A U.S. federal judge recently dismissed a lawsuit against Freddie Mac that claimed Freddie Mac materially misrepresented its exposure to risky mortgage products, leading to investment losses. The lawsuit was brought by a group of pension funds, including Central States, Southeast and Southwest Areas Pension Fund; and National Elevator Industry Pension Plan.
The plaintiffs argued that, following Freddie Mac's disclosure of a $2 billion loss for the third quarter of 2007, the company misrepresented its financial situation. These misrepresentations initially resulted in inflated share prices, followed by sharply declined share prices as Freddie Mac's poor financial situation became clear to the market. Judge John Keenan dismissed the plaintiffs' motion, saying the plaintiffs failed to adequately prove proximate cause between any misrepresentation or misstatement relating to Freddie Mac's exposure to nonprime mortgage loans, accuracy of financial reporting, and its capital adequacy and economic harm on the plaintiffs. Freddie Mac is a federal agency in the Department of Housing and Urban Development (HUD) that insures residential mortgage loans made by private lenders and sets standards for underwriting mortgage loans.