Civil Procedure

In re: Fannie Mae 2008 Securities Litigation — Study Notes

742 F. Supp. 2d 382 (S.D.N.Y. 2011)

Study notes for In re: Fannie Mae 2008 Securities Litigation: professor notes, cold call prep, exam angles, and memory aids.

To survive a motion to dismiss in a securities fraud case, plaintiffs must adequately plead scienter under the PSLRA.
Professor Notes

In this case, the plaintiffs, a class of investors, argued that Fannie Mae and its executives failed to disclose the substantial risks associated with its mortgage portfolio leading up to the financial crisis of 2008. The court focused heavily on the requirement under the Private Securities Litigation Reform Act (PSLRA) to demonstrate 'scienter,' or the intent to deceive, manipulate or defraud. The court concluded that the plaintiffs did not sufficiently allege facts to create a strong inference of scienter, thus not meeting the heightened pleading standard required by the PSLRA. This decision illustrates the challenges investors face when alleging securities fraud and underscores the importance of factual specificity in pleadings.

Cold Call Prep
  1. 1What does scienter mean in the context of securities fraud?
  2. 2Explain the relevance of the PSLRA in this case.
  3. 3What were the specific failures in the plaintiffs' allegations?
  4. 4How does this case impact future securities fraud litigation?
  5. 5What could the plaintiffs have done differently to strengthen their case?
  6. 6Describe the significance of the court's analysis of intent.
  7. 7In what ways does this case illustrate the challenges of class-action lawsuits?
Mnemonic Device

SCIENTER stands for Strong Claims In Every Notably True Elicitation of Risk.

Distinguish From
CaseDistinction
Tellabs, Inc. v. Makor Issues & Rights, Ltd.Tellabs established the standard for evaluating whether a complaint sufficiently pleads a strong inference of scienter, emphasizing a holistic approach rather than isolated facts.
Basic Inc. v. LevinsonBasic focused on materiality and reliance in securities fraud where In re: Fannie Mae centers more on the sufficiency of the allegations related to intent.
Dura Pharmaceuticals, Inc. v. BroudoDura addressed loss causation while In re: Fannie Mae primarily dealt with the pleading standards of intent under the PSLRA.
Policy Arguments

For the Rule

Requiring a heightened standard of proof for scienter under the PSLRA protects companies from frivolous lawsuits and encourages transparency in financial reporting.

Against the Rule

This heightened pleading standard may deter legitimate claims of securities fraud, disproportionately affecting small investors who may lack resources for detailed investigations.

Class Discussion Points
  • The implications of heightened pleading standards on investor protection.
  • The balance between preventing fraud and not stifling legitimate claims against corporations.
  • The differing interpretations of scienter in various courts and its impact on legal precedent.
  • Potential reforms to the PSLRA to enhance investor protections while maintaining corporate accountability.
  • The role of judicial discretion in assessing the sufficiency of allegations in securities fraud cases.
Exam Angle

This case may appear on exams as an illustration of the PSLRA's pleading requirements, particularly regarding scienter and the necessary standards for pleading securities fraud.

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