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UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA ____________________________________ | In re Federal National Mortgage | Association Securities, Derivative and | ERISA Litigation | ____________________________________| | In re Fannie Mae Securities Litigation | | ____________________________________| MDL No. 1668

Consolidated Civ. No. 1:04-cv-01639 Judge Richard J. Leon

FHFAS RESPONSE IN OPPOSITION TO KPMG LLPS MOTION TO COMPEL DEPOSITION TESTIMONY REGARDING FREDDIE MACS ACCOUNTING

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TABLE OF CONTENTS Page I. II. III. PERTINENT BACKGROUND ..........................................................................................1 LEGAL STANDARD..........................................................................................................4 DISCUSSION ......................................................................................................................4 A. The Deposition Testimony about Freddie Macs Accounting Sought by KPMG Is Irrelevant and not Discoverable.............................................................. 4 1. 2. 3. 4. B. C. Relevant Evidence about Fannie Maes FAS 133 Accounting Has Already Been Produced ............................................................................................ 5 Information about Freddie Macs Accounting Is Irrelevant ....................... 5 Information about Freddie Macs Accounting Would Be Inadmissible at Trial and, Thus, Is Not Discoverable .......................................................... 6 KPMG Admits that Information about Hundreds of Public Companies related to FAS 133 Accounting Policies Is Publically Available ............... 7

The Deposition Testimony about Freddie Macs Accounting Sought by KPMG Is Privileged ................................................................................................ 8 KPMG Has Failed to Meet Its Burden to Establish a Substantial Need for Freddie Mac Information such that the Court May Pierce the Governments Privileges ....................................................................................... 11 KPMG Has Failed to Meet Its Burden to Re-Open Ms. DeLeos Deposition, which has already Endured for Two Full Days of Testimony .......... 15 KPMGs Demand for Freddie Mac Information Is Too Late, in Addition to Being Completely Irrelevant ................................................................................. 16

D. E. IV.

CONCLUSION ..................................................................................................................18

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FHFAS RESPONSE IN OPPOSITION TO KPMG LLPS MOTION TO COMPEL DEPOSITION TESTIMONY REGARDING FREDDIE MACS ACCOUNTING Pursuant to Fed. R. Civ. P. 45 and 26, the Federal Housing Finance Agency (FHFA or agency), respectfully requests that the Court deny KPMG LLPs Motion to Compel OFHEO Chief Accountant and Deposition Witness Wanda DeLeo to Answer Questions Related to OFHEOs Public Statements on Expert Disagreement over FAS 133 Accounting (Dkt. No. 787, Sept. 29, 2009). The Defendants parade of just one more discovery request continues. Now, KPMG seeks to re-open the deposition of FHFA Chief Accountant Wanda DeLeo, formerly Chief Accountant of OFHEO, so that KPMG may interrogate her on matters regarding OFHEOs examination of Freddie Macs accounting and on a privileged report prepared by OFHEOs consultant Kroll Consulting regarding Freddie Macs accounting. KPMG claims that the testimony is relevant and not privileged because it will establish a disagreement among experts concerning the application of FAS 133. For the reasons discussed below, the Court should deny KPMGs Motion because (1) the testimony sought is irrelevant, (2) the testimony sought is privileged, and (3) the request to re-open Ms. DeLeos deposition would impose an undue burden on her and the government, especially considering the lack of any connection that the requested deposition testimony would have to this case.1 I. PERTINENT BACKGROUND KPMG seeks to compel the testimony of FHFA Chief Accountant Wanda DeLeo regarding FHFAs internal, privileged examination of Freddie Macs accounting. Ms. DeLeo

On September 15, 2009, Defendant Leanne G. Spencer filed a separate motion to compel the production of documents regarding Freddie Macs accounting (Dkt. No. 781, Sept. 15, 2009) that she subpoenaed pursuant to Rule 45 on June 5, 2009. FHFA opposed Ms. Spencers motion (Dkt. No. 792, Oct. 2, 2009).

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has already been deposed over two full days on September 21, 2009, 10 A.M. to 5 P.M., and on September 22, 2009, 10 A.M. to 7 P.M. KPMG and the other parties to the litigation had the opportunity to ask questions of Ms. DeLeo on any topic. FHFA counsel instructed Ms. DeLeo not to respond to questions only when the testimony sought was protected by a privilege. KPMG seeks to re-open Ms. DeLeos deposition to compel testimony regarding the accounting practices of the Federal Home Loan Mortgage Corporation, i.e., Freddie Mac, not Fannie Mae. Specifically, KPMG seeks information about a report by Kroll Consulting (Kroll) prepared at the direction of the Office of Federal Housing Enterprise Oversight (OFHEO) as part of OFHEOs statutory examinations of Freddie Mac. Krolls engagement resulted in a written report in which Kroll provided its opinion for OFHEOs consideration on certain of Freddie Macs accounting policies and methodologies (the Kroll Report). In addition to information concerning the Kroll Report, KPMGs Motion expressly seeks deposition testimony regarding the reasons for OFHEOs decision[s] during its statutory examination of Freddie Mac. KPMG theorizes that OFHEO has taken patently inconsistent positions regarding Freddie Macs and Fannie Maes accounting and seeks to examine Ms. DeLeo regarding its theory. Specifically, KPMG seeks to compel testimony regarding the following topics, all of which relate to Freddie Macs accounting: (1) the degree of similarity between FAS 133 issues at Fannie Mae and those at Freddie Mac (including those raised in the Kroll report cited in KPMGs motion); (2) the nature and extent of expert disagreement regarding the accounting treatments used by Freddie Mac and Fannie Mae; and (3) the differences (if any) between Freddie Mac and Fannie Mae that would account for OFHEOs decision not to take issue with Freddie Macs accounting or require it to restate once Kroll concluded that Freddie Macs FAS 133 accounting was also inappropriate.

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See KPMG LLPs Motion to Compel, Proposed Order (Dkt. No. 787-4, Sept. 29, 2009) (hereinafter KPMGs Mot.).2 Compelling such testimony would reveal the contents of the Kroll Report and the reasons behind Krolls findings, and would additionally reveal the agencys internal communications related to the Kroll Report and its review of Freddie Macs accounting. Attached hereto is the Declaration of Alfred Pollard in Support of the Assertion of Privileges by the Federal Housing Finance Agency. Ex. A. Mr. Pollard, who is the General Counsel of FHFA and formerly General Counsel of OFHEO, explains that the Kroll Report did not assess Fannie Maes accounting practices under Statement of Financial Accounting Standards No. 133 (FAS 133). OFHEO engaged Kroll to review certain specific accounting practices of Freddie Mac regarding specific elements of FAS 133. OFHEO did not ask Kroll to review any accounting practices of Fannie Mae, nor did Kroll actually undertake a review of Fannie Maes accounting practices. The Kroll Report opines only on certain accounting policies and practices of Freddie Mac under FAS 133. Ex. A 7-9. Mr. Pollard also explains that the Kroll Report, and information related to it, constitutes part of the FHFAs statutory examinations of Freddie Mac. Mr. Pollard places the Report, and information related to it, in context as part of the agencys internal decisionmaking process. Ms. DeLeo, as Chief Accountant, and other FHFA officials considered the Kroll Report as part of their decisionmaking process during FHFAs statutory examinations of Freddie Mac.

In addition to the deposition testimony sought by KPMG, Defendant Spencer seeks to compel the production of the Kroll Report itself and the agencys related back-and-forth communications. Thus, working in tandem, the Defendants would have this Court open discovery of the governments internal deliberations regarding Freddie Macs accounting, a topic that no party has previously identified as having any relevance whatsoever to this case.

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II.

LEGAL STANDARD Discovery must be relevant and not privileged. Fed. R. Civ. P. 26(b)(1) (Parties

may obtain discovery regarding any matter, not privileged, that is relevant to the claim or defense of any party. . . .); Fed. R. Civ. P. 45(c)(3)(A); Watts v. SEC, 482 F.3d 501, 507-09 (D.C. Cir. 2007) (permissible scope of discovery prohibits inquiry into non-relevant and privileged matters). Rule 45 provides special protections for non-parties that are subpoenaed, as is the case here. See Fed. R. Civ. P. 45(c), (d); Watts, 482 F.3d at 508. Rule 45s undue burden standard requires district courts supervising discovery to be generally sensitive to the costs imposed on third parties. Watts, 482 F.3d at 509. In particular, Rule 45 imposes on district courts the responsibility to analyze privilege or undue burden assertions and requires that district courts quash subpoenas that call for privileged matter or would cause an undue burden. Id. at 508; Fed. R. Civ. P. 45(c)(3)(A). Even if the Court determines that Freddie Macs accounting practices are relevant to the claims in this case (which they are not), and that information on FAS 133 practices is not available from other sources (which it is), case precedent makes clear that the testimony and examination information sought by KPMG is not generally compelled in civil litigation because it is protected by the examination privilege of federal financial regulatory agencies. See, e.g., Schreiber v. Society for Savings Bancorp., Inc., 11 F.3d 217 (D.C. Cir. 1993). III. DISCUSSION A. The Deposition Testimony about Freddie Macs Accounting Sought by KPMG Is Irrelevant and not Discoverable

The burden is on KPMG to establish that the testimony it seeks is relevant to a valid claim or defense. See Fed. R. Civ. P. 26(b)(1); Fed. R. Civ. P. 45(c)(3)(A); Watts, 482 F.3d at

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507-09. It has failed to do so. Relevant evidence means evidence having any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence. Fed. R. Evid. 401. 1. Relevant Evidence about Fannie Maes FAS 133 Accounting Has Already Been Produced

KPMG admits that the information it seeks is about Freddie Macs accounting and FHFAs internal, predecisional analysis of Freddie Macs accounting. Information about Freddie Mac is irrelevant to this case, which, as the Court is aware, concerns allegations that Fannie Mae (not Freddie Mac) committed accounting and securities fraud. KPMG, like Ms. Spencer and all of the MDL parties, has already conducted exhaustive discovery regarding OFHEOs examination of Fannie Maes accounting. Thus, although KPMG seeks to compel the deposition testimony of Ms. DeLeo related to FAS 133, Ms. DeLeo has already answered all of KPMGs questions, and all of the other parties questions, related to Fannie Maes FAS 133 accounting practices. Further, the Court is aware of the unprecedented size and scope of OFHEOs production of documents and of the length and number of OFHEO depositions, at a cost of many millions of dollars. To the extent relevant information exists and is in the possession of the government, the parties certainly already have it. 2. Information about Freddie Macs Accounting Is Irrelevant

KPMGs assertion that it needs information regarding a disagreement among experts concerning Freddie Macs accounting for FAS 133 to establish that Fannie Mae had a good faith basis for its own FAS 133 hedging and reporting is unfounded. See KPMG Mot. at 7; see also FHFAs Opposition to Defendant Leanne Spencers Motion to Compel at 3-6 (Dkt. No. 792), incorporated herein by reference (rejecting the same argument raised by Ms. Spencer). The tenuous (at best) connection that KPMG seeks to draw resolves nothing in this case. A

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disagreement among experts concerning Freddie Macs FAS 133 accounting will not establish whether Fannie Maes was lawfully undertaken and reported. Consequently, whether Freddie Mac had accounting issues similar to the accounting problems at Fannie Mae has no bearing on this case. 3. Information about Freddie Macs Accounting Would Be Inadmissible at Trial and, Thus, Is Not Discoverable

Arguing that Freddie Macs FAS 133 accounting is similar and therefore instructive may have some facial appeal. But even if there seemingly is some tangential relevance of Freddie Macs FAS 133 accounting (which there is not), the Federal Rules of Evidence would bar its admission at trial and, thus, its discovery is precluded. Fed. R. Civ. P. 26, 45. Rule 403 excludes evidence that, although relevant, is outweighed by the danger of confusion of the issues or misleading the jury, or by considerations of undue delay and waste of time. Fed. R. Evid. 403. The Court should not allow KPMG to waste time and the resources of the government to attempt to develop evidence concerning Freddie Macs accounting that will be inadmissible at trial on the basis of relevance and because it would cause substantial confusion of the issues. Moreover, to the extent KPMG seeks to focus its defense on such collateral matters (and to the extent the Court is willing to entertain it), KPMG should hire an expert witness to do its bidding. As FHFA discussed in its opposition to Ms. Spencers Motion to Compel, to make a connection between Freddie Macs accounting and Fannie Maes accounting would require a trial, within a trial, within a trial, solely to evaluate the similarities and differences of Freddie Macs and Fannie Maes derivatives (a complex endeavor that would involve, inter alia, analyzing the comparative similarities and differences in their respective hedging strategies, their accounting treatments under FAS 133 and numerous related pronouncements, and their disclosures and reporting). Even if the Court were willing to permit this type of trial-within-a-

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trial defense, the Court should not allow KPMG to commandeer government witnesses to erect such a defense. Watts, 482 F.3d at 509. 4. KPMG Admits that Information about Hundreds of Public Companies related to FAS 133 Accounting Policies Is Publically Available

Further undercutting KPMGs claim that it needs Freddie Mac information to substantiate its defense is KPMGs own assertion that [o]ver the past five years hundreds of public companies, audited by all four major accounting firms, have restated their financial statements after encountering significant difficulties applying FAS 133s complicated requirements for derivatives. KPMG Motion at 3. To the extent that the accounting deficiencies of any company other than Fannie Mae are relevant here, KPMG should hire an expert to make that analysis (if it already has not done so). Thus, KPMGs disingenuous claim that it needs testimony regarding Freddie Macs accounting from FHFAs Chief Accountant is insignificant in the face of these hundreds of public companies that have suffered FAS 133 woes. KPMG may find an expert to opine on why FAS 133 is so difficult to apply and, if in fact, it is difficult to apply in the case of Fannie Mae.3 The information for an expert to evaluate such a claim has already been produced in this case regarding Fannie Mae, or is publically available regarding other public companies who use hedge accounting. Indeed, given KPMGs assertion, chances are that KPMG itself has audited at least one of these hundreds of public companies and, thus, already has the very information regarding FAS 133 that it now seeks.

Under KPMGs theory of relevance, KPMG could subpoena any official from the Securities and Exchange Commission (SEC) to testify regarding the accounting practices at, for example, General Motors, Disney, or Berkshire Hathaway, or any company that uses hedging strategies. Again, KPMG has failed to meet its burden to demonstrate a valid need to dredge through FHFAs analysis of Freddie Macs accounting practices, especially considering the availability of Freddie Macs and other companies public disclosures.

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B.

The Deposition Testimony about Freddie Macs Accounting Sought by KPMG Is Privileged

Discovery of privileged information is prohibited. Fed. R. Civ. P. 26(b)(1); Rule 45(c)(3)(A)(iii). KPMGs motion, on its face, seeks privileged information, including an explanation from the agencys Chief Accountant for the agencys alleged decision not to bring an enforcement action against Freddie Mac. Here, the Kroll Report and the internal communications related to it and to Freddie Macs accounting are protected by the deliberative process privilege and the examination privilege.4 Also privileged are the internal and external communications related to the Kroll Report and to Krolls findings, documents related to a purported decision by OFHEO not to take issue with Freddie Macs accounting or the problems purportedly identified in the Kroll Report, and the analysis of FHFAs Chief Accountant and the accounting staff. Such information is not discoverable and is protected by the deliberative process and examination privileges. See, e.g., Dept of Interior v. Klamath Water Users Protective Assn, 532 U.S. 1, 8 (2001) (deliberative process privilege protects the internal deliberations of government staff, any advisory opinions, debates, and recommendations); In re Subpoena Served Upon the Comptroller of the Currency, 967 F.2d 630, 634 (D.C. Cir. 1992) (examination privilege protects communications in the course of the safety and soundness examinations); Bloomberg v. SEC, 357 F. Supp. 2d 156, 168 (D.D.C. 2004) (Documents such as drafts, recommendations, proposals, and suggestions that

Depending on the types of questions that KPMG may ask at a compelled deposition, there may also be responsive information protected by the attorney-client privilege and work product doctrine. These questions probing Freddie Macs accounting practices, operations, and processes also potentially risk the otherwise unlawful disclosure of confidential commercial information protected under the Trade Secrets Act (18 U.S.C. 1905). Freddie Mac has not consented to the disclosure of its confidential financial and commercial information in this case.

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reflect the personal opinions of the author rather than the policy of the agency are thus protected under [the deliberative process] privilege.). FHFA has already set forth, in the context of its Opposition to Ms. Spencers motion to compel, the reasons why it will not authorize the disclosure of this privileged information. Rather than repeat those reasons here, FHFA incorporates by reference the arguments it set forth in its Opposition to Ms. Spencers motion. See Dkt. No. 792 at 7-9. In addition, FHFA is submitting to the Court the Declaration of Alfred Pollard to substantiate the agencys assertion of privilege during Ms. DeLeos deposition. Ex. A. KPMG goes one step further than Ms. Spencer and suggests that FHFA has waived any privilege over the Kroll Report because it is referenced in a Wall Street Journal article. KPMG Mot. at 2. No such waiver has occurred.5 Neither FHFA nor OFHEO has publicly disclosed substantial parts of the Kroll Report, as erroneously claimed by KPMG. See KPMG Mot. at 2. The Wall Street Journal article in question states merely that (a) the Kroll Report exists, (b) the Kroll Report is about Freddie Macs FAS 133 accounting policies, (c) experts may disagree regarding Freddie Macs FAS 133 accounting policies, and (d) OFHEO has not initiated any regulatory action against Freddie Mac arising out of Freddie Macs FAS 133 accounting policies. The agency has not revealed any privileged information and, instead, has disclosed no more information than KPMG would be entitled to on a privilege log.

The Wall Street Journal also tellingly characterized the Kroll Report as [a] confidential February 2008 report, conceding that it was never publicly released. See FBI Looks into Losses at Freddie, WALL ST. J., April 30, 2009, attached as Ex. A to KPMG Mot. (Dkt. No. 7873). There is no factual or legal support for an inference that the Kroll Report is no longer privileged merely because, as reported, FBI investigators obtained a copy of it in connection with a federal investigation by the SEC and the Department of Justice. What is more, if that were the case, no claim of privilege over documents so obtained would survive any federal investigation.

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Even if the information in the newspaper article could constitute privileged information (which it does not), any waiver would be limited to the information already released. In In re Sealed Case, 121 F.3d 729 (D.C. Cir. 1997), the Court of Appeals determined that the White Houses release of a White House Counsels final report did not constitute waiver of any privileges attaching to the documents generated in the course of producing the report. Id. at 742. Although the Court noted that the voluntary disclosure of privileged material subject to the attorney-client privilege to unnecessary third parties in the attorney-client privilege context waives the privilege, not only as to the specific communication disclosed but often as to all other communications relating to the same subject matter, it noted that most courts have expressly rejected this approach with regard to executive privileges generally, or to the deliberative process privilege in particular. Instead, courts have said that release of a document only waives these privileges for the document or information specifically released, and not for related materials. Id. (citing Mobil Oil Corp. v. EPA, 879 F.2d 698, 700-03 (9th Cir. 1989); Mehl v. EPA, 797 F. Supp. 43, 47-48 (D.D.C 1992); Russell v. Dept of the Air Force, 682 F.2d 1045, 1048-49 (D.C. Cir. 1982) (although not addressing waiver directly, holding that deliberative process privilege applies to early drafts of Air Force report on use of herbicides in Vietnam despite public release of the final report)). This limited approach to waiver in the executive privilege context is designed to ensure that agencies do not forego voluntarily disclosing some privileged material out of the fear that by doing so they are exposing other, more sensitive documents. Id. (citing Assembly of the State of California v. Dept of Commerce, 968 F.2d 916, 922 n.5 (9th Cir. 1992); Mobil Oil Corp., 879 F.2d at 701; Mehl, 797 F. Supp. at 47-48)). Here, to be clear, the government has not released any part of the Kroll Report. Nevertheless, under the test set forth by the D.C. Circuit, even if the information in the news

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article were privileged (which it is not), any waiver would be limited to the information already made public. Consequently, KPMG would not be entitled to explore any information, other than the information it believes it can glean from public sources. C. KPMG Has Failed to Meet Its Burden to Establish a Substantial Need for Freddie Mac Information such that the Court May Pierce the Governments Privileges

KPMG erroneously claims that it may pierce the governments privileges for good cause. KPMG Mot. at 8. KPMG understates its burden to overcome the deliberative process and examination privileges. Although qualified, the Court may set the privileges aside only if it determines that KPMG has a need for FHFAs predecisional, deliberative examination material that outweighs the importance of the governments established privileges. An analysis of the factors set forth by the D.C. Circuit that the Court must evaluate in deciding whether to reject the governments assertion of privilege indicates that KPMG does not have any need whatsoever for privileged information concerning Freddie Macs accounting. The D.C. Circuit has identified five factors that should be considered when determining whether a litigants interest in disclosure outweighs the governments deliberative process and examination privileges: (i) the relevance of the evidence sought; (ii) the availability of other evidence; (iii) the seriousness of the litigation and the issues involved; (iv) the role of the government in the litigation; and (v) the possibility of future timidity by government employees who will be forced to recognize that their secrets are violable. Schreiber, 11 F.3d at 220-21 (internal quotes omitted); In re Subpoena Served on the Comptroller of Currency, 967 F.2d at 634. First, as discussed above and for the obvious reason that this case is about Fannie Mae, not Freddie Mac, information concerning Freddie Macs accounting is simply not relevant. Even if the Court were to determine that the information sought is not privileged, discovery of it would 11

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still be barred by the Federal Rules on relevance grounds. Indeed, the utter irrelevance of the information sought is alone sufficient to defeat KPMGs motion. Second, regarding the availability of other evidence, KPMG claims that it needs the governments privileged information regarding Freddie Mac to establish (1) that experts disagree over the application of FAS 133 and (2) that OFHEO at one time approved Fannie Maes accounting for FAS 133 and soon thereafter switched, criticizing the same accounting. KPMG Mot. at 9. These reasons establish no basis for piercing the governments privileges for information concerning Freddie Mac. FHFA, and before it OFHEO, have already produced scores of documents and have already given weeks worth of deposition testimony concerning any issue even potentially relevant to this proceeding, including what may fairly constitute all information concerning Fannie Mae for the relevant time period in the governments possession. Thus, the availability of other, relevant information weighs heavily in favor of the government. Further, KPMGs own factual assertions belie its claimed need for the governments privileged information. To the extent KPMG requires information concerning other companies FAS 133 accounting to show that experts disagree about FAS 133, KPMG admits that hundreds of public companies, audited by all four of the major U.S. accounting firms, have restated their financial statements due to significant difficulties applying FAS 133. KPMG Mot. at 3. If that is the case, KPMG will have absolutely no problem finding the evidence it needs to substantiate its claim that FAS 133 is difficult to apply, that Fannie Maes FAS 133 errors were honest mistakes, and, as such, that the Defendants could not have acted with scienter. In fact, such evidence, if it exists, would be publicly available, probably on the SECs website. There is simply no need to re-open Ms. DeLeos already-completed deposition for

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information that KPMG admits it can find in the public domain concerning hundreds of public companies.6 Third, KPMG argues that because this litigation is serious, it is entitled to privileged information concerning Freddie Mac. Although the seriousness of the litigation is not in dispute, KPMG has failed to establish (or even to argue) that this litigation is more serious than other cases where the D.C. Circuit has affirmed the governments assertion of the deliberative process and examination privileges. For example, in Landry v. FDIC, the D.C. Circuit ruled that the deliberative process privilege will not be pierced even in an enforcement proceeding itself, where the claims and defenses at issue were directly related to the FDICs investigation. Landry v. FDIC, 204 F.3d 1125, 1136 (D.C. Cir. 2000) (denying attempt by former bank officer to pierce deliberative process privilege of the FDIC following enforcement action). In Landry, the D.C. Circuit affirmed the regulators assertion of privilege over information concerning the actual regulated company that was at issue in the case. Here, KPMG is not seeking information concerning Fannie Mae, i.e., the regulated company at issue in this case. KPMG has offered no compelling reason (and it is KPMGs duty to do so) why the Court, in this nationwide securities class action, should reject the governments privilege over information that is related to the safety and soundness investigation of a completely different regulated entity. Fourth, KPMG fails to explain how the governments role as a non-party in this private securities litigation (albeit a non-party that already has produced over a million pages of documents concerning Fannie Mae) should move this Court to compel the production of Further, if KPMG requires information specifically concerning Freddie Macs accounting (despite its lack of relevance), OFHEOs Report of the Special Examination of Freddie Mac has been publically available since its publication in December 2003, and is still available on the FHFA website. See OFHEO Report of the Special Examination of Freddie Mac (Dec. 2003), available at http://www.fhfa.gov/Preview-FHFAWWW/webfiles/749/specialreport122003.pdf (last visited Oct. 15, 2009).
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privileged information regarding Freddie Mac. Freddie Mac is not a party. Neither is Ms. DeLeo. And neither is OFHEO. And fifth, if this Court were to compel a government employee to testify as to her personal decisionmaking process, or to the collective thought process of senior agency officials, regarding a matter that is wholly collateral to this litigation, the possibility of future timidity by government employees will undoubtedly be great. This Court and the D.C. Circuit have long recognized the importance of the governments decisionmaking process. See, e.g., Landry, 204 F.3d at 1136 (finding privilege not waived even where regulator files enforcement action); Bloomberg, 357 F. Supp. 2d at 168 (holding that the essence of the deliberative process is to protect from disclosure information that reflects the give-and-take of the consultative process and against premature disclosure of proposed policies before they have been finally formulated or adopted). KPMG admits that its purpose in seeking information related to Freddie Mac is to show that the government has made patently inconsistent positions regarding Freddie Macs FAS 133 accounting and Fannie Maes FAS 133 accounting. See KPMG Mot. at 10; see also KPMGs Proposed Order, quoted at page 2, supra (identifying OFHEOs review of Freddie Macs accounting practices as the topic of any Court-compelled deposition of Ms. DeLeo). Compelling the testimony of Ms. DeLeo in this instance would be unprecedented and would raise the specter that the basis of any government decision would be discoverable merely because an unaffected litigant would like to draw a comparison. According to KPMGs tortured logic, privileged information concerning a courts decision to sentence one criminal defendant to ten years and another criminal defendant to eight would be discoverable because it may prove

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patently inconsistent positions.7 Even the SECs privileged decisionmaking process culminating in a decision not to initiate enforcement proceedings against a given company would be discoverable to show the SECs patently inconsistent position in proceeding against another public filer. It also follows under KPMGs rationale that the FDICs examination work and deliberations concerning a bank would become discoverable even in a related action, because certain issues may be comparable to its examination of another. KPMGs theory, aside from being legally incorrect, would launch the Court down a slippery slope that will create uncertainty and potentially harm the regulatory affairs of countless agencies. D. KPMG Has Failed to Meet Its Burden to Re-Open Ms. DeLeos Deposition, which has already Endured for Two Full Days of Testimony

KPMG disingenuously argues that its motion to compel seeks information that recently came to light in a Wall Street Journal article. The topics for deposition that KPMG identifies in its Proposed Order belie KPMGs assertion. KPMG seeks to re-depose Ms. DeLeo on broad topics such as the degree of similarity between FAS 133 issues at Fannie Mae and those at Freddie Mac. See KPMGs Proposed Order. KPMG has not proposed to the Court how it will explore such an open-ended topic without imposing on Ms. DeLeo and FHFA an additional daylong deposition. Ms. DeLeo already has sat for two full days. The parties that subpoenaed Ms. DeLeo identified the deponent (and all other senior ranking OFHEO officials) as a fact witness,

KPMG would have a hard time proving patently inconsistent positions given that Freddie Mac also was forced to restate its financials and subsequently paid $125 million to settle OFHEOs enforcement action against it. Moreover, the D.C. Circuit has ruled that discovery of the governments decisionmaking process is not permitted unless the government itself is a party and the cause of action is directed at the governments subjective motivation. See, e.g., In re Subpoena Duces Tecum Served on the Office of the Comptroller of the Currency, 156 F.3d 1279, 1279-80 (D.C. Cir. 1998) ([T]he actual subjective motivation of agency decisionmakers is immaterial as a matter of law - unless there is a showing of bad faith or improper behavior.); Landry, 204 F.3d at 1136 (noting that decision to bring enforcement action in no way implies the [government]s subjective motivations).

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but now KPMG seeks to commandeer this high-ranking government official to provide expert testimony to compare the accounting practices of two different companies. Given (a) the burden of extracting a government official from her pressing duties to sit for yet another deposition; (b) the likelihood that her testimony as an expert witness, if offered into evidence, likely would be met with objections by other parties to the case (e.g., exclusionary motions); and (c) the irrelevance of the proposed deposition topics, the Court should not grant KPMG leave to re-open the deposition. E. KPMGs Demand for Freddie Mac Information Is Too Late, in Addition to Being Completely Irrelevant

KPMG has never served a subpoena on OFHEO or FHFA during the course of this litigation for information concerning Freddie Mac or for information concerning a comparison of Freddie Mac and Fannie Mae accounting. The deposition of Ms. DeLeo was secured by a subpoena served on OFHEO over two years ago by Defendants Raines and Howard. OFHEO moved to quash the deposition subpoenas arguing, inter alia, that the categories of testimony sought were irrelevant, vague, and overbroad. See Non-Party OFHEOs Motion to Quash Rainess and Howards Subpoenas, or for a Protective Order or, Alternatively, to Stay Compliance with those Subpoenas (Dkt. No. 421, June 6, 2007). Defendants Raines and Howard explained that the subpoenas were limited to testimony concerning OFHEOs examinations of Fannie Mae. See, e.g., cover letter of May 14, 2007, from Counsel for Raines to Counsel for OFHEO attaching subpoena issued to Ms. DeLeo, attached hereto as Ex. B; cover letter of May 14, 2007, from Counsel for Howard to Counsel for OFHEO attaching subpoena issued to Ms. DeLeo, attached hereto as Ex. C. The Court denied OFHEOs Motion to Quash in a minute order on October 31, 2007, presumably relying on the Defendants assurances and the subpoenas actually issued to Ms. DeLeo that the depositions would be limited to the subject matter of

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OFHEOs examinations of Fannie Mae. Although this all-encompassing topic is incredibly broad, it still does not include the information that KPMG seeks about OFHEOs examinations of Freddie Mac. At no time did KPMG join the Individual Defendants opposition to OFHEOs Motion to Quash, nor did KPMG inform the Court that it would seek information at OFHEO depositions related to Freddie Mac. Indeed, if KPMG (or the Individual Defendants) had made such an assertion at the time, the Court very well may have reconsidered its decision to deny OFHEOs motion to quash. Thus, the information presently sought, in addition to being irrelevant, is outside the scope of the original subpoena served on the agency. KPMG could have, but failed, to separately subpoena information related to Freddie Mac. KPMG, like Ms. Spencer, knows full well that OFHEO, and now FHFA, regulates both Enterprises and that both have had accounting-related issues. Thus, merely because a recent newspaper article refers to a report about Freddie Macs accounting does not change the fact that if KPMG wanted to know how OFHEO handled Freddie Macs FAS 133 accounting, it could have sought it many years ago. (OFHEO would have objected then, too, because it is irrelevant.) For this reason, and the reasons set forth above, KPMG has failed to establish any reason to reopen Ms. DeLeos deposition so that KPMG may explore this last-minute, irrelevant discovery at the governments expense.

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IV.

CONCLUSION For the foregoing reasons, the Court should deny KPMGs Motion to Compel deposition

testimony regarding Freddie Macs accounting.

Dated: October 16, 2009

Respectfully submitted,

__/s/ Joseph J. Aronica Joseph J. Aronica, D.C. Bar No. 446139 DUANE MORRIS LLP 505 9th Street, Suite 1000 Washington, D.C. 20004 Phone: (202) 776-7825 Fax: (202) 478-1885 Attorneys for the Federal Housing Finance Agency

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UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA ____________________________________ | In re Federal National Mortgage | Association Securities, Derivative and | ERISA Litigation | ____________________________________| | In re Fannie Mae Securities Litigation | | ____________________________________| MDL No. 1668

Consolidated Civ. No. 1:04-cv-01639 Judge Richard J. Leon

ORDER Upon consideration of KPMG LLPs Motion to Compel OFHEO Chief Accountant and Deposition Witness Wanda DeLeo to Answer Questions (Dkt. No. 787), the Opposition thereto of the Federal Housing Finance Agency, and the entire record herein, it is hereby ORDERED this ____ day of ______________, 2009, that the Motion to Compel is DENIED and that the deposition of Ms. DeLeo will not be re-opened.

____________________________ RICHARD J. LEON United States District Judge

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