Settlement Reached in Fannie Mae Stock Drop Suit

U.S. District Judge Paul A. Crotty of the U.S. District Court for the Southern District of New York has preliminarily approved a settlement between the Federal National Mortgage Association (FNMA) and a group of retirement plan participants who claim the firm held onto company stock when it was imprudent to do so. 

The settlement agreement provides for $9,000,000 (less attorneys’ fees and settlement expenses) to be set aside in an account for all persons who were participants in or beneficiaries (including alternate payees) of the FNMA Employee Stock Ownership Plan at any time between April 17, 2007, and May 14, 2010, and whose plan accounts included investments in the Fannie Mae Stock Fund at any point during the class period. 

In 2012, Crotty found that the plaintiffs plausibly alleged that defendants named in the lawsuit knew both the causes of the price drop of FNMA stock and the reasons it was imprudent to retain the plan’s investment in the stock. 

The benefit plan committee defendants argued that they cannot be found liable for a breach of their duty of prudence under the Employee Retirement Income Security Act (ERISA) because divesting the plan’s assets of FNMA’s stock would involve trading on insider information; alternatively, disclosure of non-public information before divesting would have caused the very decline in stock price that plaintiffs sought to avoid. Crotty rejected their arguments, saying defendants could have “taken a variety of steps that would not have been violations of the securities laws, including independently evaluating the prudence of the maintenance of the [company] stock fund as an investment option under the plans, ceasing new investments in the [company] stock fund, questioning the valuation of in-kind stock contributions to the plans, [or] considering whether public disclosure of material information would have been in the best interests of the plans’ participants … .” 

The settlement agreement is here.