SEC v. Mudd, Dallavecchia and Lund

The Securities and Exchange Commission (SEC) filed action against three former officers of the Federal National Mortgage Association (“Fannie Mae”) alleging that they made or assisted in making false and misleading public statements about the company’s exposure to subprime and Alt-A mortgages in the period leading up to the financial crisis. Specifically, the SEC alleged that Fannie Mae should have classified loans from its Expanded Approval and MyCommunityMortgage programs as subprime, and should have classified all loans with reduced documentation as Alt-A loans.

Dr. Brad Cornell was retained by Andrew Levander and Hector Gonzales of Dechert LLP on behalf of Mr. Dallavecchia to analyze the economic evidence, and rebut the testimony of the SEC’s experts. He opined that there was no accepted definition of Alt-A or subprime at the time, and that the event study performed by the SEC’s expert was flawed and should be excluded.

On Sept. 21, 2015 Messrs. Dallavecchia and Lund settled for $25,000 and $10,000, respectively, to be paid to the US Treasury “Gifts to the United States” Fund (these amounts may be paid by Fannie Mae on behalf of the executives). The agreements state that during the period at issue in the case, 2006 through 2008, “there were no universally accepted definitions of subprime” mortgages. The settlements also involve no admission of wrongdoing, no civil penalties, no disgorgement and no bar on serving as an officer or director of a public company, all penalties that the SEC originally sought.

The Compass Lexecon team that worked on the Fannie Mae case in our Pasadena office included Brad Cornell and Elisabeth Browne, among others.