State pension funds from Ohio and West Virginia, aided by well-known private trial lawyers, filed court actions yesterday against mortgage lending giant Freddie Mac and three ousted executives, accusing them of securities fraud because of accounting errors the company recently admitted.
Ohio Attorney General Jim Petro, a former state auditor who plans to run for governor in 2006, said in an interview that Freddie Mac’s “manipulation” cost the state employees’ and teachers’ pensions funds more than $25 million in lost stock value. “Freddie Mac is obligated to follow certain accounting standards, and they did not,” he said. “This is securities fraud.”
The Ohio lawsuit names former Freddie chief executive Leland C. Brendsel, president David W. Glenn and chief financial officer Vaughn A. Clarke as defendants. All were forced out in June in the midst of a financial restatement in which the company understated its income over three years by as much as $4.5 billion. An internal investigative report last month said the company manipulated its finances, and used incorrect accounting, in an attempt to create smooth earnings growth favored by Wall Street.
Ohio also filed a motion asking that it be named the lead plaintiff in the various shareholder class-action suits that have been brought against Freddie Mac.
West Virginia officials filed a similar request yesterday, the deadline for seeking such status. The state lost $1.8 million. West Virginia combined its complaint with the Central States Teamster Fund, which is seeking to recover more than $8 million.
A spokesman for Freddie Mac declined comment yesterday, citing company policy against discussing pending litigation.
Lynn A. Stout, law professor at the University of California in Los Angeles, said the state actions yesterday are part of a general trend in which state authorities are taking the lead in prosecuting fraud cases. This has occurred more frequently since a 1995 federal law said institutional investors that lost the most, rather than individual shareholders, would get priority in being named lead plaintiffs in securities cases.
James D. Cox, securities law professor at Duke University, said plaintiff firms court institutional investors like big state pension funds to try to get their business. “It’s the name of the game,” he said. “If you want to be a securities litigator, you’ve got to have a couple of these funds. There’s a pretty good campaign going on by the plaintiff firms to develop relationships with institutional investors so they would be in a position to represent them.”
For example, the University of California is the lead plaintiff in the class-action lawsuit against Enron Corp. and Arthur Andersen. It estimated it lost $145 million in the collapse of the Houston energy trader.
Lawyers representing other shareholders in lawsuits against Freddie Mac said Ohio would likely be chosen to take the lead in a federal class-action case.
Both Ohio and California sued AOL Time Warner Inc. last month for losses to their state pension funds. Ohio, which has about $90 billion in pension investments, is seeking to recover $100 million in the AOL Time Warner case. Ohio Attorney General Petro said the state also has suits pending against Enron and WorldCom and is the lead plaintiff in a federal class-action lawsuit against Global Crossing.
“I don’t mean to be excessively litigious, but I think in terms of what we’ve seen, we need to see more corporate accountability,” he said.