Troubled mortgage giant Fannie Mae now faces a round of shareholder lawsuits seeking billions of dollars in stock losses stemming from the company’s accounting missteps.

Since a report that found evidence of improper accounting at the company was released last week, several lawsuits have been filed in federal court, naming Fannie Mae, Chairman Franklin Raines, Chief Financial Officer Timothy Howard and Chief Operating Officer Daniel Mudd as defendants.

The suits allege the company misrepresented financial results and issued false and misleading statements to appear as a low-risk, steadily growing company to investors.

“The Company issued numerous other false and misleading statements and presented the public with materially false and misleading financial statements that created the illusion that Fannie Mae was a safe and steady earner and largely immune to interest-rate fluctuations and other macro-economic factors that, in comparable institutions, resulted in earnings volatility,” attorneys for Milberg Weiss Bershad & Schulman said in a statement.

New York law firm Milberg Weiss is one of several firms that intend to file for class-action status on behalf of shareholders who purchased stock between Jan. 13, 2000, and Sept. 22, 2004. The firm specializes in class-action cases.

Fannie Mae is one of the largest financial institutions in the world, with $1 trillion in reported assets and $961 billion in reported debt as of Dec. 31, 2003. Both Fannie Mae and Freddie Mac, its smaller rival, are shareholder-owned but charted by the U.S. Congress for the purpose of maintaining a constant flow of mortgage funds for the nation’s housing market.

Fannie’s federal regulator, the Office of Federal Housing Enterprise Oversight, publicly released a 211-page report late Wednesday that outlines misapplications of Generally Accepted Accounting Principles, or GAAP for short. Those missteps are not limited occurrences, “but are pervasive and are reinforced by management,” according to the report.

The report found that the company had used improper “cookie jar” reserve accounting – setting aside large cash reserves to reduce revenues in some years so they can be used in other years when the company needs them. That smoothes out a company’s earnings, but can give investors an inaccurate view of a company’s financial performance.

After the release of the OFHEO report, Fannie Mae (NYSE: FNM) shares fell another 5.9 percent to a low of $66.50 on Sept. 23, 2004, after falling 5.6 percent the previous day, for a two-day decline of $7.68, or 10.3 percent.

Fannie Mae spokesman Brian Faith said the company would not comment on the lawsuits.

Other firms that have filed complaints include Cohen Milstein Hausfeld & Toll, also of New York, and Chicago- and New York-based Lasky & Rifkind.

In addition to lawsuits and scrutiny from federal regulators, the Securities and Exchange Commission last week launched an informal investigation into Fannie Mae. The House Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises also will hold a hearing on Oct. 6 to discuss Fannie Mae’s accounting problems and management issues.


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