Case 1:04-cv-01639-RJL Document 798 Filed 10/13/09 Page 1 of 10

UNITED STATES DISTRICT COURT DISTRICT OF COLUMBIA

In re Federal National Mortgage Association Securities, Derivative and ERISA Litigation

MDL NO. 1668

In re Fannie Mae Securities Litigation

Consolidated Civil Action No.: 1:04-CV-01639 Judge Richard J. Leon

LEANNE G. SPENCERS REPLY IN SUPPORT OF HER MOTION TO COMPEL THE PRODUCTION OF DOCUMENTS BY THE FEDERAL HOUSING FINANCE AGENCY For all the bluster of its Opposition (Opp.) (Docket 792) to Ms. Spencers Motion to Compel (Docket 781), FHFA never denies that it decided not to pursue alleged errors in Freddie Macs FAS 133 results because of what an agency spokeswoman characterized to the press as disagreement among the experts on the application of that accounting rule the same rule that the Lead Plaintiffs contend the Defendants must have intentionally violated because it is so easy to apply. See Second Amended Consolidated Class Action Complaint (Docket 204) 56-58. Throughout its Opposition, FHFA mischaracterizes Ms. Spencers arguments and speculates about her motives, but it never refutes the foregoing key points. It acts as though the fact that the Kroll Report is about Freddie Mac means that it could not possibly be relevant to anything else, but that is clearly not the case particularly given the liberal scope of relevance applicable in discovery. Moreover, FHFAs decision not to take issue with Freddie Macs accounting could have been based on shifting political winds rather than an objective assessment of the facts. Finally, FHFA fails to respond to the authority cited by Ms. Spencer indicating that the agency has waived any applicable privileges. For these reasons, as well as those set forth in

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her Motion to Compel and the supporting Memorandum (Mem.), Ms. Spencer respectfully requests that the Court order FHFA to produce all documents responsive to her June 5, 2009 subpoena immediately.1 1. Relevance FHFAs efforts at misdirection start immediately, as it seeks to rename Ms. Spencers motion one to Compel the Production of Documents Regarding Freddie Mac Accounting. Opp. at 1. In fact, Ms. Spencers motion is not a wide-ranging fishing expedition into any and all aspects of Freddie Macs accounting practices; rather, it is a narrowly-tailored effort to obtain a very specific set of information that could bear directly on one of the key issues in this litigation. Thus, FHFAs bizarre statements about not opening up discovery into the Freddie Mac lawsuits can be dispensed with immediately. Ms. Spencer is not interested in the details of any other lawsuit. She is, however, interested in facts here, a single report and related communications that may support her defense that FAS 133 is so complex that scienter cannot be inferred from mere accounting mistakes. FHFA argues that [t]he Kroll Report has absolutely nothing to do with Fannie Maes accounting practices under [FAS 133]. Opp. at 2. Even if that is true,2 the report (and related communications, which are equally important) need not discuss Fannie Mae to bear on one of the central issues in this case whether FAS 133 is easy to apply, in which case one might infer that any errors were intentional, or whether it is exceedingly complex, in which case the Lead
1

As discussed below (see infra at 6-7), Ms. Spencer has submitted herewith a revised proposed Order that, if entered, would make clear that FHFAs failure to properly assert its privilege claims results in a waiver and requires immediate production of all responsive documents.
2

In asserting that Kroll did not actually review any of Fannie Maes accounting practices, Opp. at 2, FHFA completely ignores the document attached as Exhibit F to Ms. Spencers motion one of several documents produced in this case that shows that Kroll did, in fact, review Fannie Maes accounting practices. See Mem. at 5 n. 5 (This makes more likely the possibility that the documents sought . . . could involve some type of comparison between Fannie Mae and Freddie Mac.).

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Plaintiffs will have to offer actual evidence of scienter (evidence that does not exist) to prevail on their claim for securities fraud. This would be the case even if the documents related only generally to the application of FAS 133 by some other company. Here, however, the basis of comparison is much deeper. First, no other company in the world is more similar to Fannie Mae than is Freddie Mac. Second, the disputed accounting decisions by Freddie Mac were made in 2004, during the class period in this litigation. Third, the judgment that the alleged FAS 133 errors by Freddie Mac should not be pursued was made by the very same agency whose emphatic, unequivocal criticisms of Fannie Mae are the foundation of Lead Plaintiffs case. Surely it is possible that FHFAs decision not to take issue with Freddie Macs accounting was based on a better understanding of FAS 133 gained as a result of its experiences with Fannie Mae. When it finally gets around to addressing the argument that the basis for its decision not to take issue with Freddie Macs FAS 133 accounting could help Ms. Spencer establish the complexity of the matter, FHFA says that [w]hat Ms. Spencer is actually looking for is expert testimony regarding FAS 133. Opp. at 5. Not so. She seeks only the facts about what happened. Lead Plaintiffs rely extensively on OFHEOs criticisms of Fannie Maes accounting and its allegations regarding the conduct and motivations of Ms. Spencer and others. Now we have an indication that OFHEO later, in a different political context, took a very different view of very similar matters. Ms. Spencer is entitled to discover those facts, particularly the basis for the agencys publicly-stated rationale of disagreement among the experts. Finally, it is worth noting that Ms. Spencer makes no charge of selective prosecution. Opp. at 6. Although FHFAs differing treatment of the two companies is probative of the fact that its attacks on Fannie Mae were politically motivated a motivation that several OFHEO

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witnesses have admitted in depositions Ms. Spencer does not dispute that it was within FHFAs discretion to decide not to pursue any alleged errors in Freddie Macs accounting. Nevertheless, FHFAs publicly-stated rationale for that decision is relevant to the Lead Plaintiffs attempt to draw inferences about the defendants state of mind. 2. Privilege FHFAs Opposition does not respond to the authority cited by Ms. Spencer establishing that blanket assertions of privilege are disfavored and lead to waiver of any privileges that might apply. See Mem. at 6-7. Instead, it simply repeats its conclusory assertions that the documents at issue are protected by the deliberative process privilege and the examination privilege. Opp. at 7. FHFAs failure to provide the basis for its privilege claims would justify holding that any privileges have been waived, but FHFAs deficiencies are even more egregious here because the unique procedural history of this dispute gave it an extra pre-litigation opportunity to properly invoke its privileges. As explained in Ms. Spencers motion, FHFA originally made its blanket assertion of privilege in a letter responding to Ms. Spencers Rule 34 requests for these documents. Ms. Spencer later agreed to resubmit the requests in the form of a subpoena and, at the same time, expressly called attention to the deficient nature of FHFAs privilege assertions. Nevertheless, FHFA refused to provide any additional information when it objected to the subpoena. See Mem. at 5-6. Indeed, even in its filing with this Court, FHFA now for the third time offers nothing more than conclusory, blanket assertions of privilege.3

FHFA offers no support for its assertion that the recipient of a Rule 45 subpoena for documents has no obligation to go through the expensive and burdensome process of responding to a subpoena to which it has objected unless and until the issuing party has received a court order. To require a party to engage in the expensive and burdensome process of logging irrelevant information would violate Rule 45. Opp. at 8-9. FHFAs burden arguments are addressed below. See infra at 7-8.

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Moreover, FHFA itself chose to publicize this matter. We knew nothing about the Kroll Report until the Wall Street Journal article appeared in April 2009 an article in which FHFAs own spokeswoman was quoted as stating that the agency chose not to pursue Freddie Macs alleged misapplication of FAS 133 because of disagreement among the experts. The agency should not be permitted to make self-serving public statements while at the same time shielding the facts behind such statements from scrutiny with vague and unsupported assertions of privilege. On a related note, FHFA also entirely ignores the fact that both privileges it asserts are qualified in nature, meaning that they can be overcome by a showing of substantial need. See Mem. at 7. For the reasons set forth above, the documents at issue could prove extremely important to defeating Lead Plaintiffs efforts to persuade the fact-finder to infer scienter from the defendants alleged misapplications of FAS 133. They could also further bolster defense arguments that OFHEOs allegations, which form the foundation of Lead Plaintiffs complaint, were politically motivated and not based on unbiased appraisals of Fannie Maes accounting practices by demonstrating that OFHEO chose not to pursue Freddie Mac only because of a changed political calculus. Accordingly, Ms. Spencer has a substantial need for the documents.4 FHFA also says nothing about the authority cited by Ms. Spencer establishing that its privileges should have been formally claimed after personal consideration by a responsible officer of the agency. Mem. at 7. These requirements are not mere procedural niceties, but important mechanisms to establish that the government claims privilege only in a deliberate,

Of course, FHFAs failure to properly assert its privileges makes it difficult to complete this analysis. See Mem. at 7 (quoting Northrop Corp. v. McDonnell Douglas Corp., 751 F.2d 395, 405 (D.C. Cir. 1984) (The litigants need for the information cannot be balanced against its sensitive and critical role in the governments decision making process without any indication of what the information is. Any claim that the documents would be protected by this privilege is purely speculative.)).

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considered and reasonably specific manner. Landry v. FDIC, 204 F.3d 1125, 1135 (D.C. Cir. 2000) (quoting In re Sealed Case, 856 F.2d 268, 271 (D.C. Cir. 1988)). FHFA is certainly familiar with these requirements, as it has in the past offered formal declarations from agency officers to support its privilege claims. See, e.g., Second Declaration of Alfred M. Pollard in Support of Assertion by OFHEO of the Deliberative Process Privilege (April 27, 2009; Docket 724-2) 5 (Declaration of OFHEOs General Counsel stating that I have personally reviewed the OFHEO documents withheld under the deliberative process privilege . . . . I hereby assert the deliberative process privilege on behalf of OFHEO and FHFA for those documents set out below and further described in the attached exhibits. . . . The purpose of this declaration is to explain the bases for OFHEOs and FHFAs decision to withhold documents based on the deliberative process privilege.). Its failure to comply with these requirements here is unexplained and unjustified.5 Finally, we note that Ms. Spencers motion requested that the Court order FHFA to produce certain documents recently subpoenaed by Ms. Spencer. Motion to Compel at 1 (emphasis added). But FHFAs Opposition makes clear that, notwithstanding Ms. Spencers clear argument that any privileges have been waived, see Mem. at 6-7, the agency intends to continue to withhold responsive documents even if the Court rules against it. See Opp. at 7 (If the Court orders FHFA to respond to this subpoena, only responsive, non-privileged information would be available. Privileged information will be withheld and logged.). Setting aside the presumptuousness of this position by an agency that was recently held in contempt for its failure to properly claim its privileges, Ms. Spencer believes that the Court can and should hold that
5

FHFA also states in a footnote that [t]here may also be responsive information protected by the attorney-client privilege and work product doctrine. Opp. at 7 n. 6. Needless to say, if FHFA had complied with its obligations to assert its privileges with specificity and after personal consideration by a responsible officer, we would not have to deal with the hypotheticals now offered by counsel.

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FHFA has waived any privileges applicable to documents responsive to Ms. Spencers June 5, 2009 subpoena. To avoid any doubt (and future litigation) on this point, Ms. Spencer respectfully submits herewith a revised proposed Order. 3. Undue Burden As with its privilege claims, FHFAs discussion of the purported burden imposed by the subpoena ignores Ms. Spencers arguments, both factual and legal. As a factual matter, FHFA does not dispute Ms. Spencers observation that the agency has offered no explanation as to why the material sought by the subpoena would be particularly voluminous or hard to locate. Indeed, the requests all relate specifically to a single matter the investigative report prepared by Kroll and related communications. One would think that all such materials would be filed together, making them relatively easy to produce. Mem. at 8. In fact, FHFAs claims of undue burden now seem not to relate to the process of locating responsive documents, but only to the process of logging those responsive documents that the agency claims are privileged. See Opp. at 8-9. Fortunately for the agency, it has waived its privileges, so there should be no need for it to log anything. In any event, completing a privilege log is simply not that burdensome, particularly where the agency has not disputed that the responsive material is not voluminous, and it is a necessary prerequisite under the Federal Rules when relevant evidence is withheld under a claim of privilege. See Fed. R. Civ. P. 26(b)(5)(A). Finally, FHFA does not respond at all to the cases cited by Ms. Spencer indicating that the party claiming undue burden bears a heavy burden of proof. See Mem at 8. Nor does it offer anything suggesting that it can possibly meet that burden. See id. at 9 (citing Moore v. Napolitano, 2009 U.S. Dist. LEXIS 69319 at *13-14 (D.D.C. Aug. 7, 2009) (Courts entertain overbreadth and undue burden objections only when the responding party demonstrates how a request is overly broad or unduly burdensome. A responding party cannot merely state, in 7

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conclusory fashion, that a request is overbroad or unduly burdensome.) (emphasis in original; citations and quotation marks omitted)). 4. Timeliness FHFAs timeliness argument is premised on the same mischaracterization that underlies its relevance argument. It argues that Ms. Spencer could have, but failed, to ask for documents related to Freddie Macs accounting at any time over the past many years of this litigation. Opp. at 9; see also id. ([I]f Ms. Spencer wanted to know how OFHEO handled Freddie Macs FAS 133 accounting, she could have sought it many years ago.). Once again, Ms. Spencer is not interested in general documents relating to Freddie Macs accounting or how OFHEO handled Freddie Macs FAS 133 accounting. She seeks something much more specific a particular report and related communications that could go directly to her scienter. FHFA does not dispute that this particular narrow slice of information was unknown to Ms. Spencer until the publication of the Wall Street Journal article in April 2009. Accordingly, it was not possible for Ms. Spencer to request it within the deadlines in the case management orders, and thus good cause exists to permit an exception to those deadlines. CONCLUSION For the foregoing reasons, as well as those set forth in her motion and related materials, Ms. Spencer respectfully requests that her Motion to Compel the Production of Documents by the Federal Housing Finance Agency be granted and FHFA be ordered to produce all documents responsive to her June 5, 2009 subpoena immediately. A revised proposed Order is attached.

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Dated: October 13, 2009 By:

Respectfully submitted, /s/ David S. Krakoff ______________________ David S. Krakoff (D.C. Bar No. 229641) Christopher F. Regan (D.C. Bar No. 433972) Adam B. Miller (D.C. Bar No. 496339) Heather H. Martin (D.C. Bar No. 489116) MAYER BROWN LLP 1999 K Street, N.W. Washington, D.C. 20006 Tel. (202) 263-3000 Fax (202) 263-3300 Counsel for Defendant Leanne G. Spencer

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CERTIFICATE OF SERVICE I certify that on October 13, 2009, I caused the foregoing Leanne G. Spencers Reply in Support of Her Motion to Compel the Production of Documents by the Federal Housing Finance Agency to be electronically filed with the Clerk of Court using the CM/ECF system, which will send notification of such filing to the counsel of record in this matter who are registered on the CM/ECF system.

/s/ Adam B. Miller ______________________ Adam B. Miller

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UNITED STATES DISTRICT COURT DISTRICT OF COLUMBIA

In re Federal National Mortgage Association Securities, Derivative and ERISA Litigation

MDL NO. 1668

In re Fannie Mae Securities Litigation

Consolidated Civil Action No.: 1:04-CV-01639 Judge Richard J. Leon

[PROPOSED] ORDER The Court, after considering Leanne G. Spencers Motion to Compel the Production of Documents by the Federal Housing Finance Agency and the relevant pleadings, and for good cause shown, hereby GRANTS the Motion and HOLDS (i) that documents responsive to Ms. Spencers June 5, 2009 subpoena are relevant and (ii) that the Federal Housing Finance Agency has waived any privileges applicable to such documents by failing to properly claim such privileges despite ample opportunity to do so. Accordingly, the Court hereby ORDERS that the Federal Housing Finance Agency shall immediately produce all documents responsive to Ms. Spencers subpoena. IT IS SO ORDERED on this ____ day of ___________, 2009.

__________________________________ RICHARD J. LEON UNITED STATES DISTRICT JUDGE