934 F. Supp. 2d 609
S.D.N.Y.2013Background
- SEC sues Freddie Mac former executives Syron, Cook, and Bisenius for securities fraud and aiding/abetting under Exchange Act and Securities Act provisions.
- Defendants argue Freddie Mac is an independent establishment exempt from Exchange Act liability; court analyzes this threshold issue.
- Freddie Mac’s disclosures from 2006–2008 claimed subprime exposure was not significant or basically no subprime exposure in certain contexts.
- Statements by Syron and Cook and Freddie Mac’s quarterly/annual disclosures were at issue, focusing on subprime exposure scope.
- Court grants in part and denies in part: Section 17(a)(2) claim dismissed; remaining claims survive.
- Key factual backdrop includes Freddie Mac’s programs (A-minus, EA), the growth of high-risk loans, and internal acknowledgments of subprime-like risk.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Section 3(c) excludes Freddie Mac from Exchange Act liability | SEC argues Freddie Mac is not an independent establishment; thus Exchange Act applies | Freddie Mac fits independent establishment definition | Freddie Mac not an independent establishment; Exchange Act applies |
| Whether the alleged misrepresentations/omissions are actionable | SEC alleges misstatements about subprime exposure were misleading | Disclosures and context may render statements non-misleading or not material | Plaintiff states plausible misrepresentations and half-truths; claims survive for most counts |
| Whether the SEC adequately pleaded scienter for Syron and Cook | SEC asserts recklessness through prior meetings, warnings, and known subprime risk | Defendants contend lack of clear facts showing recklessness | Court finds strong inference of recklessness for Syron and Cook |
| Whether the SEC adequately pleaded aiding and abetting liability | Defendants knowingly certified/sub-certified misleading disclosures and aided fraud | Argues insufficient to prove substantial assistance or knowledge | Aiding and abetting claims against all Defendants survive on knowledge and substantial assistance grounds |
| Whether Section 17(a)(2) claims against Syron and Cook can stand | Statements in stock offerings incorporated by reference; alleged misrepresentations obtained money/property | Defendants did not personally obtain money or property from offerings | Section 17(a)(2) claims dismissed for lack of personal obtainment of money/property by Syron and Cook |
Key Cases Cited
- Aaron v. SEC, 446 U.S. 680 (U.S. 1980) (textual approach; unless language is ambiguous, rely on statute's language)
- Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (U.S. 1972) (remedial purposes must not override clear statutory language)
- Apuzzo v. SEC, 689 F.3d 204 (2d Cir. 2012) (Apuzzo rejects proximate-causation requirement for aiding and abetting in SEC actions)
- Mendrala v. Crown Mortgage Co., 955 F.2d 1132 (7th Cir. 1992) (tests whether Freddie Mac is an independent establishment under FTCA-type analysis)
- SEC v. Mudd, 885 F. Supp. 2d 654 (S.D.N.Y. 2012) (treats independent-establishment issue for Freddie Mac; adoption of Mendrala framework)
- Stoker v. SEC, 865 F. Supp. 2d 457 (S.D.N.Y. 2012) (dispute over obtainment in Sec 17(a)(2); adopts broader view aligning with Apuzzo)