Ohio Attorney General Jim Petro has filed a securities fraud, class-action lawsuit against Fannie Mae, alleging the mortgage buyer manipulated its earnings to artificially inflate the price of its common stock.

The suit was filed in U.S. District Court, Southern District of Ohio on behalf of the Ohio Public Employees Retirement System, State Teachers Retirement System of Ohio, Ohio Bureau of Workers’ Compensation and all other purchasers of Fannie Mae common stock from Oct. 11, 2000, through Sept. 22, 2004.

“These defendants manipulated earnings in a fraudulent scheme to deceive investors about Fannie Mae’s true financial state,” Petro said in a statement. “This deception could cost shareholders billions of dollars.”

A Fannie Mae spokesman, Brian Faith, said the company would not comment on the lawsuit.

The complaint alleges that Fannie Mae and its top executives–Franklin D. Raines, J. Timothy Howard and Leanne G. Spencer–artificially inflated the company’s publicly traded common stock through false public financial statements.

The lawsuit also alleges Fannie Mae and its officers violated the Securities Exchange Act and Securities and Exchange Commission rules by not disclosing the company failed to apply generally accepted accounting procedures, lacked sufficient internal auditing controls, and failed to report the volatility of the company’s earnings.

Petro filed a similar suit against Fannie Mae’s corporate cousin Freddie Mac last year when Freddie Mac was found to have used improper accounting methods.

Fannie and Freddie regulator, the Office of Federal Housing Enterprise Oversight, in September released a report charging Fannie Mae had used improper “cookie jar” reserve accounting – setting aside large cash reserves to reduce revenues in some years so they could be used in other years when the company needed them. Since the report was released, Fannie Mae has been targeted by several class-action lawsuits and a Congressional hearing.

The Securities and Exchange Commission last month launched a formal investigation of Fannie Mae.

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 chartered by the U.S. Congress to maintain a constant flow of mortgage funds for the nation’s housing market.

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Send tips or a Letter to the Editor to jessica@inman.com or call (510) 658-9252, ext. 133.

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