Citigroup, Merrill Lynch, Morgan Stanley, UBS AG and Wachovia Corp. have been named as defendants in a “failure to warn” class action filed yesterday in New York State Supreme Court in Manhattan. The lawsuit alleges that the banks failed to warn investors about proposed accounting-rule changes that lowered the value of preferred Fannie Mae (FNM) stock.
The complaint alleges that “Defendants were negligent in failing to warn plaintiff and other members. The offering circular and other offering materials omitted to state material facts.” The security involved is Fannie Mae’s Series T Preferred Stock and the banks were a syndicate of underwriters to the Series T preferred shares. The complaint alleges that FASB is considering changes to Financial Accounting Standard 140 that may require Fannie Mae and Freddie Mac (FRE) to bring a combined $3.7 trillion in off balance sheet assets on to their books, which would substantially raise their capital requirements. “When news about these new accounting rules and their possible effect upon Fannie Mae became public, the company’s stock dropped substantially.”
The case is Orkin v. Merrill Lynch, Pierce, Fenner & Smith Inc., 08602564, Supreme Court of the State of New York (Manhattan).
