Deloitte & Touche As Part Of A Conspiracy To Destroy Fannie Mae
Yep, it was a conspiracy: Plaintiffs allege that Deloitte was a chief enabler of a broad-based conspiracy--involving high ranking officials at FHFA, Treasury and The White House--to drain the private company of all financial resources. (The word conspiracy is never used in the complaint, which focuses on Deloitte's professional malfeasance. But the accounting firm's actions can only be understood in the context of the government's broader, highly coordinated, agenda.)
The burden of proof: The facts underlying the allegations are not set forth in the complaint with great specificity. This is not like a complaint alleging securities fraud in Federal Court, where the plaintiff must essentially prove his case before he is given the opportunity to pursue discovery. If I knew nothing of Fannie or the government conservatorship when I read the complaint, I would be skeptical of the plaintiffs chances at success. (Then again, if I knew nothing of Fannie Mae, I never would have imagined that a large corporation in conservatorship would pay out cash dividends.)
The numbers always looked highly suspicious, as I wrote in December 2013 and in November 2014. But it's very difficult to prove that loan loss provisions were calculated in a fraudulent manner, because the process, which involves subjective assessments and professional judgement, can be complicated by many moving parts.
To the uninitiated, the timing differences that drive bank earnings and equity may seem difficult to grasp. Accrual accounting for lending institutions was neatly summed up by William Faulkner. "The past is never dead," he wrote. "In fact, it's never really past." Bank accounting is all about the continual reconciliation of the past, measured as loan loss provisions in prior quarters, with the present, measured as the cash proceeds from loans taken off the books. Moreover new loan loss provisions are continually updated, based extrapolations of backward-looking data.
Defense counsel would hope to sow confusion that works in favor of the defendants. But the plaintiffs should prevail if the data is really is very lopsided, if it is clear that the process for arriving at the numbers was a sham.
Plaintiffs' counsel know what they are doing. Thomas, Alexander, Forrester & Sorensen specializes in going after accounting firms, and won a $112 million settlement against Ernst & Young in connection with its negligence in the Bernie Madoff Ponzi scheme.
My understanding is that plaintiffs' counsel have spoken with knowledgeable corporate insiders, who have described in detail how the process of corporate governance was continually short-circuited.
It didn't start in September 2008
At first blush, it is difficult to get one’s head around the allegations of an ongoing pattern of accounting fraud, directed by high ranking corporate and government officials, at Fannie Mae. So it may be worthwhile to step back and review the government’s oversight of the GSEs over the past dozen years or so. Because there’s a lot of cognitive dissonance to overcome.
Money talks, bullshit walks.
Fannie Mae Accounting Scandal Presages The Deloitte Lawsuit
For more details on the travesty known as the Fannie Mae accounting scandal, see this, this, this, and this. And in case you doubted that past is prologue, consider this gentle rebuke by Judge Richard Leon, “The discovery process was unnecessarily prolonged by OFHEO’s repeated and stubborn assertion of privileges that had to be litigated up to the Court of Appeals.”
And a primary motivation for placing Fannie in conservatorship may very well have been that, in September 2008, the five year statue of limitatiions for the crime of lying to a Federal official had not yet passed with regard to the false statements made by a small cadre of officials at OFHEO and the SEC.
[Modified from the original to reflect the allegation that Fannie, not Deloitte, had the direct obligation to restate its financials and that Deloitte failed in its duty as a public watchdog to withdraw its opinions on the original, misleading statements.]
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