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Fannie Vs. Auditor

Fannie Vs. AuditorAnswer filed in $2 billion lawsuit

April 27, 2007

By JERRY DeMUTH

In response to a lawsuit filed by Fannie Mae against its former auditor, an answer to the complaint has been filed accusing the Washington, D.C.-based company of massive fraud.

Fannie committed fraudulent and negligent misrepresentation and fraudulent inducement when providing information to KPMG for its audits, the accounting firm alleges in its answer to a suit Fannie filed against it last December.

That suit, which seeks more than $2 billion in damages from the accounting giant, alleges that KPMG is to blame for the mistakes made in its financial statements that led Fannie to restate its earnings.

But KPMG, in its cross-claims against the government sponsored housing enterprise, which were filed last week in U.S. District Court for the District of Columbia, charges that “Fannie Mae repeatedly, systematically and intentionally misled KPMG over a number of years, in violation of its contractual promises, its written representations and federal law,” including SEC and FASB rules, and thus is responsible for any mistakes in those financial statements.

Further, KPMG charges that “Fannie Mae’s omissions and material misrepresentations to KPMG were willfully and wantonly reckless or malicious.

Fannie’s actions were done, KPMG alleges, “to deceive KPMG” and “to induce KPMG to issue unqualified audit opinions and unmodified review reports on Fannie Mae’s annual financial statements and quarterly balance sheets.

But, in its cross-claims, KPMG does not provide any examples of any of the omissions and misrepresentations it alleges that occurred.

The charges pertain to the years 1998 through 2004 — when Fannie fired KPMG as its auditor.

In support of its argument, KPMG cites reports on Fannie by its regulator, the Office of Federal Housing Enterprise Oversight, and by a committee commissioned by the GSE’s board of directors, which produced what is commonly known as The Rudman Report.

KPMG, stating that it suffered injury to its reputation, lost fees, legal costs and exposure to legal liability, including suits against it, asks for compensatory damages to be determined at a jury trial, punitive or exemplary damages equal to not less than three times compensatory damages, interest, costs and expenses and any additional relief to be determined by the court.

In its District Court filing, KPMG also makes 37 affirmative defenses, including lack of liability for the actions of others and lack of wrong doing by itself, in its answer to Fannie’s suit against it.

Related:

Fannie Files $2 Billion Lawsuit
For the third time this year, auditors have been the target of legal actions over the faulty financials of mortgage firms. But the defendant in the latest litigation, a lawsuit filed by mortgage behemoth Fannie Mae, said the issues raised in Fannie’s complaint are already being addressed in a federal case.


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