In 2007, Federal Reserve Chairman Ben S. Bernanke and U.S. Treasury Secretary Henry Paulson urged Fannie Mae to raise capital and undergird its balance sheet in order to comply with various regulations. Thereafter, Fannie Mae initiated a capital raising campaign, with the objective of reinforcing its balance sheet for: (i) continued satisfaction of government mandated capital requirements, thus allowing the Company to continue purchasing mortgages from banks nationwide; (ii) to increase shareholder value; and (iii) to provide stability to the secondary mortgage market.
In May of 2008, Citigroup, UBS, Merrill Lynch, Morgan Stanley and Wachovia distributed an Offering Circular in connection with the sale of about 80 million shares, or $2 billion, of Fannie Preferred Stock, Series T. It is alleged that the Offering Circular contained materially false and misleading information. Specifically, the Offering Circular misrepresented Fannie Mae’s capital position by postponing a series of asset write-offs that were mandated under Generally Accepted Accounting Principles (“GAAP”). Had the entirety of Fannie Mae’s capital deficiencies been disclosed by Citigroup, UBS, Merrill Lynch, Morgan Stanley and Wachovia, Fannie Mae’s ability to raise the capital would have been significantly hindered. As a result of these and other materially false and misleading statements and omissions, Citigroup, UBS, Merrill Lynch, Morgan Stanley and Wachovia violated Section 12(a)(2) of the Securities Act of 1933 as well as Sections 10(b) and 20(a) of the Exchange Act.
In July of 2008, the reality about Fannie Mae’s actual financial condition began to be revealed. Specifically, in a July 11, 2008 article, The New York Times said that the U.S. Federal Government was considering taking over Fannie Mae and placing it in a conservatorship due to growing financial stress on the Company. As a result of this announcement, Fannie Mae’s Series T Preferred Stock declined $2.03 per share, or 10.6%, from $19.03 per share on July 10, 2008, to $17.00 per share on July 11, 2008. A little over one month later, on August 20, 2008, The New York Times stated that a bailout by the U.S. Federal Government was becoming increasingly likely. Following this news, shares of the Fannie Mae’s Series T Preferred Stock declined an additional $2.79 per share, or 20%, from $13.78 per share on August 19, 2008 to close at $10.99 per share on August 20, 2008.
In September of 2008, the Federal Housing Finance Agency (“FHFA”) was appointed conservator of Fannie Mae by the United States Treasury Department, pursuant to the Federal Housing Finance Regulatory Reform Act of 2008 and the Federal Housing Enterprises Financial Safety and Soundness Act of 1992. The Treasury Department’s announcement of the takeover plan uncovered Fannie Mae’s inadequate capital management and significant capital inflation, thereby causing the price of Fannie Mae’s Series T Preferred Stock to drop $10.70 per share, or 78%, from $13.70 per share on September 5, 2008 to $3.00 per share on September 8, 2008. Overall, the value of Fannie Mae’s Series T Preferred Stock fell $22 per share, or 88%, from the initial offering price of $25 per share on May 13, 2008, to under $2 per share in early October 2008.