[JURIST]
The US Court of Appeals for the Second Circuit [official website] on Tuesday upheld [opinion, PDF] the dismissal of shareholders’ lawsuit against Freddie Mac [corporate website] alleging the company misled investors by understating its sub-prime mortgage exposure and overstating its capital strength. The US District Court for the Southern District of New York [official website] dismissed the lawsuit brought by the shareholders for the plaintiffs’ failure to establish a “causal connection between the material misrepresentation and the loss.” The appeals court attributed the shareholders’ losses to the nationwide phenomenon of the “housing bubble burst,” an intervening event, and not the misrepresentations of Freddie Mac’s financial state. The appeals court also found that Freddie Mac made extensive disclosures about its investments to shareholders during the company’s financial decline.

In October the Federal Housing Finance Agency [official website] (FHFA), acting in its capacity as conservator for Freddie Mac, reached a settlement [JURIST report] with JPMorgan Chase & Co. [corporate website] for $480 million. The FHFA accused JPMorgan of misrepresenting the quality of sub-prime mortgages sold to Freddie Mac. The FBI [official website] began an investigation [JURIST report] in September 2008 of 26 financial institutions for possible mortgage fraud, including Freddie Mac. That same month, Freddie Mac’s share prices plummeted after its financial weakness was revealed to the public, leading the company to be placed under government custody.