raines motion to dimiss facts 051013

7/23/2019 Raines Motion to Dimiss Facts 051013

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TABLE OF CONTENTS

INTRODUCTION .......................................................................................................................... 1ARGUMENT .................................................................................................................................. 2I. MR. RAINESS STATEMENT OF UNDISPUTED MATERIAL FACTS

SHOULD BE DEEMED ADMITTED. .............................................................................. 2II. PLAINTIFFS IDENTIFY NO EVIDENCE THAT MR. RAINES KNEW,

OR HAD REASON TO KNOW, THAT FANNIE MAES FAS 133 OR FAS91 ACCOUNTING POLICIES VIOLATED GAAP. ........................................................ 4A. Plaintiffs Identify No Evidence that Mr. Raines Knew, or Had Reason

To Know, that Fannie Maes Accounting for FAS 133 ViolatedGAAP. ..................................................................................................................... 4

B. Plaintiffs Identify No Evidence that Mr. Raines Knew, or Had ReasonTo Know, that Fannie Maes Accounting for FAS 91 Violated GAAP. ................ 7

C. On This Record, the Court Should Grant Summary Judgment inFavor of Mr. Raines. ............................................................................................... 8

III. PLAINTIFFS IDENTIFY NO EVIDENCE THAT MR. RAINESSSTATEMENTS WERE FALSE OR MADE WITH SCIENTER. ..................................... 9A. Statement No. 1 July 30, 2003 Conference Call. ............................................... 10B. Statement No. 2 October 6, 2004 Congressional Testimony. ............................ 12

IV. PLAINTIFFS FAIL TO IDENTIFY ANY OTHER EVIDENCE THATWOULD ESTABLISH SCIENTER AS TO MR. RAINES. ............................................ 13A. Plaintiffs Cite No Evidence that Mr. Raines Engaged in Improper

Earnings Management. ......................................................................................... 131. Bulk Mortgage Insurance. ......................................................................... 132. Debt Buybacks. ......................................................................................... 14

B. Plaintiffs Cite No Evidence that Mr. Raines Knew or Should HaveKnown of Alleged Deficiencies in Internal Controls and CorporateGovernance. .......................................................................................................... 151. Internal Controls. ...................................................................................... 152. Corporate Governance. ............................................................................. 16

C. Mr. Rainess Lack of Stock Sales and Fannie Maes ExecutiveCompensation Structure Do Not Support a Claim of Securities Fraud. ............... 18

V. THE PAUL WEISS AND OFHEO REPORTS DO NOT ESTABLISH MR.RAINESS SCIENTER. ................................................................................................... 20

CONCLUSION ............................................................................................................................. 21

Case 1:04-cv-01639-RJL Document 993 Filed 01/06/12 Page 2 of 27


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TABLE OF AUTHORITIES

FEDERAL CASES

1443 Chapin St., LP v. PNC Bank, N.A., No. 08-1532,F. Supp. 2d, 2011 WL4071849 (D.D.C. Sept. 14, 2011) ............................................................................................20

Acito v. IMCERA Grp., Inc., 47 F.3d 47 (2d Cir. 1995) ................................................................19

Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986) ....................................................................3

Barnett v. PA Consulting Grp., Inc., No. 04-1245, 2011 WL 4894117 (D.D.C. 2011) ..................3

City of Moundridge v. Exxon Mobil Corp., No. 04-cv-940, 2009 WL 5385975 (D.D.C.Sept. 30, 2009), affd per curiam, 409 F. Appx 362 (D.C. Cir. 2011) .....................................3

Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (2005).........................................................................9

Gilbert v. Napolitano, 760 F. Supp. 2d 21 (D.D.C. 2011) ...............................................................3

Greenberg v. FDA, 803 F.2d 1213 (D.C. Cir. 1986) ...................................................................3, 8

In re Balanced Plan, Inc., 257 B.R. 921 (Bankr. W.D. Mo. 2001) ...............................................21

In re Fannie Mae Sec. Litig., 503 F. Supp. 2d 25 (D.D.C. 2007) ..................................................21

In re IMAX Sec. Litig., 587 F. Supp. 2d 471 (S.D.N.Y. 2008) ......................................................16

In re Metris Cos. Sec. Litig., 428 F. Supp. 2d 1004 (D. Minn. 2006) ...........................................19

In re REMEC Inc. Sec. Litig., 702 F. Supp. 2d 1202 (S.D. Cal. 2010) ....................................16, 18

In re Sept. 11 Litig., 621 F. Supp. 2d 131 (S.D.N.Y. 2009) ..........................................................20

In re Wachovia Equity Sec. Litig., 753 F. Supp. 2d 326 (S.D.N.Y. 2011) ......................................8

In re Worlds of Wonder Sec. Litig., 35 F.3d 1407 (9th Cir. 1994) ................................................16

Jackson v. Finnegan, Henderson, Farabow, Garrett & Dunner, 101 F.3d 145 (D.C. Cir.

1996) ..........................................................................................................................................3

Kalnit v. Eichler, 264 F.3d 131 (2d Cir. 2001) ..........................................................................2, 18

Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000) ..............................................................................19

Phillips v. LCI Intl, Inc., 190 F.3d 609 (4th Cir. 1999) ................................................................19

Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38 (2d Cir. 1978) .................................................10



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Roth v. OfficeMax, 527 F. Supp. 2d 791 (N.D. Ill. 2007) ........................................................14, 16

Schoonejongen v. Curtiss-Wright Corp., 143 F.3d 120 (3d Cir. 1998) ...........................................3

SEC v. Guenthner, 395 F. Supp. 2d 835 (D. Neb. 2005) ...............................................................17

Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) .................................................2

Twist v. Meese, 854 F.2d 1421 (D.C. Cir. 1988) ...........................................................................20

OTHER AUTHORITIES

Fed. R. Civ. P. 56 .........................................................................................................................3, 8

Fed. R. Evid. 408 ...........................................................................................................................21

Fed. R. Evid. 702 .......................................................................................................................3, 17

D.D.C. Local Rule 7(h)(1) ...........................................................................................................2, 3



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INTRODUCTION

To avoid summary judgment, Plaintiffs must identify evidence establishing all elements

necessary for a viable claim of securities fraud against Mr. Raines. Plaintiffs identify no

witness (among the scores deposed) who will testify that s/he informed Mr. Raines that Fannie

Maes accounting violated GAAP during the Class Period; no witness who will claim that Mr.

Raines ever directed any of his subordinates to violate GAAP; no evidence that Mr. Raines ever

overruled accounting judgments made by accounting professionals; and no evidence that Mr.

Raines had any independent knowledge of the technical requirements of any accounting rule, or

whether Fannie Maes policies were in accordance with GAAP. This failure is particularly

noteworthy in light of the volumes of evidence submitted with Mr. Rainess opening

memorandum (Mot.) demonstrating that witnesses will recount, and contemporaneous

documents will reflect, numerous assurances to Mr. Raines that Fannie Maes accounting

complied with GAAP in all material respects.

In the absence of evidence, Plaintiffs Opposition relies on a lawyer-created narrative,

occasionally punctuated by references to the record that, upon examination, reflect immaterial,

mischaracterized, invented, or inadmissible evidence. Plaintiffs hope to induce the Court and

then a jury to fill in the evidentiary gaps by speculating falsely as to what actually happened,

and, on the basis of that speculation and without the necessary aid of an expert, concluding that

there was misconduct on the part of Mr. Raines. But Plaintiffs story is not evidence, and their

failure to cite specific evidence warrants a grant of summary judgment in favor of Mr. Raines.

To decide this motion, we respectfully submit that the Court should do four things:

First, the Court should review Plaintiffs response to Mr. Rainess Statementof Undisputed Material Facts. Instead of citing record evidence that wouldcreate a contested issue of fact, Plaintiffs offer non-responsive evidence, legalarguments, attorney opinion, and challenges to credibility for every single factthey purportedly dispute. None of these satisfies Plaintiffs threshold burden



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record as contested. Fed. R. Civ. P. 56(c)(1)(A); Greenberg v. FDA, 803 F.2d 1213, 1221 (D.C.

Cir. 1986). But for each of the facts Plaintiffs purport to dispute, they fail to meet this threshold

burden. In the place of evidence, Plaintiffs offer:

legal argument,2 even though it is improper to blend[ ] factual assertionswith legal argument in a statement of facts,Jackson v. Finnegan, Henderson,Farabow, Garrett & Dunner, 101 F.3d 145, 153 (D.C. Cir. 1996);

unsupported attorney opinion,3 even though an attorneys opinion does notsuffice where expert opinion is required, and Plaintiffs did not designate theircounsel to offer expert testimony,see Fed. R. Evid. 702; and

challenges to the credibi li tyof uncontroverted testimony and other evidence, 4even though such credibility challenges are not sufficient to create a factualdispute,Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 25657 (1986) (notingthat discredited testimony is an [in]sufficient basis for drawing a contraryconclusion to defeat summary judgment); see also Barnett v. PA Consulting

Grp., Inc., No. 04-1245, 2011 WL 4894117, at *9 (D.D.C. 2011).

The Court should thus deem Mr. Rainess Statement as admitted. See Gilbert v.

Napolitano, 760 F. Supp. 2d 21, 23 n.1 (D.D.C. 2011) (striking exhibit in plaintiffs opposition

to Statement of Material Facts where many of [the] facts are neither material nor disputed).5

2See, e.g.,Pls. SUMF Resp. 61 (Due to the myriad internal control weaknesses endemic throughout the

financial reporting process, any reliance on the Financial Standards and Financial Reporting groups in this contextwas beyond reckless.);see also id. 47, 47, 4951, 54, 6268, 7074, 78, 8387, 89, 90, 105, 106, 108, 11014, 116, 11821, 124, 125, 12830, 133, 13743, 14851, 15457, 174, 185, 209, 211, 212.

3See, e.g., Pls. SUMF Resp. 4 (Raines received the equivalent of formal training in accounting in his variouspositions in finance and investment banking and government[.]);see also id. 5, 16, 19, 46, 47, 4951, 106, 108,11016, 11821, 12426, 12830, 13845, 147, 149, 150, 16372, 174, 185, 196, 212.

4See, e.g., Pls. SUMF Resp. 19 (Lead Plaintiffs do not dispute the testimony as quoted; however, they disputeBoyles credibility and reliability.);see also id. 4, 81, 83, 87, 89, 90, 139, 15962. Issues of credibility defeatsummary judgment only where an issue of material fact cannot be resolved without observation of the demeanorof witnesses (e.g., where the appearance of the witness is relevant to, for instances, certain injuries).Schoonejongen v. Curtiss-Wright Corp., 143 F.3d 120, 130 (3d Cir. 1998) (alteration and emphasis omitted)(quoting Fed. R. Civ. P. 56(e) advisory committees Note, 1963 amend.). This is for obvious reasons: summary

judgment would never be granted if an evaluation of credibility were required even where the opposing partypresents no contrary evidence.

5See also City of Moundridge v. Exxon Mobil Corp., No. 04-cv-940, 2009 WL 5385975, at *1 n.4 (D.D.C. Sept.30, 2009) (treating movants facts as admitted where they were supported by the record and counterstatementasserted facts with no record citations, made legal arguments, and did not identify material facts with genuine factissues), affd per curiam, 409 F. Appx 362 (D.C. Cir. 2011);Jackson, 101 F.3d at 153 (same); D.D.C. L.R. 7(h)(1)(directing that, in determining summary judgment motion, court may assume that facts identified by the movingparty in its statement of material facts are admitted, unless such a fact is controverted in the statement of genuineissues filed in opposition to the motion).



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II. PLAINTIFFS IDENTIFY NO EVIDENCE THAT MR. RAINES KNEW, OR HADREASON TO KNOW, THAT FANNIE MAES FAS 133 OR FAS 91

ACCOUNTING POLICIES VIOLATED GAAP.

A. Plaintiffs Identify No Evidence that Mr. Raines Knew, or Had Reason ToKnow, that Fannie Maes Accounting for FAS 133 Violated GAAP.

With regard to FAS 133, the main accounting policy in this case, Plaintiffs assert that

Mr. Raines told investors that he believed Fannie Maes accounting for derivatives under FAS

133 complied with GAAP when he knew it did not. See Opp. at 1416. Plaintiffs focus on Mr.

Rainess statements that Fannie Mae spent millions of dollars for new computers and hired new

people in connection with the implementation of FAS 133, accurately reported the volatility

FAS 133 created, and made no attempt to smooth FAS 133 earnings. Seeid. at 1415. They

then assert that Mr. Raines knew Fannie Mae was applying FAS 133 improperly to minimize

the attendant volatility in reported earnings. See id. at 14.

In support, Plaintiffs cite a single document: an internal KPMG e-mail between auditors

Harry Argires and Mark Serock, which was undisputedly not addressed to and never seen by

Mr. Raines, in which Mr. Argires suggests that certain issues about FAS 133 be raised with Mr.

Raines. See Opp. at 15. Plaintiffs fail to mention (but do not dispute) that Mr. Argires and Mr.

Serock never told Mr. Raines that Fannie Maes accounting violated GAAP, which is the

inference Plaintiffs seek. SAUMF 22022;see also SUMF 15, 2634. On the contrary,

both acknowledged that KPMG repeatedly told Mr. Raines that the companys accounting

complied with GAAP in all material respects. SAUMF 222. Ms. Spencer is also referenced

in the e-mail. Not only did Ms. Spencer never tell Mr. Raines that Fannie Maes accounting

departed from GAAP, she repeatedly told him exactly the opposite: quarter after quarter and

year after year, Ms. Spencer certified to Mr. Raines that Fannie Maes financial statements



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fairly present[ed] in all material respects the financial condition, results of operations and cash

flows of the company as of, and for, the period presented in each report. SUMF 77.

Plaintiffs argue that Mr. Raines knew his statements were false because he had a

meeting with Jonathan Boyles during which he learned that Fannie Mae had designed and

implemented the Companys FAS 133 policy in a way that would minimize earnings

volatility. Opp. at 14. The undisputed testimony, however, demonstrates that the meeting had

nothing to do with the propriety of Fannie Maes FAS 133 accounting. Rather, the meeting was

about Fannie Maes hedging strategiesi.e., which types of derivatives Fannie Mae should use

in managing its business risks. At that meeting, Mr. Boyles gave Mr. Raines a short

presentation about certain goals Fannie Mae set in relation to the original implementation of

FAS 133. One such objective related to minimizing earnings volatility. Mr. Boyles articulated

that goal in connection with a discussion ofthe typesof derivatives Fannie Mae purchased. In

relation to the implementation of FAS 133, Fannie Mae focused their derivatives transactions on

those types of derivatives that qualified for hedge accounting. That goal had nothing to do with

improperly implementing FAS 133 and nothing in the record suggests that Mr. Raines was so

told. See SAUMF 22427. Plaintiffs remarkably fail to acknowledge or explain (but do not

dispute) the following testimony from Mr. Boyles:

Q: What did Mr. Raines say at that meeting about volatility?

A: That the purpose of the exercise of getting a fresh look wasnt aroundreducing volatility. He didnt seem to care about that. He seemed focusedon the business practice of hedging and whether there were any other

hedging strategies that the business should be looking at.Q: Okay. And is it fair to say that when you wrote earlier about earnings

volatility being minimized as being a tenet of the strategies that FannieMae used to hedge under FAS 133, that direction did not come from Mr.Raines?

A: No, it did not.



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SAUMF 227 (emphases added). Plaintiffs cite no evidence or expert opinion that any effort to

decrease earnings volatility caused Fannie Maes FAS 133 policy to violate GAAP.

As to the alleged misstatement that Fannie Mae spent millions of dollars on new

computer systems, Plaintiffs identify no evidence demonstrating that Mr. Rainess statement

was false or misleading. The undisputed record is replete with evidence to the contrary. Fannie

Mae did, in fact, (i) spend millions of dollars on new computer systems in relation to its

implementation of FAS 133; (ii) create an entirely new system (aptly named the FAS 133

System) to record journal entries related to Fannie Maes derivatives transactions; and (iii)

expend significant efforts modifying existing systems (e.g., the DEBTS system) to assist in its

implementation of FAS 133. SAUMF 22830. Plaintiffs engage in a logical fallacy by

asserting that Mr. Rainess statement is false because Fannie Mae sought to implement FAS

133 in a way that would leverage off existing systems as much as possible. Opp. at 14. The

two statements plainly are not mutually exclusive. Fannie Mae could, of course, spend millions

of dollars for new computer systems while at the same time leveraging off of existing systems

as much as possible. And that is what it undisputedly did.

As a last resort, Plaintiffs attempt to employ statements of Mr. Donald Nicolaisen, then-

Chief Accountant of the SEC, as quasi-expert evidence of Mr. Rainess scienter. Seeid. at 28

29 (citing Mr. Nicolaisens December 2004 statements). Again, Plaintiffs fail to mention (but

do not dispute) that Mr. Nicolaisen testified under oath, both in this case and before Congress,

that he made no findings regarding whether any violations of the accounting standards were

knowing or intentional. SAUMF 231. Nevertheless, Mr. Nicolaisen made numerous

statements reflecting Mr. Rainess lack of scienter and desire to ensure Fannie Maes

accounting was correct:



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Mr. Raines want[ed] to be certain that [Mr. Nicolaisen and the SEC staff]understood [Mr. Rainess] desire to support quality financial reporting and thecommitment that Fannie Mae had to producing good financial statements andthat he would look for any comments or recommendations that we wouldhave, SUMF 204 (emphasis added);

[Mr. Raines] was passionate about wanting Fannie Mae to have accountingthat would be recognized as appropriate [and] best in class, . . . his own view,as I recall, was that he thought their accounting was appropriate, that he didn'tagree with OFHEO but he was very clear in saying regardless of what I thinkwhat is important is that this institution have credibility in the public arenaand therefore whatever you conclude we will follow. And I recall that veryprecisely, that he was very clear about that, SUMF 208 (emphasis added);

Mr. Raines was very clear in his view that he wanted to have the rightaccounting, the appropriate accounting by Fannie Mae . . . it was to me veryclear that whatever that decision was, whether he liked it or not, that he wouldfollow that decision, SUMF 209 (emphasis added).

Although Plaintiffs omission is inexcusable, it mirrors the tactic they employed to obtain an

opinion from their former expert, Mr. Harvey Pitt, shielding from review the critical testimony

of Mr. Nicolaisen that in fact demonstrates the absence of scienter.

B. Plaintiffs Identify No Evidence that Mr. Raines Knew, or Had Reason ToKnow, that Fannie Maes Accounting for FAS 91 Violated GAAP.

With regard to FAS 91, the second accounting policy underlying this case, Plaintiffs

allege that in his October 6, 2004 testimony before Congress, Mr. Raines misled the public by

stating that our accounting staff has repeatedly determined that our policies and practices with

regard to FAS 91 . . . are reasonable and in accord with GAAP. Opp. at 18. Mr. Rainess

opening papers demonstrate that it is undisputed that: (i) Fannie Maes internal accounting

professionals and senior executives (as well as KPMG) repeatedly determined and advised Mr.

Raines that Fannie Maes FAS 91 accounting complied with GAAP in all material respects; and

(ii) Mr. Raines played no role in designing Fannie Maes policies and practices related to

amortization accounting under FAS 91.6

SUMF 11, 24, 3234, 3637, 86, 90, 14243.

6 With regard to Plaintiffs allegation concerning the amount Fannie Mae booked for a catch-up expense for thefourth quarter of 1998before the beginning of the Class Period, and for a period before Mr. Raines was CEOPlaintiffs fail to mention (but do not dispute) that: (i) numerous professionals have testified that they believed theaccounting was appropriate; (ii) the CFO, Mr. Howard, and Controller, Ms. Spencer, recommended the decision to



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mail between KPMG auditors (Messrs. Argires and Serock), which was not addressed to Mr.

Raines and could not establish scienter on his part; (ii) the testimony of Mr. Nicolaisen, who

stated he made no findings with respect to intent, but noted Mr. Rainess desire to ensure Fannie

Maes accounting was correct; and (iii) Mr. Barness 2002 Memorandum, which Mr. Barnes

testified he wrote as a result of Mr. Rainess encouragement to employees to raise issues of

concern, SUMF 19798, to establish scienter as against Mr. Raines. See infra Part II.B. In

contrast, Mr. Raines would present the testimony of dozens of witnessesincluding Messrs.

Argires and Serockto establish that: (i) no one ever informed Mr. Raines that Fannie Maes

accounting violated GAAP, and dozens of persons stated the contrary; (ii) Mr. Raines never

directed anyone to violate GAAP; and (iii) Mr. Raines never overruled the accounting

judgments made by professionals and always instructed his subordinates that his primary

concern was to ensure that whatever change[s] needed to be made from an accounting

perspective . . . should be made to ensure compliance with GAAP. See SUMF 12, 16062.

On this record, Plaintiffs seek a trial to ask that a jury make the speculative leap to

scienter as against Mr. Raines, with nothing to bridge the chasm. Plaintiffs evidence simply

does not permit the unreasonable inference they seek; thus summary judgment is warranted.

III. PLAINTIFFS IDENTIFY NO EVIDENCE THAT MR. RAINESS STATEMENTSWERE FALSE OR MADE WITH SCIENTER.

To prevail on their securities fraud claims against Mr. Raines, Plaintiffs must identify

evidence that Mr. Raines made a material misrepresentation or omission, did so with scienter,

and that Mr. Rainess misrepresentation . . . proximately caused the plaintiffs loss. Pls. Loss

Causation Opp. (Dkt. No. 971) at 1 (citingDura Pharm., Inc. v. Broudo, 544 U.S. 336, 346

(2005)). In their Opposition, Plaintiffs identify only two such alleged misrepresentations by Mr.



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Raines.8 But there is no evidence from which a reasonable juror could infer that Mr. Raines

made these statements conclusorily or without investigation and with utter disregard for

whether there was a basis for the assertions made therein so as to constitute extremely reckless

or intentional behavior on his part. Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38, 4748

(2d Cir. 1978). Thus, neither of these statements can sustain a fraud claim against Mr. Raines.

A. Statement No. 1 July 30, 2003 Conference Call.Plaintiffs contend that in response to a question whether Fannie Mae used any

accounting practices or any accounting driven transactions, that have either distorted your

financial presentations or that might appear questionable if known to the public, Mr. Raines

stated the following:

I can say to you that we have not undertaken any transactions to distort ourtrue financial condition. . . . weve tried to be very fastidious in our accountingto reflect the economics of our business.

Opp. at 1314. Plaintiffs apparently cannot decide precisely which of Mr. Rainess statements

in the July 30, 2003 conference call were false.

Plaintiffs first theory was that Mr. Rainess statements were false and misleading with

regard to Mr. Rainess assur[ance to] investors that Fannie Mae did not have the same

accounting issues as Freddie Mac. Compl. 271.9 Plaintiffs offer no evidence, however, to

suggest that any such representation was false or made with scienter. As noted previously, in

the wake of the announcement of Freddie Macs Restatement, Mr. Raines received additional,

specific assurances that Fannie Maes accounting was in compliance with GAAP. See Mot. at

8 Plaintiffs identify: (i) a July 30, 2003 conference call with the financial press and analysts (Statement No. 1);and (ii) Mr. Rainess October 2004 testimony before Congress (Statement No. 2). See Opp. at 13, 17. Plaintiffstherefore concede that only these two statements can meet all of the elements of their securities fraud claims. SeeMot. at 3; Pls. Loss Causation Opp. at 9 (identifying statements Plaintiffs attribute to Mr. Raines and whichPlaintiffs allege proximately caused loss). The Courts resolution of the motion for summary judgment regardingthe loss causation methodology used by Plaintiffs expert does not impact the resolution of this motion.

9See also Loss Causation Opp. at 46; Jarrell Rept. 9394 & n.61.



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3132; SUMF 14651. Plaintiffs own experts have conceded that Mr. Rainess public

statements describing Fannie Maes accounting as appropriateeven in light of Freddie Macs

disclosureswere (i) made only after the entire Audit Committeewith KPMG presenthad

been told at the end of a series of assessments that Fannie Mae did not have the same

accounting issues as Freddie Mac, and (ii) in fact probably true. Mot. at 33 (citing

depositions of Robert Berliner and John Barron).

In their Opposition to Mr. Rainess Motion, Plaintiffs proffer a second theory: that a

different statement from the same conference call was false or misleading because Mr. Raines

knew that senior management undertook transactions to move earnings into future reporting

periodsthereby distorting the Companys true financial condition. Opp. at 1314. Under

this second theory, Mr. Raines misled investors because Fannie Mae was engaged in a host of

loss smoothing and earnings management tools to shift earnings from current reporting periods

into future reporting periods. Id. at 13. This theory fails because Mr. Rainess statement has

nothing to do with either earnings management or loss smoothing. Rather, he was discussing

Fannie Maes extensive quarterly certification and disclosure process and his decision, approved

by the SEC, to disclose both GAAP earnings (which mechanically reported all volatility

consequent to the implementation of FAS 133) as well the companys core earnings, which

more clearly reflected the true economics of the company. This theory also fails because it rests

on the presumption that any transaction which has the effect of moving earnings into future

reporting periodssuch as an end-of-a-quarter sale or an expanded advertising budget at years

endnecessarily distorts the Companys true financial position. Id. at 1314. That



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IV. PLAINTIFFS FAIL TO IDENTIFY ANY OTHER EVIDENCE THAT WOULDESTABLISH SCIENTER AS TO MR. RAINES.

A. Plaintiffs Cite No Evidence that Mr. Raines Engaged in Improper EarningsManagement.

1. Bulk Mortgage Insurance.Plaintiffs identify Fannie Maes purchase of bulk mortgage insuranceand its attendant

impact upon earningsas evidence that Fannie Mae manipulated earnings. Opp. at 9. They

suggest that as of at least 2001, Mr. Raines was personally involved in discussions related to

the use of insurance transactions, and imply that Mr. Raines was involved in the accounting for

the so-called Radian Transaction. Seeid. at 10. The uncontroverted evidence, however,

establishes that, although Mr. Raines endorsed the concept of protecting against credit losses

through the purchase of insurance (a judgment that events in the mortgage market after his

departure from Fannie Mae confirm as wise), he was never involved in the selection or design

of any particular transactions, much less in the accounting for any particular transaction.

Plaintiffs cite one October 17, 2001 e-mail from Adolfo Marzol, Executive Vice

President and Chief Credit Officer, in support of their allegation. Id. at 10. Plaintiffs fail to

provide, however, any of the undisputed record testimony, including (i) Mr. Marzols testimony

that although Mr. Raines expressed a willingness to buy insurance to help manage Fannie Maes

rising credit losses, Mr. Raines did not direct or suggest any particular transaction; and (ii)

testimony from various members of Fannie Maes Credit Policy department stating that they

considered Mr. Rainess guidance to protect against credit losses as a business decision and did

not interpret his guidance as an instruction to manipulate earnings, to engage in any particular

transaction, or to account for a particular transaction in any particular way. See SAUMF

23844. Plaintiffs hope to create the impression of fraud by noting that in the Restatement,

Fannie Mae admitted that the accounting for the Radian Transaction violated GAAP. See Opp.



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at 1011 & n.37. But Plaintiffs cite no evidence that Mr. Raines was involved in any way with

the Radian Transactionone of numerous insurance transactionsnor that he had anything to

do with the accounting for this one transaction.12

See SAUMF 23839. And even had Mr.

Raines been involved, apost hoc acknowledgement that a transaction violated GAAP, standing

alone, does not establish fraud or scienter for Mr. Raines, as a matter of law.13

As such,

Plaintiffs have failed to cite any evidence of scienter.

2. Debt Buybacks.Plaintiffs cite Fannie Maes purchase of debt as evidence of improper earnings

management, Opp. at 11, but offer no evidence that such transactions are improper or were

inadequately disclosed. No such evidence exists. The record establishes that: (i) debt

buybacks were approved for execution only after a determination that the transaction would

bear economic benefits, not because of their effect on earnings per share; and (ii) the fact and

amount of debt buybacks were fully reflected on Fannie Maes financial statements. See

SAUMF 24546. Further, Plaintiffs own expert confirmed that [c]ertain transactions may

be executed to manage earnings (i.e., change the pattern of earnings) without violating GAAP.

At Fannie Mae, an example of this was its debt buyback program. Ex. 191 at 5-5 (Fierstein

Rept.);see also Ex. 192 (Fierstein Dep. 343:18344:20).

12 Moreover, Plaintiffs expert conceded that there was a legitimate business justification for entering into theRadian Transaction, and the transaction was quantitatively immaterial to Fannie Maes financial statements in2002, 2003, and 2004. Ex. 192 (Fierstein Dep. 561:17, 799:2800:1). The absence of materiality alone is a basison which to disregard this issue for purposes of evaluating Mr. Rainess motion.

13See, e.g., Roth v. OfficeMax, 527 F. Supp. 2d 791, 79798 (N.D. Ill. 2007); Mot at 56, 1922 (collecting cases).



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B. Plaintiffs Cite No Evidence that Mr. Raines Knew or Should Have Knownof Alleged Deficiencies in Internal Controls and Corporate Governance.

1. Internal Controls.Plaintiffs contend that Mr. Raines misled the public by certifying to the investing

public that he personally disclosed to KPMG and the audit committee all significant

deficiencies and material weaknesses in the design or operation of internal controls over

financial reporting, because he was aware of significant deficiencies in Fannie Maes internal

controls environment. Opp. at 20 (citing March 15, 2004 Certification of Franklin D. Raines).

But Plaintiffs do not dispute that Mr. Raines issued this certification after an extensive process

in which he was repeatedly told that there were no material weaknesses or significant

deficiencies in internal controls. See Mot. at 2226. Instead, Plaintiffs cite an August 2003

letter from Sampath Rajappa, Fannie Maes former Chief Internal Auditor, to Mr. Raines, and

characterize that letter as warning Mr. Raines that internal control environment was cracking

under the pressure of EPS goals that he set. Opp. at 19. The letter makes no such allegation.

Mr. Rajappa sent this letter because Mr. Raines had maintained an atmosphere where he said if

you guys have anything on your mind, let me know, and I believe he meant it. SAUMF 248.

Plaintiffs fail to mention that the same letter reiterated Mr. Rajappas assurances to Mr. Raines

about the state of Fannie Maes internal controls, accounting, integrity, and culture:

Fannie Mae is the best company I have worked for and as I have said thetone at the top is the best I have seen. In my 9+ years here, as the controllerand head auditor, I have never seen or been part of any discussion whereanything was ever discussed that could be considered to be not kosher.

You have some of the best senior managers in Financeveryknowledgeable, conscientious, and hardworking.

The above is certainly not to be critical of anyone, or to imply somebody isdoing something bad, but given our limitations (including mine) wecollectively need to make some mid-course corrections.



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SAUMF 247 (emphases added). Plaintiffs next cite the 2002 Barnes Memorandum and

assert that Mr. Barnes sent the memorandum to Mr. Raines,see Opp. at 1819, but as discussed

supra, there is no evidence that Mr. Raines everreceivedthe memorandum. See Part II.B.14

None of this evidence suggests that Mr. Raines was aware of any material deficiencies

in Fannie Maes internal controls environment. And upon hearing concerns about the

Controllers Office, Mr. Raines allocated significant additional resources to that function,see

SAUMF 249, evidence which is directly inconsistent with plaintiffs proposed inference of

scienter. See In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1425 (9th Cir. 1994) (noting

that actions which evinced officers good faith belief in optimism of company conclusively

rebutted plaintiffs speculative inferences in light of lack of direct evidence on scienter).

Even if the evidence could be construed as Plaintiffs wish, these isolated assertions regarding

Fannie Maes operations are not sufficient to establish scienter because such evidence at most

constitutes an issue of corporate mismanagement or negligence, not federal securities fraud.

In re REMEC Inc. Sec. Litig., 702 F. Supp. 2d 1202, 1249 (S.D. Cal. 2010) (granting summary

judgment to CEO on scienter grounds in the face of internal control allegations).15

2. Corporate Governance.Plaintiffs argue that Mr. Rainess reliance upon Fannie Maes corporate governance

structure was unreasonable. See Opp. at 2125. Plaintiffs do not dispute the extensive

certification and disclosure process described in Mr. Rainess opening brief. See Mot. at 22

14

Plaintiffs also claim that one of Fannie Maes experts, Mr. Roy Van Brunt, answered, when posed with ahypothetical question, that if a CEO had been told that his accounting systems were grossly inadequate yet wentahead and issued and signed financial reports . . . it would raise a red flag. Opp. at 20. But Plaintiffs cite noevidence that Mr. Raines was ever told by anyone that the accounting systems were grossly inadequate.

15See also In re IMAX Sec. Litig., 587 F. Supp. 2d 471, 483 (S.D.N.Y. 2008) (noting that [t]he failure . . . toidentify problems with the defendant-companys internal controls and accounting practiceswithout moredoes not constitute reckless conduct);Roth, 527 F. Supp. 2d at 79798 ([M]ere allegations of GAAP violations,the restatement of income, or statements regarding the internal controls of a company that are later proven to befalse, are not sufficient to demonstrate that those who made the statements committed securities fraud.).



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to continue to be deposed, and the Court struck Mr. Pitt as an expert.16 The only expert

testimony remaining in this case is undisputed that Fannie Mae had an appropriately designed

corporate governance structure, which warranted the reliance of a senior executive such as Mr.

Raines in connection with the proper determination and implementation of [its] accounting

standards. Ex. 195 at 1314 (Gilson Rept.).17

See In re REMEC Inc. Sec. Litig., 702 F.

Supp. 2d at 1228 (granting summary judgment in light of absence of expert testimony).

C. Mr. Rainess Lack of Stock Sales and Fannie Maes ExecutiveCompensation Structure Do Not Support a Claim of Securities Fraud.

To establish scienter on motive and opportunity, Plaintiffs must point to concrete

benefits that could be realized by . . . the false statements and wrongful nondisclosures alleged.

Kalnit, 264 F.3d at 139. That Mr. Raines engaged in absolutely no stock sales is fatal to any

motive and opportunity theory, because this fact alone negates any possible inference of

scienter. See Mot. at 1518. Although Plaintiffs assert that a jury could reasonably conclude

that a corporate officer complicit in such earnings management would not unload any company

stock, so long as its inflated price holds steady, Opp. at 2728, courts uniformly reject this

proposition. Allegations that officers were motivated to defraud the public because an inflated

stock price would increase their compensation are insufficient, as a matter of law, because to

16See Ex. 193 (Pitt Dep. 329:321, 336:17338:3). With no expert to testify on their behalf, Plaintiffs suggest thatMr. Rainess experts are testifying against him. See Opp. at 2224. That allegation is unusually brazen andmisleading. The hypotheticals posed to Professor Gilson and quoted by Plaintiffs presupposed that Mr. Raines wastold of these criticisms during the Class Period, for which Plaintiffs cite no evidence. And as for certification anddisclosure controls, every quotation taken from Professor Hafts deposition is based on a laundry list of suggestions

from a 2008 to 2009 edition book written by Professor Haft, which by Professor Hafts own testimony were takentotally out of context,see, e.g.,Ex. 194 (Haft Dep. 136:22138:4), because every procedure as suggested fromthe preface of the book and throughout, whether you use a particular procedure or not, depends upon the particularfacts and circumstances involving the company. So it is a general guide, not a definitive list of required practices,id. at 40:342:8;see also Rainess Resp. to Pls. Genuine Issues of Material Fact 96.

17See also id. at 13.b ([T]he corporate governance structure of FNMA was appropriately designed and wouldwarrant the reliance of a senior executive such as Mr. Raines . . . .); Ex. 196 at 14 (Osborne Rept.) (concluding[t]hroughout the Class Period, Fannie Mae maintained robust corporate governance processes and that Mr.Raines acted as a reasonable CEO would during that period).



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V. THE PAUL WEISS AND OFHEO REPORTS DO NOT ESTABLISH MR.RAINESS SCIENTER.

In their final gambit, Plaintiffs assert that Fannie Maes regulator charged Mr. Raines

with intentional and reckless misconduct and cite the reports issued by Paul Weiss and OFHEO,

along with a complaint filed by the SEC and a Notice of Charges filed by OFHEO. See Opp. at

2830. These reports, complaints, and settlements do not establish Mr. Rainess scienter and, in

any event, are not ultimately admissible against him. Statements in reports, when relied upon

for the truth of the matter asserted, are hearsay and therefore generally inadmissible.21

See In re

Sept. 11 Litig., 621 F. Supp. 2d 131, 153 (S.D.N.Y. 2009). But even if the Paul Weiss Report

were admissible, it would not aid Plaintiffs case, as it states: we did not find that [Mr. Raines]

knew the Companys accounting departed from GAAP in significant ways. Ex. 190 at 5.

Plaintiffs citations to the OFHEO Reports are equally unavailing. All the statements

Plaintiffs cite from OFHEO Reports against Mr. Raines either (i) generalize about the intentions

and knowledge of Fannie Maes senior management, employees, or senior executives; or

(ii) bear solely on the quality of Fannie Maes internal controls. Neither category of statements

establishes scienter for Mr. Raines.22 The first category of statementsi.e,statements

concerning various senior managementnever mentions Mr. Raines by name or otherwise

distinguishes between him and an indefinite number of Fannie Maes senior management.23

21 Mr. Raines hereby joins and incorporates by reference Part I.C of the Reply Brief of Leanne G. Spencer and PartVI of the Reply Brief of J. Timothy Howard, regarding the inadmissibility of the Paul Weiss and OFHEO Reports.

22 The Court need consider only the specific portions of the OFHEO Reports that Plaintiffs cite in their brief. See

1443 Chapin St., LP v. PNC Bank, N.A., No. 08-1532, F. Supp. 2d, 2011 WL 4071849, at *7 (D.D.C. Sept. 14,2011). Plaintiffs may not cite and rely on those reports in their entirety to avoid summary judgment. See Twist v.

Meese, 854 F.2d 1421, 1425 (D.C. Cir. 1988) ([A] district court judge should not be obliged to sift throughhundreds of pages of depositions, affidavits, and interrogatories in order to make [its] own analysis anddetermination of what may, or may not, be a genuine issue of material disputed fact.).

23See Opp. at 14 (referring to objectives of management); id. at 17 (referring to manipulations of seniormanagement); id. at 29 (quoting OFHEO Reports findings about efforts of senior management and seniorexecutives); Pls. Resp. to SUMF 117 (describing senior managements views on FAS 133 and their efforts toimplement those views); id. 142 (same).



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As this Court has already held (in accord with other courts), allegations of scienter must be

specific to each defendant. See In re Fannie Mae Sec. Litig., 503 F. Supp. 2d 25, 3940

(D.D.C. 2007) (PSLRA requires plaintiffs to allege specific facts demonstrating that each of

the defendants acted with the requisite state of mind.). The second category of statements

imports OFHEOs conclusions about the alleged deficiencies in Fannie Maes internal

controls.24 As discussed in Part IV.B.1, however, evidence of faulty internal controls at most

bears on mismanagement and does not support the inference of securities fraud. Accordingly,

whatever the Courts ruling on the admissibility of the Paul Weiss and OFHEO Reports, none of

the statements on which Plaintiffs rely can defeat Mr. Rainess motion for summary judgment.

Finally, Plaintiffs rely on an SEC Complaint against Fannie Maenot Mr. Rainesin

an enforcement action that was later settled. See Opp. at 2829. That complaint is inadmissible

hearsay. See In re Balanced Plan, Inc., 257 B.R. 921, 925 (Bankr. W.D. Mo. 2001) (finding

SEC complaint inadmissible hearsay for which no exception to inadmissibility applies).

Contrary to Plaintiffs suggestion that it charged Mr. Raines with intentional and reckless

misconduct, Opp. at 28, the complaint does not make any allegations against Mr. Raines. And

the SEC did not serve a Wells Notice on Mr. Raines, suggesting that the agency was not even

considering charging him for violation of any securities statute, including negligence statutes.25

CONCLUSION

For the foregoing reasons, Mr. Raines requests that this Court enter an order granting

summary judgment and dismiss the case against him in its entirety.

24See Pls. Resp. to SUMF 43, 61, 106, 142, 170, 172, 185.

25 Plaintiffs offer no rationale for their reliance on the Notice of Charges issued by OFHEO in a separateadministrative proceeding that was settled with a denial of liability by Mr. Raines. See Opp. at 2930. There isnone. Rule 408 plainly excludes such evidence. See Fed. R. Evid. 408(a)(1) (prohibiting use of settlement to provevalidity of a disputed claim).



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Dated: December 28, 2011 Respectfully submitted,

/s/ Kevin M. DowneyKevin M. Downey (D.C. Bar No. 438547)Alex G. Romain (D.C. Bar No. 468508)

Joseph M. Terry (D.C. Bar No. 473095)Matthew L. Fore (D.C. Bar No. 491184)WILLIAMS & CONNOLLY LLP725 Twelfth Street, N.W.Washington, D.C. 20005Tel: (202) 434-5000Fax: (202) 434-5029

Counsel for Defendant Franklin D. Raines



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CERTIFICATE OF SERVICE

I certify that January 6, 2012, pursuant to the Revised Order Governing Filing

Requirements for Motions for Summary Judgment (Dkt. No. 962) (Nov. 15, 2011), I caused to

be served the following: (1) Reply Memorandum in Support of Defendant Franklin D. Rainess

Motion for Summary Judgment; (2) Defendant Franklin D. Rainess Reply to Lead Plaintiffs

Responses to Defendant Rainess Statement of Undisputed Material Facts and Statement of

Additional Undisputed Material Facts in Support of Defendant Franklin D. Rainess Motion for

Summary Judgment; (3) Defendant Franklin D. Rainess Responses to Lead Plaintiffs Statement

of Genuine Issues of Material Fact Precluding Summary Judgment; and (4) Declaration of Eun

Young Choi in Support of Defendant Franklin D. Rainess Motion for Summary Judgment.

/s/ Eun Young ChoiEun Young Choi (D.C. Bar No. 987677)


raines motion to dimiss facts 051013

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