Former Freddie Mac chief executive Richard Syron and two other one-time executives lost their bid to escape a U.S. regulator's lawsuit accusing them of misleading investors about the company's exposure to risky mortgage loans.
U.S. District Judge Richard Sullivan in Manhattan partially granted but otherwise denied the defendants' motion to dismiss the case, one of the biggest enforcement actions brought against executives spilling out of the financial crisis.
Sullivan in his Thursday ruling sided with the SEC, finding the lawsuit's allegations supported a plausible inference that Syron and Patricia Cook, Freddie Mac's former chief business officer, misrepresented the company's subprime exposure.
He also rejected the defendants' contention even if Syron and Cook verbally misrepresented Freddie's exposure, investors could have looked to detailed quantitative information to calculate its subprime exposure.
"In this case, the Court cannot conclude that no reasonable investor could have found the alleged misrepresentations and omissions to be material in light of the quantitative disclosures," Sullivan wrote.
The judge also allowed SEC claims against Donald Bisenius, a former executive vice president for Freddie's single family guarantee business.
Lawyers for Syron and Cook did not respond to requests for comment. Daniel Beller, a lawyer for Bisenius, declined comment. A spokesman for the SEC did not respond to a request for comment.
Syron, Cook and Beller were hit with the SEC lawsuit in December 2011, as the agency launched a similar lawsuit against three ex-Fannie Mae executives, including former chief executive Daniel Mudd.
U.S. District Judge Paul Crotty denied the Fannie executives' bids to dismiss the case against them in August 2012.
In the Freddie Mac case, Syron and the other defendants also argued they were exempt from liability under the Securities Exchange Act of 1934 since Freddie, as a government-sponsored corporation, was an independent U.S. establishment.
Sullivan rejected that argument, saying "had Congress in 1970 or at any time since then wished to designate Freddie Mac as an independent establishment, it would have done so."
© 2014 Thomson/Reuters. All rights reserved.