By Patricia Hurtado
Sept. 5 (Bloomberg) -- Citigroup Inc., Merrill Lynch & Co. and three other banks were accused in a shareholder lawsuit of failing to warn investors about proposed accounting-rule changes that lowered the value of preferred Fannie Mae stock.
Karen Orkin, who bought 600 shares of Fannie Mae's Series T Preferred Stock in May, filed a complaint in New York State Supreme Court in Manhattan in a proposed class-action, or group, lawsuit. Orkin said about 89 million shares of the stock were sold, and the stock dropped 44 percent in value in four months.
``Defendants were negligent in failing to warn plaintiff and other members,'' Orkin said in the complaint filed yesterday. ``The offering circular and other offering materials omitted to state material facts,'' she said in the complaint.
The banks were a syndicate of underwriters to the Series T preferred shares, Orkin said in the complaint. Proposed changes in accounting rules, known as FAS No. 140, by the Financial Accounting Standards Board, ``allowed Fannie Mae to remove certain liabilities from its balance sheet and to put them into trusts,'' Orkin said in the lawsuit. Morgan Stanley, UBS AG and Wachovia Corp. are also defendants in the case.
FASB is considering changes to Financial Accounting Standard 140 that may require Fannie Mae and Freddie Mac 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,'' Orkin said.
Fannie Mae, the largest U.S. mortgage finance company, and Freddie Mac have posted combined losses of $14.9 billion in the past four quarters as mortgage delinquencies rose.
Orkin said she purchased her preferred stock on May 13 at $25 per share and that it's now trading below $14 a share.
``Should FAS 140 be changed as described above, Fannie Mae could be required to raise up to $46 billion of capital, an amount that would have a substantial impact upon the company,'' Orkin said in the lawsuit. Her lawyer, Ronen Sarraf, couldn't immediately be reached for comment.
Congress created Fannie Mae and McLean, Virginia-based Freddie Mac to increase financing for low-income homebuyers. The companies own or guarantee 40 percent of the $10.5 trillion residential mortgage market and are the biggest borrowers in the U.S. after the federal government.
Stephen Cohen, a Citigroup spokesman, and Wachovia spokesman Tony Mattera didn't return voice-mail messages left at their offices after business hours. Morgan Stanley spokeswoman Marie Ali, UBS spokesman Doug Morris and Merrill spokesman William Halldin declined to comment.
The case is Orkin v. Merrill Lynch, Pierce, Fenner & Smith Inc., 08602564, Supreme Court of the State of New York (Manhattan).
To contact the reporter on this story: Patricia Hurtado in New York at firstname.lastname@example.org
Last Updated: September 5, 2008 00:01 EDT