Case 1:04-cv-01639-RJL Document 993 Filed 01/06/12 Page 1 of 27

UNITED STATES DISTRICT COURT DISTRICT OF COLUMBIA In re Federal National Mortgage Association Securities, Derivative, and ERISA Litigation

MDL No. 1688

In re Fannie Mae Securities Litigation

Consolidated Civil Action No. 1:04-cv-01639 (RJL)

REPLY MEMORANDUM IN SUPPORT OF DEFENDANT FRANKLIN D. RAINESS MOTION FOR SUMMARY JUDGMENT

Case 1:04-cv-01639-RJL Document 993 Filed 01/06/12 Page 2 of 27

TABLE OF CONTENTS

INTRODUCTION .......................................................................................................................... 1 ARGUMENT .................................................................................................................................. 2 I. II. MR. RAINESS STATEMENT OF UNDISPUTED MATERIAL FACTS SHOULD BE DEEMED ADMITTED. .............................................................................. 2 PLAINTIFFS IDENTIFY NO EVIDENCE THAT MR. RAINES KNEW, OR HAD REASON TO KNOW, THAT FANNIE MAES FAS 133 OR FAS 91 ACCOUNTING POLICIES VIOLATED GAAP. ........................................................ 4 A. Plaintiffs Identify No Evidence that Mr. Raines Knew, or Had Reason To Know, that Fannie Maes Accounting for FAS 133 Violated GAAP...................................................................................................................... 4 Plaintiffs Identify No Evidence that Mr. Raines Knew, or Had Reason To Know, that Fannie Maes Accounting for FAS 91 Violated GAAP. ................ 7 On This Record, the Court Should Grant Summary Judgment in Favor of Mr. Raines. ............................................................................................... 8

B. C. III.

PLAINTIFFS IDENTIFY NO EVIDENCE THAT MR. RAINESS STATEMENTS WERE FALSE OR MADE WITH SCIENTER. ..................................... 9 A. B. Statement No. 1 July 30, 2003 Conference Call. ............................................... 10 Statement No. 2 October 6, 2004 Congressional Testimony. ............................ 12

IV.

PLAINTIFFS FAIL TO IDENTIFY ANY OTHER EVIDENCE THAT WOULD ESTABLISH SCIENTER AS TO MR. RAINES. ............................................ 13 A. Plaintiffs Cite No Evidence that Mr. Raines Engaged in Improper Earnings Management. ......................................................................................... 13 1. 2. B. Bulk Mortgage Insurance. ......................................................................... 13 Debt Buybacks. ......................................................................................... 14

Plaintiffs Cite No Evidence that Mr. Raines Knew or Should Have Known of Alleged Deficiencies in Internal Controls and Corporate Governance. .......................................................................................................... 15 1. 2. Internal Controls. ...................................................................................... 15 Corporate Governance. ............................................................................. 16

C. V.

Mr. Rainess Lack of Stock Sales and Fannie Maes Executive Compensation Structure Do Not Support a Claim of Securities Fraud. ............... 18

THE PAUL WEISS AND OFHEO REPORTS DO NOT ESTABLISH MR. RAINESS SCIENTER. ................................................................................................... 20

CONCLUSION ............................................................................................................................. 21 - ii -

Case 1:04-cv-01639-RJL Document 993 Filed 01/06/12 Page 3 of 27

TABLE OF AUTHORITIES FEDERAL CASES 1443 Chapin St., LP v. PNC Bank, N.A., No. 08-1532,F. Supp. 2d, 2011 WL 4071849 (D.D.C. Sept. 14, 2011) ............................................................................................20 Acito v. IMCERA Grp., Inc., 47 F.3d 47 (2d Cir. 1995) ................................................................19 Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986) ....................................................................3 Barnett v. PA Consulting Grp., Inc., No. 04-1245, 2011 WL 4894117 (D.D.C. 2011) ..................3 City of Moundridge v. Exxon Mobil Corp., No. 04-cv-940, 2009 WL 5385975 (D.D.C. Sept. 30, 2009), affd per curiam, 409 F. Appx 362 (D.C. Cir. 2011) .....................................3 Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (2005).........................................................................9 Gilbert v. Napolitano, 760 F. Supp. 2d 21 (D.D.C. 2011)...............................................................3 Greenberg v. FDA, 803 F.2d 1213 (D.C. Cir. 1986) ...................................................................3, 8 In re Balanced Plan, Inc., 257 B.R. 921 (Bankr. W.D. Mo. 2001) ...............................................21 In re Fannie Mae Sec. Litig., 503 F. Supp. 2d 25 (D.D.C. 2007) ..................................................21 In re IMAX Sec. Litig., 587 F. Supp. 2d 471 (S.D.N.Y. 2008) ......................................................16 In re Metris Cos. Sec. Litig., 428 F. Supp. 2d 1004 (D. Minn. 2006) ...........................................19 In re REMEC Inc. Sec. Litig., 702 F. Supp. 2d 1202 (S.D. Cal. 2010)....................................16, 18 In re Sept. 11 Litig., 621 F. Supp. 2d 131 (S.D.N.Y. 2009) ..........................................................20 In re Wachovia Equity Sec. Litig., 753 F. Supp. 2d 326 (S.D.N.Y. 2011) ......................................8 In re Worlds of Wonder Sec. Litig., 35 F.3d 1407 (9th Cir. 1994) ................................................16 Jackson v. Finnegan, Henderson, Farabow, Garrett & Dunner, 101 F.3d 145 (D.C. Cir. 1996) ..........................................................................................................................................3 Kalnit v. Eichler, 264 F.3d 131 (2d Cir. 2001) ..........................................................................2, 18 Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000) ..............................................................................19 Phillips v. LCI Intl, Inc., 190 F.3d 609 (4th Cir. 1999) ................................................................19 Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38 (2d Cir. 1978) .................................................10 - iii -

Case 1:04-cv-01639-RJL Document 993 Filed 01/06/12 Page 4 of 27

Roth v. OfficeMax, 527 F. Supp. 2d 791 (N.D. Ill. 2007) ........................................................14, 16 Schoonejongen v. Curtiss-Wright Corp., 143 F.3d 120 (3d Cir. 1998) ...........................................3 SEC v. Guenthner, 395 F. Supp. 2d 835 (D. Neb. 2005) ...............................................................17 Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) .................................................2 Twist v. Meese, 854 F.2d 1421 (D.C. Cir. 1988) ...........................................................................20 OTHER AUTHORITIES Fed. R. Civ. P. 56 .........................................................................................................................3, 8 Fed. R. Evid. 408 ...........................................................................................................................21 Fed. R. Evid. 702 .......................................................................................................................3, 17 D.D.C. Local Rule 7(h)(1) ...........................................................................................................2, 3

- iv -

Case 1:04-cv-01639-RJL Document 993 Filed 01/06/12 Page 5 of 27

INTRODUCTION To avoid summary judgment, Plaintiffs must identify evidence establishing all elements necessary for a viable claim of securities fraud against Mr. Raines. Plaintiffs identify no witness (among the scores deposed) who will testify that s/he informed Mr. Raines that Fannie Maes accounting violated GAAP during the Class Period; no witness who will claim that Mr. Raines ever directed any of his subordinates to violate GAAP; no evidence that Mr. Raines ever overruled accounting judgments made by accounting professionals; and no evidence that Mr. Raines had any independent knowledge of the technical requirements of any accounting rule, or whether Fannie Maes policies were in accordance with GAAP. This failure is particularly noteworthy in light of the volumes of evidence submitted with Mr. Rainess opening memorandum (Mot.) demonstrating that witnesses will recount, and contemporaneous documents will reflect, numerous assurances to Mr. Raines that Fannie Maes accounting complied with GAAP in all material respects. In the absence of evidence, Plaintiffs Opposition relies on a lawyer-created narrative, occasionally punctuated by references to the record that, upon examination, reflect immaterial, mischaracterized, invented, or inadmissible evidence. Plaintiffs hope to induce the Court and then a jury to fill in the evidentiary gaps by speculating falsely as to what actually happened, and, on the basis of that speculation and without the necessary aid of an expert, concluding that there was misconduct on the part of Mr. Raines. But Plaintiffs story is not evidence, and their failure to cite specific evidence warrants a grant of summary judgment in favor of Mr. Raines. To decide this motion, we respectfully submit that the Court should do four things:

First, the Court should review Plaintiffs response to Mr. Rainess Statement of Undisputed Material Facts. Instead of citing record evidence that would create a contested issue of fact, Plaintiffs offer non-responsive evidence, legal arguments, attorney opinion, and challenges to credibility for every single fact they purportedly dispute. None of these satisfies Plaintiffs threshold burden -1-

Case 1:04-cv-01639-RJL Document 993 Filed 01/06/12 Page 6 of 27

to identify a genuine issue of material fact, and the Court may therefore deem Mr. Rainess Statement of Material Undisputed Facts as admitted. Second, the Court should evaluate the evidence that Plaintiffs proffer to establish scienter with regard to the accounting policiesFAS 133 and FAS 91on which their Complaint (and the Restatement) was primarily based. The paucity of proffered evidence on this issue is astonishing, and what Plaintiffs offer falls far short of establishing scienter. Third, the Court should assess the only two statements by Mr. Raines that Plaintiffs claim were false and caused Plaintiffs loss. The evidence reflects the absence of scienter: those statements were truthful and were not made with extreme recklessness. Finally, the Court should reject Plaintiffs attempt to divert the Courts attention to practices and policies that are not germane to this motioni.e., earnings management, internal controls, corporate governance, and executive compensationbecause they are either unobjectionable or cannot sustain a claim for securities fraud.

Lacking the contemporaneous evidence necessary to prove a case, Plaintiffs ultimately rely upon statements made and conclusions reached in subsequent investigations conducted long after the events at issue, in plain contravention of the Federal Rules of Evidence and the well-established rule that there is no fraud by hindsight, Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 320 (2007), or by speculation, Kalnit v. Eichler, 264 F.3d 131, 142 (2d Cir. 2001). Because Plaintiffs have failed to identify particular evidence in support of their claims, the Court should grant summary judgment in favor of Mr. Raines. ARGUMENT I. MR. RAINESS STATEMENT OF UNDISPUTED MATERIAL FACTS SHOULD BE DEEMED ADMITTED. As required by Local Rule 7(h)(1), Mr. Rainess motion identified 219 material facts, as to which he contends there is no genuine issue. See Raines Statement of Undisputed Material Facts (SUMF).1 In response, Plaintiffs concede 97 facts while purporting to dispute the remaining 122. See Pls. SUMF Resp. To demonstrate a genuine contested issue that would warrant a trial, however, Plaintiffs must cite particular evidence that supports their view of the
Plaintiffs Response to Mr. Rainess SUMF is abbreviated as Pls. SUMF Resp.; Mr. Rainess Statement of Additional Undisputed Facts (which includes additional facts cited in this brief) is abbreviated as SAUMF.
1

-2-

Case 1:04-cv-01639-RJL Document 993 Filed 01/06/12 Page 7 of 27

record as contested. Fed. R. Civ. P. 56(c)(1)(A); Greenberg v. FDA, 803 F.2d 1213, 1221 (D.C. Cir. 1986). But for each of the facts Plaintiffs purport to dispute, they fail to meet this threshold burden. In the place of evidence, Plaintiffs offer:

legal argument,2 even though it is improper to blend[ ] factual assertions with legal argument in a statement of facts, Jackson v. Finnegan, Henderson, Farabow, Garrett & Dunner, 101 F.3d 145, 153 (D.C. Cir. 1996); unsupported attorney opinion,3 even though an attorneys opinion does not suffice where expert opinion is required, and Plaintiffs did not designate their counsel to offer expert testimony, see Fed. R. Evid. 702; and challenges to the credibility of uncontroverted testimony and other evidence, 4 even though such credibility challenges are not sufficient to create a factual dispute, Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 25657 (1986) (noting that discredited testimony is an [in]sufficient basis for drawing a contrary conclusion to defeat summary judgment); see also Barnett v. PA Consulting Grp., Inc., No. 04-1245, 2011 WL 4894117, at *9 (D.D.C. 2011).

The Court should thus deem Mr. Rainess Statement as admitted. See Gilbert v. Napolitano, 760 F. Supp. 2d 21, 23 n.1 (D.D.C. 2011) (striking exhibit in plaintiffs opposition to Statement of Material Facts where many of [the] facts are neither material nor disputed).5

See, e.g., Pls. SUMF Resp. 61 (Due to the myriad internal control weaknesses endemic throughout the financial reporting process, any reliance on the Financial Standards and Financial Reporting groups in this context was beyond reckless.); see also id. 47, 47, 4951, 54, 6268, 7074, 78, 8387, 89, 90, 105, 106, 108, 110 14, 116, 11821, 124, 125, 12830, 133, 13743, 14851, 15457, 174, 185, 209, 211, 212. See, e.g., Pls. SUMF Resp. 4 (Raines received the equivalent of formal training in accounting in his various positions in finance and investment banking and government[.]); see also id. 5, 16, 19, 46, 47, 4951, 106, 108, 11016, 11821, 12426, 12830, 13845, 147, 149, 150, 16372, 174, 185, 196, 212. See, e.g., Pls. SUMF Resp. 19 (Lead Plaintiffs do not dispute the testimony as quoted; however, they dispute Boyles credibility and reliability.); see also id. 4, 81, 83, 87, 89, 90, 139, 15962. Issues of credibility defeat summary judgment only where an issue of material fact cannot be resolved without observation of the demeanor of witnesses (e.g., where the appearance of the witness is relevant to, for instances, certain injuries). Schoonejongen v. Curtiss-Wright Corp., 143 F.3d 120, 130 (3d Cir. 1998) (alteration and emphasis omitted) (quoting Fed. R. Civ. P. 56(e) advisory committees Note, 1963 amend.). This is for obvious reasons: summary judgment would never be granted if an evaluation of credibility were required even where the opposing party presents no contrary evidence. See also City of Moundridge v. Exxon Mobil Corp., No. 04-cv-940, 2009 WL 5385975, at *1 n.4 (D.D.C. Sept. 30, 2009) (treating movants facts as admitted where they were supported by the record and counterstatement asserted facts with no record citations, made legal arguments, and did not identify material facts with genuine fact issues), affd per curiam, 409 F. Appx 362 (D.C. Cir. 2011); Jackson, 101 F.3d at 153 (same); D.D.C. L.R. 7(h)(1) (directing that, in determining summary judgment motion, court may assume that facts identified by the moving party in its statement of material facts are admitted, unless such a fact is controverted in the statement of genuine issues filed in opposition to the motion).
5 4 3

-3-

Case 1:04-cv-01639-RJL Document 993 Filed 01/06/12 Page 8 of 27

II.

PLAINTIFFS IDENTIFY NO EVIDENCE THAT MR. RAINES KNEW, OR HAD REASON TO KNOW, THAT FANNIE MAES FAS 133 OR FAS 91 ACCOUNTING POLICIES VIOLATED GAAP. A. Plaintiffs Identify No Evidence that Mr. Raines Knew, or Had Reason To Know, that Fannie Maes Accounting for FAS 133 Violated GAAP.

With regard to FAS 133, the main accounting policy in this case, Plaintiffs assert that Mr. Raines told investors that he believed Fannie Maes accounting for derivatives under FAS 133 complied with GAAP when he knew it did not. See Opp. at 1416. Plaintiffs focus on Mr. Rainess statements that Fannie Mae spent millions of dollars for new computers and hired new people in connection with the implementation of FAS 133, accurately reported the volatility FAS 133 created, and made no attempt to smooth FAS 133 earnings. See id. at 1415. They then assert that Mr. Raines knew Fannie Mae was applying FAS 133 improperly to minimize the attendant volatility in reported earnings. See id. at 14. In support, Plaintiffs cite a single document: an internal KPMG e-mail between auditors Harry Argires and Mark Serock, which was undisputedly not addressed to and never seen by Mr. Raines, in which Mr. Argires suggests that certain issues about FAS 133 be raised with Mr. Raines. See Opp. at 15. Plaintiffs fail to mention (but do not dispute) that Mr. Argires and Mr. Serock never told Mr. Raines that Fannie Maes accounting violated GAAP, which is the inference Plaintiffs seek. SAUMF 22022; see also SUMF 15, 2634. On the contrary, both acknowledged that KPMG repeatedly told Mr. Raines that the companys accounting complied with GAAP in all material respects. SAUMF 222. Ms. Spencer is also referenced in the e-mail. Not only did Ms. Spencer never tell Mr. Raines that Fannie Maes accounting departed from GAAP, she repeatedly told him exactly the opposite: quarter after quarter and year after year, Ms. Spencer certified to Mr. Raines that Fannie Maes financial statements

-4-

Case 1:04-cv-01639-RJL Document 993 Filed 01/06/12 Page 9 of 27

fairly present[ed] in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the period presented in each report. SUMF 77. Plaintiffs argue that Mr. Raines knew his statements were false because he had a meeting with Jonathan Boyles during which he learned that Fannie Mae had designed and implemented the Companys FAS 133 policy in a way that would minimize earnings volatility. Opp. at 14. The undisputed testimony, however, demonstrates that the meeting had nothing to do with the propriety of Fannie Maes FAS 133 accounting. Rather, the meeting was about Fannie Maes hedging strategiesi.e., which types of derivatives Fannie Mae should use in managing its business risks. At that meeting, Mr. Boyles gave Mr. Raines a short presentation about certain goals Fannie Mae set in relation to the original implementation of FAS 133. One such objective related to minimizing earnings volatility. Mr. Boyles articulated that goal in connection with a discussion of the types of derivatives Fannie Mae purchased. In relation to the implementation of FAS 133, Fannie Mae focused their derivatives transactions on those types of derivatives that qualified for hedge accounting. That goal had nothing to do with improperly implementing FAS 133 and nothing in the record suggests that Mr. Raines was so told. See SAUMF 22427. Plaintiffs remarkably fail to acknowledge or explain (but do not dispute) the following testimony from Mr. Boyles: Q: What did Mr. Raines say at that meeting about volatility? A: That the purpose of the exercise of getting a fresh look wasnt around reducing volatility. He didnt 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. Q: Okay. And is it fair to say that when you wrote earlier about earnings volatility being minimized as being a tenet of the strategies that Fannie Mae used to hedge under FAS 133, that direction did not come from Mr. Raines? A: No, it did not.

-5-

Case 1:04-cv-01639-RJL Document 993 Filed 01/06/12 Page 10 of 27

SAUMF 227 (emphases added). Plaintiffs cite no evidence or expert opinion that any effort to decrease earnings volatility caused Fannie Maes FAS 133 policy to violate GAAP. As to the alleged misstatement that Fannie Mae spent millions of dollars on new computer systems, Plaintiffs identify no evidence demonstrating that Mr. Rainess statement was false or misleading. The undisputed record is replete with evidence to the contrary. Fannie Mae did, in fact, (i) spend millions of dollars on new computer systems in relation to its implementation of FAS 133; (ii) create an entirely new system (aptly named the FAS 133 System) to record journal entries related to Fannie Maes derivatives transactions; and (iii) expend significant efforts modifying existing systems (e.g., the DEBTS system) to assist in its implementation of FAS 133. SAUMF 22830. Plaintiffs engage in a logical fallacy by asserting that Mr. Rainess statement is false because Fannie Mae sought to implement FAS 133 in a way that would leverage off existing systems as much as possible. Opp. at 14. The two statements plainly are not mutually exclusive. Fannie Mae could, of course, spend millions of dollars for new computer systems while at the same time leveraging off of existing systems as much as possible. And that is what it undisputedly did. As a last resort, Plaintiffs attempt to employ statements of Mr. Donald Nicolaisen, thenChief Accountant of the SEC, as quasi-expert evidence of Mr. Rainess scienter. See id. at 28 29 (citing Mr. Nicolaisens December 2004 statements). Again, Plaintiffs fail to mention (but do not dispute) that Mr. Nicolaisen testified under oath, both in this case and before Congress, that he made no findings regarding whether any violations of the accounting standards were knowing or intentional. SAUMF 231. Nevertheless, Mr. Nicolaisen made numerous statements reflecting Mr. Rainess lack of scienter and desire to ensure Fannie Maes accounting was correct:

-6-

Case 1:04-cv-01639-RJL Document 993 Filed 01/06/12 Page 11 of 27

Mr. Raines want[ed] to be certain that [Mr. Nicolaisen and the SEC staff] understood [Mr. Rainess] desire to support quality financial reporting and the commitment that Fannie Mae had to producing good financial statements and that he would look for any comments or recommendations that we would have, SUMF 204 (emphasis added); [Mr. Raines] was passionate about wanting Fannie Mae to have accounting that would be recognized as appropriate [and] best in class, . . . his own view, as I recall, was that he thought their accounting was appropriate, that he didn't agree with OFHEO but he was very clear in saying regardless of what I think what is important is that this institution have credibility in the public arena and therefore whatever you conclude we will follow. And I recall that very precisely, that he was very clear about that, SUMF 208 (emphasis added); Mr. Raines was very clear in his view that he wanted to have the right accounting, the appropriate accounting by Fannie Mae . . . it was to me very clear that whatever that decision was, whether he liked it or not, that he would follow that decision, SUMF 209 (emphasis added).

Although Plaintiffs omission is inexcusable, it mirrors the tactic they employed to obtain an opinion from their former expert, Mr. Harvey Pitt, shielding from review the critical testimony of Mr. Nicolaisen that in fact demonstrates the absence of scienter. B. Plaintiffs Identify No Evidence that Mr. Raines Knew, or Had Reason To Know, that Fannie Maes Accounting for FAS 91 Violated GAAP.

With regard to FAS 91, the second accounting policy underlying this case, Plaintiffs allege that in his October 6, 2004 testimony before Congress, Mr. Raines misled the public by stating that our accounting staff has repeatedly determined that our policies and practices with regard to FAS 91 . . . are reasonable and in accord with GAAP. Opp. at 18. Mr. Rainess opening papers demonstrate that it is undisputed that: (i) Fannie Maes internal accounting professionals and senior executives (as well as KPMG) repeatedly determined and advised Mr. Raines that Fannie Maes FAS 91 accounting complied with GAAP in all material respects; and (ii) Mr. Raines played no role in designing Fannie Maes policies and practices related to amortization accounting under FAS 91.6 SUMF 11, 24, 3234, 3637, 86, 90, 14243.
6

With regard to Plaintiffs allegation concerning the amount Fannie Mae booked for a catch-up expense for the fourth quarter of 1998before the beginning of the Class Period, and for a period before Mr. Raines was CEO Plaintiffs fail to mention (but do not dispute) that: (i) numerous professionals have testified that they believed the accounting was appropriate; (ii) the CFO, Mr. Howard, and Controller, Ms. Spencer, recommended the decision to

-7-

Case 1:04-cv-01639-RJL Document 993 Filed 01/06/12 Page 12 of 27

Plaintiffs only basis for asserting that Mr. Raines knew that Fannie Maes amortization policy did not comply with GAAP is a 2002 Memorandum that former Fannie Mae employee Roger Barnes allegedly sent to Mr. Raines. See Opp. at 18. Notably, Mr. Barness allegations in this Memorandum were not related to either Fannie Maes precision threshold policy for amortization (the Class Period allegation which led to the Restatement), nor the 1998 amortization expense (the pre-Class Period allegation); thus, they are immaterial to the issues on the pending motion.7 Moreover, after Mr. Raines became aware of Mr. Barness allegations in August 2003, Internal Audit, KPMG, the Controllers Department, and the Legal Department investigated the allegations by Mr. Barnes, and informed Mr. Raines that Mr. Barness concerns were based on inaccurate and incomplete information and without merit. SUMF 19495; see also Mot. at 1213. C. On This Record, the Court Should Grant Summary Judgment in Favor of Mr. Raines.

The very mission of the summary judgment procedure is to pierce the pleadings and to assess the proof in order to see whether there is a genuine need for trial. Fed. R. Civ. P. 56 advisory committees Note, 1963 amend. Despite the absence of any evidence to support their allegations against Mr. Raines, Plaintiffs nevertheless continue to press for a jury to hear their claims. As Plaintiffs describe their own case, however, they would present at trial: (i) one e-

recognize $240 million, and stand by that decision as appropriate today; and (iii) Mr. Raines did not learn that KPMG had recorded a non-material audit difference related to the amount booked until 2000, and upon learning of the audit difference, directed that there should not be any audit differences going forward, see SAUMF 23237. Plaintiffs also fail to note that all record witnessesincluding those responsible for receiving and logging documents sent to Mr. Rainesdeny that Mr. Raines received the 2002 Memorandum, and by Mr. Barness own admission, he is not in a position to confirm whether Mr. Raines ever received it. See Mot. at 12; SUMF 180 83. Plaintiffs offer no evidence to the contrary, but nevertheless argue that whether Mr. Raines received the Barnes Memorandum is a contested issue of material fact. Pls. Resp. to SUMF 18083. The absence of evidence, however, does not create a genuine issue of fact. See Greenberg, 803 F.2d at 1221; cf. In re Wachovia Equity Sec. Litig., 753 F. Supp. 2d 326, 352 (S.D.N.Y. 2011) (dismissing claims in light of missing link problem on issue of scienter, due to Plaintiffs failure to plead that person whose allegations formed basis of complaint had actually communicated concerns to senior management).
7

-8-

Case 1:04-cv-01639-RJL Document 993 Filed 01/06/12 Page 13 of 27

mail between KPMG auditors (Messrs. Argires and Serock), which was not addressed to Mr. Raines and could not establish scienter on his part; (ii) the testimony of Mr. Nicolaisen, who stated he made no findings with respect to intent, but noted Mr. Rainess desire to ensure Fannie Maes accounting was correct; and (iii) Mr. Barness 2002 Memorandum, which Mr. Barnes testified he wrote as a result of Mr. Rainess encouragement to employees to raise issues of concern, SUMF 19798, to establish scienter as against Mr. Raines. See infra Part II.B. In contrast, Mr. Raines would present the testimony of dozens of witnessesincluding Messrs. Argires and Serockto establish that: (i) no one ever informed Mr. Raines that Fannie Maes accounting violated GAAP, and dozens of persons stated the contrary; (ii) Mr. Raines never directed anyone to violate GAAP; and (iii) Mr. Raines never overruled the accounting judgments made by professionals and always instructed his subordinates that his primary concern was to ensure that whatever change[s] needed to be made from an accounting perspective . . . should be made to ensure compliance with GAAP. See SUMF 12, 16062. On this record, Plaintiffs seek a trial to ask that a jury make the speculative leap to scienter as against Mr. Raines, with nothing to bridge the chasm. Plaintiffs evidence simply does not permit the unreasonable inference they seek; thus summary judgment is warranted. III. PLAINTIFFS IDENTIFY NO EVIDENCE THAT MR. RAINESS STATEMENTS WERE FALSE OR MADE WITH SCIENTER. To prevail on their securities fraud claims against Mr. Raines, Plaintiffs must identify evidence that Mr. Raines made a material misrepresentation or omission, did so with scienter, and that Mr. Rainess misrepresentation . . . proximately caused the plaintiffs loss. Pls. Loss Causation Opp. (Dkt. No. 971) at 1 (citing Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 346 (2005)). In their Opposition, Plaintiffs identify only two such alleged misrepresentations by Mr.

-9-

Case 1:04-cv-01639-RJL Document 993 Filed 01/06/12 Page 14 of 27

Raines.8 But there is no evidence from which a reasonable juror could infer that Mr. Raines made these statements conclusorily or without investigation and with utter disregard for whether there was a basis for the assertions made therein so as to constitute extremely reckless or intentional behavior on his part. Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38, 4748 (2d Cir. 1978). Thus, neither of these statements can sustain a fraud claim against Mr. Raines. A. Statement No. 1 July 30, 2003 Conference Call.

Plaintiffs contend that in response to a question whether Fannie Mae used any accounting practices or any accounting driven transactions, that have either distorted your financial presentations or that might appear questionable if known to the public, Mr. Raines stated the following: I can say to you that we have not undertaken any transactions to distort our true financial condition. . . . weve tried to be very fastidious in our accounting to reflect the economics of our business. Opp. at 1314. Plaintiffs apparently cannot decide precisely which of Mr. Rainess statements in the July 30, 2003 conference call were false. Plaintiffs first theory was that Mr. Rainess statements were false and misleading with regard to Mr. Rainess assur[ance to] investors that Fannie Mae did not have the same accounting issues as Freddie Mac. Compl. 271.9 Plaintiffs offer no evidence, however, to suggest that any such representation was false or made with scienter. As noted previously, in the wake of the announcement of Freddie Macs Restatement, Mr. Raines received additional, specific assurances that Fannie Maes accounting was in compliance with GAAP. See Mot. at
Plaintiffs identify: (i) a July 30, 2003 conference call with the financial press and analysts (Statement No. 1); and (ii) Mr. Rainess October 2004 testimony before Congress (Statement No. 2). See Opp. at 13, 17. Plaintiffs therefore concede that only these two statements can meet all of the elements of their securities fraud claims. See Mot. at 3; Pls. Loss Causation Opp. at 9 (identifying statements Plaintiffs attribute to Mr. Raines and which Plaintiffs allege proximately caused loss). The Courts resolution of the motion for summary judgment regarding the loss causation methodology used by Plaintiffs expert does not impact the resolution of this motion.
9 8

See also Loss Causation Opp. at 46; Jarrell Rept. 9394 & n.61.

- 10 -

Case 1:04-cv-01639-RJL Document 993 Filed 01/06/12 Page 15 of 27

3132; SUMF 14651. Plaintiffs own experts have conceded that Mr. Rainess public statements describing Fannie Maes accounting as appropriateeven in light of Freddie Macs disclosureswere (i) made only after the entire Audit Committeewith KPMG presenthad been told at the end of a series of assessments that Fannie Mae did not have the same accounting issues as Freddie Mac, and (ii) in fact probably true. Mot. at 33 (citing depositions of Robert Berliner and John Barron). In their Opposition to Mr. Rainess Motion, Plaintiffs proffer a second theory: that a different statement from the same conference call was false or misleading because Mr. Raines knew that senior management undertook transactions to move earnings into future reporting periodsthereby distorting the Companys true financial condition. Opp. at 1314. Under this second theory, Mr. Raines misled investors because Fannie Mae was engaged in a host of loss smoothing and earnings management tools to shift earnings from current reporting periods into future reporting periods. Id. at 13. This theory fails because Mr. Rainess statement has nothing to do with either earnings management or loss smoothing. Rather, he was discussing Fannie Maes extensive quarterly certification and disclosure process and his decision, approved by the SEC, to disclose both GAAP earnings (which mechanically reported all volatility consequent to the implementation of FAS 133) as well the companys core earnings, which more clearly reflected the true economics of the company. This theory also fails because it rests on the presumption that any transaction which has the effect of moving earnings into future reporting periodssuch as an end-of-a-quarter sale or an expanded advertising budget at years endnecessarily distorts the Companys true financial position. Id. at 1314. That

- 11 -

Case 1:04-cv-01639-RJL Document 993 Filed 01/06/12 Page 16 of 27

presumption improperly conflates a transaction which has an effect on company earnings with the accounting for and disclosure of that transaction.10 B. Statement No. 2 October 6, 2004 Congressional Testimony.

Plaintiffs identify Statement No. 2 as follows: Upon reading of [OFHEOs allegation that senior management deferred $199 million in expenses to maximize executive bonuses] in the report, the company undertook to assemble the relevant facts. And we have learned of no facts and no other materials that support the allegation that the decision about the amount to book was related to bonuses. . . . the $240 million estimate was arrived at as part of an analysis, conducted by our accounting and financial staff, independent of any considerations of compensation. Additionally, this analysis was documented at the time and was fully discussed with our independent auditor. . . . [W]e looked into the facts of what happened [in 1998], and we found no facts that would support the allegation that was included in the report. Opp. at 17. Plaintiffs argue that this statement was false because of circumstances surrounding the decision regarding amortization of expenses in 1998, which occurred more than two years before the beginning of the Class Period. See id. at 1718; Mot. at 1 n.1. But Plaintiffs point to no evidence that Mr. Rainess statementi.e., that we have learned of no facts or other materials that support the allegation that the [1998 amortization] decision . . . was related to bonuses, Opp. at 17was false or made with scienter. Plaintiffs fail to mention (but do not dispute) the considerable evidence demonstrating that Mr. Raines had reason to believe that his statement was accurate.11

10

Plaintiffs own expert, Sharon Fierstein, acknowledges that transactions may be executed to manage earnings (i.e., change the pattern of earnings) without violating GAAP. Ex. 191 (Fierstein Rpt. at 5-5); see also Ex. 192 (Fierstein Dep. 339:2340:8). These include, without limitation: (i) that prior to this testimony, Mr. Raines was told by William McLucas of WilmerHale LLP that, after investigating the issue, he had learned of no facts or other materials supporting the notion that the recommendation to book $199 million was due to a desire to hit bonus targets; (ii) Ms. Spencers reassurance to Mr. Raines, prior to his testimony, that Fannie Mae had booked the correct amount; and (iii) the representations that Mr. Raines received confirming the propriety of Fannie Maes FAS 91 accounting, see SAUMF 23537; SUMF 13345. See also infra Part II.B.

11

- 12 -

Case 1:04-cv-01639-RJL Document 993 Filed 01/06/12 Page 17 of 27

IV.

PLAINTIFFS FAIL TO IDENTIFY ANY OTHER EVIDENCE THAT WOULD ESTABLISH SCIENTER AS TO MR. RAINES. A. Plaintiffs Cite No Evidence that Mr. Raines Engaged in Improper Earnings Management. 1. Bulk Mortgage Insurance.

Plaintiffs identify Fannie Maes purchase of bulk mortgage insuranceand its attendant impact upon earningsas evidence that Fannie Mae manipulated earnings. Opp. at 9. They suggest that as of at least 2001, Mr. Raines was personally involved in discussions related to the use of insurance transactions, and imply that Mr. Raines was involved in the accounting for the so-called Radian Transaction. See id. at 10. The uncontroverted evidence, however, establishes that, although Mr. Raines endorsed the concept of protecting against credit losses through the purchase of insurance (a judgment that events in the mortgage market after his departure from Fannie Mae confirm as wise), he was never involved in the selection or design of any particular transactions, much less in the accounting for any particular transaction. Plaintiffs cite one October 17, 2001 e-mail from Adolfo Marzol, Executive Vice President and Chief Credit Officer, in support of their allegation. Id. at 10. Plaintiffs fail to provide, however, any of the undisputed record testimony, including (i) Mr. Marzols testimony that although Mr. Raines expressed a willingness to buy insurance to help manage Fannie Maes rising credit losses, Mr. Raines did not direct or suggest any particular transaction; and (ii) testimony from various members of Fannie Maes Credit Policy department stating that they considered Mr. Rainess guidance to protect against credit losses as a business decision and did not interpret his guidance as an instruction to manipulate earnings, to engage in any particular transaction, or to account for a particular transaction in any particular way. See SAUMF 23844. Plaintiffs hope to create the impression of fraud by noting that in the Restatement, Fannie Mae admitted that the accounting for the Radian Transaction violated GAAP. See Opp. - 13 -

Case 1:04-cv-01639-RJL Document 993 Filed 01/06/12 Page 18 of 27

at 1011 & n.37. But Plaintiffs cite no evidence that Mr. Raines was involved in any way with the Radian Transactionone of numerous insurance transactionsnor that he had anything to do with the accounting for this one transaction.12 See SAUMF 23839. And even had Mr. Raines been involved, a post hoc acknowledgement that a transaction violated GAAP, standing alone, does not establish fraud or scienter for Mr. Raines, as a matter of law.13 As such, Plaintiffs have failed to cite any evidence of scienter. 2. Debt Buybacks.

Plaintiffs cite Fannie Maes purchase of debt as evidence of improper earnings management, Opp. at 11, but offer no evidence that such transactions are improper or were inadequately disclosed. No such evidence exists. The record establishes that: (i) debt buybacks were approved for execution only after a determination that the transaction would bear economic benefits, not because of their effect on earnings per share; and (ii) the fact and amount of debt buybacks were fully reflected on Fannie Maes financial statements. See SAUMF 24546. Further, Plaintiffs own expert confirmed that [c]ertain transactions may be executed to manage earnings (i.e., change the pattern of earnings) without violating GAAP. At Fannie Mae, an example of this was its debt buyback program. Ex. 191 at 5-5 (Fierstein Rept.); see also Ex. 192 (Fierstein Dep. 343:18344:20).

12

Moreover, Plaintiffs expert conceded that there was a legitimate business justification for entering into the Radian Transaction, and the transaction was quantitatively immaterial to Fannie Maes financial statements in 2002, 2003, and 2004. Ex. 192 (Fierstein Dep. 561:17, 799:2800:1). The absence of materiality alone is a basis on which to disregard this issue for purposes of evaluating Mr. Rainess motion. See, e.g., Roth v. OfficeMax, 527 F. Supp. 2d 791, 79798 (N.D. Ill. 2007); Mot at 56, 1922 (collecting cases).

13

- 14 -

Case 1:04-cv-01639-RJL Document 993 Filed 01/06/12 Page 19 of 27

B.

Plaintiffs Cite No Evidence that Mr. Raines Knew or Should Have Known of Alleged Deficiencies in Internal Controls and Corporate Governance. 1. Internal Controls.

Plaintiffs contend that Mr. Raines misled the public by certifying to the investing public that he personally disclosed to KPMG and the audit committee all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting, because he was aware of significant deficiencies in Fannie Maes internal controls environment. Opp. at 20 (citing March 15, 2004 Certification of Franklin D. Raines). But Plaintiffs do not dispute that Mr. Raines issued this certification after an extensive process in which he was repeatedly told that there were no material weaknesses or significant deficiencies in internal controls. See Mot. at 2226. Instead, Plaintiffs cite an August 2003 letter from Sampath Rajappa, Fannie Maes former Chief Internal Auditor, to Mr. Raines, and characterize that letter as warning Mr. Raines that internal control environment was cracking under the pressure of EPS goals that he set. Opp. at 19. The letter makes no such allegation. Mr. Rajappa sent this letter because Mr. Raines had maintained an atmosphere where he said if you guys have anything on your mind, let me know, and I believe he meant it. SAUMF 248. Plaintiffs fail to mention that the same letter reiterated Mr. Rajappas assurances to Mr. Raines about the state of Fannie Maes internal controls, accounting, integrity, and culture:

Fannie Mae is the best company I have worked for and as I have said the tone at the top is the best I have seen. In my 9+ years here, as the controller and head auditor, I have never seen or been part of any discussion where anything was ever discussed that could be considered to be not kosher. You have some of the best senior managers in Financevery knowledgeable, conscientious, and hardworking. The above is certainly not to be critical of anyone, or to imply somebody is doing something bad, but given our limitations (including mine) we collectively need to make some mid-course corrections.

- 15 -

Case 1:04-cv-01639-RJL Document 993 Filed 01/06/12 Page 20 of 27

SAUMF 247 (emphases added). Plaintiffs next cite the 2002 Barnes Memorandum and assert that Mr. Barnes sent the memorandum to Mr. Raines, see Opp. at 1819, but as discussed supra, there is no evidence that Mr. Raines ever received the memorandum. See Part II.B.14 None of this evidence suggests that Mr. Raines was aware of any material deficiencies in Fannie Maes internal controls environment. And upon hearing concerns about the Controllers Office, Mr. Raines allocated significant additional resources to that function, see SAUMF 249, evidence which is directly inconsistent with plaintiffs proposed inference of scienter. See In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1425 (9th Cir. 1994) (noting that actions which evinced officers good faith belief in optimism of company conclusively rebutted plaintiffs speculative inferences in light of lack of direct evidence on scienter). Even if the evidence could be construed as Plaintiffs wish, these isolated assertions regarding Fannie Maes operations are not sufficient to establish scienter because such evidence at most constitutes an issue of corporate mismanagement or negligence, not federal securities fraud. In re REMEC Inc. Sec. Litig., 702 F. Supp. 2d 1202, 1249 (S.D. Cal. 2010) (granting summary judgment to CEO on scienter grounds in the face of internal control allegations).15 2. Corporate Governance.

Plaintiffs argue that Mr. Rainess reliance upon Fannie Maes corporate governance structure was unreasonable. See Opp. at 2125. Plaintiffs do not dispute the extensive certification and disclosure process described in Mr. Rainess opening brief. See Mot. at 22
14

Plaintiffs also claim that one of Fannie Maes experts, Mr. Roy Van Brunt, answered, when posed with a hypothetical question, that if a CEO had been told that his accounting systems were grossly inadequate yet went ahead and issued and signed financial reports . . . it would raise a red flag. Opp. at 20. But Plaintiffs cite no evidence that Mr. Raines was ever told by anyone that the accounting systems were grossly inadequate.

See also In re IMAX Sec. Litig., 587 F. Supp. 2d 471, 483 (S.D.N.Y. 2008) (noting that [t]he failure . . . to identify problems with the defendant-companys internal controls and accounting practiceswithout more does not constitute reckless conduct); Roth, 527 F. Supp. 2d at 79798 ([M]ere allegations of GAAP violations, the restatement of income, or statements regarding the internal controls of a company that are later proven to be false, are not sufficient to demonstrate that those who made the statements committed securities fraud.).

15

- 16 -

Case 1:04-cv-01639-RJL Document 993 Filed 01/06/12 Page 21 of 27

27. Instead, Plaintiffs offer their own opinionsas legal counsel, not corporate governance expertsthat Fannie Maes corporate governance structure was not appropriately designed and did not function properly. See Opp. at 21. But to establish that a CEO of a large publicly traded corporation was extremely reckless so as to constitute scienter, expert testimony is not just helpful but in fact required. In order for a fact-finder to determine whether defendants acted with scienter in this context, s/he must understand what constituted common, accepted activity for a company such as Fannie Mae at the time: knowledge that is beyond the purview of an average juror. Because the assessment of Mr. Rainess conduct with respect to corporate governance raises question[s] that require[ ] technical, and specialized knowledge, and since [t]he standard[] of conduct of a professional under these circumstances is not within the courts general knowledge and experience, the absence of expert testimony from Plaintiffs on the question of corporate governance warrants summary judgment in Mr. Rainess favor. SEC v. Guenthner, 395 F. Supp. 2d 835, 84647 (D. Neb. 2005) (stating [t]he need for expert testimony . . . is analogous to the need for expert testimony on the standard of care in a professional malpractice case and granting judgment as a matter of law for officers due to SECs failure to present expert testimony on whether officers actions complied with GAAP). Indeed, it is difficult if not impossible to have an intelligent evaluation of the facts regarding the corporate governance system at Fannie Mae without the application of [the] specialized knowledge of an expert witness. Fed. R. Evid. 702, advisory committees Note, 1972 Proposed Rules. Recognizing this reality, Plaintiffs previously engaged Harvey Pitt to opine on Mr. Rainess compliance with the standard of care for corporate governance, but, upon realizing that Plaintiffs had withheld from him material information relevant to his opinions, Mr. Pitt refused

- 17 -

Case 1:04-cv-01639-RJL Document 993 Filed 01/06/12 Page 22 of 27

to continue to be deposed, and the Court struck Mr. Pitt as an expert.16 The only expert testimony remaining in this case is undisputed that Fannie Mae had an appropriately designed corporate governance structure, which warranted the reliance of a senior executive such as Mr. Raines in connection with the proper determination and implementation of [its] accounting standards. Ex. 195 at 1314 (Gilson Rept.).17 See In re REMEC Inc. Sec. Litig., 702 F. Supp. 2d at 1228 (granting summary judgment in light of absence of expert testimony). C. Mr. Rainess Lack of Stock Sales and Fannie Maes Executive Compensation Structure Do Not Support a Claim of Securities Fraud.

To establish scienter on motive and opportunity, Plaintiffs must point to concrete benefits that could be realized by . . . the false statements and wrongful nondisclosures alleged. Kalnit, 264 F.3d at 139. That Mr. Raines engaged in absolutely no stock sales is fatal to any motive and opportunity theory, because this fact alone negates any possible inference of scienter. See Mot. at 1518. Although Plaintiffs assert that a jury could reasonably conclude that a corporate officer complicit in such earnings management would not unload any company stock, so long as its inflated price holds steady, Opp. at 2728, courts uniformly reject this proposition. Allegations that officers were motivated to defraud the public because an inflated stock price would increase their compensation are insufficient, as a matter of law, because to

See Ex. 193 (Pitt Dep. 329:321, 336:17338:3). With no expert to testify on their behalf, Plaintiffs suggest that Mr. Rainess experts are testifying against him. See Opp. at 2224. That allegation is unusually brazen and misleading. The hypotheticals posed to Professor Gilson and quoted by Plaintiffs presupposed that Mr. Raines was told of these criticisms during the Class Period, for which Plaintiffs cite no evidence. And as for certification and disclosure controls, every quotation taken from Professor Hafts deposition is based on a laundry list of suggestions from a 2008 to 2009 edition book written by Professor Haft, which by Professor Hafts own testimony were taken totally out of context, see, e.g., Ex. 194 (Haft Dep. 136:22138:4), because every procedure as suggested from the preface of the book and throughout, whether you use a particular procedure or not, depends upon the particular facts and circumstances involving the company. So it is a general guide, not a definitive list of required practices, id. at 40:342:8; see also Rainess Resp. to Pls. Genuine Issues of Material Fact 96.
17

16

See also id. at 13.b ([T]he corporate governance structure of FNMA was appropriately designed and would warrant the reliance of a senior executive such as Mr. Raines . . . .); Ex. 196 at 14 (Osborne Rept.) (concluding [t]hroughout the Class Period, Fannie Mae maintained robust corporate governance processes and that Mr. Raines acted as a reasonable CEO would during that period).

- 18 -

Case 1:04-cv-01639-RJL Document 993 Filed 01/06/12 Page 23 of 27

support scienter based on the benefit [that] a defendant derives from an increase in the value of his holdings, a plaintiff must demonstrate some sale of personally-held stock or insider trading. Phillips v. LCI Intl, Inc., 190 F.3d 609, 622 (4th Cir. 1999).18 Plaintiffs attempt to salvage their case by asserting that Mr. Raines created a compensation program with a particularly strong motive . . . to manipulate earnings, and then by mischaracterizing two components of the program: the annual bonus and the EPS Challenge Grant.19 See Opp. at 2526. But the record is plain that: (i) Congress, by statute, required Fannie Maes Board to set compensation for all executive officers and to tie compensation to corporate performance; (ii) Fannie Maes compensation structureincluding the use of EPS as a metricwas set by the Board with the aid of a series of outside compensation experts, well before Mr. Rainess tenure; and (iii) expert testimony uniformly rejected Plaintiffs arguments, and concluded that Fannie Maes executive compensation plan, taken as a whole, was comparable to its peers and did not create strong incentives to manipulate accounting results to achieve particular earnings-based goals.20 See SAUMF 25056. After seven years of discovery, Plaintiffs case unravels because they have failed to produce evidence of scienter. Instead, their case teeters on repeated, but unsupported, theories of motive and opportunity, mixed with a mere suggestion of recklessness. In re Metris Cos. Sec. Litig., 428 F. Supp. 2d 1004, 1013 (D. Minn. 2006) (granting summary judgment where theories of recklessness and motive were unsupported by discovery).
See also Novak v. Kasaks, 216 F.3d 300, 307 (2d Cir. 2000) (noting that plaintiffs cannot rely on motives possessed by virtually all corporate insiders, including . . . the desire to maintain a high stock price in order to increase executive compensation for scienter); Acito v. IMCERA Grp., Inc., 47 F.3d 47, 54 (2d Cir. 1995) (same). Plaintiffs also reference Mr. Rajappas $6.46 Speech, Opp. at 2627, but fail to mention (i) that Mr. Rajappas speech directed Internal Audit employees to be detailed, be obsessive about the facts, go where the facts take [you] and be objective, be fair, but be tough when there are serious control issues, be polite, be business courteous, but never compromise or dilute your conclusions, SAUMF 257; or (ii) that the speech, when read in full, was a positive speech about the importance of risk management, see, e.g., Ex. 195 at 28790 (Gilson Rept.).
20 19 18

See Ex. 182 at 6 (Guay Rept.); Ex. 197 at 78 (Meyer Rept.).

- 19 -

Case 1:04-cv-01639-RJL Document 993 Filed 01/06/12 Page 24 of 27

V.

THE PAUL WEISS AND OFHEO REPORTS DO NOT ESTABLISH MR. RAINESS SCIENTER. In their final gambit, Plaintiffs assert that Fannie Maes regulator charged Mr. Raines

with intentional and reckless misconduct and cite the reports issued by Paul Weiss and OFHEO, along with a complaint filed by the SEC and a Notice of Charges filed by OFHEO. See Opp. at 2830. These reports, complaints, and settlements do not establish Mr. Rainess scienter and, in any event, are not ultimately admissible against him. Statements in reports, when relied upon for the truth of the matter asserted, are hearsay and therefore generally inadmissible.21 See In re Sept. 11 Litig., 621 F. Supp. 2d 131, 153 (S.D.N.Y. 2009). But even if the Paul Weiss Report were admissible, it would not aid Plaintiffs case, as it states: we did not find that [Mr. Raines] knew the Companys accounting departed from GAAP in significant ways. Ex. 190 at 5. Plaintiffs citations to the OFHEO Reports are equally unavailing. All the statements Plaintiffs cite from OFHEO Reports against Mr. Raines either (i) generalize about the intentions and knowledge of Fannie Maes senior management, employees, or senior executives; or (ii) bear solely on the quality of Fannie Maes internal controls. Neither category of statements establishes scienter for Mr. Raines.22 The first category of statementsi.e, statements concerning various senior managementnever mentions Mr. Raines by name or otherwise distinguishes between him and an indefinite number of Fannie Maes senior management.23
21

Mr. Raines hereby joins and incorporates by reference Part I.C of the Reply Brief of Leanne G. Spencer and Part VI of the Reply Brief of J. Timothy Howard, regarding the inadmissibility of the Paul Weiss and OFHEO Reports.

22

The Court need consider only the specific portions of the OFHEO Reports that Plaintiffs cite in their brief. See 1443 Chapin St., LP v. PNC Bank, N.A., No. 08-1532, F. Supp. 2d, 2011 WL 4071849, at *7 (D.D.C. Sept. 14, 2011). Plaintiffs may not cite and rely on those reports in their entirety to avoid summary judgment. See Twist v. Meese, 854 F.2d 1421, 1425 (D.C. Cir. 1988) ([A] district court judge should not be obliged to sift through hundreds of pages of depositions, affidavits, and interrogatories in order to make [its] own analysis and determination of what may, or may not, be a genuine issue of material disputed fact.).

See Opp. at 14 (referring to objectives of management); id. at 17 (referring to manipulations of senior management); id. at 29 (quoting OFHEO Reports findings about efforts of senior management and senior executives); Pls. Resp. to SUMF 117 (describing senior managements views on FAS 133 and their efforts to implement those views); id. 142 (same).

23

- 20 -

Case 1:04-cv-01639-RJL Document 993 Filed 01/06/12 Page 25 of 27

As this Court has already held (in accord with other courts), allegations of scienter must be specific to each defendant. See In re Fannie Mae Sec. Litig., 503 F. Supp. 2d 25, 3940 (D.D.C. 2007) (PSLRA requires plaintiffs to allege specific facts demonstrating that each of the defendants acted with the requisite state of mind.). The second category of statements imports OFHEOs conclusions about the alleged deficiencies in Fannie Maes internal controls.24 As discussed in Part IV.B.1, however, evidence of faulty internal controls at most bears on mismanagement and does not support the inference of securities fraud. Accordingly, whatever the Courts ruling on the admissibility of the Paul Weiss and OFHEO Reports, none of the statements on which Plaintiffs rely can defeat Mr. Rainess motion for summary judgment. Finally, Plaintiffs rely on an SEC Complaint against Fannie Maenot Mr. Rainesin an enforcement action that was later settled. See Opp. at 2829. That complaint is inadmissible hearsay. See In re Balanced Plan, Inc., 257 B.R. 921, 925 (Bankr. W.D. Mo. 2001) (finding SEC complaint inadmissible hearsay for which no exception to inadmissibility applies). Contrary to Plaintiffs suggestion that it charged Mr. Raines with intentional and reckless misconduct, Opp. at 28, the complaint does not make any allegations against Mr. Raines. And the SEC did not serve a Wells Notice on Mr. Raines, suggesting that the agency was not even considering charging him for violation of any securities statute, including negligence statutes.25 CONCLUSION For the foregoing reasons, Mr. Raines requests that this Court enter an order granting summary judgment and dismiss the case against him in its entirety.

24 25

See Pls. Resp. to SUMF 43, 61, 106, 142, 170, 172, 185.

Plaintiffs offer no rationale for their reliance on the Notice of Charges issued by OFHEO in a separate administrative proceeding that was settled with a denial of liability by Mr. Raines. See Opp. at 2930. There is none. Rule 408 plainly excludes such evidence. See Fed. R. Evid. 408(a)(1) (prohibiting use of settlement to prove validity of a disputed claim).

- 21 -

Case 1:04-cv-01639-RJL Document 993 Filed 01/06/12 Page 26 of 27

Dated: December 28, 2011

Respectfully submitted, /s/ Kevin M. Downey Kevin M. Downey (D.C. Bar No. 438547) Alex G. Romain (D.C. Bar No. 468508) Joseph M. Terry (D.C. Bar No. 473095) Matthew L. Fore (D.C. Bar No. 491184) WILLIAMS & CONNOLLY LLP 725 Twelfth Street, N.W. Washington, D.C. 20005 Tel: (202) 434-5000 Fax: (202) 434-5029 Counsel for Defendant Franklin D. Raines

- 22 -

Case 1:04-cv-01639-RJL Document 993 Filed 01/06/12 Page 27 of 27

CERTIFICATE OF SERVICE I certify that January 6, 2012, pursuant to the Revised Order Governing Filing Requirements for Motions for Summary Judgment (Dkt. No. 962) (Nov. 15, 2011), I caused to be served the following: (1) Reply Memorandum in Support of Defendant Franklin D. Rainess Motion for Summary Judgment; (2) Defendant Franklin D. Rainess Reply to Lead Plaintiffs Responses to Defendant Rainess Statement of Undisputed Material Facts and Statement of Additional Undisputed Material Facts in Support of Defendant Franklin D. Rainess Motion for Summary Judgment; (3) Defendant Franklin D. Rainess Responses to Lead Plaintiffs Statement of Genuine Issues of Material Fact Precluding Summary Judgment; and (4) Declaration of Eun Young Choi in Support of Defendant Franklin D. Rainess Motion for Summary Judgment.

/s/ Eun Young Choi Eun Young Choi (D.C. Bar No. 987677)