fannie mae summary judgement hearing

1

UNITED STATES DISTRICT COURTFOR THE DISTRICT OF COLUMBIA

IN RE: FANNIE MAE SECURITIESLITIGATION

. . . . . . . . . . . . . . . .

::::

Docket No. CV04-1639 (RJL)

June 6, 2012

10:00 a.m.

TRANSCRIPT OF MOTIONS HEARINGBEFORE THE HONORABLE RICHARD J. LEON

UNITED STATES DISTRICT JUDGE

APPEARANCES:

For the Class Plaintiffs: WILLIAM MARKOVITSMELANIE CORWINCHRISTOPHER STOCKPAUL DEMARCOWaite Schneider Bayless & Chesley1513 Fourth & Vine TowerOne West Fourth StreetCincinnati, Ohio 45202

DANIEL S. SOMMERSCohen Milstein Sellers & Toll,

PLLC1000 New York Avenue, NWWashington, DC 20005

For Fannie Mae: JEFFREY KILDUFFROBERT STERNO'Melveny & Myers, LLP1625 I Street, N.W.Washington, D.C. 20006

Case 1:04-cv-01639-RJL Document 1049 Filed 09/04/12 of 53

2

For Franklin Raines: KEVIN DOWNEY, ESQ.ALEX ROMAINJOSEPH TERRYWilliams & Connolly, LLP725 12th Street, N.W.Washington, D.C. 20005

For Leanne Spencer: DAVID KRAKOFFCHRISTOPHER F. REGAN ESQ.ADAM MILLERBuckley Sandler, LLP1250 24th Street, N.W.Washington, D.C. 20037

For J. Timothy Howard: ERIC DELINSKYSTEVEN SALKYCAROLYN REYNOLDSMILES CLARKZuckerman, Spaeder, LLP1800 M Street, N.W.Suite 1000Washington, D.C. 20006

For KPMG: JOSEPH WARINSCOTT FINKGibson, Dunn & Crutcher, LLP1050 Connecticut Avenue, N.W.Washington, D.C. 20036

For FHFA: JOSEPH ARONICA, ESQ.Duane Morris, LLP505 9th Street, NWWashington, DC 20004

Also Present: Kevin LewisCarl ReedFranklin RainesLeanne SpencerTimothy HowardAdam GoldsteinEvan StolovSteve GeorgianJames Goldsmith


3

Steve Carlin

Court Reporter: PATTY ARTRIP GELS, RMROfficial Court ReporterRoom 4700-A, U.S. CourthouseWashington, D.C. 20001(202) 962-0200

Proceedings reported by machine shorthand, transcript producedby computer-aided transcription


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

4

P R O C E E D I N G S

COURTROOM DEPUTY: Calling civil case 04-1639, In Re:

Fannie Mae Securities Litigation. Counsel, please approach the

podium and identify yourself for the record.

MR. DEMARCO: Paul DeMarco for the Plaintiffs.

THE COURT: Good morning.

MR. DEMARCO: Good morning.

MR. STERN: Good morning, your Honor, Robert Stern of

O'Melveny & Myers on behalf of Fannie Mae. With me is Mr.

Robertson of Fannie Mae, Associate General Counsel.

THE COURT: Welcome back.

MR. MARKOVITS: Bill Markovits on behalf of Lead

Plaintiffs OPERS and STRS. With me today are Paul DeMarco,

Chris Stock and Melanie Corwin of the Waite Schneider firm.

Also at counsel table are Kevin Lewis our technical consultant

and Dan Sommers of Cohen Milstein.


MR. DOWNEY: Good morning, your Honor, Kevin Downey

from Williams & Connolly on behalf of the Defendant Frank

Raines. With me today are my partners Alex Romain and Joe

Terry, and Mr. Raines is also present in the Court today.


MR. DELINSKY: Good morning Eric Delinsky on behalf of

Defendant J. Timothy Howard. I am here today with my partners

Steve Salky, Carolyn Reynolds, and Miles Clark and my client


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

5

Mr. Howard is present as well in the courtroom.


MR. KRAKOFF: Good morning, your Honor.


MR. KRAKOFF: David Krakoff from Buckley Sandler with

my partners Chris Regan and with Adam Miller on behalf of Leanne

Spencer. Ms. Spencer is here today, your Honor, in the

courtroom.

THE COURT: Welcome.

MR. KRAKOFF: Thank you, your Honor.

MR. WARIN: Good morning, your Honor, Joseph Warin

representing KPMG of the Gibson, Dunn & Crutcher firm with my

colleague and partner Scott Fink, and two of our clients are

present. I expect that they will be here moment their. James

Goldsmith and Steve Georgian of the Law Department of KPMG.

Thank you.


MR. ARONICA: Good morning, Judge. Joe Aronica from

Duane Morris on behalf of FHFA as conservative of Fannie Mae.

THE COURT: Welcome back. All right. Mr. Downey, I

think you are making the argument.

MR. DOWNEY: That's correct, your Honor.

THE COURT: So you have got 45 minutes. You can split

I it up if you would like.

MR. DOWNEY: I would like to reserve 15 minutes for


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

6

rebuttal.

THE COURT: Okeydoke.

MR. DOWNEY: May it please the Court, Kevin Downey on

behalf of Frank Raines. I would like to begin, your Honor, by

reorienting the Court to the elements of a securities claim

using one of the charts that was used in various forms by both

sides yesterday. So let me put that up. As the Court knows, we

are here --

THE COURT: Wait a second there. Let me ask you a

question to start. If the Court would rule in favor

hypothetically the Motion we were arguing yesterday afternoon,

what would be the effect be on your client? Would that moot

this Motion?

MR. DOWNEY: It effectively moots the Motion, your

Honor. I think there is a formal answer and a practical answer.

I think the formal answer is there are allegations in

Plaintiffs' complaint about other accounting violations. If the

Court entered judgment on the Motion, those would remain and

would be pending. That's the formal answer.

The practical answer is two-fold. First of all, with

regard to Mr. Raines, the evidence is no different with regard

to FAS 133 or those other accounting violations.

THE COURT: I was trying to remember any discussion by

Plaintiffs' counsel yesterday that was specific to Mr. Raines

and I don't remember that.


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

7

MR. DOWNEY: That's correct.

THE COURT: Did you hear any? You were here.

MR. DOWNEY: I was watching more closely than probably

the Court for the mention of his name.

THE COURT: I will take judicial notice of that.

MR. DOWNEY: And it was mentioned, his name was

mentioned in passing a handful of times but not in association

with these events.

THE COURT: I certainly don't remember a specific

event that was referenced or a specific transcription reference

or a specific document reference to him. I just don't remember

it.

MR. DOWNEY: That's correct. I agree with that, your

Honor.

THE COURT: Okay. But that was yesterday's argument.

This is today's.

MR. DOWNEY: I understand so I want to anticipate what

I think the Plaintiffs will say by telling the Court what I

understand the allegations against Mr. Raines to be.

THE COURT: All right.

MR. DOWNEY: I think if I might do that, I will just

focus on the element of material misrepresentation because while

that's not at issue on today's Motion, what are --

THE COURT: Hold on a second. We have got a technical

issue here. Ken, my screen is not working here.


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

8

MR. DOWNEY: I knew I should have brought the boards.

THE COURT: All right. We got them both working now.

Go ahead.

MR. DOWNEY: Focusing on the material misrepresentation

element, the question is what material misrepresentations did

Mr. Raines make? And I think the answer is very straight

forward. The Plaintiffs say that when he signed eight financial

statements of Fannie Mae that were disclosed to the public, the

accounting in those financial statements was erroneous.

THE COURT: Right.

MR. DOWNEY: And they allege with regard to scienter

that he knew the accounting was erroneous and then they

identified three statements that he made publicly which were in

essence in support of the company's accounting and they say,

well, since he knew the company's accounting was wrong, he made

false statements in connection with the accounting.

It all comes back to the accounting. It leaves us as I

think your Honor's question anticipates in an odd position.

Mr. Raines, a non accountant, who asked accountants both

internally and externally many, many times in every reporting

period whether the accounting conformed to GAAP is answering as

a Defendant in a fraud case on the theory that he should have

known despite what he was told about the accounting that the

accounting was wrong.

THE COURT: Let me ask you to pause a second. Assuming


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

9

for the sake of discussion that his inquiries were always about

is this in conformance with GAAP, okay, if the answer he was

getting was yes hypothetically, all right, does that from your

point of view, and obviously I want to hear the Plaintiffs'

point of view in a second, in a few minutes, does that override,

for lack of a better way of putting, any situation where it was

not in compliance with FAS 133?

MR. DOWNEY: It would, your Honor. As I understand it

as I think what the record says about the question he is asking

and the question he is supposed to ask is --

THE COURT: Right.

MR. DOWNEY: -- are the financial statements presented

in conformity with GAAP taken as a whole; and when he asked that

question, the record is uniform and undisputed that he was told,

yes, every time he signed a financial statement, that is what he

was told.

Hypothetically there could be a situation where there

was within the financial statements some departure from one

accounting standard or another that was deemed to be -- not

render the financial statements not in conformity with GAAP

either because it was immaterial or because the accountants

considered there to be ambiguity in the accounting standards.

With regard to FAS 133, it was never brought to

Mr. Raines' attention because I don't think it is the case that

the accountants ever thought there was a deviation from GAAP in


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

10

any respect. They believed they were construing a standard and

interpreting it correctly both internally and externally, and I

think you got some sense of that yesterday.

THE COURT: So the violation that Senator Rudman's

report unearthed with regard -- and that the company accepted,

Mr. Ashley was the chairman at that point, that the company

accepted have been unearthed were violations of FAS 133, it is

your position that this record as it stands today has no

evidence in it that those violations of FAS 133 had ever been

brought to your client's attention?

MR. DOWNEY: That's my argument today and that's what

Senator Rudman concluded as well. As I think the Court knows,

our position is despite the fact that Senator Rudman concluded

that Mr. Raines had no knowledge of deviations from GAAP, the

report for several reasons is clearly not admissible as to him.

THE COURT: I don't want to parse these words too

carefully but we do need to parse them, deviations of FAS 133,

violations of FAS 133.

MR. DOWNEY: No. Whatever the language is, no

deviations from 133 were brought to Mr. Raines' attention.

THE COURT: Okay.

MR. DOWNEY: To make sure my answer is clear, let me

answer it yet another way. The Court saw yesterday documents

which involved discussions largely between accounting personnel

where there were departures from GAAP, known departures from


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

11

GAAP, that type of language in discussions between the

accountants. Mr. Fink explained to you what they meant and

that that language is not significant.

THE COURT: Right.

MR. DOWNEY: And I think Mr. Fink is right with regard

with regard to that, but that kind of language was never used

with Mr. Raines. In other words, Mr. Raines was never told

there is a known departure from GAAP but it is okay for the

reasons Mr. Fink said yesterday. The representations to him

were that it was in conformity with GAAP.

And the reason the Court can be so confident and

quickly confident about what I am saying is you can look in the

middle of Plaintiffs' opposition brief to see is there any

admissible evidence in this case which suggests that Mr. Raines

was told about deviations from GAAP in any respect, immaterial

interpretations et cetera. They cite one document, your Honor,

one document which is an e-mail which Mr. Raines is not on which

is Exhibit 199 to our papers. What happened -- I am sorry. It

is not Exhibit 199. It is to their papers and I will give you

the exhibit number in a moment.

THE COURT: Okay.

MR. DOWNEY: Mr. Argires was deposed and the gist of

the discussion in the e-mail is Mr. Argiers says using language

similar to yesterday we should inform Mr. Raines and Mr. Howard

that there are some known departures from GAAP.


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

12

Now, you would expect and I think the Court's

expectation was clear from the exchanges yesterday that the

Plaintiffs would depose Mr. Argiers and they would ask him did

this happen? Well, the Plaintiffs did depose Mr. Argiers but

they didn't ask him: Did you provide that information to

Mr. Raines and they didn't ask him because as Exhibit 199

shows, which is a declaration from Mr. Argiers, he never told

Mr. Raines that there was a departure at any level from GAAP or

a violation of FAS 133; and he certainly doesn't believe there

was a deviation from 133.

What he represents in that declaration and which a lot

of the record reflects is he like other KPMG personnel told

Mr. Raines that the company was acting in compliance with FAS

133 because that's what they believed and that's what they

believe today, and yet we are here in this case answering in a

fraud claim. One document after eight years on FAS 133 related

to Mr. Raines, one document.

THE COURT: Now, was that e-mail, a copy of that e-mail

sent to your client?

MR. DOWNEY: No.

THE COURT: No.

MR. DOWNEY: No. The reason we went to the trouble of

getting a Sworn Statement from him was the document on its face

would clearly not be admissible. It would be hearsay as to

Mr. Raines, but the question is, well, did any such conversation


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

13

take place? No such conversation took place.

THE COURT: Okay.

MR. DOWNEY: So in the absence of -- and I should say,

your Honor, consistent with I think the discussion yesterday and

I could talk about this in whatever detail the Court would like,

Mr. Raines' involvement in this process was to participate in

meetings in every financial reporting period and to gather

around him the internal accounting experts and KPMG and to go

through the financial statements with them and ask them what are

the important things in here? Are you comfortable that they are

compliant with GAAP? Is there any reason I shouldn't sign a

certification that these statements are in compliance with GAAP?

And by the time the financial statements were signed,

the answer was uniformly yes. There is absolutely not a shred

of dispute about that in the record. When he asked is the

accounting being done in compliance with GAAP, the answer was

always yes.

So what do the Plaintiffs do? I mean what is their case

built on? Well, I think they have what is effectively a motive

case. They try to take e-mails which do not reflect anything

about accounting or a knowledge of a violation of accounting and

they say, well, they reflect bad motive or bad thinking and as a

result the Court should infer there were accounting violations

because there were these kinds of motives.

Now, I could address that at many levels, but let me


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

14

just say taking them one at time the record is undisputed those

motives didn't exist. I can explain this I think , your Honor,

very simply referring the Court to very few documents within the

record. So let me take each of their themes or theories or

motives or however you want to characterize it, their theories

of the case. I think they are three-fold.

One is that there was a desire to minimize earnings

volatility. Mr. Fink talked about that yesterday.

THE COURT: That's the tenets?

MR. DOWNEY: That's within the tenets of the memo that

Mr. Boyles prepared.

THE COURT: Right.

MR. DOWNEY: And, your Honor, with regard to that

issue, and I do not in any sense want to imply that minimizing

earnings volatility is a bad thing. It is a good thing if it is

done consistently with GAAP and appropriately.

THE COURT: I think Mr. Fink made that point.

MR DOWNEY: He did. But let me show you what

Mr. Raines' relationship was with regard to that goal in

particular because as to Mr. Raines, there is particular

evidence in the record as to whether he cared about that goal or

directed people to comply with that goal. The author of that

memo as the Court will recall was Jonathan Boyles, the company's

director of accounting policy.

THE COURT: Right.


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

15

MR. DOWNEY: And he had a conversation with Mr. Raines

about the subject of minimizing earnings volatility, and you

will get a sense of what Mr. Raines said. I don't have the

video so I just have --

THE COURT: That was pretty fancy, wasn't it.

MR. DOWNEY: Yes, that was. I feel kind of still old

school even though I thought I was going to look good with

the --

THE COURT: Well, your's is small firm compared to

O'Melveny.

MR. DOWNEY: This is testimony that Mr. Boyles gave.

He was asked what did Mr. Raines say at that meeting about

volatility? He answered: That the purpose of the exercise of

getting a fresh look wasn't around reducing volatility. He

didn't seem to care about that. He seemed focused on the

business practice of hedging and whether there were any other

hedging strategies that the business should be looking at.

So even if that's a motive that you want to evaluate

according to what Mr. Fink said, and I think you should and you

would come to the conclusion Mr. Fink suggested, as to

Mr. Raines, the evidence is undisputed it is not a goal that he

was seeking to advance within the company. So that's one

motive.

The biggest motive that the Plaintiffs talk about as

part of their presentation is compensation and if you read their


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

16

brief, it is all over their brief.

THE COURT: I have read it.

MR. DOWNEY: They say in a variety of ways Mr. Raines

was, however you want to say it, attempting to enrich himself,

was using the compensation system to line his pockets and that

he was doing this essentially in two ways. One, with regard to

the bonus program and then, second, with regard to a program

affecting options. Let me take each in turn and make sure that

I articulate what we understand the Plaintiffs' theory to be.

With regard to the bonus program, here is what the

Plaintiffs say, and I am not characterizing it, I am reading

from their brief. At age nine of their brief, they say that

Fannie had the uncanny ability to narrowly exceed the maximum

bonus target year after year, the uncanny ability to narrowly

exceed the maximum bonus target.

Then at page 27 they say the goal was simple,

consistently meet and narrowly exceed quarterly earnings targets

and thereby max out senior management bonuses. That's their

allegation. Let me show you graphically what that allegation

would look like if it were true.

I have shown you the three years of the class period --

2001, 2002, 2003. What the Plaintiffs say the earnings

performance of the company was a very narrow exceeding of this

blue line which is the bonus target to make it look like the

company was either right at the target or slightly above the


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

17

target and they got there by accounting manipulation, your

Honor. That's the Plaintiffs' theory.

Now, what actually happened? What are the undisputed

facts as to what the company did in terms of earnings during the

three years of the class period? This is what happened. This is

why I am not using the boards any more. You can actually change

this right in front of you.

THE COURT: That's pretty fancy.

MR. DOWNEY: Yes. This is the actual performance of

the company. This is the real world and what the record shows

happened. In 2001, they did exceed the bonus target but not by

a few cents, by $0.28 which is an enormous amount. And what

happened at 2003? They didn't meet the maximum bonus target.

They missed it by two or $0.03.

Now, if the Plaintiffs' view of the world were true,

everyone within Fannie would act at Mr. Raines's direction to

undertake some accounting manipulation to get this number to the

target level or lightly above and you don't need in any respect

to dig through the record that's in front of you to see what I

am saying. These numbers are in the Plaintiffs' brief. You

don't even have to go to the appendix. They are in the

Opposition Motion to Ms. Spencer's Summary Judgment Motion.

Right there. They lay out the numbers. Look around

how they present the situation but look at the years during the

class period. This is what it shows.


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

18

Now, let me turn to the other compensation program

that's a significant focus of the Plaintiffs. This is the

so-called $6.46 program or the challenge grant program. This is

a program that was initiated early in Mr. Raines' tenure where

Mr. Raines set a goal for the company to double its earnings

within five years. And you didn't get additional compensation

as a Fannie employee if the company doubled earnings.

What you got was the options you were already getting

would vest more quickly.

Now, the suggestion of Plaintiffs over and over and

over again is that the company manipulated its earnings in order

to get to that $6.46 target because all of the employees were

trying to get there so their options would vest more quickly.

In other words, let me show you what the Plaintiffs' allegations

would like look on a graph.

The company did get to the $6.46 target so the black

column which is the pre-restatement EPS are the actual earnings

of the company and far from being close to $6.46, the company

was at $7.91. Now, I have arbitrarily picked a number below

$6.46. I have picked $5.25 but whatever the number is, the gist

of Plaintiff' allegation is if you didn't engage in accounting

manipulation, the company would have ended up well before the

$6.46 target. Well, let's see what actually happened when the

restatement was done and all the accounting misapplications were

corrected.


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

19

The employees at Fannie earned more, $8.08. In other

words, if every error that the restatement suggested exists had

been done the way the restatement suggested it should have been

done, employees would have been $0.17 more above the $6.46

target. Again, the Court doesn't need to labor through the

record in order to find whether or not this is true. This is

possible just by comparing the restatement to the financial

statement for the 10-K for the 2003 period.

So the core implication that they try to create or the

inference they ask the Court to draw is the compensation was

being manipulated. Now, knowing that this is what the record

was going to show, the Plaintiffs use rhetoric to the effect

that, well, even if we can't link compensation to a particular

accounting misapplication, let's say the compensation system

incentivized people in the wrong way, that it was a bad

compensation system.

And what happened at Fannie Mae is because employees

had these incentives, they manipulated the accounting. That's

the gist of the rhetoric in Plaintiffs' brief. What is the

evidence that's undisputed in the record with regard to that?

Well, the evidence that's in the record is the expert

testimony and report of defense expert Wayne Gay of the Wharton

School. He reviewed all of the relevant evidence in the record

and concluded two things. One is that the compensation system

at Fannie Mae exceeded the standard of care for companies of


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

20

comparable size and business practice and, number two, the

compensation system actually acted to disincentivize fraud. I

won't go through all the reasons that's true, but at a high

level, your Honor, the reason he comes to that conclusion is in

addition to cash compensation, there was lots of equity

compensation. Employees got stock and they got options so their

interest was in the long term value of the company, not in some

short term reward.

Now, that's obviously a matter for expert testimony

because Plaintiffs' claim, after all, is that Mr. Raines'

compensation system or the compensation system when he was at

Fannie Mae created unusually strong incentives. Now, you would

expect the Plaintiffs' expert to say the opposite, but the

Plaintiffs don't have an expert. They did have an expert who

was going to proffer a basis for the rhetoric that's in their

brief, Professor Bebchuk of the Harvard Law School.

THE COURT: Bebchuk?

MR. DOWNEY: That's right. He submitted a report that

which I made some of the claims that are now in Plaintiffs'

brief. Professor Gay submitted his report and he pointed out

six major conceptual errors in the report and a host of minor

errors. Professor Bebchuck withdrew his report, did not appear

for his deposition and did not file a reply or rebuttal report

in response to the Professor Bebchuk.

So the only be evidence in the record is the opinion of


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

21

Professor Gay. The only evidence in the record, in other words,

your Honor, is that it is undisputed that the compensation

system at Fannie Mae did not create unusually strong incentives.

In fact, it disincentivized fraud.

So, your Honor, it really comes down to what the Court

could view as a legal question, and I would say it is two-fold.

The Plaintiffs can't link compensation systems, compensation

decisions to accounting decisions because in fact the scheme

that they say existed with compensation didn't exist; and they

don't have an expert who says that the way in which Fannie

compensated people was different from other companies or that it

incentivized fraud.

On those kinds of facts, there is voluminous authority

within the Courts to say you can't allow a securities fraud case

to go to the jury because there is a compensation system that

rewards performance in some form. And we have cited those cases

in our reply brief, but they include, for example, the Metras

case from Minnesota involving a CEO and a CFO where Summary

Judgment was granted and there is a host of second authority to

that effect.

Now, passing the compensation theory, there is a

general discussion which I think we will hear a lot about during

Mr. DeMarco's presentation which is that the company was engaged

in improper earnings management, and that relates to some

respects to compensation; but let me take it as a distinct


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

22

theory because I anticipate he will put up a number of e-mails

where the company is talking about either performance targets or

compensation targets and he will say to you this proves there

was a fraud.

Well, as Mr. Krakoff will discuss, therefore I won't,

the Plaintiffs own expert conceded that paying attention to

compensation targets and earnings targets is entirely

appropriate as long as you doing it in a manner that's not

designed to defraud people.

But let me take the one transaction that they focused

on the most in their opposition brief to give the Court a sense

of what I think ultimately is the hollowness of Plaintiffs' case

and that's debt buy-backs, your Honor. And a debt buy-back is a

transaction in which the company decides that it can buy-back

debt at a price that it finds attractive.

Now, here is what true about those transactions at

Fannie Mae. They all happened. They are not phoney

transactions that didn't happened, but the Plaintiffs say, well,

we know they happened, we know they are not phoney transactions

but you were making people think the performance of the company

was different than it was because you were buying back that debt

in an amount that implied your earnings were something but your

earnings in fact would have been much more if you hadn't bought

the debt back. In other words, these were furtive secret

transactions that distorted the public's perception of what


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

23

was goings on. That's an odd allegation your Honor, because

those transactions are publicly disclosed in the financial

statements of Fannie Mae. Let me give you a sense of part of

what's conveyed there.

This is directly from Fannie Mae's 10-K for the year

2003, a disclosure about debt buy-backs. The company says we

recognized the pre-tax loss, they describe another transaction,

but they also say from the repurchase of $20 billion of debt.

That's in 2003.

Then they say in 2002 we recognized another loss from

the repurchase of $8 billion of debt. Not only do they disclose

the fact that those transactions are occurring, they also

disclose the effect on the financial statements by disclosing

the pre-tax loss.

So far from being a furtive or concealed transaction,

these are right in the publicly disclosed financial statements.

Moreover, what is particularly hard to imagine Plaintiffs'

allegations in light of this fact is after all the company has

been through, multiple restatements and investigations with

which the Court is well familiar, no one has ever questioned the

accounting for these transactions. There isn't any question

ever raised by any external audience that the accounting for

these things was not only done in good faith, but was in

conformity with GAAP.

Let me spend a moment if I might just on directing the


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

24

Court's attention to what's in the record about what Mr. Raines

knew and what Mr. Raines did not know about accounting because I

think if the Court looks again at a relatively few paragraphs of

our statement of material fact, you will get a sense of

Mr. Raines' participation in the process.

Those are our statements of material facts paragraphs

82 to 84. And you should look at Plaintiffs' responses as well

and the bases on which they purport to create a dispute, but

they describe, your Honor, in detail these meetings that I

described. Who participated? All the individuals you saw on

video yesterday and more. What was said? Representations made

to Mr. Raines about GAAP compliance.

I mention it now only to say it is a rebuttal to what I

would almost call a parody contained in Plaintiffs' opposition

where they say, well, Mr. Raines now says he wasn't involved.

Mr. Raines was involved exactly as a CEO should be involved. He

checked and checked with the appropriate people. He sought to

have the right policies and procedures in place and today the

people involved in that accounting -- I should say yesterday --

the people involved in that accounting came to you and told you

they still think it was right.

That's the evidence during the class period of what

Mr. Raines was told about accounting. Let me show you some of

the direct evidence about what Mr. Raines said during the class

period because I think it is unusual to have this kind of direct


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

25

evidence in a securities fraud case.

I am going to show to you, your Honor, two examples of

an accounting issue coming up that was brought to Mr. Raines'

attention and what the direct evidence showed his reaction was.

Now, remember the Plaintiffs' case would be if Mr. Raines knew

there was an accounting judgment which might affect the

financial statements or might fake the company's practices, he

would try to suppress it because his interest was in

manipulating these things for compensation and earnings target.

Let me take two of many vignettes that I could show

you, but I will take two to give you a flavor of it. First, the

Court is well familiar with the Plaintiffs' allegations

regarding Roger Barnes coming forward and making -- raising

concerns that he had about the -- certain aspects of Fannie

Mae's accounting and you would think from Plaintiffs'

allegations Mr. Raines tried to suppress that.

I am going to show you testimony from the internal

auditor who brought those concerns to Mr. Raines' attention and

what Mr. Raines' reaction was when he brought them to

Mr. Raines' attention. This is the testimony of Sam Rajappa who

the Court saw briefly. He was asked: Do you recall what

Mr. Raines told on you this call? And he said: Yes. He was on

a conference call. I briefly described what he, referring to

Mr. Barnes, had alleged and Frank's comment was to tell me go

ahead and do the work, meaning the work to investigate, and go


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

where the facts take you. That's exactly what he said.

This is a direct evidence of what happens when there is

an accounting issue. Mr. Raines said not suppress this or let's

hope it is not too bad. He said go where the facts take you.

Let me show you another vignette which relates to a

concern that arose in the accounting department in 2002 about

changes with regard to the interpretation and application of FAS

91. This is the testimony of Janet Pennewell who the Court saw

on video yesterday as well. Ms. Pennewell is talking about an

interaction she had with Mr. Raines where she brought this to

this attention. She says he, referring to Mr. Raines, was very

definitive in making it very clear that he absolutely didn't

care or was even interested in seeing the impact on the

financial statements of this change. He just wanted me to

proceed with doing whatever the right thing was and the strong

way that he said that I thought was an important thing to

communicate to my staff in terms of setting the tone at the top

for the overall corporation.

This, your Honor, is the direct evidence in the record

of the state of mind of Frank Raines during the class period. I

think before we hear in great detail about Plaintiffs' theory

about this e-mail and that e-mail that has nothing do with

accounting, the Plaintiffs should answer what evidence do they

have to dispute this direct evidence? What evidence do they have

which suggest Mr. Raines was told the company's accounting was


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

27

not in compliance? What evidence do they have that what they

say about compensation is even true in the class period?

And if I may unless the Court has further questions, I

will reserve for rebuttal.

THE COURT: That's fine. Thank you, sir. Mr. DeMarco.

MR. DEMARCO: Good morning again, your Honor.


MR. DEMARCO: Paul DeMarco for the Lead Plaintiffs. I

forgot to hit my button.

MR. DOWNEY: It is up here.

MR. DEMARCO: Thank you. After listening to Mr.

Downey's argument, I feel as though I should be looking for

another button, the reset button, the one that reminds us we are

here on Summary Judgment, your Honor.

Mr. Downey has talked a lot about what the witnesses

who have testified in support of Mr. Raines say. What I intend

to show today is that based on his reply memorandum and his

argument today Raines actually ignored key evidence and expert

testimony that Plaintiffs puts forward in their opposition and I

want to pose this proposition.

The moving party who skips blindly past key evidence

on a dispositive issue like scienter should not get to first

base on Summary Judgment let alone all the way home.

I also intend to show that even where he hasn't ignored

other evidence bearing on scienter, the gist of his argument is


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

28

that your Honor should construe it in the light favorable to

Raines. When the key evidence pertaining to Raines' scienter is

construed as it must be in Plaintiffs' favor and the fair

inferences are drawn as they also must be in Plaintiffs' favor,

there are more than enough fact questions as to Raines' scienter

to warrant Summary Judgment and letting the jury resolve

scienter.

Your Honor, if I may draw an analogy. At dog shows and

beauty contests the contestants get judged looking their

absolute best in the most flattering light possible. You might

say therein lies the difference between those contests and a

Motion for Summary Judgment because the movants' case doesn't

get evaluated looking its best at this stage. Quite the

contrary. Supreme Court precedence tell us it is mandatory for

a District Court to view the movants' case not in the most

flattering light but basically in the least flattering light.

The whole question posed by a Defendant's Motion for

Summary Judgment is whether the evidence for or against that

Defendant is worthy of the give and take of trial and the

serious consideration of a jury. To make that call a District

Court must construe all of the evidence and draw all of the

justifiable inferences therefrom not in favor of the moving

party but actually against him.

And the Supreme Court has been very clear, of course,

on that since even before the 1986 trilogy. Mr. Raines is no


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

29

different from a lot of Defendants moving for Summary Judgment.

They sort of use the upside down approach to Summary Judgment

where they want the inferences to be slanted in their favor

where they want to be able to disregard evidence that is not

favorable to them, and I think you could see that from the way

his attorneys have presented and argued the evidence in their

initial memorandum and their reply memorandum in Court today.

They slant all of the evidence toward Mr. Raines.

They interpret every relevant document, and I am going

to talk about many of them, they interpret every relevant

document that Mr. Raines ever saw and every relevant statement

that he ever made or that was made to him exclusively in a way

that benefits Mr. Raines where a piece of evidence could be

interpreted one way for Mr. Raines and another way against

Mr. Raines. Raines' counsel insists that your Honor interpret

it only in the way that helps Raines, never in the way that

hurts his case.

So my second proposition is if the evidence presented

on a dispositive issue is subject to reasonable conflicting

interpretations, Summary Judgment is improper because it is up

to the jury to interpret the evidence and draw those inferences.

The case against Raines is full of evidence mainly documentary

evidence that is subject to conflicting interpretations. Some

of that evidence, as I said at the outset, Raines has out and

out ignored in the briefs in an argument today; and I would like


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

30

to walk the Court through that evidence.

Before doing that, I feel the need briefly to review

what we are talking about in terms of the law of scienter.

Generally Courts have stated that scienter should not be

resolved by Summary Judgment. It is, of course, a mental state

embracing intent to deceive, manipulate or defraud but as was

talked about yesterday, knowing or reckless conduct can meet the

scienter requirement at this point. I also want to make --

THE COURT: Is there any direct evidence on the record

that he had intent to defraud?

MR. DEMARCO: That he had direct evidence of intent

to --

THE COURT: Is there any direct evidence on this

record, any, one document, any statement by him attributed to

him, is there any in this record?

MR. DEMARCO: Yes.

THE COURT: There is?

MR. DEMARCO: No,no. I am just saying I understand your

question. Let me answer your question the way I understand it.

Direct evidence of fraud, did he come out with --

THE COURT: Intent to defraud.

MR. DEMARCO: Intent to defraud. Did he express an

intent to defraud to anyone? Did anyone express the intent to

defraud to him specifically in those terms? No, there is no

direct evidence.


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

31

THE COURT: Okay.

MR. DEMARCO: But circumstantial --

THE COURT: Let me finish.

MR. DEMARCO: Sure.

THE COURT: The way this works is when I start, you

stop.

MR. DEMARCO: Yes, sir.

THE COURT: It makes it much simpler for her. Believe

me, you want a clear record of what happens in this room.

MR. DEMARCO: Thank you.

THE COURT: Now, so there is no direct evidence?

MR. DEMARCO: Right.

THE COURT: All right. So at most there is indirect

evidence?

MR. DEMARCO: That's right.

THE COURT: All right. Or what can we call

circumstantial evidence, right?

MR. DEMARCO: Correct.

THE COURT: What's your best single piece of

circumstantial evidence that Franklin Raines intended to defraud

the public, the investing public? What's your single best

strongest piece of evidence of that during the time period?

MR. DEMARCO: I think the best evidence is the -- is a

piece of evidence that Mr. Downey didn't talk about in his

reply.


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

32

THE COURT: He did not talk about it?

MR. DEMARCO: Did not talk about it in his reply.

THE COURT: Did not talk about.

MR. DEMARCO: That was a statement made on the Kudlow

and Cramer show on CNBC on July 24.

THE COURT: On a TV show? A statement on a TV show?

MR. DEMARCO: To the investing public, right.

THE COURT: Go ahead.

MR. DEMARCO: I do need to set this up because --

THE COURT: Go ahead.

MR. DEMARCO: -- I need to show what he knew prior to

making that statement.

THE COURT: That's fine.

MR. DEMARCO: And if I may, can we call up, Kevin,

slide 160, please? This is a memo to Mr. Raines dated

November 4, 2001, from Ms. Spencer in which she explains to him

management's plans for managing earnings and smoothing income

out of 2002 and eventually into 2003.

His knowledge -- so his knowledge of the plans of

management and the smoothing ideas come originally from this

document. Kevin, would you call up 161? I want to read some of

the passages from it, what Mr. Raines learns. He learns that

earnings have been managed. We have been managing such a big

part of them.

THE COURT: Who authored this?


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

33

MR. DEMARCO: This is Ms. Spencer to Mr. Raines

November 4, 2001.

THE COURT: Okay.

MR. DEMARCO: It talks about smoothing ideas to move

income. It talks about Tim, that is Tim Howard, has Peter

working on ideas. That is to manage earnings and move income.

And it says quarter four assumes that we will do what are called

special actions to bring it down, earnings down. So the take

home for this for Mr. Raines was that management needed to move

a lot of income in earnings -- I am sorry -- a lot of earnings

out of 2002 and into 2003.

In fact, she uses the figure -- would you call up,

Kevin, 163, please? You will see at the bottom that Ms. Spencer

uses the figure which she is telling him we have to move

$850 million of income in order to hit what she calls -- can I

have 162, please -- what she calls the glide path, the glide

path to the pre-set EPS targets.

Now, I want to stop for a second and explain why all of

this is significant. I want to do it in the context of --

THE COURT: That would be helpful because on its face

it doesn't in any way suggest to me anything, anything that

suggests an intent to defraud anyone. So I need your help.

MR. DEMARCO: Okay.

THE COURT: And actually what I would prefer since

lawyers can't testify is an expert. Do you have an expert's


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

34

opinion --

MR. DEMARCO: I was about to give you --

THE COURT: -- who says that that kind of language

constitutes an intent to defraud someone? Do you have an expert

who said that?

MR. DEMARCO: Let me call up the expert who is our

expert Fierstein.

THE COURT: Fierstein.

MR. DEMARCO: And it is slide 169 please, Kevin. This

is the opinion of our accounting expert, Sharon Fierstein, in

rebuttal and what she characterizes -- can I have 169, please?

Oh, that's it. I am sorry. She characterizes -- first she

talks about the warnings that were -- had been made public prior

to that point. SEC Chief Account Lynn Turner clarified the

issue by indicating that misapplication of GAAP and stretching

the rules to achieve desired targets are fraudulent accounting

practices that would be targeted by the SEC.

She goes on to conclude in her report: It is clear

from these examples that abusive earnings management was the

subject of frequent discussion by the public and, in particular,

by the SEC before, during and after the restatement period.

Documentary evidence regarding Fannie Mae's violations of GAAP

and its obsession with earnings management is cited throughout

my report. References to earnings management minimizing

volatility of earnings and smoothing of income losses are


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

35

plentiful in support that this mindset was woven through the

fabric of the organization. And she goes to say that

transactions were enter into -- as transactions were entered

into, Fannie Mae's desire to manage earnings helped to shape its

accounting decision process which ultimately resulted in

numerous GAAP violations.

Now, what did OFHEO/the OFHEO report have to say on the

same topic? Kevin, would you call up slide 152, please?

It said that Mr. Raines, Mr. Howard and others engaged

in improper earnings management to generate unjustified levels

of compensation for themselves and other executives. These

actions are highly inappropriate -- set a highly inappropriate

tone at the top that was itself an unsafe and unsound practice.

You were told Mr. Downey that we had no expert opining

even though he said this is a matter for expert testimony. I

would also cite the Court to another expert, Mr. Berliner and --

THE COURT: Hold on a second.

MR. DEMARCO: Sure.

THE COURT: This excerpt that you have just put up here

from the Rudman Report?

MR. DEMARCO: Yes. No, that's the OFHEO report. I am

sorry.

THE COURT: This is OFHEO report?

MR. DEMARCO: Yes.

THE COURT: Okay. So who is it that is giving this


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

36

opinion?

MR. DEMARCO: The author of the report.

THE COURT: Who is that?

MR. DEMARCO: I don't know the author of the report,

but it is a public record that would fit under the 8038

exception and would be admissible against Mr. Raines.

Could I have slide 151, Kevin? It also characterizes

Mr. Raines' fixation on EPS results saying that EPS results

mattered, not how they were achieved.

Now, I think this answers the question that was raised

Mr. Downey: Where is the expert testimony that says this sort

of management of earnings is not proper? But I want to go then

to the next step because --

THE COURT: Did the OFHEO report cite any documents or

testimony indicating that Mr. Raines had an intent to defraud

anyone?

MR. DEMARCO: Yes.

THE COURT: He did?

MR. DEMARCO: Yes, in followup to this --

THE COURT: The OFHEO report you just cited?

MR. DEMARCO: Yes. Let me call up number 149. By

deliberately and intentionally manipulating accounting to hit

earnings targets, senior management maximized the bonuses and

other executive compensation they received at the expense of

shareholders. Earnings management made a significant


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

37

contribution to the compensation of Fannie Mae chairman and CEO

Franklin Raines which totaled over $90 million from 1998 through

2003. Of that total, over $52 million was directly tied to

achieving earnings per share targets.

And going back to Ms. Fierstein's reference to this,

she characterizes that as the --

THE COURT: I am looking for where that says an intent

to defraud.

MR. DEMARCO: Well, it says intentionally managing

and --

THE COURT: It says manipulating. It doesn't say

managing.

MR. DEMARCO: Right. I am sorry. So in terms of where

this, the evidence of --

THE COURT: Was that OFHEO investigation done with an

intent to discern whether or not securities fraud had occurred

here?

MR. DEMARCO: I don't think with that specific intent,

your Honor.

THE COURT: Indeed they never do that, do they?

MR. DEMARCO: No.

THE COURT: That's not their job?

MR. DEMARCO: I wouldn't think so.

THE COURT: You know it is not their job.

MR. DEMARCO: Except that --


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

38

THE COURT: Be at least candid about the limitations on

OFHEO's responsibilities. Be candid.

MR. DEMARCO: Absolutely, absolutely, but that's not

to say --

THE COURT: This is not the Securities and Exchange

Commission.

MR. DEMARCO: I understand. It is not to say that the

evidence that they disgorge cannot go to that issue and your

Honor I will asked where did they -- what did they point to in

terms of an intent to deceive? Well, the next place that I think

we have to go because we have covered how Mr. Raines was

obsessed with smoothing earnings, let's go to what I originally

talked about which is the Kudlow and Cramer statement.

THE COURT: It is not your position that smoothing

earnings is per se evidence of an intent to defraud, that's not

your position?

MR. DEMARCO: No.

THE COURT: Indeed, that would be a very difficult

position to take.

MR. DEMARCO: No. That's not my position because, as

Ms. Fierstein made clear, the problem with earnings management

is when it is intended to meet preset targets, that's the

problem. And the fraud comes in when Mr. Raines denies that

that's what's happening and that's what happened on the Kudlow

and Cramer show which is slide 1727.


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

39

He is asked: You have no smoothing techniques in

your -- and, by the way, this is July 2003 so it is a couple

years after the memo that he first received -- you have no

smoothing techniques in your earning and revenue management?

Mr. Raines says: We looked at each and every one of those

things included in that report that Freddie Mac did, and we have

done none of those, absolutely none.

Now, in our view it is a fair inference that his

statement to the investing public that you say see there --

THE COURT: Wait a minute. What is it that was going

on in the report about Freddie Mac?

MR. DEMARCO: There was also earnings management at

Freddie Mac.

THE COURT: Right.

MR. DEMARCO: And nine days earlier Fannie Mae had been

asked whether or not it was doing any of that sort of earnings

management. Its spokesperson said, no, we don't do any of it.

This is the followup to it. That's why there was this

discussion in the air.

THE COURT: Hold on. I am confused. Is it your

position that the kinds of practices that were going on at

Fannie Mae at the time were exactly the same as the ones that

were going on at Freddie Mac and that were contained in that

Freddie Mac report?

MR. DEMARCO: Not exactly the same.


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

40

THE COURT: Not exactly the same.

MR. DEMARCO: No.

THE COURT: So how could an answer of that kind there

that you have just referenced me to constitute in some way

deception if the accounting practices being used -- I assume you

mean the FAS 133 policy?

MR. DEMARCO: No. I am talking about the earnings and

revenue management which is what the question asks.

THE COURT: Okay.

MR. DEMARCO: Are you doing any improper earnings --

THE COURT: Well, I thought from yesterday's argument

the point that your colleagues were making was that they were

misusing the FAS 133 policy as a vehicle to smooth out the

earnings? Maybe I am misunderstood them.

MR. DEMARCO: In general, manipulating accounting to

smooth out the earnings, yes.

THE COURT: Yes. I mean the impression I got certainly

was that they had a FAS 133 policy that OFHEO blessed, but they

didn't apply it the way it was drafted or they applied it in

ways that was inconsistent with it and the reason why they did

that was in order to manipulate the earnings over the period in

question and thereby maximize their bonuses.

MR. DEMARCO: Right.

THE COURT: That was kind of the -- I don't know if it

was stated quite in that solgistic manner, but that was in


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

41

essence the argument. Does that sound right to you?

MR. DEMARCO: Except that what we are talking about

here, the accounting manipulations we are talking about here do

not necessarily all implicate FAS 133.

THE COURT: Okay. What beyond FAS 133 are you focusing

on now?

MR. DEMARCO: Well, we were talking about the debt

buy-back situation which I can get into. We were talking about

the accounting for interest only securities; the -- a number of

manipulations that I will get into that did not -- the

amortization that did not implicate FAS 133, but I think a fair

inference from this is that his statement is contrary to what he

learned from Ms. Spencer's smoothing memo.

THE COURT: Two years earlier.

MR. DEMARCO: Two years earlier and just to be --

THE COURT: Did she testify about having any, in her

deposition, did she testify about having any discussions with

him about the contents of that memo?

MR. DEMARCO: I don't recall any discussion about the

content of this memo.

THE COURT: What was she asked about it?

MR. DEMARCO: I do not know, your Honor.

THE COURT: You haven't looked at that deposition?

MR. DEMARCO: I haven't looked at it for that question.

THE COURT: Well, then I will take that as there is no


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

42

evidence from her deposition that she ever discussed that memo,

the contents of it with Mr. Raines.

MR. DEMARCO: But what I think the Court should note

about that memo and about the Kudlow and Cramer statement that

we see there --

THE COURT: Do you know if he read it?

MR. DEMARCO: I am sorry.

THE COURT: Do you know if Mr. Raines even read the

memo? Do you have any evidence that he read it?

MR. DEMARCO: I think it is an inference that he --

from receiving the memo two years will earlier. I don't have

any direct evidence that he put his eyes on it and read it.

THE COURT: Was he deposed in this case?

MR. DEMARCO: Yes.

THE COURT: Was he confronted?

MR. DEMARCO: I don't believe so.

THE COURT: With that memo?

MR. DEMARCO: I don't believe so.

THE COURT: You don't believe so or you are not sure?

MR. DEMARCO: I am not sure.

THE COURT: You are not sure. Okay. I will take that

as there is no evidence that he was confronted with it and

acknowledged having read it.

MR. DEMARCO: So in the reply memorandum that was filed

by Mr. Raines, he does not mention the smoothing memo even


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

43

though Plaintiffs cited it as --

THE COURT: Do you think he should have mentioned that

to Mr. Kudlow on that TV show?

MR. DEMARCO: The smoothing memo?

THE COURT: Yes.

MR. DEMARCO: No, I am not saying he should have

mentioned the smoothing memo. I am saying in the reply

memorandum as the party that was seeking Summary Judgment that

he should have at least mentioned the memo and why it doesn't go

to the issue of scienter.

THE COURT: Well, if he wasn't confronted with it, if

he wasn't questioned about it, if he was never asked if he even

read it or if there was ever any discussion about it, if there

is no evidence that Ms. Spencer ever discussed it with him, then

why would they raise it --

MR. DEMARCO: Well, I think --

THE COURT: -- in the reply?

MR. DEMARCO: -- as the moving party they are bound to

respond to the evidence that we cite.

THE COURT: Okay.

MR. DEMARCO: And they did not do that.

THE COURT: Well, we will see if Mr. Downey has a

response to that.

MR. DEMARCO: I am sorry.

THE COURT: We will see if he has got a response today


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

44

when he gets up.

MR. DEMARCO: Okay. I am assuming that the first time

we hear about the smoothing memo is the --

(Attorney DeMarco collapses.)

(Whereupon, a recess was taken at 12:03 p.m.)

(Resumed at 12:03 p.m.)

THE COURT: Well, welcome back, everyone. Obviously

the Court's paramount concern is the health of counsel. He is

in good hands I am told and being taken care of and hopefully it

is going to be turn out to be nothing of any consequence; but I

have spoken with the counsel for the case that's being argued,

and I think everyone is in agreement that unless, and I stress

unless, the doctors give him a completely clean bill of health

and unless he feels up to it, we will not be resuming this

argument what's left in it. There is only about roughly

45 minutes left in it, not even quite that.

We will not be resuming it today unless both of those

things happen, both the doctors say he is completely fine to

proceed and he feels completely fine to proceed. It is not

going to be good enough just for doctors to say he can proceed.

So I will tentatively set a resumption of the argument

for 3:30, but it is subject to both of those hurdles being

crossed. I will expect counsel to just update Mr. Cockrell

sometime maybe around 3:00, 3:15 as to how it is progressing or

maybe earlier. I don't know. But I want to emphasize there is


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

45

zero pressure on him to resume today at all. None.

As to the other two arguments, there is just no way we

are going to get those in today, the ones that were scheduled

for today. We will have to -- the game plan tentatively because

of my existing schedule is to get the remainder of this argument

and the other two in next week. Why do I say that? Because the

week after next I have a trial for a whole week and the week

after that is the judicial conference for a whole week; and then

we are in July and the month of July I have two trials scheduled

and sentencings in other hearings and other cases.

So it could, if we don't get this done next week, it

could be August or later before it gets done and the year is

slipping, you know, the summer slipping away as a minimum. So I

have assured counsel for Mr. Raines and Plaintiffs' counsel that

we can find a day next week. I will move existing hearings

around. We will get it in preferably towards the end of the

week so that if it is necessary for Plaintiffs' counsel to have

someone else get up to speed, he or she will have extra days to

get up to speed. So we will try to shoot for Thursday or Friday

next week. I don't have my calendar right in front of me, but

we will work that out today, this afternoon as to what day next

week.

So if Plaintiffs' -- excuse me -- well, if Plaintiffs'

counsel or defense counsel know already that there is a day

certain next week that they have to be in Istanbul on some FCPA


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

46

case or they have to be on trial in the Eastern District of

Virginia and I don't want to get crossways with one of my

breathren across the river or whatever, make sure that Ken knows

that those days are just sacrosanct and they won't be around or

available or whatever.

But I really want to do it next week and I would prefer

to do it Wednesday, Thursday or Friday so that if additional

counsel has to get up to speed, they will have time to get up to

speed.

As far as tomorrow goes, I don't think it has any

effect on tomorrow. We will proceed the way we are scheduled to

proceed for tomorrow. We won't change any of the times for

tomorrow, and we will just move forward with our schedule.

Is that agreeable to Plaintiffs' counsel?

MS. CORWIN: Yes.

THE COURT: Is that agreeable to defense counsel?

MR. DOWNEY: It is, your Honor. Thank you.

THE COURT: Mr. Delinsky, is that agreeable to you?

MR. DELINSKY: In concept, yes, your Honor. Could I

take a -- with a member of Plaintiffs' counsel -- a ten-second

side bar with your Honor?

THE COURT: With me?

MR. DELINSKY: Just to explain a quick issue which I

think is very solvable for next week.

THE COURT: Okay.


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

47

(Bench conference on the record.)

MR. DELINSKY: I have jury duty here. So I think it

can be put off, but I may need to -- I will check.

THE COURT: In this Court?

MR. DELINSKY: In this Court. I was this week and I

put it off because of this other thing.

THE COURT: We can help you put that off.

MR. DELINSKY: So I will try myself. If there is an

issue, can I contact chambers?

THE COURT: Yes. You let the jury folks know. I can

go to the Chief Judge if necessary to get you a new date.

MR. DELINSKY: Okay. That's all.

MR. STOCK: Nothing from me. Thanks.

THE COURT: Jury duty is sacrosanct in Ohio too.

MR. STOCK: It is. We will take our direction from

you, your Honor. Thank you.

MR. DELINSKY: Thank you, Judge.

(End of bench conference.)

THE COURT: Mr. Krakoff, do you have any issues or are

you okay?

MR. KRAKOFF: I am fine, your Honor.

THE COURT: Is that all right with you for next week,

try to do it next week?

MR. KRAKOFF: Absolutely. We can confer and let Mr.

Cockrell know as to the particular days.


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

48

THE COURT: Yes. Do that. Very good. All right,

counsel. Thank you for your cooperation and your flexibility

and we will do our best to see if we can finish today, we will.

If not, we won't and I emphasize that it is totally up to the

doctors and how he feels. It is not -- this is not the holy

grail. If we don't do it today, we don't do it today. We will

get it done. We will stand in recess will until 3:30.

(Whereupon, a recess was taken at 12:11 p.m.)

(Resumed at 3:39 p.m.)

COURTROOM DEPUTY: Recalling civil case 04-1639 In Re:

Fannie Mae Securities Litigation. Counsel, please come forward

and identify yourself for the record.

MR. MARKOVITS: Bill Markovits and with me is Melanie

Corwin on behalf of Lead Plaintiffs OPERS and STRS.


MR. DOWNEY: Kevin Downey from Williams & Connolly on

behalf of Frank Raines.


MR. DELINSKY: Eric Delinsky from Zuckerman Spaeder on

behalf of Defendant Tim Howard.


MR. KRAKOFF: David Krakoff from Buckley & Sandler for

Leanne Spencer.

THE COURT: Well, I understand through Mr. Cockrell

tells me that counsel for Plaintiff is having some tests at the


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

49

hospital and resting comfortably and not in any distress which

I am happy to hear but that obviously today isn't an option. So

I thought what we would do is just take a look at next week's

options, schedule it, the completion of this argument hopefully

with the counsel for the Plaintiff who took ill. If not, then

with whoever else could step in in his behalf.

Then, of course, we have to schedule the arguments the

same day for the other two individual Defendants. So I asked

you all to at least give some thought to that and then look at

your calendars and I gather Mr. Downey had a conflict on one of

the days, Thursday I think it might have been? Are you in court

That day somewhere, Mr. Downey?

MR. DOWNEY: The issue is counsel can be available any

of the three days, but Mr. Raines' youngest daughter is

graduating from high school at noon on Thursday of next week and

I think that's right in the middle of almost any schedule we

could set for that day.

THE COURT: Yes. Well, okay. I hear you. Well,

obviously I would like to accommodate him to the extent it is

his case, it is his Motion that's being litigated by you; but I

also need to take into consideration counsel's -- is it

realistic that counsel could be ready as early as Wednesday?

MR. MARKOVITS: I am sure that's possible, your Honor.

He is -- I just left him at the hospital -- he is being kept

overnight for observation but he is doing much better, and I


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

50

talked to him about his schedule and I believe he would be

available Wednesday of next week. His conflicts don't arise

until later in the month.

THE COURT: If God forbid he couldn't do it physically,

so to speak, would you be in a position, your firm be in a

position to have a lawyer available next Wednesday to argue the

Plaintiffs' position as to these three Motions?

MR. MARKOVITS: Yes, we would, your Honor.

THE COURT: Okay. So if worse came to worse, you could

have another lawyer ready to go?

MR. MARKOVITS: Absolutely.

THE COURT: All right. So counsel why don't we pick it

back up on Wednesday morning. Basically let me get my -- let's

say we need basically about an hour. I think he had about

roughly 20 minutes, 25 minutes into the 45 minutes so there were

about, to round it off, let's say he had about 25 minutes left.

Of course, you have 15 minutes of rebuttal time. So let's call

that an hour essentially.

So let's say we start at 10:30 with the picking it back

up and go to until 11:30, then take a little break and get set

up. And then I think you were next, Mr. Delinsky. Your client

was next, right?

MR. DELINSKY: That's correct, your Honor.

THE COURT: Right. So maybe we will pick it back up

with your client at noon and then go for an hour and a half and


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

51

then have the lunch break and then pick it back up with Mr.

Krakoff's client after lunch. It is basically the same schedule

we had today except it is just starting at 10:30. Does that

work for you?

MR. DELINSKY: It does, your Honor.

MR. MARKOVITS: That's fine, your Honor.

THE COURT: All right. So we will obviously go forward

tomorrow with tomorrow's arguments as planned and then we will

leave it in next Wednesday to complete this argument and to do

the other two arguments.

MR. DOWNEY: Thank you, your Honor.

THE COURT: I want to stress, again, that you make sure

that you express to your colleague, you know, that the Court

doesn't want him to feel any pressure to be back here until --

unless and until he is really physically able to do that and if

there is any doubt in his mind or his doctors' minds, I don't

wants there to be any doubt so have someone else getting ready,

so to speak.

MR. MARKOVITS: We will, your Honor.

THE COURT: In the bullpen. Send him my best wishes

too.

MR. MARKOVITS: We will, thank you.

THE COURT: So are there any other questions, counsel?

MR. KRAKOFF: I just have one question. For my

client's planning purposes, I think we were the afternoon


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

52

session. We had figured that the morning session would go a

little late.

THE COURT: Yes. I think we did it until like maybe

12:00 to 1:30. Then we will take the luncheon break from 1:30

to like 3:30 and then your argument would be like 3:30 to 5:00

basically.

MR. KRAKOFF: Okay. I just wanted to know in case she

has a work conflict or something to make sure that she can --

she is here on time.

THE COURT: So say she is back here by 3:00, she should

be ready to go.

MR. KRAKOFF: Okay. It could be that she is here, your

Honor, all day. I just wanted to in the case she has got

something.

THE COURT: Yes. We will leave the equipment basically

where it is between now and then so to the extent you were going

to use this same equipment, it will be ready to go. Ken will

coordinate with you. There shouldn't be any issue there.

MR. KRAKOFF: Thank you, your Honor.

THE COURT: Anything else for the Plaintiffs?

MR. MARKOVITS: No. Thank you, your Honor.

THE COURT: All right. We will see you in the morning,

counsel.

Whereupon, at 3:46 p.m., the proceedings were

concluded.)


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

53

CERTIFICATE OF REPORTER

I, Patty A. Gels, certify that the foregoing is a

correct transcript from the record of proceedings in the

above-entitled matter.

_________________________


fannie mae summary judgement hearing

Documents