(CN) — An Ohio retirement fund can sue Freddie Mac for claims it concealed a $2 billion loss on risky mortgages from investors before a 2007 financial report sent its stocks reeling, the Sixth Circuit ruled Wednesday.
The Ohio Public Employees Retirement System, also known as OPERS, sued the Federal Home Loan Mortgage Corporation in January 2008, alleging that the government-sponsored mortgage broker lied about the number of subprime loans it purchased in 2006 and 2007.
Following the release of a financial statement revealing a $2 billion loss on Nov. 20, 2007, Freddie Mac’s stock dropped 29 percent in one day, resulting in shareholder losses of over $6.6 billion.
In its complaint, OPERS claimed “the drop in [stock] price ‘confirms empirically that the market was previously unaware of the full extent of Freddie Mac’s exposure to, and risk from, non-traditional mortgages.” Freddie Mac blamed the price drop on the financial crisis.
U.S. District Court Judge Benita Y. Pearson ruled for Freddie Mac, citing several of the mortgage giant’s annual reports in her opinion, pointing out how their disclosures run counter to OPERS’ argument.
“Before November 2007, Freddie Mac had already disclosed that it was increasing its purchase of non-traditional mortgages products that may default more often,” she said.
But the Sixth Circuit disagreed Wednesday, ruling that OPERS had adequately alleged Freddie Mac misled investors about the qualities of its loans and rigors of its underwriting process.
Here is the court document. Click here.