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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 LEANNE G. SPENCERS MOTION TO COMPEL THE PRODUCTION OF DOCUMENTS REGARDING FREDDIE MAC ACCOUNTING Pursuant to Fed. R. Civ. P. 45 and 26, the Federal Housing Finance Agency (FHFA or agency), respectfully requests that the Court deny Defendant Leanne G. Spencers Motion to Compel the Production of Documents regarding Freddie Mac Accounting (Dkt. No. 781). The Defendants parade of just one more discovery request continues. For the reasons discussed below, the Court should deny the Motion because (1) the documents sought are irrelevant, (2) the documents sought are privileged, (3) the subpoena is unduly burdensome, and (4) Ms. Spencer has failed to show good cause for serving a subpoena for documents after the deadlines set by the Court.1

On September 29, 2009, KPMG filed a separate motion to compel deposition testimony regarding the Kroll Report on Freddie Macs accounting (Dkt. No. 787). Specifically, KPMG seeks testimony from FHFA Chief Accountant Wanda DeLeo, formerly Chief Accountant of OFHEO, who has already completed her deposition, regarding the Kroll Report and Freddie Macs accounting. Accordingly, the Court may wish to consider withholding a ruling on Ms. Spencers Motion to Compel until KPMGs Motion to Compel similar information is fully briefed and before the Court.

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I.

PERTINENT BACKGROUND On June 5, 2009, Defendant Spencer caused a subpoena for documents to be served on

FHFA. A copy of the subpoena is attached to Ms. Spencers Motion to Compel. FHFA objected to the subpoena via letter dated June 18, 2009, a copy of which is also attached to Ms. Spencers Motion. The subpoena seeks the production of a report by Kroll Consulting prepared at the direction of the Office of Federal Housing Enterprise Oversight (OFHEO) as part of OFHEOs statutory examinations of the Federal Home Loan Mortgage Corporation, i.e., Freddie Mac, not Fannie Mae. Krolls engagement resulted in a written report in which Kroll provided its opinion for OFHEOs consideration on certain of Freddie Macs accounting policies (the Kroll Report). In addition to the Kroll Report, the subpoena seeks the production of all internal and external communications related to the Kroll Report or to Krolls findings. The subpoena also seeks all documents relating to a purported decision by OFHEO not to take issue with Freddie Macs accounting or the problems purportedly identified in the Report. In other words, the subpoena expressly seeks the agencys privileged investigative files, internal communications, and communications with its hired contractor regarding the agencys decisions. The Kroll Report has absolutely nothing to do with Fannie Maes accounting practices under Statement of Financial Accounting Standards No. 133 (FAS 133). OFHEO engaged Kroll to review certain accounting practices of Freddie Mac. OFHEO did not ask Kroll to review any accounting practices of Fannie Mae, nor did Kroll actually review any of Fannie Maes accounting practices. As alleged by Ms. Spencer, the Kroll Report addresses only Freddie Macs accounting practices under FAS 133.

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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). III. DISCUSSION A. Ms. Spencer Has Failed to Establish that the Documents She Seeks Are Relevant to this Litigation

The burden is on Ms. Spencer to establish that the documents she seeks are 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 507-09. She has failed to do so. She claims to need this information because it is relevant to show FHFAs knowledge of Fannie Maes accounting. However, Ms. Spencers subpoena seeks, in her own words: [A] report prepared for FHFA by an outside investigative firm called Kroll regarding Freddie Macs accounting treatment for certain types of derivative instruments under FAS 133. The report and related documents could bear directly on the nature of, and FHFAs knowledge of, similar transactions undertaken by Fannie Mae that are at issue in this litigation. (emphasis added).

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Motion to Compel at 1. Thus, the information she seeks relates not to Fannie Maes accounting, but to Freddie Macs accounting. Ms. Spencers logic is fatally flawed. First, as the Court is aware, this litigation involves allegations that Fannie Mae (not Freddie Mac) committed accounting and securities fraud. It involves alleged acts and omissions of, among others, Ms. Spencer. Ms. Spencer either did, or did not, commit the acts alleged in the Plaintiffs class action complaint. Whether Freddie Mac had accounting problems similar to those problems at Fannie Mae has no bearing on whether Ms. Spencer did, or did not, commit the acts alleged. Second, even more attenuated is Ms. Spencers claim that the Kroll Report is relevant to show FHFAs knowledge of Fannie Maes accounting. It is unclear what Ms. Spencer intends by FHFAs knowledge of Fannie Maes accounting.2 Assuming, arguendo, Ms. Spencer needs information related to FHFAs knowledge of Fannie Maes accounting, however, a report about Freddie Macs accounting, prepared during OFHEOs statutory examination of Freddie Mac, cannot and will not yield what Ms. Spencer wants. Moreover, Ms. Spencer has already conducted exhaustive discovery regarding OFHEOs examination of Fannie Maes accounting.3 Third, to open discovery to OFHEOs examinations of Freddie Mac is to open this case to an entire new set of unrelated facts and cast of unrelated players. OFHEOs special examination of Freddie Mac resulted in Notices of Charges against Freddie Mac and several of its executives and former executives. Those charges were settled. The acts and omissions of Freddie Mac that

2 3

Or how it is even an issue in this case, and Ms. Spencers Motion to Compel offers no help.

The Court is well aware of the unprecedented size and scope of OFHEOs production of documents and electronically stored information, and of the length and number of OFHEO depositions. Ms. Spencer has all the information she needs to show FHFAs knowledge of Fannie Maes accounting. And then some.

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lead to Notices of Charges could, and did, form the basis of an entirely separate civil lawsuit, which was settled years ago. That lawsuit is not relevant here. Fourth, Ms. Spencer claims that she needs the Kroll Report to show that the application of accounting rules is complex and that a disagreement of experts exists regarding the application of those complex rules. What Ms. Spencer is actually looking for is expert testimony regarding FAS 133. Plaintiffs will likely have accounting experts to establish their claims against Fannie Mae and against Ms. Spencer. Ms. Spencer, if she has not already, will need to find her own accounting experts. And Ms. Spencer and the other defendants have already probed the complexities of FAS 133 and possible disagreements among experts. She may not commandeer government reports irrelevant to her own alleged violations to build her defense. Watts, 482 F.3d at 509. Assuming, arguendo, that Krolls analysis of Freddie Macs accounting could establish a disagreement of experts regarding FAS 133, the Report is still irrelevant to whether Fannie Maes accounting was proper. Ms. Spencer thus envisions a trial, within a trial, within a trial, solely to evaluate the similarities and differences of Freddie Macs and Fannie Maes derivatives and accounting treatments of those derivatives. If experts disagree about Freddie Macs accounting, or in the application of FAS 133, that provides no basis for Ms. Spencers extrapolation, based on the Kroll Report, that experts disagree about Fannie Maes accounting. That leap would require experts to first establish whether Fannie Maes and Freddie Macs portfolios are similar enough to warrant comparison. Next, experts would need to compare the

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entities accounting practices under FAS 133 and then testimony would be required to explain what assistance, if any, such a comparison would be to the finder of fact.4 Fifth, it is apparently Ms. Spencers hope, based on a Wall Street Journal article, to establish possible disparate treatment by OFHEO. This reasoning is premised on Ms. Spencers assumption, apparently based that same article, that the analysis set forth in the Kroll Report regarding Freddie Macs accounting is similar to OFHEOs analysis of Fannie Maes accounting in OFHEOs Reports of the Special Examination of Fannie Mae. As explained above, the basis of OFHEOs special examination of Freddie Mac, and the litigation that ensued, are entirely different cases and have no place here. In any event, it is wholly irrelevant that Fannie Mae was compelled to issue a multi-billion dollar financial restatement due, in part, to its failed FAS 133 accounting policies, while Freddie Mac was not. And assuming Krolls analysis of Freddie Macs FAS 133 practices can even be compared to Fannie Maes FAS 133 practices, Ms. Spencers charge of selective prosecution is misplaced (in addition to being irrelevant): the Securities and Exchange Commission, not OFHEO, ordered Fannie Mae to issue the restated financial statements that are the basis of this lawsuit.5 And sixth, Ms. Spencers argument should not be taken seriously because it would open discovery to agency decisions regarding either Enterprise not only relating to FAS 133, but to every accounting and controls determination made that did not result in an enforcement action.

This diversionary discovery tactic would derail the forward movement of this case and create unnecessary costs and burdens for parties and non-parties alike. The Court should put a stop to this line of discovery before it starts.

Even if the violations were the same with both Enterprises, the agency has supervisory and regulatory discretion to pursue one and not the other for legal and policy reasons.

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B.

Ms. Spencers Subpoena Seeks Privileged Information and the Court Should not Compel FHFA to Respond to It

Although the substance of FHFAs assertion of privilege is not currently before the Court, the Court may consider that the subpoena, on its face, seeks internal agency communications in deciding whether to compel FHFA to respond to it. Discovery of privileged information is prohibited. Fed. R. Civ. P. 26(b)(1). Rule 45(c)(3)(A)(iii) authorizes the Court to quash a subpoena where the subpoena seeks disclosure of privileged information. 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.6 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. The analysis of Freddie Macs accounting sought by Ms. Spencer was prepared by a contractor of OFHEO as part of OFHEOs statutory examination of Freddie Mac. The Report itself constitutes part of the agencys internal decision-making process, as well as part of the agencys statutory examination of Freddie Mac, and is clearly privileged. Ms. Spencers subpoena goes far beyond merely asking for the Report, which is privileged in and of itself. In addition, in violation of Rule 45, the subpoena expressly seeks all drafts and non-identical copies. See Ms. Spencers subpoena at 3 (Instruction 5). The subpoena seeks the production of all internal and external communications related to the Kroll Report, or to Krolls findings, and all 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.

There may also be responsive information protected by the attorney-client privilege and work product doctrine.

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Thus, Ms. Spencers subpoena expressly seeks the agencys investigative files, internal communications, and communications with the agencys contractor regarding the agencys decisions made during the examination of Freddie Mac. Such information is not discoverable and is protected by the deliberative process and examination privileges. See, e.g., Dept of Interior and Bureau of Indian Affairs 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 reflect the personal opinions of the author rather than the policy of the agency are thus protected under [the deliberative process] privilege.). Moreover, there is significant cost and burden to FHFA in collecting and logging such privileged documents. The subpoena broadly seeks electronically stored information, including all related email. Merely collecting the documents could entail an entirely new ESI discovery process involving the types of costs and burdens the agency shouldered in complying with the previous subpoenas. Indeed, the costs and burdens of complying with the subpoena (i.e., searching for, attorney review, privilege logs), merely for the purpose of logging privileged information, far outweighs Ms. Spencers claimed need for such irrelevant information. Ms. Spencer also claims that FHFA has somehow waived its assertion of privilege over the documents that she has subpoenaed. Ms. Spencer is wrong. FHFA timely lodged objections to Ms. Spencers subpoena informing her that FHFA would not comply. The recipient of a Rule 45 subpoena for documents has no obligation to go through the expensive and burdensome

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process of responding to a subpoena to which it has objected unless and until the issuing party obtains a court order. To require a party to engage in the expensive and burdensome process of logging irrelevant information would violate Rule 45. This is especially true here where Ms. Spencers subpoena seeks wholly irrelevant information and is out-of-time, in violation of the Courts order. FHFA has no obligation to create a privilege log of irrelevant documents at the whim of Ms. Spencer. As set forth above, if the Court orders FHFA to respond to this subpoena, the agency would be required to produce only responsive, non-privileged information, if any, and to identify on a log all information withheld on the basis of a privilege. C. Ms. Spencers Subpoena for Freddie Mac Accounting Information Is Too Late

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. Ms. Spencer knows full well that OFHEO, and now FHFA, regulates both Enterprises and that both have had accountingrelated issues. Thus, merely because a recent newspaper article refers to a report about Freddie Macs accounting does not change the fact that if Ms. Spencer wanted to know how OFHEO handled Freddie Macs FAS 133 accounting, she 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, Ms. Spencer has failed to establish good cause to warrant a departure from the Courts scheduling orders so that Ms. Spencer can engage in this last-minute, irrelevant discovery at the expense of FHFA and the American taxpayer.

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IV.

CONCLUSION For the foregoing reasons, the Court should deny Ms. Spencers Motion to Compel the

production of documents related to Freddie Mac.

Dated: October 2, 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 Leanne G. Spencers Motion to Compel the Production of Documents by the Federal Housing Finance Agency (Dkt. No. 781), 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 the subpoena that Defendant Spencer caused to be served on the Federal Housing Finance Agency on June 5, 2009, is QUASHED.

____________________________ RICHARD J. LEON United States District Judge