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UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
____________________________________
|
In re Federal National Mortgage | MDL No. 1668Association Securities, Derivative and |
ERISA Litigation |
____________________________________|
| Consolidated Civ. No. 1:04-cv-01639
In re Fannie Mae Securities Litigation |
| 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. PERTINENT BACKGROUND ..........................................................................................1II. LEGAL STANDARD ..........................................................................................................4III. DISCUSSION ......................................................................................................................4
A. The Deposition Testimony about Freddie Macs Accounting Sought byKPMG Is Irrelevant and not Discoverable .............................................................. 41. Relevant Evidence about Fannie Maes FAS 133 Accounting Has Already
Been Produced ............................................................................................ 52. Information about Freddie Macs Accounting Is Irrelevant ....................... 53. Information about Freddie Macs Accounting Would Be Inadmissible at
Trial and, Thus, Is Not Discoverable .......................................................... 64. KPMG Admits that Information about Hundreds of Public Companies
related to FAS 133 Accounting Policies Is Publically Available ............... 7B. The Deposition Testimony about Freddie Macs Accounting Sought by
KPMG Is Privileged ................................................................................................ 8C. 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 ....................................................................................... 11D. KPMG Has Failed to Meet Its Burden to Re-Open Ms. DeLeos
Deposition, which has already Endured for Two Full Days of Testimony .......... 15E. KPMGs Demand for Freddie Mac Information Is Too Late, in Addition to
Being Completely Irrelevant ................................................................................. 16IV. 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 ofFreddie Macs accounting and on a privileged report prepared by OFHEOs
consultant Kroll Consulting regardingFreddie 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 BACKGROUNDKPMG seeks to compel the testimony of FHFA Chief Accountant Wanda DeLeo
regarding FHFAs internal, privileged examination of Freddie Macs accounting. Ms. DeLeo
1 On September 15, 2009, Defendant Leanne G. Spencer filed a separate motion to compelthe 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. Spencersmotion (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 Maeand those at Freddie Mac (including those raised in the Kroll reportcited 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 Maethat would account for OFHEOs decision not to take issue withFreddie Macs accounting or require it to restate once Krollconcluded that Freddie Macs FAS 133 accounting was alsoinappropriate.
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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.
2In 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-forthcommunications. Thus, working in tandem, the Defendants would have this Court opendiscovery of the governments internal deliberations regarding Freddie Macs accounting, a topicthat no party has previously identified as having any relevance whatsoever to this case.
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II. LEGAL STANDARDDiscovery 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. DISCUSSIONA. 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 AlreadyBeen 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 IrrelevantKPMGs 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 atTrial 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 Companiesrelated 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.
3 Under KPMGs theory of relevance, KPMG could subpoena any official from theSecurities and Exchange Commission (SEC) to testify regarding the accounting practices at, forexample, General Motors, Disney, or Berkshire Hathaway, or any company that uses hedgingstrategies. Again, KPMG has failed to meet its burden to demonstrate a valid need to dredgethrough FHFAs analysis of Freddie Macs accounting practices, especially considering theavailability of Freddie Macs and other companies public disclosures.
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B. The Deposition Testimony about Freddie Macs Accounting Sought byKPMG 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
4 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 workproduct doctrine. These questions probing Freddie Macs accounting practices, operations, andprocesses also potentially risk the otherwise unlawful disclosure of confidential commercialinformation protected under the Trade Secrets Act (18 U.S.C. 1905). Freddie Mac has notconsented 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.
5 The Wall Street Journal also tellingly characterized the Kroll Report as [a] confidentialFebruary 2008 report, conceding that it was never publicly released. SeeFBI Looks intoLosses at Freddie, WALL ST.J., April 30, 2009, attached as Ex. A to KPMG Mot. (Dkt. No. 787-3). There is no factual or legal support for an inference that the Kroll Report is no longerprivileged merely because, as reported, FBI investigators obtained a copy of it in connectionwith a federal investigation by the SEC and the Department of Justice. What is more, if thatwere the case, no claim of privilege over documents so obtained would survive any federalinvestigation.
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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. InIn 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. (citingMobil 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 forFreddie 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
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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, inLandry 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). InLandry, 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
6 Further, if KPMG requires information specifically concerning Freddie Macs accounting(despite its lack of relevance), OFHEOs Report of the Special Examination of Freddie Mac hasbeen publically available since its publication in December 2003, and is still available on theFHFA website. See OFHEO Report of the Special Examination of Freddie Mac (Dec. 2003),available athttp://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 ofany 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 day-
long 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,
7 KPMG would have a hard time proving patently inconsistent positions given thatFreddie Mac also was forced to restate its financials and subsequently paid $125 million to settleOFHEOs enforcement action against it. Moreover, the D.C. Circuit has ruled that discovery ofthe governments decisionmaking process is not permitted unless the government itself is a partyand the cause of action is directed at the governments subjective motivation. See, e.g.,In reSubpoena 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 isimmaterial 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 impliesthe [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 toBeing 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 re-
open Ms. DeLeos deposition so that KPMG may explore this last-minute, irrelevant discovery at
the governments expense.
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IV. CONCLUSIONFor 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. AronicaJoseph J. Aronica, D.C. Bar No. 446139DUANE MORRIS LLP505 9th Street, Suite 1000Washington, D.C. 20004Phone: (202) 776-7825Fax: (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 | MDL No. 1668Association Securities, Derivative and |
ERISA Litigation |
____________________________________|
| Consolidated Civ. No. 1:04-cv-01639
In re Fannie Mae Securities Litigation |
| 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. LEONUnited States District Judge
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