The subprime mortgage collapse has triggered a wave of class actions by angry shareholders who allege that Fannie Mae, Freddie Mac and underwriters cloaked the true financial health of the two mortgage giants, both now under conservatorship with the U.S. Treasury Department, to boost stock offerings.
The most recent suit, filed on Oct. 9 by the law firm Whatley, Drake & Kallas of Birmingham, Ala., alleges that stock underwriters failed to disclose that Fannie Mae was "grossly undercapitalized" due to subprime holdings when it issued a stock offering at $25 per share in December 2007. The stock is currently valued at about $1.50. The suit does not yet have a name plaintiff. Case No. 08-cv-08008 (S.D.N.Y.).
The Whatley filing joins two similar class actions filed recently in the Southern District of New York related to other stock offerings by the mortgage companies. All the suits make similar allegations and include many of the same defendants, including Morgan Stanley, Merrill Lynch, Goldman Sachs & Co., UBS Securities LLC and Wachovia Capital Markets LLC, all of which declined to comment. Crisafi v. Merrill Lynch, No. 08-cv-08008, and Mark v. Goldman Sachs & Co., No. 08-cv-08181.
Allegations of failure to disclose subprime liabilities are the basis for two more class actions, one each against Freddie and Fannie and their corporate officers. Kuriakose v. Federal Home Loan Mortgage Co. (Freddie Mac Action), No. 08-CV-07281, and Genovese v. Ashley (Fannie Mae Action), No. 08-CV-07831. Both were filed in the U.S. District Court for the Southern District of New York.
The class actions are likely to incite even more litigation by wealthier individual and institutional investors, said Lawrence L. Klayman, a former securities broker turned litigator and partner at Klayman & Toskes of Boca Raton, Fla.
Investors who lost $100,000 or more on the fall of the stock of Freddie and Fannie likely will recover far more if they pursue their own suit or arbitration, Klayman said.
"If you have a significant amount at stake, you should consider an action of your own," he said. "The individual investor who owns a few shares belongs in the class action, but our investors typically have much larger losses."
The tide of subprime litigation is rising just as Klayman & Toskes is settling the last of the cases it brought on behalf of investors in evanescent dot-com companies that floundered when the tech bubble burst at the beginning of the decade.
"We expect to wrap up the last of our cases from the tech bubble in the first quarter of next year, so based on that I anticipate this (subprime litigation) will keep us busy for seven or eight years," Klayman said.