factor, caused the stock price decline that

plaintiffs claim injured them. Id. at 342-43.

In sum, a plaintiff cannot recover more than the portion of any stock price decline that is

caused by the correction of an earlier materially false or misleading statement that caused the

stock price to become artificially inflated. The news that causes the stock price to decline must

remove the original inflation caused by the alleged fraud; otherwise that news is only one of the

tangle of factors affecting a companys stock price and not curative of the alleged fraud. Id. at

343-44; see also Oscar Private Equity Invs. v. Allegiance Telecom, Inc ., 487 F.3d 261, 271 (5th

Cir. 2007), revd on other grounds,Erica P. John Fund, Inc. v. Halliburton Co., 131 S. Ct. 2179

(2011) (holding that simply establishing that the price reacted to the entire bundle of negative

information ... suggests only market efficiency, not loss causation, for there is no evidence

linking the culpable disclosure to the stock-price movement) (emphasis in original);In re

BankAtlantic Bancorp. Inc. Sec. Litig., No. 07-61542-CIV, 2011 WL 1585605, at *19 (S.D. Fla.

April 25, 2011) ([W]here a fraud is revealed contemporaneously with the announcement of

other negative, but non-fraud-related information, plaintiffs bear the burden of disaggregating the

effect of the unrelated negative information on the stock price.).



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Accordingly, summary judgment is appropriate where the plaintiff does not suffice to

draw the requisite causal connection between [the corrective disclosure] and the fraud alleged in

the complaint. In re Omnicom Grp., Inc. Sec. Litig.,597 F.3d 501, 512-13 (2nd Cir. 2010).

IV. ARGUMENTA. PLAINTIFFS CANNOT ESTABLISH THAT THE ALLEGED

MISSTATEMENTS OR OMISSIONS CONCERNING FANNIE MAES

ACCOUNTING PRACTICES INFLATED FANNIE MAES STOCK

PRICE.

1. Plaintiffs concede that Fannie Maes financial statements andearnings announcements did not inflate Fannie Maes stock price.

Plaintiffs not only fail to identify when inflation entered Fannie Maes stock price, but

their expert affirmatively denies that Fannie Maes financial statements, earnings press releases,

and KPMGs audit opinions published during the class period caused any inflation to enter into

Fannie Maes stock price. According to Professor Jarrell, inflation in Fannie Maes stock was

constant for months, even years, on endunchanged between April 17, 2001 and June 16, 2003,

and between July 30, 2003 and September 22, 2004. SUMF 21, 23, 25 (Ex. 1, Jarrell Report

92, 95, 245); 29 (Ex. 4, Jarrell Dep. 265:15-20, 267:12-270:9). Plaintiffs complaint, on the

other hand, sets out 150 pages of alleged material misstatements throughout the class period, and

Plaintiffs allege that Defendants published false financial reports on no fewer than 22 occasions

during the class period. SUMF 166 (SAC 210-315; Ex. 9, Summary of Days Related to

Fannie Mae Earnings Announcements or Fin. Statements 4/17/01 12/23/04). But Professor

Jarrell opines that not a single one of these financial reports caused any additional inflation to

enter Fannie Maes stock price. SUMF 28 (Ex. 4, Jarrell Dep. 272:17-273:21). In fact, the

only two dates on which Professor Jarrell affirmatively identifies an increase in inflation were

dates on which no financial statements were released. SUMF 21-24, 28 (Ex. 1, Jarrell Report

91-95, 240-45). Professor Jarrell even concedes that his calculated inflation of $5.52 per



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share did not enter the stock price on the first day of the class period, and denies that there was

any movement in the stock price on that date. SUMF 26 (Ex. 4, Jarrell Dep. 270:10-272:11).

Not surprisingly, courts have found that such a disconnect between the calculated

inflation and the alleged misrepresentations is sufficient to warrant summary judgment. One

court noted that the link between the misrepresentation and the price in a fraud-on-the-market

case is severed by showing that the allegedly false information the market was absorbing was

not causing the stock price to artificially inflate. Moodys, 2011 U.S. Dist. LEXIS 36023, at

*35. Where the expert opinion showed no statistically significant price increase on the dates of

the claimed misrepresentations, the court concluded that [b]y Plaintiffs own admission, the

misinformation [defendant] allegedly provided the market did not cause any such inflation. Id.

at *34. Another court found no loss causation where the plaintiffs failed to tie any loss to these

particular statements, because the inflationary rate of the stock remained the same before and

after the alleged fraudulent statements were made. Miva, 2009 U.S. Dist. LEXIS 127748, at

*19-22.

Indeed, courts have repeatedly held that to prove loss causation, a plaintiff must

specifically identify the inflation associated with the alleged fraud. Dura, 544 U.S. at 342; see

also Semerenko, 223 F.3d at 184 (requiring the purchase of a security at a price that is inflated

due to an alleged misrepresentation as a necessary prerequisite for proving loss causation); IPO,

383 F. Supp. 2d at 580 (requiring proof of artificial inflation in addition to dissipation as a result

of disclosing events);Miva, 2009 U.S. Dist. LEXIS 127748, at *21 (concluding the plaintiffs

expert provided no analysis as to how much inflation may be attributable to either or both of the

allegedly fraudulent statements and fails to analyze the effect of each particular

misrepresentation). Here, Professor Jarrell claims that the $5.52 of inflation was somehow in



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the stock price by the first day of the class period, but he does not opine that any of this inflation

was caused by the release of an allegedly fraudulent financial statement (or any other fraudulent

statement for that matter) on that day.5 SUMF 28 (Ex. 1, Jarrell Report 240-45; Ex. 4,

Jarrell Dep. 272:17-273:21). Without evidence that the alleged misstatements in the financial

statements were the source of the artificial inflation in Fannie Maes stock price, Plaintiffs

cannot prove that the correction of those alleged misstatements were the cause of the stock price

decline. Summary judgment should be granted in favor of defendants.

2. Even where he specifically identifies inflationary days, ProfessorJarrell fails to prove that any allegedly fraudulent statements created

inflation on June 16, 2003 and July 30, 2003.

As noted, Professor Jarrell does not tie any of the inflation he calculates to any of the

allegedly fraudulent financial statements. In fact, he does not tie the majority of the inflation to

any specific misrepresentation. He does identify two datesJune 16, 2003 and July 30, 2003

on which he concludes positive statements attributed to Raines resulted in residual increases in

Fannie Maes stock price that contributed to the inflation.6 Professor Jarrells treatment of these

two dates, however, is seriously flawed, as he merely assumes, without analysis (much less

proof), that the stock price movement on these dates stemmed from the allegedly fraudulent

5 Plaintiffs experts analysis also fails to the extent he opines that part of the inflation that he concludes came outof the stock price in September 2004 existed before the class period began. Plaintiffs simply cannot recover forinflation incurred before the class period. See In re IBM Corporate Sec. Litig., 163 F.3d 102, 107 (2nd Cir. 1998)([A] defendant . . . is liable only for those statements made during the class period);Lattanzio v. Deloitte &Touche LLP, 476 F.3d 147, 154 (2nd Cir. 2007) (defendant accounting firms failure to correct a statement preclass

period was not actionable);In re The Warnaco Grp.,Inc. Sec. Litig., 388 F. Supp. 2d 307, 315 (S.D.N.Y. 2005)(same).6 Specifically, Professor Jarrell attributes $2.47 of inflation on June 16, 2003 to a public statement reportedlyissued by Franklin Raines after the market closed on June 13, 2003, in which Raines expressed that Fannie Mae hasdone its derivatives accounting properly. SUMF 23-24 (Ex. 1, Jarrell Report 91-92, 245); SUMF 59 (Ex.18, Dow Jones Bus. News, June 13, 2003, 5:25 PM). Professor Jarrell opines that a statement reportedly made byRaines during a teleconference on July 30, 2003, in which Raines allegedly stated that Fannie Mae did not engage inthe same improper accounting as Freddie Mac, caused Fannie Maes stock price to be inflated by an additional$1.11. SUMF 21-22 (Ex. 1, Jarrell Report, 93-95, 245); SUMF 65 (Ex. 21, Event Tr., CCBN StreetEvents,July 30, 2003, 11:30 AM).



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statements.7 But an actual analysis of news on these dates shows that the information released

was not new and that the release of other company-specific information was likely responsible

for, and at the very least contributed to, the residual stock price increase Professor Jarrell

calculated. Because Professor Jarrell cannot prove that his calculated inflation on June 16 and

July 30, 2003 was caused by any alleged fraud on those dates, summary judgment is appropriate

with respect to any losses allegedly resulting from statements on those dates.8

a. June 16, 2003Numerous problems plague Professor Jarrells assumption that an alleged statement by

Raines on June 16, 2003, in which he assured investors that the company had properly done its

accounting, caused the stock price increase.9 First, Professor Jarrell does not consider that

Fannie Mae had recently made similar statements. For example, as Plaintiffs admit in their

Complaint, Fannie Mae confirmed on June 10, 2003 it did not have accounting issues similar to

those being experienced by Freddie Mac. SUMF 57 (Ex. 17, Wall St. J., June 10, 2003, at A1;

SAC 270). But in an efficient market, the reiteration of week-old information would not cause

a stock price change on June 16. See Omnicom, 541 F. Supp. 2d at 551 (holding that [a]

recharacterization of previously disclosed facts is not new information);In re DVIInc. Sec.

7 Indeed, even Professor Jarrell admits that there may have been confounding news released on both dates andthat his analysis of these dates is not rigorous. SUMF 27 (Ex. 3, Jarrell Rebuttal Report 83; Ex. 4, Jarrell Dep.288:16-293:11).8 Because only Franklin Raines spoke on these dates, Defendants KPMG, Tim Howard and Leanne Spencercannot be liable for the introduction of any inflation on these dates, even if Professor Jarrells and Plaintiffsanalyses were otherwise correct. Janus Capital Grp., Inc. v. First Derivative Traders, 131 S. Ct. 2296, 2301 (2011)

(holding defendant must have made the misstatement to be liable under 10(b)); Stoneridge Inv. Partners, LLC, v.Scientific Atlanta, Inc., 552 U.S. 148, 161-63 (2008) (holding defendants could not be held liable where they did notmake or cause to be made the allegedly fraudulent statements).9 Notably, the alleged misrepresentation on June 13, 2003 appears nowhere in the 300-plus pages of PlaintiffsSecond Amended Consolidated Complaint (or in the pleadings that preceded it), or in any response by Plaintiffs toDefendants interrogatories. Indeed, Mr. Raines was not even asked about this statement at his deposition.Professor Jarrell is the first one to identify the statement, and the only one to claim it was a misrepresentation. Butthe deadline for amending pleadings and conducting discovery has long since passed in this case, and it is far toolate in the day for Plaintiffs to raise new claims about additional misrepresentations. Trying to do so through theirdamages expert smacks of an attempt to find an injury and then go in search of a claim.



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Litig., No 2:03-cv-05336, 2010 U.S. Dist. LEXIS 92888, at *90-91 (E.D. Pa. Sept. 3, 2010)

(granting partial summary judgment for defendants because alleged corrective disclosure was

merely a recharacterization of previously disclosed information and revealed nothing new about

the alleged fraud). Even more, Professor Jarrells own model showed that the market reacted to

the news when it was originally released on June 10, as Fannie Maes stock price suffered a

statistically significant decline on that day. SUMF 58 (Ex. 2, Jarrell Report Ex. 11).

Second, Professor Jarrell ignores the fact that Fannie Mae Chief Economist David Berson

commented on June 16 that the shake-up at Freddie Mac had little effect on the secondary

mortgage market. SUMF 60 (Ex. 19, Dow Jones Intl News, June 16, 2003, 1:52 PM).

Notably, the Berson article was published just before 2:00 PM, and the stock price increased an

additional $1.57 after 2:00 PM. SUMF 61 (Ex. 5, Kleidon Report Ex. 6B). Rainess alleged

statement, on the other hand, was issued after the market closed on Friday, June 13, yet Fannie

Maes stock price opened on June 16 only one penny higher. Id. Although the timing of these

movements demonstrates that the stock price increase in the afternoon of June 16, 2003 was

caused not by Rainess reported statement but by Bersons, Professor Jarrell makes no attempt to

disentangle the impact of each statement. See, e.g.,In re Williams Sec. Litig., 558 F.3d 1130,

1137 (10th Cir. 2009) (requiring plaintiffs to [show] that his losses were attributable to the . . .

fraud and not the myriad of other factors that affect a companys stock price).

Thus, instead of considering the previous disclosures or the impact of the Berson

statement, Professor Jarrell assumes a causal relationship between the inflation and Rainess

reported statement. This failure to engage in even a rudimentary independent analysis does not

satisfy Plaintiffs burden to affirmatively prove causation.



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b. July 30, 2003Professor Jarrells conclusions with respect to the alleged inflation on July 30, 2003, are

likewise insufficient. Professor Jarrell once again fails to consider the other information

disclosed that day that could have affected the stock price. For example, he does not address the

fact that Raines reportedly discussed on the teleconference multiple topics important to investors

besides the accounting issues, among them (i) the current interest rate environment and Fannie

Maes risk-management tools and (ii) the regulatory and legislative environment around Fannie

Mae and Freddie Mac. SUMF 65 (Ex. 21, Event Tr., CCBN StreetEvents, July 30, 2003, 11:30

AM). In particular, Raines reportedly stated that Fannie Maes risk management strategies had

held up well and that we are quite pleased with the results. Id. Professor Jarrell makes no

attempt to separate out any residual price increase caused by such positive statements, which are

unrelated to the alleged fraud, from that caused by statements that did concern the accounting,

thus leaving this Court or a jury no way to determine which portion of the residual stock price

increase, if any, is actually connected to the allegedly fraudulent statements.

And, most importantly, Plaintiffs own accounting expert, John Barron, testified that

Rainess alleged July 30, 2003 statement was not false. SUMF 49 (Ex. 6, Barron Dep. 613:4-

614:5). Plaintiffs cannot on the one hand admit that a statement was not fraudulent, but on the

other, attempt to recover for inflation allegedly caused by the statement. Accordingly, Plaintiffs

have failed to prove that Rainess purported statement on July 30 created any inflation.

* * *

Plaintiffs have therefore not met their burden of proving the inflation was created by any

alleged fraud, either in the financial statements or in any of the statements made in June and July

of 2003. Summary judgment is warranted.



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First, Professor Jarrell did not disentangle the effect of company-specificinformation that might have caused the stock price to decline but that is notcorrective of the alleged fraud. Such information includes news regardingsignificant, negative changes in the political and regulatory environment faced byFannie Maea circumstance noted by all the damages experts in this actionand

extends to other events such as changes in management, regulatory investigations,and even the filing of this lawsuit.

Second, Professor Jarrell has failed to disentangle declines caused by events notrelated to this lawsuit. Such factors include alleged inflation that predates theclass period and any declines associated with the claimmuch discussed in thepress, but not at issue in this caseregarding allegations by OFHEO aboutaccounting judgments in 1998, several years before the class period begins.

Third, Professor Jarrell has failed to disentangle information that proved false,such as concerns the market had about the Companys solvency.

Because Professor Jarrell admittedly fails to disentangle the recoverable declines caused

by the revelation of fraud from those caused by other factors, Plaintiffs are unable to sustain their

burden of proof on loss causation. See Oscar Private Equity Invests., 487 F.3d at 271 (holding

that where plaintiffs expert does detail[ed] event studies supporting a finding that [the stock]

reacted to the entire bundle of negative information . . . this reaction suggests only market

efficiency, not loss causation, for there is no evidence linking the culpable disclosure to the stock

price movement) (emphasis in original); Fener v. Operating Engrs Constr. Indus. &

Miscellaneous Pension Fund, 579 F.3d 401, 410 (5th Cir. 2009) (We reject any event study that

shows only how a stock reacted to the entire bundle of negative information, rather than

examining the evidence linking the culpable disclosure to the stock-price movement.)

(emphasis in original);Lattanzio, 476 F.3d at 158 (Plaintiffs have not alleged facts to show that

Deloittes misstatements, among others (made by Warnaco) that were much more consequential

and numerous, were the proximate cause of plaintiffs loss; nor have they alleged facts that

would allow a factfinder to ascribe some rough proportion of the whole loss to Deloittes

misstatements.);Ikon, 131 F. Supp. 2d at 690 (finding there is no evidence that the alleged



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misstatements caused the loss, as opposed to or in addition to other factors); In re Nuveen

Funds/City of Alameda Sec. Litig., No. C 08-4575 SI, 2011 WL 1842819, at *8 (N.D. Cal. May

16, 2011) (excluding plaintiffs experts opinions on loss causation and granting summary

judgment in favor of defendants where the expert did not perform any investigation or analysis

to support his conclusion that plaintiffs losses were caused by defendants fraud).

Accordingly, Defendants deserve judgment as a matter of law.10

1. Professor Jarrell fails to disentangle declines caused by non-correctivedisclosures due to his erroneous application of a self-defined

foreseeable consequences standard.

a.

The decline in Fannie Maes stock price was drenched inpolitics and influenced by other non-corrective disclosures.

Over the course of the four dates in September 2004 on which Professor Jarrell opines the

alleged inflation was removed from Fannie Maes stock price, the market was reacting not just to

news of alleged accounting errors but also to other events directly affecting the company. SUMF

11 (Ex. 4, Jarrell Dep. 179:22-181:1). Experts on both sides agreed that, as a government-

sponsored entity (or GSE), Fannie Mae was subject to significant intervention by political and

regulatory authorities and to the varying views of members of Congress as to Fannie Maes role

and appropriate charter. See SUMF 12, 14 (Ex. 4, Jarrell Dep. 102:17-106:19; 107:5-109:16);

SUMF 50 (Ex. 7, Ruback Report 44-47); SUMF 51 (Ex. 8, James Report 37-61). Not

10 It is worth noting that besides failing to disentangle the price impacts associated with the three types of non-fraud related information mentioned above, Professor Jarrell also did not disentangle the price impacts caused byone allegedly fraudulent statement from those caused by another; he instead lumps all of the declines together andattributes them to fraud generally, without regard to the specific allegations in the complaint. Thus, should

Defendants prevail, for example, on their Motion for Partial Summary Judgment on the alleged misstatementsconcerning FAS 133 (or any other motion for summary judgment regarding a specific alleged misstatement),Professor Jarrells loss causation analysis could not be used to support any of Plaintiffs claims, regardless of thespecific alleged misrepresentation or omission those claims are based on. See In re BankAtlantic, 2011 WL1585605, at *18-20 (holding that plaintiff could not establish loss causation for any claim of fraud where theexperts analysis did not distinguish between the effects of various different alleged misrepresentations and the juryhad found that at least one of the alleged misrepresentations were not fraudulent);Miva, 2009 U.S. Dist. LEXIS127748, at *21 (noting that plaintiffs expert provided no analysis as to how much inflation may be attributable toeither or both of the allegedly fraudulent statements and fail[ed] to analyze the effect of each particularmisrepresentation).



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surprisingly, after Korologoss statement on September 22, 2004 previewing the OFHEO report,

there was significant political pressure affecting Fannie Mae:

Treasury Secretary John Snow stated, [I]t is important to have a strong GSEregulator and [t]hat strong regulator ought to have more authority than thecurrent regulator. That strong regulator needs to have greater authority overcapital standards, over capital levels. It needs to have greater authority over newlines of business that these entities can go into, because the lines of businessaffect foundations of safety and risk levels. SUMF 76 (Ex. 27, Bloomberg,Sept. 22, 2004, 12:28 PM).

U.S. Senator Richard Shelby, one of Fannie Maes most vocal congressionalcritics, indicated his intent to continue pressing for legislation this yearoverhauling the companys oversight. SUMF 77 (Ex. 28, Dow Jones IntlNews, Sept. 22, 2004, 12:53 PM, at 1).

One analyst noted that regulatory uncertainty creates a situation that is difficultto quantify. SUMF 80 (Ex. 31, Susquehanna Fin. Grp., Sept. 22, 2004, no

time, at 1).11

The market continued to speculate about the political implications of the report on the

following day, September 23, after the OFHEO report was released. For example:

The Wall Street Journal noted that [t]he issue is drenched in politics. SUMF 93 (Ex. 40, Wall St. J., Sept. 23, 2004, at A1)

The Washington Postreported, Yesterdays disclosure that governmentregulators have raised safety and soundness questions about mortgage financegiant Fannie Mae has given new ammunition to critics of the company and itssister firm, Freddie Mac. It continued, noting that critics including FederalReserve Chairman Alan Greenspan and Treasury Secretary Snow have called fortighter regulation and restrictions on further growth. SUMF 94 (Ex. 41, Wash.Post, Sept. 23, 2004, at E01).

Morgan Stanley noted that the risk of regulatory intervention warrants areduction in our target price but stated that a derivatives-related write down

would not necessarily indicate any impairment in the economic value of thecompany. SUMF 97 (Ex. 45, Morgan Stanley & Co., Sept. 23, 2004, no timeat 1-3).

11 See also SUMF 75 (Ex. 26, Dow Jones Cap. Mkts. Rep., Sept. 22, 2004, 9:27 AM, at 2); SUMF 78 (Ex. 29,Dow Jones Intl News, Sept. 22, 2004, 3:26 PM, at 1).



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Citigroup Smith Barney reported that [s]ome investors have worried thatmissteps by [Fannie Mae] would finally give Congress the urgency to act to reign[sic] in the GSEs at the same time the companies influence in the process isgreatly reduced. Investors have worried that a Congressional overhaul of theGSEs regulator could result in slower growth and higher capital requirements.

SUMF 96 (Ex. 42, Citigroup Global Mkts., Sept. 23, 2004, no time, at 3).

Market analysts also discussed whether OFHEO might impose a capital surchargeon Fannie Mae, as it did with Freddie Mac after the accounting issues at that firm.SUMF 85 (Ex. 34, Dow Jones Intl News, Sept. 22, 2004, 4:14 PM); SUMF

92 (Ex. 39, Sanford C. Bernstein & Co., Sept. 23, 2004, no time, at 1).12

On September 24, 2004, the media continued to discuss potential action that regulators

might take with regard to Fannie Mae. For example, The Wall Street Journal reported that

investors are starting to fret again that the stumbles will force real regulatory change that could

hurt earnings. [T]here may be a renewed push for legislation in Congress to crimp the

companies ability to dominate the mortgage market. SUMF 107 (Ex. 59, Wall St. J., Sept.

24, 2004, at C1). Likewise, an analyst at Capital Research observed, It seems to me that the

real question for the stock is not fundamental, but political: how will the Board respond to the

charges and what will the impact be in the regulatory bill sitting in Congress. SUMF 108 (Ex.

60, Capital Res., Sept. 24, 2004, no time).13

Professor Jarrell concedes that, in addition to responding to the political developments,

investors were also reacting during the September 2004 disclosure days to the release of other

news about the company. SUMF 11-12 (Ex. 4, Jarrell Dep. 102:17-106:19; 179:22-181:1).

For example, after the market closed on September 23, Fannie Mae disclosed that it had

amended agreements with its top three officers. SUMF 104 (Ex. 12, Fannie Mae, Current

Report (Form 8-K), Sept. 23, 2004, 5:23 PM). Market participants quickly noted that the

12 See also SUMF 94 (Ex. 36, N.Y. Times, Sept. 23, 2004, at C%; Ex. 41, Wash. Post, Sept. 23, 2004, at E01);SUMF 95 (Ex. 43, A.G. Edwards & Sons, Inc., Sept. 23, 2004, no time, at 2).13 See also SUMF 106 (Ex. 58, Reuters News, Sept. 24, 2004, 11:56 AM); SUMF 109 (Ex. 57, N.Y. Times,Sept. 24, 2004, at C5).



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amendments toughened the language on what constituted grounds for dismissal and questioned

the implications of such action for a possible management shake-up. SUMF 104 (Ex. 55, Wall

St. J., Sept. 24, 2004, no time); SUMF 105 (Ex. 56, N.Y. Times, Sept. 24, 2004, no time, at

C5). Professor Jarrell opines that the news of these amendments affected the stock price. SUMF

8 (Ex. 1, Jarrell Report 145-46, 152-53; Ex. 4, Jarrell Dep. 175:4-11).

In addition, several class action lawsuits were filed against the company on September

24, 2004. See SUMF 103 (Ex. 50, Press Release (Sept. 23, 2004, 4:26 PM) (Schiffrin &

Barroway LLP); Ex. 51, Press Release (Sept. 23, 2004, 7:03 PM) (Lerach Coughlin Stoia Geller

Rudman & Robbins LLP); Ex. 52, Press Release (Sept. 24, 2004, 12:12 PM) (Cohen, Milstein,

Hausfeld & Toll, P.L.L.C.); Ex. 53, Press Release (Sept. 24, 2004, 1:07 PM) (Milberg Weiss

Bershad & Schulman LLP)). Professor Jarrells report lists various news articles reporting on

the filing of the lawsuits, suggesting that the lawsuits may have impacted Fannie Maes share

price.

Furthermore, the market reacted during these days to the announcement of various

regulatory investigations. First, before the market opened on September 22, it was announced

that the SEC had decided to investigate the allegations in the OFHEO report. See SUMF 73

(Ex. 25, Press Release (Sept. 22, 2004, 8:04 AM)). The market continued to react to this news

after the market closed that day and on the following day. SUMF 88 (Ex. 34, Dow Jones Intl

News, Sept. 22, 2004, 4:14 PM; Ex. 36, N.Y. Times, Sept. 23, 2004, no time). And before the

market opened on September 30, 2004, press reports indicated that the Department of Justice had

launched a criminal investigation into possible accounting fraud at Fannie Mae. SUMF 112

(Ex. 61, Wall St. J., Sept. 30, 2004, at A2). Later that day, Bloomberg clarified that the

Department of Justice was considering whether to conduct a criminal investigation into



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accounting fraud at Fannie Mae. SUMF 115 (Ex. 64, Bloomberg, Sept. 30, 2004, 12:01

PM).14 Professor Jarrell concedes that the news of each investigation contributed to the stock

price declines on their respective disclosure dates. SUMF 6, 9 (Ex. 1, Jarrell Report 116-

17, 124-128, 160-64, 168-69).

All of these events, which did not disclose the alleged fraud, clearly were being

considered by market participants and, as Plaintiffs admit, likely impacted the companys stock

price.

b. Plaintiffs cannot recover for declines caused by the politicaldevelopments or the other company-specific events simply by

calling them direct and foreseeable consequences of a fraud.

As noted, Professor Jarrell does not disentangle the stock price effect of any of the above

confounding events. He claims he does not need to engage in such an analysis because all of the

confounding eventsthe political developments, management issues, class action lawsuits, and

regulatory investigationsare direct and foreseeable consequences of the fraud, and any stock

price reaction to the consequence is, in effect, a recoverable stock price reaction to the revelation

of the fraud.15 SUMF 17 (Ex. 3, Jarrell Rebuttal Report 13, 20; Ex. 4, Jarrell Dep. 55:21-

57:9, 179:22-181:20). There is abundant case law rejecting this approach. Courts have

consistently rejected the notion that any impact on stock price caused by a consequence of the

alleged fraudeven one that is foreseeablenecessarily shows that the stock price was reacting

14 The Department of Justice ultimately dropped its investigation without bringing any charges. SUMF 118 (Ex.68, Wall St. J., Aug. 25, 2006, at A3).15 Professor Jarrell acknowledged that the losses caused by stock price declines from such consequences weredifferent in kind from losses arising from the removal of inflation created by fraud. He illustrated the differencewith a hypothetical in his Rebuttal Report, SUMF 19 (Ex. 3, Jarrell Rebuttal Report at 12-13), and at hisdeposition referred to inflation created by the alleged accounting misrepresentation as Category A and stock priceeffects due to increased political and regulatory risks and the release of other non-corrective information asCategory B, SUMF 19, (Ex. 4, Jarrell Dep. 43:6-47:6).



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to the disclosure of the alleged fraud.16 But Professor Jarrell just assumes, without analysis, that

the stock price declines in response to the foreseeable consequences are the same as stock

price declines in response to the fraud and includes in his calculations the entire residual declines

for each date, even that portion of the declines attributable to the foreseeable consequences.

As a result, Professor Jarrells analysis does not prove the declines on the September disclosure

dates were caused by the alleged fraud, and thus he cannot establish loss causation.

Courts have continuously declined to find loss causation where the evidence suggests the

market is reacting to the impact of alleged frauda foreseeable consequencerather than a

corrective disclosure revealing the true facts. In Omnicom, the plaintiffs expert had opined that

a directors resignation and the ensuing negative media attention were foreseeable risks of the

alleged fraud. 597 F.3d at 513. The Second Circuit did not question foreseeability: Fraud may

lead to a directors resignation and to negative stories by the media. Id. at 513-14.

However, these negative stories did not cause recoverable securities fraud damages because they

revealed nothing new about the alleged fraud. The court held, none of these matters even

purported to reveal some then-undisclosed fact with regard to the specific misrepresentations

alleged in the complaint . . . . Id. at 511. The Fourth Circuit in Teachers Retirement System of

Louisiana v. Hunterlikewise held that the plaintiffs failed to show loss causation where a stock

price decline was due to the filing of a lawsuit. 477 F.3d 162, 187-88 (4th Cir. 2007). The court

concluded that the market was not reacting to new facts . . . that revealed [defendants] previous

16 Testimony from Plaintiffs own expert shows why no court has adopted his direct and foreseeable standard:there is no standard. For instance, the risk that the accounting issues would lead to a change in the politicalenvironment in Congress, which would cause the market to fear new (and unspecified) limitations on the companysoperations, and therefore reduce its value, is called direct. Asked what makes the factors he cites foreseeable,Professor Jarrell supported a wide variety of formulations, including: (i) a 50% likelihood; (ii) something thatseveral people would think of who are knowledgeable and expert in the field; (iii) highly likely; (iv) potentiallyforeseeable; and (v) but for. SUMF 20 (Ex. 4, Jarrell Dep. 50:11-51:22; 53:16-18; 56:2-57:4; 101:2-17; 251:1-6). Professor Jarrells varying descriptions provide no insight into what his opinion on foreseeability actually is,and none of his various formulations satisfy the standards set forth in the relevant cases. See., e.g., Williams, 558F.3d at 1142-43 (dismissing damages that were not the companys legally foreseeable destiny).



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representations to have been fraudulent but only to fears of a period of instability and discord

that could disrupt the companys operations. Id; see also Berks Cnty. Emps. Ret. Fund v. First

Am. Corp., 734 F. Supp. 2d 533, 541 (S.D.N.Y. 2010) (rejecting plaintiffs claim for damages

arising from a stock price decline allegedly prompted by announcement that defendants major

customer (which happened to be Fannie Mae) was questioning its business relationship with

defendant because that announcement disclosed no new information regarding defendants).

InIn re Oracle Corporation Securities Litigation, the Ninth Circuit rejected the

plaintiffs argument that loss causation could be established by pointing to the markets reaction

to an earnings missthe consequence of the alleged fraudrather than to the markets reaction

to the revelation of the fraudulent acts. 627 F.3d 376, 392 (9th Cir. 2010). In reaching this

conclusion, the Ninth Circuit cited the opinion inDura, noting that [t]o touch upon a loss is

not to cause a loss, and it is the latter that the law requires. Id. (citingDura, 544 U.S. at 343);

see also In re IPO Sec. Litig., 399 F. Supp. 2d 261, 266 (S.D.N.Y. 2005) (concluding that a

negative market reaction to the impact of the alleged fraud, such as failure to meet earnings

forecasts or a statement foreshadowing such failure, does not mean that the event disclosed the

alleged scheme to the market).

InIn re Williams Securities Litigation, the Tenth Circuit rejected an earlier stock decline

as hopelessly confounded, concluding that the filing of the very lawsuit at issue was at least one

factor that was certainly at play that the plaintiffs expert had failed to consider. 558 F.3d at

1141-42 (citingHunter, 477 F.3d at 187-88). The court observed: This is another

manifestation of [the experts] belief that all negative information about [defendant company]

was a revelation of the fraud- he saw no need to separate fraud-related from non-fraud-related

losses, because he assumed any and all losses were of the former variety. Id. at 1142. The



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court also concluded that another stock price decline upon the announcement of the defendant

companys bankruptcy was not causally connected to the alleged fraud, even if [b]ankruptcy

might have been a possibility from the moment [the alleged fraud occurred], and might even

have been a likely possibility. Id. at 1143. But a likely possibility that results from the

revelation of the fraud is not loss causation. The court reasoned that there are simply too many

potential intervening causes to say that bankruptcy was [a] legally foreseeable destiny such that

the stock price after the decline caused by the bankruptcy represented the stocks true value at

the time of the initial fraud. Id.

The recent decision in theMoodys securities litigation further demonstrates the courts

aversion to finding loss causation by looking at the reaction to a foreseeable consequence.

There the court refused to allow damages allegedly caused by the statement of a politician.

Plaintiffs claimed that Moodys had falsely claimed its ratings were independent despite

undisclosed conflicts of interest and sought, in part, to recover losses allegedly caused by a

statement made by the ranking member of the U.S. Senate Banking Committee, Senator Shelby,

the same Senator whose comments on Fannie Mae Professor Jarrell cites. SUMF 12 (Ex. 1,

Jarrell Report 119 and n.88, 138; Ex. 3, Jarrell Rebuttal Report 44). The plaintiffs alleged

that Senator Shelbys announcement that Moodys was facing Congressional scrutiny and that

increased regulation of the credit rating agencies enjoyed bipartisan support had an immediate

negative impact on the companys stock price. Moodys , 2011 U.S. Dist. LEXIS 36023, at *13-

14. The court rejected plaintiffs argument. It held that whether or not the call for Congressional

action resulted from the alleged fraud, it did not reveal any information about that fraud, and thus

did not establish loss causation. Id. at *14-15.



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The necessity of distinguishing between losses caused by foreseeable consequences and

those caused by revelation of the actual fraud is no more apparent than in the context of declines

resulting from the announcement of a regulatory investigation. As a number of courts have held,

such an announcement may have an understandably negative impact on a companys stock price,

but that does not make it a corrective disclosure and cannot show loss causation. See, e.g.,

Metzler Inv. Gmbh v. Corinthian Colls., Inc., 540 F.3d 1049, 1063-64 (9th Cir. 2008)

(concluding loss causation not adequately pleaded by referring to disclosure of government

investigation because disclosure only revealed a risk or potential for fraudulent conduct); In

re Dell Inc. Sec. Litig., 591 F. Supp. 2d 877, 910 (W.D. Tex. 2008) (holding that the

announcement of an investigation, absent a revelation of prior misrepresentations, is not a

curative disclosure);Berks Cnty Emps Ret. Fund, 734 F. Supp. 2d at 540-41 (denying class

certification in part because of failure to establish loss causation, finding that a Bloomberg article

announcing state attorney generals subpoenas was not curative);In re Avista Corp. Sec. Litig.,

415 F. Supp. 2d 1214, 1220-21 (E.D. Wash. 2005) (announcements about investigation by a

regulatory commission were not corrective because they didnt make the misrepresentations

public and thus are insufficient to show a causal link);Rudolph v. Utstarcom, 560 F. Supp. 2d

880, 888 (N.D. Cal. 2008) (The Court therefore agrees with the other courts that have reached

this question that the announcement of an internal investigation cannot support an allegation of

loss causation.) (citing cases).

These cases make clear that a decline caused by a foreseeable consequence to the alleged

fraud cannot itself establish loss causation; the consequence of a fraud reveals nothing new about

the alleged fraud, and thus does not amount to a corrective disclosure. To the extent a decline is

the result of the markets reaction to the impact of the alleged fraudsuch as political reform,



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management turnover, regulatory investigations, or even the filing of this very litigationthat

decline does not prove that the market reacted to the disclosure of the facts that had been

misrepresented. Accordingly, Professor Jarrell should have disentangled the residual stock price

declines caused by a reaction to the foreseeable consequence from those caused by the

revelations of the alleged misrepresentations. But Professor Jarrell admitted that he did not

undertake this analysis, instead lumping all of the negative reactions together in his assessment

of the September declines. SUMF 17 (Ex. 3, Jarrell Rebuttal Report 13, 20; Ex. 4, Jarrell

Dep. 55:21-57:9; 179:22-181:20) (admitting that he did not exclude the effects of foreseeable

consequences). Neither this court nor a jury could determine, based on Professor Jarrells

incomplete analysis, that the stock price declines in September were caused by the disclosure of

the alleged fraud. And for September 30, the only cause of the stock price decline identified by

Professor Jarrell was the foreseeable consequencei.e., the announcement of the DOJ

investigation; he does not point to any other statements revealing the alleged fraud on that day.17

SUMF 9 (Ex. 1, Jarrell Report 160-64, 168-69; Ex. 4, Jarrell Dep. 189:15-189:18). Thus his

analysis on that day fails not simply because he did not disentangle the effect of the foreseeable

consequence but because he did not identify any decline caused by the alleged fraud, and he

cannot recover for those caused by the foreseeable consequence.

Plaintiffs have thus not proven loss causation with respect to any of the September 2004

disclosure dates. The court should reject Plaintiffs request to change well established precedent

17 In fact, shortly after news broke regarding the DOJ investigation on September 30, 2004, OFHEO clarified thatit had not made a criminal referral to the DOJ, and ultimately, the DOJ ultimately dropped its investigation. SUMF 123 (Ex. 11,Hearing Before the S. Comm. on Cap. Mkts., Ins. & Govt Sponsored Enters. of the H. Comm. on Fin.Servs., 108th Cong. 40, Oct. 6, 2004); SUMF 118 (Ex. 68, Wall St. J., Aug. 25, 2006, at A2). The days on whichboth of those positive announcements were made had statistically significant stock price increases according toProfessor Jarrells analysis. SUMF 118, 128 (Ex. 2, Jarrell Report Ex. 11).



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on recovery for foreseeable, but non-corrective, consequences of the alleged fraud and grant

summary judgment in favor of Defendants.

c. Plaintiffs new theory demands damages unavailable in aprivate securities action.

Plaintiffs new foreseeable consequences theory should also be rejected because it

defies a second line of cases. It confuses harm to the shareholders, which is recoverable under

Section 10(b), with harm to the corporation, which is not. Explaining the former, the Eleventh

Circuit stated:

[P]laintiffs will be allowed to recover only damages actually caused by themisrepresentation. The proper measure of damages utilizes the out-of-pocketrule: the plaintiff can recover the difference between the price paid and the realvalue of the security, i.e., the fair market value absent the misrepresentations, atthe time of the initial purchase by the defrauded buyer.

Robbins v. Koger Props., Inc., 116 F.3d 1441, 1447 n.5 (11th Cir. 1997) (citations omitted). As

the Third Circuit held inLaSala v. Bordier et Cie, securities fraud damages are the amount of

the difference between what they paid for the pumped securities and what those securities were

really worth. 519 F.3d 12, 130 (3d Cir. 2008). Although the company lost its economic

viability as a result of the revelation of the alleged fraud, as reflected in its declining stock

price, that was not the kind of loss plaintiffs could recover in a securities class action. Id. at

131.

It is well-settled that a corporate shareholder cannot recover for injury to the corporation,

even injury caused by fraud. An injury directly tied to the fate of the corporation is not injury

to the shareholder but to the corporation, and is only recoverable by the corporation or in a

derivative action. Labovitz v. Wash. Times Corp., 172 F.3d 897, 902 (D.C. Cir. 1999). Although

an injury to the corporation tends to diminish each share of stock equally because corporate

assets or their value are diminished, that is not an injury the shareholders can sue for. Tooley v.



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Donaldson, Lufkin, & Jenrette, Inc., 845 A.2d 1031, 1037 (Del. 2004).18 A contrary rule would

authorize multitudinous litigation and ignore the corporate entity. Cowin v. Bresler, 741 F.2d

410, 414 (D.C. Cir. 1984).

The change in Fannie Maes political fortunes, for example, affects the entire business of

the company. It was a risk that, whether by federal statute or regulatory action, Fannie Mae

would be forced to restrict its operations. A restriction of a companys operations may impact

the companys stock price, but that impact is suffered by all shareholders equally, regardless of

when they purchased their sharesor, even more importantly, whether they purchased during

the class period. That is true of any number of Plaintiffs claimed injuries: changes in

management, the filing of lawsuits, regulatory investigations, the imposition of an excess capital

requirement. Nothing could make the point more clear than the fact that these are the same

injuries that Fannie Mae claimed in the now-settled litigation with KPMG.19 Whether or not

economic theory recognizes this distinction, the law certainly does: stock price declines due to

such direct and foreseeable consequences are not recoverable as securities fraud damages.

Because Plaintiffs expert admits that he has failed to disentangle these factors in their

analysis of loss causation and damages, his opinion is inadmissible as a matter of law, and

Plaintiffs therefore cannot establish loss causation.

18 Seealso Cheeks v. Fort Myer Constr. Co., 722 F. Supp. 2d 93, 109 n.9 (D.D.C. 2010) (D.C. courts have oftenlooked to Delaware for guidance on matters of corporate law);Harpole Architects, P.C. v. Barlow, 668 F. Supp. 2d68, 77 n.4 (D.D.C. 2009) (D.C. courts generally look to Delaware for guidance on matters of corporate law).19 Professor Jarrell testified that the losses resulting from the replacement of KPMG as auditor and restatementwere direct and foreseeable consequences and the filing of a lawsuit are recoverable as the suit is a foreseeableeconomic consequence of securities fraud. SUMF 18 (Ex. 4, Jarrell Dep. 249:20-250:4; 516:13-17). As thiscourt is aware, in its litigation with KPMG, now settled, Fannie Mae sought recovery for precisely those types ofdamages.



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2. Professor Jarrell fails to disentangle declines caused by allegationsconcerning events prior to the beginning of the class period.

It should be beyond dispute that Plaintiffs can only recover for a misrepresentation that is

part of their claims. Accordingly, Plaintiffs cannot recover for inflation caused by alleged

misrepresentations made before the class period even began. See IBM, 163 F.3d at 107 ([a]

defendant . . . is liable only for those statements made during the class period);Lattanzio, 476

F.3d at 154 (defendant accounting firms failure to correct a statement pre-class period was not

actionable); Warnaco, 388 F. Supp. 2d at 315 (noting there were no allegations of contrary

statements that auditor had duty to correct within the class period). Professor Jarrell concedes

that some or all of his claimed $5.52 inflation as of April 17, 2001 pre-dated the class period and

thus must have been caused by events prior to the class period. SUMF 26 (Ex. 4, Jarrell Dep.

270:10-272:11). Despite that fact that declines caused by the removal of inflation created prior

to the class period are not recoverable in this action, Professor Jarrell made no attempt to

disentangle the declines caused by disclosures concerning pre-class period events from declines

actually caused (if any) by revelation of the alleged fraud. SUMF 11 (Ex. 4, Jarrell Dep.

179:22-181:1). Summary judgment should be granted for this reason alone.

In fact, Professor Jarrell himself identifies news concerning at least one event that pre-

dates the class period by several years but which he admits contributed to the September

declines: allegations by OFHEO regarding accounting judgments under FAS 91 that allegedly

affected the companys 1998 financial results and Fannie Maes executive bonuses.20 SUMF

15 (Ex. 4, Jarrell Dep. 93:19-94:2; 97:6-10). He could hardly do otherwise, as claims about this

1998 event featured prominently in the OFHEO report and were widely reported by the press and

by analysts. See, e.g., SUMF 81 (Ex. 32, Wachovia Sec., Sept. 22, 2004, no time; Ex. 33, Dow

20 These allegations are disputed by the individuals allegedly involved in those judgments.



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Jones News Service, Sept. 22, 2004, 12:45 PM). Professor Jarrells failure to account for the

declines caused by the allegations concerning the 1998 accounting, particularly where the

allegation had such a high profile in the OFHEO report, is inexcusable. That admission alone

renders his opinion on loss causation untenable.

3. Professor Jarrell fails to disentangle declines caused by allegationsthat proved untrue.

The 2004 interim OFHEO Report questioned Fannie Maes solvency, alleging in bold

print that [t]he matters detailed in this report are serious and raise concerns regarding the

validity of previously reported financial results, the adequacy of regulatory capital, the quality of

management supervision, and the overall safety and soundness of the Enterprise. SUMF 84

(Ex. 10, OFHEO, Report of Findings to Date) (emphasis removed). As the market later learned

when the OFHEO director testified before Congress on October 6, 2004, OFHEO did not, in fact,

consider Fannie Mae to be in serious danger of insolvency. SUMF 123 (Ex. 11,Hearing

Before the S. Comm. on Cap. Mkts., Ins. & Govt Sponsored Enters. of the H. Comm. on Fin.

Servs., 108th Cong. 27, Oct. 6, 2004). Plaintiffs cannot possibly establish that their losses were

caused by the alleged fraud by pointing to declines that occurred because of concerns that were

subsequently revealed to be unfounded.

This confounding information undoubtedly contributed to the stock price decline claimed

by Plaintiffs. Again, Professor Jarrell admits as much. SUMF 11, 16 (Ex. 4, Jarrell Dep.

163:5-164:19; 179:22-181:1). But those declines could not, as a matter of law, be attributed to

the revelation of the fraud, as it was later revealed no fraud occurred. Professor Jarrell again has

failed to disentangle yet another factor, again rendering his opinion flawed and inadmissible.

Lattanzio, 476 F.3d at 158;Ikon, 131 F. Supp. 2d at 690.



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* * * *

Because Professor Jarrell has failed to identify for each of the September disclosure dates

the portion of his stock price decline, if any, that was caused by the correction of the claimed

misrepresentations rather than a confounding event or foreseeable consequence, Plaintiffs cannot

me

Motion for Summary Judgement Memo KMPG

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