In a recent post (here), I described the "new wave" of credit crisis lawsuits, in which the companies involved were damaged by their exposures to other companies experiencing credit crisis losses. The latest of these new wave lawsuits to be filed involves the Federal Agricultural Mortgage Corporation, or "Farmer Mac" as it is more familiarly known.
Freddie Mac is a government sponsored entity that was established to support a secondary market for agricultural real estate and rural housing mortgage loans. According to their December 5, 2008 press release (here), plaintiffs’ lawyers have initiated a securities lawsuit against Farmer Mac and certain of its directors and officers in federal court in the District of Columbia. According to the press release,
a) defendants were inflating Farmer Mac’s results through manipulations relating to the characterization of impairment costs and/or depreciation expenses which inflated the Company’s reported cash flows, gross margins and Core and GAAP-earnings; (b) the Company’s financial results were inflated by defendants’ use of overly optimistic assumptions of asset valuations and investments, which were also reflected in defendants’ misuse of mark-to-market accounting; (c) the Company’s exposure to investment losses and credit problems of trading partners such as Lehman Bros. and Fannie Mae was much greater than represented; and (d) the Company was not on track to meet or exceed guidance sponsored or endorsed by defendants.
Investors only first learned the truth about Farmer Mac on September 12, 2008, when its shares closed at $16.56, from an open of $23.78, losing over 30% of their value in one day after the Company filed documents with the SEC saying it would incur significant charges due to its exposure to Fannie Mae securities. Further, shares of the Company continued to trade down thereafter to close to $2.00 per share following announcements concerning the resignation of its Chairman of the Board and losses related to debt issued by Lehman Brothers.
The involvement of the allegations relating to the company’s Fannie Mae and Lehman Brothers investments is the reason I have characterized this case as a new wave credit crisis lawsuit. That is, it was its exposure to these other companies that caused Farmer Mac’s problems, at least in part.
However, because of the allegations relating to Farmer Mac’s own asset valuations, including its alleged misuse of mark-to-market accounting, the lawsuit also has characteristics of the more conventional subprime and credit-crisis related type of litigation that has accumulated over the last two years.
In any event, I have added the Farmer Mac lawsuit to my running tally of subprime and credit crisis-related securities lawsuits, which can be accessed here. With the addition of the Farmer Mac lawsuit, the current tally of subprime and credit crisis-related securities lawsuits now stands at 132, of which 92 have been filed in 2008.
And Speaking of Credit Crisis Litigation: One of the more noteworthy events during the current credit crisis was the collapse of Bear Stearns in March 2008 (which already seems like a long time ago, doesn’t it?) and its acquisition by JP Morgan Chase.
Following JP Morgan’s March 16, 2008 agreement to acquire Bear Stearns, shareholders of Bear Stearns filed a New York (New York County) Supreme Court lawsuit against both Bear Stearns and JP Morgan, alleging that the $10 per share consideration JP Morgan paid for Bear Stearns was inadequate. The plaintiffs sought damages from Bear Stearns’ directors for claimed violations of their fiduciary duties and from JP Morgan for its allegedly tortious conduct in effecting the merger.
In a December 4, 2008 opinion (here), Judge Herman Cahn granted the defendants’ motion for summary judgment. The court rejected the plaintiffs’ challenges to the deal, holding that the business judgment rule applied, and that under the rule, the court could not second guess the board:
In response to a sudden and rapidly-escalating liquidity crisis, Bear Stearns’ directors acted expeditiously to consider the company’s limited options. They attempted to salvage some $1.5 billion in shareholder value and averted a bankruptcy that may have returned nothing to the Bear Stearns’ shareholders, while wreaking havoc on the financial markets. The Court should not, and will not, second guess their decision.
In a December 5, 2008 post on the Harvard Law School Corporate Governance Blog (here), the attorneys that represented JP Morgan in the Bear Stearns case discuss the decision in greater detail, noting that "as the credit crisis continues and evolves, boards will continue to face serious challenges. The Bear Stearns opinion confirms, however, that the directors that act diligently and in good faith should not have exposure for their actions."
The suggestion that the Bear Stearns opinion represents a precedent in support of the protection of directors arguably has already been borne out in a North Carolina court.. As Francis Pileggi discusses on his Delaware Corporate and Commercial Litigation Blog (here), the North Carolina court considering shareholders’ challenges to the merger of Wachovia and Wells Fargo has dismissed the action, with reference to the New York court’s decision in the Bear Stearns case. The Wachovia and Wells Fargo merger was arranged in similarly unusual circumstances in light of the economic turmoil that in very short order saw some of the countries largest financial institutions "go under" or need "bailouts."
A December 6, 2008 Charlotte Observer article describing the ruling in the Wachovia case can be found here.
Fake ID: In a recent post (here), I analyzed the problems associated with credential inflation and reviewed famous examples of identity misrepresentation. However, a recent episode involving prominent attorney Marc S. Dreier, the name partner of Drier LLP, may represent a whole new level of identity misrepresentation.
As reported on December 5, 2008 on the City Room blog (here), earlier last week Toronto police arrested Drier for "fraudulent impersonation." A December 8. 2008 Law.com article (here) reports that at a meeting in the offices of the Ontario Teachers’ Pension Plan with representatives of Fortress Investment Group and involving a multimillion dollar deal between the two organizations, Drier "pretended to be Michael Padfield, senior legal counsel for investments at Ontario Teachers." The Wall Street Journal reports (here) that Dreier passed out Padfield’s business card and signed documents as Padfield. When Padfield himself arrived at the meeting, police were called.
As if that were not enough, three attorneys from the Wilson Sonsini firm have been retained "to examine firm operations and finances, including escrow accounts." Whether or not these concerns are related to Drier’s arrest is not specified. However, the Above the Law blog reports here that as much as $38 million is missing from the Dreier firm’s client escrow account.
The Journal also reports that federal prosecutors are looking into concerns raised by Solow Realty, a former client of the firm, "that Mr. Dreier allegedly was selling to hedge funds fraudulent documents falsely purporting to be debt instruments of Solow without Solow’s authority."
The firm’s holiday party, planned to take place last Thursday night at the Waldorf Astoria, was cancelled. I guess it is hard to party when your name partner is (or was) in jail and your client escrow account is missing tens of millions of dollars.
I doubt even John Grisham could have made this one up.
UPDATE: The Marc Dreier story just keeps getting weirder and weirder. In a totaly bizarre development, on December 8, 2008, the SEC filed a complaint against Dreier in which it accused him of "fraud in connection with an elaborate scheme that raised at least $113 million from the sale of bogus promissory notes." Read the SEC’s press release here. The press release that Dreier has already admitted his involvement with the phony note sale. The WSJ.com Law Blog reports (here), that the DoJ has also filed a criminal complaint against Dreier and that he was arrested upon his return to the U.S. on Sunday. The firm’s lender has also sued the law firm because the firm is in default on its line of credit.