opinin denying motion to dismiss

8/23/2019 Opinin Denying Motion to Dismiss

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UNITED STATES DISTRICT COURTSOUTHERN DISTRICT OF NEW YORK

_____________________

No. 11 Civ. 9201 (RJS)_____________________

U.S.SECURITIES AND EXCHANGE COMMISSION,

Plaintiff,

VERSUS

RICHARD F.SYRON, et al.,

Defendants.___________________

MEMORANDUM AND ORDERMarch 28, 2013

___________________

RICHARDJ .SULLIVAN,District Judge:

Plaintiff, the U.S. Securities and

Exchange Commission (SEC), brings thisaction against Defendants Richard F. Syron,Patricia L. Cook, and Donald J . Bisenius(collectively, Defendants), former seniorexecutives of the Federal Home LoanMortgage Corporation (Freddie Mac), forviolations of anti-fraud provisions of thefederal securities laws. The SECs claimsarise from statements regarding the extent ofFreddie Macs subprime portfolio thatallegedly misled investors into believing thatFreddie Macs exposure to subprime loanswas significantly less than it actually was.

Before the Court is Defendants motionto dismiss the Complaint (Compl.) withprejudice for failure to state a claim,pursuant to Rule 12(b)(6) of the FederalRules of Civil Procedure. For the reasonsset forth below, the Court grants

Defendants motion to dismiss the claim

against Syron and Cook under Section17(a)(2) of the Securities Act of 1933, butdenies Defendants motion as to each of theSECs other claims.

I. BACKGROUNDA. Facts

1. Freddie MacIn 1970, Congress established Freddie

Mac as a shareholder-owned GovernmentSponsored Entity (GSE).1

1 Except where otherwise noted, the following factsare derived from the Complaint. In resolving theinstant motion, the Court has also consideredDefendants Joint Memorandum of Law in Supportof the Motion to Dismiss (Defs. Mem.), the SECsMemorandum of Law in Opposition to the Motion to

(Compl. 9.)

Case 1:11-cv-09201-RJS Document 91 Filed 03/28/13 Page 1 of 29


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Freddie Macs purpose was to promoteresidential mortgage lending by providingliquidity to that industry through thepurchase and guarantee of residentialmortgage loans and mortgage-related

securities. (Id.) At all times relevant to thisaction, Freddie Macs common stock tradedon the New York Stock Exchange. (Id.)Also at all relevant times, Freddie Macissued annual and quarterly reports of itsfinancial condition, initially in the form ofInformation Statements and InformationStatement Supplements, and later afterJuly 2008, when Freddie Mac voluntarilyregistered its stock under Section 12(g) ofthe Exchange Act in the form of Form 10-

Ks and Form-10Qs. (Id.) Although FreddieMac was exempt from the registration anddisclosure requirements of federal securitieslaws until its voluntary registration in July2008, the Information Statements andInformation Statement Supplements werevirtually identical to the typical reports ofregistered entities. (Id.)

Freddie Macs business is organized intothree main segments: Single FamilyGuarantee (Single Family), Investments,and Multifamily. (Id. 10.) Single Familyrepresents Freddie Macs primary businesssegment and is responsible for fulfilling thecompanys mission by purchasingresidential mortgages and mortgage-relatedsecurities in the secondary market andsecuritizing them as Freddie Mac mortgage-backed securities, known as ParticipationCertificates (PCs). (Id. 11-12.) Duringthe period between March 2007 and August2008 (the Relevant Period), the reportedsize of Single Familys portfolio grew from$1.4 trillion to $1.8 trillion. (Id. 11.)

Dismiss (Pl.s Oppn), and Defendants Joint ReplyMemorandum of Law in Support of the Motion toDismiss (Reply), as well as the various exhibits anddeclarations attached thereto.

Single Family also included whatFreddie Mac refers to as StructuredSecurities, which are securities issued byFreddie Mac that represent beneficialinterests in pools of PCs and certain other

mortgage-related assets. (Defs. Mem. 9;seeDecl. of Daniel J . Beller, dated Apr. 30,2012, Doc. No. 53 (Beller Decl.), Ex. 5 at4-5.) A subset of Structured Securities, inturn, were known as StructuredTransactions, in which Freddie Macpurchased senior interests in a trust holdingmortgage-related collateral and then issuedguaranteed Structured Securities backed bythose senior interests. (Defs. Mem. 9; seeBeller Decl. Ex. 2 at 68-69; id. Ex. 5 at 5.)

The collateral in those trusts typicallyconsisted of mortgage-backed securitiesissued by private issuers rather than GSEs,which Freddie Macs disclosures referred toas non-agency mortgage-backedsecurities. (Defs. Mem. 9; see BellerDecl. Ex. 2 at 68-69; id. Ex. 5 at 5.) Duringthe Relevant Period, Structured Transactionsamounted to approximately $20.4 billion to$29.4 billion, or 1% to 2%, of the SingleFamily portfolio. (SeeBeller Decl. Ex. 2 at68; id. Ex. 7 at 76, tbl.48.)

2. DefendantsDefendant Richard F. Syron was

Chairman of the Board and Chief ExecutiveOfficer (CEO) of Freddie Mac fromDecember 2003 until September 2008.(Compl. 15.) As part of his responsibilityfor overseeing Freddie Mac, Syron chairedthe Senior Executive Team (SET), whichmanaged the companys strategic direction,

and regularly attended Board of Directors(Board) meetings, meetings of the BoardsMission, Sourcing, and TechnologyCommittee (MSTC), and meetings of theEnterprise Risk Management Committee(ERMC), a committee of executives andsenior management from Freddie Macsthree business segments that considered the



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credit, market, and operations risks toFreddie Mac. (Id. 16.) Prior to joiningFreddie Mac, Syron served in seniorpositions at the Federal Reserve Bank ofBoston and the Federal Home Loan Bank of

Boston. (Id. 17.)

Defendant Patricia L. Cook was FreddieMacs Executive Vice President (EVP) ofInvestments and Capital Markets and ChiefBusiness Officer from August 2004 throughSeptember 26, 2008. (Id. 19.) In thosepositions, Cook directly oversaw the SingleFamily business. (Id. 78.) Cook alsoserved on the SET and attended meetings ofthe ERMC and MSTC. (Id. 20.)

Defendant Donald J. Bisenius held anumber of senior positions at Freddie Macduring his nearly two-decade tenure there.He served as Senior Vice President (SVP)of Credit Policy and Portfolio Managementfrom November 2003 to April 2008, SVP ofSingle Family Credit Guarantee from May2008 to May 2009, and EVP of SingleFamily Credit Guarantee from May 2009 toApril 2011, when he left Freddie Mac. (Id. 24.) In those positions, Bisenius had

direct responsibility for the credit risksassociated with the Single Family businesssegment. (Id. 79.) Bisenius also served onthe Disclosure Committee that reviewedFreddie Macs Information StatementSupplement (ISS) for the period endingMarch 31, 2008 and Form 10-Q for theperiod ending June 30, 2008. (Id. 27.)

3. Single Familys Acquisition of Loanswith Greater Credit Risks

As part of the process whereby loanswere purchased for Single Family, FreddieMac began using an automated underwritingsystem called Loan Prospector in 1995. (Id. 31.) Loan Prospector classified loans bycredit risk and assigned each loan a scorereflecting the loans risk of default. (Id.

32-33.) Freddie Mac grouped the scoresinto six categories corresponding to the levelof anticipated risk. (Id. 33.) From leastrisky to riskiest, the categories were: A+,A1, A2, A3, C1, and C2. (Id.) Loans in the

first four categories were designatedAccept Loans, which Freddie Mac couldautomatically underwrite. (Id. 33-34.)Loans with a C1 or C2 rating, on the otherhand, were designated Caution Loans.(Id. 33.) Such loans had multiple riskycredit characteristics, including high loan-to-value (LTV) ratios, borrowers with lowcredit scores, unusual property types, andhigh debt-to-income ratios. (Id. 35.)Unlike Accept Loans, Caution Loans

generally had to be manually underwritten,and originators needed to produce additionaldocumentation regarding borrowerscreditworthiness and to make particularrepresentations concerning the loans creditquality. (Id.)

Beginning in the late 1990s, however,Freddie Mac began to loosen the termsapplicable to Caution Loans. In October1997, it initiated the A-Minus Program,under which Single Family could purchaseC1 loans on the same terms as Accept Loanswith the payment of an additional fee by theseller. (Id. 36.) Single Familys sales andmarketing materials for the programs roll-out stated that A-minus loans account forapproximately 50 percent of subprimeloans in the housing market. (Id. 37(internal quotation marks omitted).) InNovember 1998, Freddie Mac revised itsCredit Policy Book to reflect the influenceof the A-Minus Program on Single Familysrisk profile. The memorandum authorizingthose revisions described mortgages eligiblefor the A-Minus Program as mortgagesgenerally includ[ing] 54% to 56% of thesubprime market. (Id. 38 (internalquotation marks omitted).) It alsocharacterized the credit quality of C2 loansas subprime. (Id. (internal quotation



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marks omitted).) Bisenius signed andapproved the revisions to the Credit PolicyBook. (Id.)

In 1999, Bisenius also directed the

creation of Segmentor, an econometricmodel designed to enhance LoanProspectors ability to identify subprimeloans for acquisition. (Id. 39.) Segmentorevaluated loans credit characteristics andgenerated a subprime score for each loan.(Id.) Loans with low scores received C1 orC2 ratings. (Id.)

Between 1999 and 2007, Freddie Macintroduced several other programs to acquireloans with riskier credit characteristics. (Id. 44-47.) One of the most significant ofthe new programs was known as ExpandedApproval (EA). Freddie Mac internallyconsidered EA loans to have credit risk atbest equivalent to A-minus loans equivalent, that is, to C1 loans. (Id. 46.)A Freddie Mac policy statement circulatedinternally in August 2005 described EAloans as appear[ing] to be subprime innature and high risk. (Id. (internalquotation marks omitted).) The net effect of

EA and similar programs was a dramaticincrease in Single Familys portfolio of EA,C1, and C2 loans. Between the first quarterof 2005 and the second quarter of 2008, theaggregate value of EA, C1 and C2 loans inSingle Family ballooned from $75 billion to$244 billion. (Id. 48.) As a percentage ofSingle Familys total portfolio, EA, C1, andC2 loans increased from six percent tofourteen percent during that time. (Id.)

Defendants allegedly learned the trueextent of Freddie Macs subprime exposureover the course of 2006 and early 2007. InMay 2006, Syron and Cook attendedmeetings of Board committees at whichattendees were told that Freddie Mac waspurchasing higher-risk loans and looseningunderwriting standards, thereby increasing

the companys overall credit risk. (Id. 52-53.) Several months later, inDecember 2006, Syron and Cook attended aBoard meeting at which attendees received apresentation that included a glossary

defining subprime mortgages asmortgages that involve elevated credit riskand that are typically made to borrowerswho have a blemished or weak credit historyand/or a weaker capacity to repay. (Id. 55 (internal quotation marks omitted).)The following month, in January 2007,Syron and Cook attended an ERMC meetingat which attendees were told of thelikelihood that [Freddie Mac is] alreadypurchasing subprime loans under existing

acquisition programs a warning repeatedin subsequent ERMC reports that Syrontypically received. (Id. 56 (internalquotation marks omitted).)

Syron, Cook, and Bisenius all attendedmeetings in February and March of 2007that addressed the mounting credit risk inthe Single Family portfolio. On February 6-7, they attended a SET meeting at which apresentation noted that Freddie Macalready purchase[d] subprime-like loans;that the [w]orst 10% of the [Single Family]Flow Business were subprime-like loans;and that Freddie Mac was purchasing greaterpercentages of risk layer[ed] loans bearinggreater default costs and losses. (Id. 57(alterations in original and internal quotationmarks omitted).) On March 2-3, Defendantsattended a Board meeting at which Cookgave a presentation and stated that FreddieMac already purchase[d] subprime-likeloans to help achieve our HUD goals;[s]ome of our current purchases havesubprime-like risk; and fixed-ratesubprime doesnt look all that different thanthe bottom of our purchases. (Id. 59(internal quotation marks omitted).) Cookand Bisenius received a similar message atan MSTC meeting in June 2007, where itwas communicated that certain risky loans,



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including Caution Loans, acquired byFreddie Mac were equivalent to subprime,subprime-like, and subprime in nature.(Id. 67 (internal quotation marks omitted).)

Biseniuss own writings echoed thesame theme. In April 2007, when he beganto develop a Model Subprime Offering (theOffering) meant to expand Freddie Macssubprime holdings, Bisenius recognized thatthe Offering would compete with existingacquisition programs and proposedabolishing the A-Minus Program so as tonot canabalize [sic] the Offering. (Id. 63.) Bisenius reiterated thisrecommendation in an ExecutiveSummary of the Offering that he sponsoredand which Cook received in June 2007. TheExecutive Summary identified severalexisting Freddie Mac programs that werealready acquiring and guaranteeing the sameloans targeted by the Offering and noted thatthe A-Minus Program has credit risk andproduct parameters . . . that match, and insome cases, are broader than those outlinedin the proposed model Subprime offering.(Id. 68 (internal quotation marks omitted).)In respect to EA loans, Bisenius struck asimilar tone in an August 20, 2007 email toCook and others that described such loans asclearly subprime. (Id. 46 (internalquotation marks omitted).)

Against this backdrop, the SEC allegesthat between March 23, 2007 and August 6,2008, Defendants misled investors intobelieving that Freddie Mac had far lessexposure to subprime loans than it actuallydid. The essence of the SECs claims is that

(1) Syron and Cook misled investorsthrough comments that each personallymade and (2) all three Defendants aided andabetted the dissemination of misleadingstatements in Freddie Macs quarterly andannual financial disclosures. The statementsat issue allegedly caused investors to believethat Single Familys total exposure to

subprime loans was between $2 billion and$6 billion 0.1% to 0.2% of the portfolio when in fact it was between $141 billion and$244 billion 10% to 14% throughout thattime. See infraSections I.A.4.a to I.A.4.g.

Because the SECs claims turn on theprecise content of those comments anddisclosures, the Court provides the followingdetailed summary.

4. The Allegedly Misleading Statementsa. 2006 Year-End Statements

On March 23, 2007, Freddie Mac issuedits Information Statement and Annual

Report to Stockholders for the fiscal yearending December 31, 2006 (the 2006 IS).(Beller Decl. Ex. 2 at cover page). In it,Freddie Mac included the followingdisclosure:

Participants in the mortgage marketoften characterize loans based upontheir overall credit quality at the timeof origination, generally consideringthem to be prime or subprime. There

is no universally accepted definitionof subprime. The subprime segmentof the mortgage market primarilyserves borrowers with poorer creditpayment histories and such loanstypically have a mix of creditcharacteristics that indicate a higherlikelihood of default and higher lossseverities than prime loans. Suchcharacteristics might include acombination of high loan-to-value

ratios, low [credit] scores ororiginations using lowerunderwriting standards such aslimited or no documentation of aborrowers income. The subprimemarket helps certain borrowers byincreasing the availability ofmortgage credit.



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While we do not characterize thesingle-family loans underlying thePCs and Structured Securities in ourcredit guarantee portfolio as eitherprime or subprime, we believe that,

based on lender-type, underwritingpractice and product structure, thenumber of loans underlying thesesecurities that are subprime is notsignificant. Also included in ourcredit guarantee portfolio areStructured Securities backed by non-agency mortgage-related securitieswhere the underlying collateral wasidentified as being subprime by theoriginal issuer. At December 31,

2006 and 2005, the StructuredSecurities backed by subprimemortgages constituted approximately0.1 percent and 0.2 percent,respectively of our credit guaranteeportfolio.

(Id. Ex. 2 at 69; Compl. 84.) The 2006 ISalso contained a table categorizing the loansin Single Family according to, inter alia,original loan-to-value (LTV) ratios,current estimated LTV ratios, andborrowers credit scores. (Beller Decl. Ex. 2at 70.) Syron certified, and Cook andBisenius each sub-certified, the 2006 IS.(Compl. 87.) The 2006 IS was laterincorporated by reference into an OfferingCircular dated April 10, 2007, pursuant towhich Freddie Mac issued $500 million ofpreferred stock. (Id. 88.)

On the same day that Freddie Macissued the 2006 IS, Syron participated in an

earnings conference call in which an analystnoted the growth of subprime products andobserved that Freddie Mac had abstainedfrom purchasing loans with higher LTVratios. (Id. 89.) Referring to the subprimemarket, Syron responded that Freddie Mac[wasnt] involved in underwriting much ofthat business . . . directly but was working

to develop products in the subprime space. . . on a pretty accelerated basis. (Id.(internal quotation marks omitted).)

Syron made more detailed comments

regarding Freddie Macs subprime exposureon May 14, 2007 at the UBS GlobalFinancial Services Conference. There, hestated that at the end of 2006, Freddie hadbasically no subprime exposure in ourguarantee business, and about $124 billionof AAA rated subprime exposure in ourretained portfolio.2

As of December 31, 2006, Single Familyheld approximately $141 billion of C1, C2,and EA loans, representing approximately10 percent of its portfolio. (Id. 86.)

(Id. 92 (internalquotation marks omitted).) Cook repeatedthat statement verbatim three days later atthe Lehman Brothers 10th Annual FinancialServices Conference. (Id. 93.) Notably,before Syron and Cook made thosestatements, Freddie Macs then-head ofexternal reporting reviewed drafts of theirspeeches and warned Bisenius by email thatFreddie Macs portfolio includes loans thatunder some definitions would be consideredsubprime and that Freddie Mac shouldreconsider making as sweeping a statementas we have basically no subprime. (Id. 96.) The Complaint does not allege,however, that Cook or Syron ever receivedthat warning.

b. First Quarter of 2007On June 14, 2007, Freddie Mac issued

its ISS for the first quarter of 2007 (the

2 Freddie Macs retained portfolio (RetainedPortfolio) consisted of investments the companymade and held. Those investments includedmortgages and mortgage-related securities with lessattractive investment returns and with incrementalrisk, which Freddie Mac made to advance itsaffordable housing goals. (Defs. Mem. 11 (internalquotation marks omitted).)



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1Q07 ISS). (Id. 98.) That documentincorporated the 2006 IS by reference. (Id. 99.) The 2006 IS and 1Q07 ISS, in turn,were incorporated by reference into FreddieMacs July 17, 2007 Offering Circular,

pursuant to which Freddie Mac issued $500million of preferred stock. (Id. 100.)

c. Second Quarter of 2007On August 30, 2007, Freddie Mac issued

its ISS for the second quarter of 2007 (the2Q07 ISS). (Id. 101.) With respect tosubprime loans, the 2Q07 ISS reproducedthe first paragraph from the 2006 ISdisclosure3

3 The only differences in language between theparagraphs were that the 2Q07 ISS qualified the wordloans in the first sentence with the term single-family, and the last sentence used the wordbroadening instead of increasing. None of theparties argues and the Court does not find thatthese changes altered the Paragraphs meaning in anyway.

(the Prefatory Paragraph) andthen added the following statement: Weestimate that approximately $2 billion, or0.1 percent, and $3 billion, or 0.2 percent, ofloans underlying our single-family mortgageportfolio, at June 30, 2007 and December31, 2006, respectively, were classified assubprime mortgage loans. (Id. 101.) The2Q07 ISS also disclosed that, as of thosedates, Freddie Mac held approximately$119 billion and $124 billion, respectively,of non-agency mortgage-related securitiesbacked by subprime loans in its Retained

Portfolio, which was separate from theSingle Family guarantee portfolio. (Id.) Inaddition, the 2Q07 ISS again included atable displaying the percentages of SingleFamily loans associated with various LTVratios and credit scores. (Beller Decl. Ex. 3at 32.) This ISS, however, for the first timeadded analysis of multiple risk factors,known as risk layering, that discussed, forexample, the average LTV ratio for loans

where the average credit score at originationwas below 660 one commonly usedindicator of risky mortgages. (See id. Ex. 3at 33; Defs. Mem. 2.) Syron certified, andCook and Bisenius each sub-certified, the

2Q07 ISS. (Compl. 105.)

On September 25, 2007, Freddie Macissued an Offering Circular that incorporatedby reference the 2Q07 ISS and 2006 IS. (Id. 106.) Pursuant to that offering, FreddieMac issued another $500 million ofpreferred stock. (Id.)

As of the close of the second quarter of2007, Single Family held approximately$182 billion of C1, C2, and EA loans,representing approximately 11 percent of itsportfolio. (Id. 103.)

d. Third Quarter of 2007On November 20, 2007, Freddie Mac

issued its ISS for the third quarter of 2007(the 3Q07 ISS). That document againreproduced the Prefatory Paragraph,following which it stated, We estimate thatapproximately $5 billion and $3 billion of

loans underlying our StructuredTransactions at September 30, 2007 andDecember 31, 2006, respectively, wereclassified as subprime mortgage loans. (Id. 107.) The 3Q07 ISS contained no generalstatement about Single Familys subprimeholdings. (SeeBeller Decl. Ex. 4 at 32-33.)As in the previous quarters ISS, however,the 3Q07 ISS went on to describe theamount of non-agency mortgage-relatedsecurities backed by subprime loans in the

Retained Portfolio, to display a table withinformation about the LTV ratios andborrowers credit scores of loans in SingleFamily, and to offer risk-layeringinformation. (Id. Ex. 4 at 31-32.) Syroncertified, and Cook and Bisenius each sub-certified, the 3Q07 ISS. (Compl. 110.)



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Three weeks after the publication of the3Q07 ISS, Syron spoke at the GoldmanSachs & Co. Financial Services Conference.There, he stated:

We didnt do any subprimebusiness. . . . In terms of our insightinto the subprime stuff, we didntbuy any subprime loans. I mean, webought some securities, which wecan go through, and we think werefine in. We bought them for goalpurposes. But we didnt buy inguarantee, essentially[,] anysubprime loans. So we werent inthat business.

(Id. 112.) Then, on November 29, 2007,Freddie Mac issued an Offering Circular thatincorporated by reference the 3Q07 ISS and2006 IS. (Id. 111.) Pursuant to thatoffering, Freddie Mac issued $6 billion ofpreferred stock. (Id.)

As of the close of the third quarter of2007, Single Family held approximately$206 billion of C1, C2, and EA loans,representing approximately 13 percent of its

portfolio. (Id. 109.)

e. 2007 Year-End StatementsOn February 28, 2008, Freddie Mac

issued its Information Statement and AnnualReport to Stockholders for the 2007 fiscalyear (the 2007 IS). (Beller Decl. Ex. 5 atcover page.) Like previous disclosures, the2007 IS reproduced the Prefatory Paragraphdiscussing the subprime market generally

and then stated:

While we have not historicallycharacterized the single-family loansunderlying our PCs and StructuredSecurities as either prime orsubprime, we do monitor the amountof loans we have guaranteed with

characteristics that indicate a higherdegree of credit risk. See MortgagePortfolio Characteristics -- HigherRisk Combinations for furtherinformation. We estimate that

approximately $6 billion and $3billion of loans underlying ourStructured Transactions at December31, 2007 and 2006, respectively,were classified as subprimemortgage loans.

(Compl. 114; Beller Decl. Ex. 5 at 93-94.) The 2007 IS also disclosed theamount of subprime exposure in theRetained Portfolio and provided a tableof information about the LTV ratios andcredit scores of the loans in SingleFamily. (Compl. 114; Beller Decl. Ex.5 at 96.) Syron certified, and Cook sub-certified, the 2007 IS. (Compl. 117.)

As of the close of the 2007 fiscal year,Single Family held approximately $226billion of C1, C2, and EA loans,representing approximately 13 percent of itsportfolio. (Id. 116.)

f. First Quarter of 2008On May 14, 2008, Freddie Mac issued

its ISS for the first quarter of 2008 (the1Q08 ISS). (Id. 118.) The 1Q08 ISSreproduced the Prefatory Paragraph andtacked on the following language:

While we have not historicallycharacterized the single-family loansunderlying our PCs and Structured

Securities as either prime orsubprime, we do monitor the amountof loans we have guaranteed withcharacteristics that indicate a higherdegree of credit risk (see HigherRisk Combinations for furtherinformation). In addition, weestimate that approximately $4



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billion of security collateralunderlying our StructuredTransactions at both March 31, 2008and December 31, 2007 wereclassified as subprime.

(Id.; Beller Decl. Ex. 6 at 41.) Once again,Freddie Mac also disclosed the subprimeexposure in its Retained Portfolio, includeda table with information about the LTVratios and credit scores of Single Familyloans, and provided risk-layeringinformation. (Compl. 118; Beller Decl.Ex. 6 at 40-41.)

As of the close of the first quarter of2008, Single Family held approximately$239 billion of C1, C2, and EA loans,representing approximately 14 percent of itsportfolio. (Id. 119.)

g. Second Quarter of 2008On August 6, 2008, Freddie Mac issued

its Form 10-Q for the second quarter of 2008(the 2Q08 Form 10-Q). (Beller Decl. Ex.7 at cover page.) That disclosure containedthe standard Prefatory Paragraph, followed

by the statement:

While we have not historicallycharacterized the single-family loansunderlying our PCs and StructuredSecurities as either prime orsubprime, we do monitor the amountof loans we have guaranteed withcharacteristics that indicate a higherdegree of credit risk (see HigherRisk Combinations for further

information). In addition, weestimate that approximately $6billion of security collateralunderlying our StructuredTransactions at both June 30, 2008and December 31, 2007 wereclassified as subprime.

(Compl. 121.) The 2Q08 Form 10-Q wenton to state:

Although we do not categorize oursingle-family loans into prime or

subprime, we recognize that certainof the mortgage loans in our retainedportfolio exhibit higher riskcharacteristics. Total single-familyloans include $1.3 billion at bothJune 30, 2008 and December 31,2007, of loans with higher-riskcharacteristics, which we define asloans with original LTV ratiosgreater than 90% and borrower creditscores less than 620 at the time ofloan origination.

(Id.) In addition, as in past disclosures, the2Q08 Form 10-Q discussed subprimeexposure in the Retained Portfolio,displayed a table categorizing the loans inSingle Family according to creditcharacteristics, and provided risk-layeringinformation. (See Beller Decl. Ex. 7 at 59-61.)

As of the close of the second quarter of

2008, Single Family held approximately$244 billion of C1, C2, and EA loans,representing approximately 14 percent of itsportfolio. (Compl. 122.)

B. Procedural HistoryThe SEC initiated this action on

December 16, 2011. (Doc. No. 1.) TheSEC alleges that (1) Syron and Cookviolated Section 10(b) of the Exchange Act

of 1934, 15 U.S.C. 78j(b), and Rule 10b-5(b), 17 C.F.R. 240.10b-5(b); (2) Syron,Cook, and Bisenius aided and abettedviolations of Section 10(b) and Rule 10b-5(b); (3) Syron and Cook violated Section17(a)(2) of the Securities Act of 1933, 15U.S.C. 77q(a)(2); (4) Syron violatedExchange Act Rule 13a-14, 17 C.F.R.



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240.13a-14; and (5) Syron, Cook, andBisenius aided and abetted violations ofSection 13(a) of the Exchange Act, 15U.S.C. 78m(a), and Rules 12b-20 and 13a-13, 17 C.F.R. 240.12b-20, 240.13a-13.

Defendants moved to dismiss the SECsComplaint with prejudice on April 30, 2012(Doc. No. 52), arguing that (1) all claimsshould be dismissed for failure to adequatelyallege any actionable misrepresentation oromission; (2) claims one, two, and fiveshould be dismissed for failure to adequatelyallege scienter; (3) claims two and fiveshould also be dismissed for failure toadequately allege substantial assistance;(4) claims two, four, and five should be

dismissed because Section 3(c) of theExchange Act exempts Defendants fromliability; and (5) claim three should bedismissed for failure to state a claim underSection 17(a)(2). Defendants motion wasfully briefed as of July 2, 2012 (Doc. No.72), and on August 20, 2012, the Court heldoral argument on the motion.

II. LEGAL STANDARDTo survive a motion to dismiss pursuant

to Rule 12(b)(6) of the Federal Rules ofCivil Procedure, a complaint must providethe grounds upon which [the] claim rests.ATSI Commcns, Inc. v. Shaar Fund,Ltd., 493 F.3d 87, 98 (2d Cir. 2007).Plaintiffs must allege enough facts to statea claim to relief that is plausible on itsface. Bell Atl. Corp. v. Twombly, 550 U.S.544, 570 (2007). A claim has facialplausibility when the plaintiff pleads factualcontent that allows the court to draw the

reasonable inference that the defendant isliable for the misconduct alleged. Ashcroftv. Iqbal, 556 U.S. 662, 678 (2009). Inreviewing a Rule 12(b)(6) motion todismiss, a court must accept as true allfactual allegations in the complaint and drawall reasonable inferences in favor of theplaintiff. ATSI Commcns, 493 F.3d at 98.

However, that tenet is inapplicable to legalconclusions. Iqbal, 556 U.S. at 678. Thus,a pleading that only offers labels andconclusions or a formulaic recitation ofthe elements of a cause of action will not

do. Twombly, 550 U.S. at 555. If theplaintiff ha[s] not nudged [its] claimsacross the line from conceivable toplausible, [its] complaint must bedismissed. Id. at 570.

Where a complaint alleges fraud, theheightened pleading standard of FederalRule of Civil Procedure 9(b) also applies.Under Rule 9(b), [i]n alleging fraud ormistake, a party must state with particularitythe circumstances constituting fraud ormistake. Fed. R. Civ. P. 9(b). However,[m]alice, intent, knowledge, and otherconditions of a persons mind may bealleged generally. Id. This standardrequires the plaintiff to (1) specify thestatements that the plaintiff contends werefraudulent, (2) identify the speaker, (3) statewhere and when the statements were made,and (4) explain why the statements werefraudulent. Stevelman v. Alias ResearchInc., 174 F.3d 79, 84 (2d Cir. 1999) (internalquotation marks omitted).

III.DISCUSSIONDefendants argue that the Court must

dismiss each of the SECs five causes ofaction for failure to allege facts adequate tostate a claim. The common thread runningthrough those five causes of action is theSECs allegation that Freddie Macsfinancial disclosures and Syron and Cooks

statements misled investors into believingthat Single Familys subprime exposure wasfar less than it actually was. These allegedmisrepresentations would offer a naturalstarting point for the Courts discussionwere it not for the fact that Defendantsquestion, as an initial matter, whether theExchange Act of 1934, 15 U.S.C. 78a et



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seq., the basis of four of the SECs claims,even applies to them. Accordingly, theCourt turns to that question first.

A. Applicability of the Exchange ActSection 3(c) of the Exchange Act states

that the Act shall not apply to any . . .independent establishment of the UnitedStates or to any officer . . . of any such . . .establishment. 15 U.S.C. 78c(c).Defendants argue that they are exempt fromliability under the Exchange Act becauseFreddie Mac is an independentestablishment of the United States, andthey are its officers.

Defendants argument obviously turnson what, exactly, the term independentestablishment means. As in any caseinvolving statutory interpretation, theinquiry must begin with the text of thestatute. See Virgilio v. City of New York,407 F.3d 105, 112 (2d Cir. 2005) (Wheninterpreting a statute, the first step . . . is todetermine whether the language at issue hasa plain and unambiguous meaning withregard to the particular dispute in the case.

(quotingRobinson v. Shell Oil Co., 519 U.S.337, 340 (1997))). The Exchange Act,however, neither defines the termindependent establishment nor uses itagain. See SEC v. Mudd, 885 F. Supp. 2d654, 662 (S.D.N.Y. 2012). The term doesappear elsewhere in the U.S. Code, and oneprovision even purports to define it, but allto little avail in shedding light on itsapplication here. See 5 U.S.C. 104(defining an independent establishment as,

among other things, an establishment in theexecutive branch . . . which is . . . part of anindependent establishment).

Defendants attempt to demonstrate thatthe plain meaning of independentestablishment includes Freddie Mac bycobbling together dictionary definitions of

the words independent andestablishment. (See Defs. Mem. 70-71.)However, although dictionaries canilluminate the meanings of words andphrases, see, e.g., Schindler Elevator Corp.

v. United States ex rel. Kirk, 131 S. Ct.1885, 1891 (2011), this is not a case wherethey do, cf. MCI Telecommcns Corp. v. Am.Tel. & Tel. Co., 512 U.S. 218, 240 (1994)(Dictionaries can be useful aids in statutoryinterpretation, but they are no substitute forclose analysis of what words mean as usedin a particular statutory context.). The factthat independent establishment is definedelsewhere in the U.S. Code howeverunhelpfully is strong evidence that it is a

term of art and not a simple adjective-nounpair. See Devlin v. United States, 352 F.3d525, 534 (2d Cir. 2003) (When giving aterm a uniform definition for purposes of astatute . . . , the term can either be given itsordinary or natural meaning or be treated asa term of art that has a conventionalmeaning. (internal quotation marksomitted)). Thus, the Court shares JudgeCrottys view in SEC v. Mudd, anenforcement action against Fannie Maeexecutives, that the dictionary definitions ofthe words independent andestablishment do not clarify whether[Freddie Mac,] a governmental sponsoredprivate corporation, falls within Section3(c)s exception. 885 F. Supp. 2d at 662.

Case law addressing the meaning ofindependent establishment suggests that,contrary to Defendants arguments, FreddieMac is not covered by the term. In thedeepest treatment of the matter to date,Judge Crotty determined that Freddie Macssister entity, Fannie Mae, is not anindependent establishment within themeaning of Section 3(c) by applying a set ofcriteria developed by the Seventh Circuit inMendrala v. Crown Mortg. Co., 955 F.2d1132 (7th Cir. 1992). See Mudd, 885 F.Supp. 2d at 663. Mendrala presented the



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question of whether Freddie Mac was afederal agency within the meaning of theFederal Tort Claims Act (FTCA). See955F.2d at 1133. The FTCA defines a federalagency to include the executive

departments, the judicial and legislativebranches, the military departments,independent establishments of the UnitedStates, and corporations primarily acting asinstrumentalities or agencies of the UnitedStates. 28 U.S.C. 2671. To determinewhether Freddie Mac fell within thatdefinition, the Seventh Circuit considered:(1) the federal governments ownershipinterest in the entity; (2) federal governmentcontrol over the entitys activities; (3) the

entitys structure; (4) governmentinvolvement in the entitys finances; and(5) the entitys function or mission.Mendrala, 955 F.2d at 1136. The SeventhCircuit concluded that Freddie Mac satisfiednone of the first four criteria. The federalgovernment had no ownership interest in it;exercised only limited control over itsBoard; exercised no control over its day-to-day operations; and gave it noappropriations. Id. at 1138-39. Withrespect to the fifth factor, the SeventhCircuit recognized that Freddie Macfurthers an important federal mission butnoted that that is equally true of [a]llfederally chartered corporations, and thefact that an entity is federally chartered doesnot make it a federal agency under the[FTCA]. Id. at 1139. Based on thisanalysis, the court in Mendrala held thatFreddie Mac is not a federal agency underthe FTCA, thereby holding implicitly thatFreddie Mac must not be an independentestablishment. Id.; see also Mudd, 885 F.Supp. 2d at 663 (discussingMendrala).

In addition to offering a thorough andpersuasive analysis in its own right,Mendrala has the added benefit of being inharmony with Second Circuit precedent.Although the Second Circuit has never

definitively interpreted what independentestablishment means, it has suggested thatindependent establishments are defined by asubstantial governmental role in fundingand oversight, J ohnson v. Smithsonian

Inst., 189 F.3d 180, 189 (2d Cir. 1999)(quoting Expeditions Unlimited AquaticEnters., Inc. v. Smithsonian Inst., 566 F.2d289, 296 (D.C. Cir. 1977)) a characteristicthat Freddie Mac, for reasons explained inMendrala, clearly lacked during theRelevant Period.

Defendants offer no compelling reasonas to why the Court should not adoptMendralas reasoning. Instead, they arguethat Freddie Mac is analogous to the FederalDeposit Insurance Co. (FDIC) and to theFederal Reserve Bank, each of which hasbeen held to be an independentestablishment by a district court outside theSecond Circuit. (See Defs. Mem. 71-72;Defs. Reply 26-27); Howe v. Bank for IntlSettlements, 194 F. Supp. 2d 6, 23-24 (D.Mass. 2002) (Federal Reserve Bank);Colonial Bank & Trust Co. v. Am.Bankshares Corp., 439 F. Supp. 797, 803(E.D. Wis. 1977) (FDIC).

The Court, however, finds that the FDICand Federal Reserve cases offer virtually noguidance for the instant matter. First, theycontain no analysis of why the FDIC andFederal Reserve are independentestablishments, holding in cursory fashionthat Section 3(c) of the Exchange Actplainly exempts those entities. See Howe,194 F. Supp. 2d at 24 (noting the clarity ofthe statutory text and holding that Section

3(c) seems directly applicable to FederalReserve officials); Colonial Bank, 439 F.Supp. at 803 ([T]he clear language of[Section 3(c)] makes it applicable to theFDIC.); see also OKC Corp. v. Williams,461 F. Supp. 540, 549 (N.D. Tex. 1978)(holding summarily that Section 3(c)exempts officers and employees of the SEC



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from Exchange Act liability). But see Lewisv. United States, 680 F.2d 1239, 1241 (9thCir. 1982) (holding that the Federal ReserveBank is not a federal agency, and thereforeimplicitly not an independent establishment,

for purposes of the FTCA). Second, even ifthe Court were to find those cases holdingsto be persuasive, it still finds that FreddieMac is distinguishable from the FDIC,Federal Reserve, and SEC. Whereasofficers at those entities are federalemployees, during the Relevant PeriodFreddie Macs officers were not. Cf. Howe,194 F. Supp. 2d at 24 (interpreting the caselaw on Section 3(c) to stand for theproposition that government officials are

immune from Exchange Act claims(emphasis added)). Moreover, during theRelevant Period Freddie Mac was apublicly-traded corporation governed by aboard comprising a supermajority ofmembers elected by shareholders, whereasmembers of the governing bodies of theSEC, Federal Reserve, and FDIC areappointed by the President of the UnitedStates and confirmed by the Senate.Compare 12 U.S.C. 1452(a)(2)(A)(establishing Freddie Macs 13-member,shareholder-elected board), with 12 U.S.C. 241 (establishing a Board of Governors forthe Federal Reserve Bank and requiring thatthe governors be presidentially appointedand Senate-confirmed), and 12 U.S.C. 1812 (establishing the FDICs five-memberboard of directors and requiring that all fivedirectors be presidentially appointed andSenate-confirmed), and 15 U.S.C. 78d(establishing the SEC and requiring that itsfive commissioners be presidentiallyappointed and Senate-confirmed).

The fact is, with few exceptions, theonly entities deemed to be independentestablishments are those that Congress hasexplicitly designated as such. See Mudd,885 F. Supp. 2d at 664 (listing such entities).Congress did not so designate Freddie Mac

when it established the corporation in 1970and has not done so since. There is alsoscant evidence to suggest that Congress everintended Freddie Mac to have independent-establishment status. Defendants point only

to the Senate committee report for theExchange Act, which stated that the actshall not apply to instrumentalities andagencies of the United States. S. Rep. No.73-792, at 14 (1934). Based on thatstatement, Defendants argue that Congressintended to exempt Freddie Mac from theExchange Act by designating the entity afederal instrumentality. (Defs. Mem. 72-73(citingKidder Peabody & Co. v. UnigestionIntl Ltd., 903 F. Supp. 479, 495-96

(S.D.N.Y. 1995), which held that 12 U.S.C. 1455(g) establishes that Freddie Mac is aninstrumentality of the United States)).Federal law, however, clearly distinguishesbetween instrumentalities and independentestablishments. See, e.g., 28 U.S.C. 2671(defining federal agency, for FTCApurposes, to include both independentestablishments and corporations primarilyacting as instrumentalities . . . of the UnitedStates (emphasis added)). Indeed, the veryCongress that enacted the Exchange Actdrew such a distinction. Compare15 U.S.C. 77c(a)(2) (exempting any instrumentalityof the Government of the United Statesfrom liability under the Securities Act of1933), with id. 78c(c) (exemptingindependent establishments, but notinstrumentalities, from liability under theExchange Act of 1934). Congresss recordover the ensuing decades confirms that whenCongress wishes to designate an entity as anindependent establishment, it does soexplicitly. See Mudd, 885 F. Supp. 2d at664.

Accordingly, the Court concludes that,had Congress in 1970 or at any time sincethen wished to designate Freddie Mac as anindependent establishment, it would havedone so. Because Congress has not, the



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Court holds that Freddie Mac is not anindependent entity and that Defendants arein fact subject to Exchange Act liability.

B. MisrepresentationsHaving determined that Defendants are

not exempt from the Exchange Act, the nextquestion is whether the SECs allegationsestablish the misrepresentations required tostate a claim for each of the five causes ofaction against Defendants. The essence ofthe SECs allegations is that, in 2007 and2008, when Freddie Mac purported toquantify its exposure to subprime loans in itsSingle Family guarantee portfolio[,] . . . itused an undisclosed and extremely narrowdefinition of subprime that was not at allevident on the face of the Companysdisclosures and that misled investors as tothe true extent of Single Familys subprimeexposure. (Pl.s Oppn 23.)

Defendants offer a multi-layeredargument for why the SECs allegations,even if true, establish no actionablemisrepresentation or omission. First, theyargue that Freddie Mac never defined

subprime to refer to its loans creditcharacteristics; rather, to the extent FreddieMacs disclosures employed the term,Defendants contend they made clear thatthey were using it narrowly to refer to one ormore non-credit characteristics. (Defs.Mem. 29-32.) Second, Defendants arguethat Freddie Macs subprime disclosures, ontheir face, referred only to a small subset ofSingle Family, not the entire portfolio.Finally, they argue that to the extent Freddie

Macs disclosures and Defendantscomments were potentially misleading,Freddie Macs detailed quantitativedisclosures presented enough accurateinformation to correct any misimpressionsthat the statements, by themselves, mighthave created.

The Court will address each ofDefendants points in turn.

1. Freddie Macs Definition of SubprimeAt its core, this case turns on a single

question: when Freddie Mac and itsexecutives used the term subprime, whatdid reasonable investors understand them tomean by it? The SEC alleges that, basedmainly on Freddie Macs financial reports,investors reasonably understood FreddieMacs statements about its subprimeexposure to refer to the size of its portfolioof loans posing high credit risk that is,loans Freddie Mac internally classified asC1, C2, or EA. Conversely, Defendantsargue that Freddie Macs disclosures madeclear that subprime was used morenarrowly: sometimes to refer to loans fromself-identified subprime originators, othertimes to refer to loans identified as subprimeby their originators, but always to refer tonon-credit characteristics, and always in amanner apparent to investors.

Much of the parties dispute concernsthe significance of the Prefatory Paragraph,

which appeared in each of Freddie Macsfinancial disclosures during the RelevantPeriod except for the 1Q07 ISS. (SeeCompl. 84, 101, 107, 114, 118, 121.)The SEC argues that as the only definitionof subprime that was evident on the face ofFreddie Macs written disclosures, thePrefatory Paragraph led investors to believethat Freddie Mac understood subprime torefer to the credit characteristics theparagraph discussed. (Pl.s Oppn 25-28.)

Defendants, by contrast, describe thePrefatory Paragraph as merely anillustrative and impressionisticcharacterization of the subprime market,and not a definition that any reasonableinvestor would believe is subject toquantification. (Defs. Mem. 26-27.)



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There is support for each sidesinterpretation. As Defendants note, thePrefatory Paragraph does not purport toascribe a definitive meaning to subprime.Indeed, it states that [t]here is no

universally accepted definition of the termand offers only examples of creditcharacteristics that subprime loans mightpossess. (See, e.g., Compl. 84 (emphasisadded).) On the other hand, the SEC iscorrect that the Prefatory Paragraph containsthe disclosures most detailed discussion ofthe characteristics of subprime loans.Moreover, as a logical matter, just becauseFreddie Mac acknowledges that there is nouniversally accepted definition of subprime

does not necessarily mean it has not adopteda particular definition for its own purposes.Here, particularly given the importance ofthe term subprime to the mortgageindustry, a reasonable investor plausiblycould have interpreted the PrefatoryParagraph to be setting forth Freddie Macsdefinition of the term.

That risk was especially great in the2006 IS, which each ISS in 2007incorporated by reference. Immediatelyfollowing the Prefatory Paragraph, the 2006IS stated: While we do not characterize thesingle-family loans underlying the PCs andStructured Securities in our credit guaranteeportfolio as either prime or subprime, webelieve that, based on lender-type,underwriting practice and product structure,the number of loans underlying thesesecurities that are subprime is notsignificant. (Id. 84.) This statement isconfusing in its own right Freddie Macfirst states that it does not characterizeSingle Family loans as subprime and thenproceeds to do just that. The confusionsurrounding Freddie Macs use of the termsubprime only deepens when thestatement following the Prefatory Paragraphis viewed in context. In the PrefatoryParagraph, Freddie Mac stated that subprime

loans typically have a mix of creditcharacteristics that indicate a higherlikelihood of default and higher lossseverities than prime-loans. Suchcharacteristics might include . . .

originations using lower underwritingstandards such as limited or nodocumentation of a borrowers income.(Id. (emphasis added).) This portion of thePrefatory Paragraph belies Defendantsargument that underwriting practice, asused in the 2006 IS, plainly did not refer toa mix of credit characteristics of the loansbut rather to the characteristics of the loansissuers. (Defs. Mem. 31.) In fact, thePrefatory Paragraph identifies underwriting

practice as a credit characteristic, placing itin the same category as metrics such as LTVratios and credit scores. Thus, when the2006 IS stated that, based on . . .underwriting practice . . . , the number ofloans underlying [Single Family] securitiesis not significant, a reasonable investorcould have believed that Freddie Mac wasusing subprime in the sense of risky creditcharacteristics. That understanding wouldhave generated a misimpression regardingSingle Familys exposure, for with $141billion of C1, C2, and EA loans (Compl. 86), Single Familys exposure to loanswith risky credit characteristics was quitesignificant.

The surrounding terms lender-type andproduct structure did not mitigate this riskof misrepresentation. Defendants insist thatthose terms unambiguously referred to non-credit characteristics lender-type toself-described subprime originators andproduct structure to such features of loansas pre-payment penalties and adjustableinterest rates. (Defs. Mem. 31-32.)However, while Freddie Mac may haveunderstood those terms in those ways,Defendants point to no statements in the2006 IS that would have apprised investorsof those definitions. As a result, investors



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had nothing to go on but context, and thecontext in which those terms were used immediately following the PrefatoryParagraphs discussion of the creditcharacteristics of subprime loans could

plausibly suggest to a reasonable investorthat the terms referred back to thatdiscussion.4

Thus, the Court finds that reasonableinvestors could have understood thePrefatory Paragraph to set forth FreddieMacs operative definition of subprime.This fact has important implications forwhether the SECs allegations support aplausible inference of misrepresentation.The Prefatory Paragraph appeared in each ofFreddie Macs disclosures during theRelevant Period, and the disclosures, in turn,provided the background against whichinvestors understood the comments bySyron and Cook that are at issue here. Ifinvestors reasonably believed that thePrefatory Paragraph set forth Freddie Macsoperative definition of subprime, itfollows that throughout the Relevant Periodinvestors would have reasonably believed

4 The Court notes that none of the foregoingdiscussion is meant to deny the possibility thatinvestors could reasonably have understood termslike subprime and underwriting practice inexactly the way that Freddie Mac perhaps intended.

To advance beyond the pleadings stage, however, theSEC need show only that Defendants liability is aplausible inference from the facts alleged, not theonlyone. Where factual allegations support multipleplausible inferences, the Court cannot decide amongthose interpretations on a motion to dismiss. See,e.g., Anderson News, L.L.C. v. Am. Media, Inc., 680F.3d 162, 185 (2d Cir. 2012) (The choice between

two plausible inferences that may be drawn fromfactual allegations is not a choice to be made by thecourt on a Rule 12(b)(6) motion.); Sedighim v.Donaldson, Lufkin & Jenrette, Inc., 167 F. Supp. 2d639, 647 (S.D.N.Y. 2001) ([T]he court may notchoose among plausible interpretations of . . .disclosure documents if a trier of fact could agreewith plaintiffs interpretation of the relevantlanguage, the motion to dismiss must be denied.).

that when Freddie Mac and its executivesdiscussed the extent of Freddie Macssubprime exposure, what they meant wasthe extent of Freddie Macs exposure toloans with risky credit characteristics that

is, loans Freddie Mac classified as C1, C2,and EA.

That understanding, of course, is notdispositive of whether Freddie Mac and itsexecutives misrepresented the companyssubprime exposure. It merely establishesthe baseline against which to judge theaccuracy of the companys disclosures. TheCourt turns to that inquiry next.

2. The Scope of Freddie Macs SubprimeDisclosures

Defendants next argue that FreddieMacs statements could not have misledreasonable investors as to Single Familystotal subprime exposure because, on theirface, the statements purported to describethe exposure of only a part and a smallpart, at that of the larger portfolio. (Defs.Mem. 28-30.)

As an initial matter, the factual premiseof Defendants argument is inaccurate.Although several of the allegedly misleadingstatements did, on their face, describe only anarrow slice of Single Familys assets, the2Q07 ISS was not so cabined. Immediatelyafter the Prefatory Paragraph, it stated: Weestimate that approximately $2 billion, or0.1 percent, and $3 billion, or 0.2 percent, ofloans underlying our single-family mortgageportfolio, at June 30, 2007 and December

31, 2006, respectively, were classified assubprime mortgage loans. (Compl. 101.)As discussed above, a reasonable investorcould have understood this statement tomean that Single Family held only $2-3billion of loans with risky creditcharacteristics. Understood that way, thestatement was clearly inaccurate; as of the



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dates mentioned, Single Family held $144billion and $182 billion, respectively, of C1,C2, and EA loans. (Id. 86, 103.)Defendants in effect concede as much bysuggesting that the statement probably was

a drafting error, which, they note, FreddieMac fixed in the next report. (Defs. Mem.29 n.16.) Whether that was the case,however, is a factual question outside thepleadings, and accordingly is not appropriatefor consideration on a motion to dismiss.

The statements attributed to Syron andCook are similarly problematic. Each onepurported to describe all of Single Familyssubprime exposure, and each failed to setforth the narrow manner in whichDefendants assert they employed the termsubprime. The statements werecategorical: [we] werent involved inunderwriting much of that subprimebusiness (Compl. 89); at the end of2006, Freddie had basically no subprimeexposure in our guarantee business (id. 92); and [w]e didnt do any subprimebusiness (id. 112). Furthermore, thecontexts of those statements only magnifiedthe danger of misrepresentation. Forexample, Syron made the first of theforegoing comments in response to aquestion from an analyst who used the termsubprime to refer to higher LTVproducts that is, to loans defined by acredit characteristic. (Beller Decl. Ex. 12 at5.) A reasonable investor could believe thatby responding as he did, without clarifyinghis different understanding of subprime,Syron implicitly adopted the questionersdefinition of the term.

Syron and Cooks statements remainproblematic when read in light of FreddieMacs financial disclosures. Defendantsargue that Syron and Cooks statementswere not misleading because they wereconsistent with the 2006 IS. (Defs. Mem.40-42.) Such consistency helps Defendants,

however, only if the 2006 IS, in turn, wasconsistent with reality (id. at 40), and theCourt has already found that the Complaintsufficiently alleges that it was not. Asexplained above, a reasonable investor could

have interpreted the 2006 IS to assert thatSingle Familys exposure to risky loans wasnot significant. Against this backdrop, areasonable investor could have interpretedSyron and Cooks statements in much thesame way, reinforcing the misimpressionthat Single Family contained few loans atrisk of default.5

The remaining set of allegedlymisleading statements appeared in the 2006IS, the 3Q07 ISS, and all disclosures duringthe Relevant Period subsequent to the 3Q07ISS. All of those statements weresubstantially similar, providing estimates ofthe value of subprime mortgage loansunderlying Freddie Macs StructuredTransactions as of various dates. (SeeCompl. 84, 112, 114, 118, 121.) On theirface, those statements were accurate, andthere appears to be no allegation to thecontrary. Rather, the SEC argues that thestatements were misleading in context.Specifically, the SEC contends that byquantifying only the subprime loansunderlying Structured Transactions whiledescribing the rest of Single Familys

5 For the same reasons, this case is different fromDodds v. Cigna Securities, Inc., a case cited byDefendants, in which the Second Circuit held that aplaintiff cannot rely on misleading oralstatements . . . when the offering materials contradictthe oral assurances. 12 F.3d at 351. In that case, the

Second Circuit found, as a matter of law, that theofficial corporate disclosures were not misleading.Id. at 350-51. The same is true of Brown v. E.F.Hutton Grp., Inc., a case the Second Circuit reliedupon inDodds. Id. (citingBrown, 991 F.2d at 1031).Unlike the plaintiffs in those cases, the SEC here hasalleged sufficient facts to demonstrate that FreddieMacs disclosures were inaccurate and potentiallymisleading.



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subprime exposure as not significant,Freddie Mac suggested that Single Familyeffectively had no subprime exposure otherthan to a small amount of loans underlyingits Structured Transactions. (Pl.s Oppn

33.)

The law is well settled . . . that so calledhalf truths literally true statements thatcreate a materially misleading impression will support claims for securities fraud.SEC v. Gabelli, 653 F.3d 49, 57 (2d Cir.2011), revd on other grounds sub nom.,Gabelli v. SEC, 133 S. Ct. 1216 (2013).Thus, once a party chooses to discussmaterial issues, it ha[s] a duty to be bothaccurate and complete so as to avoidrendering statements misleading. In reMBIA, Inc. Sec. Litig., 700 F. Supp. 2d 566,578 (S.D.N.Y. 2010) (quoting Caiola v.Citibank N.A., N.Y., 295 F.3d 312, 331 (2dCir. 2002)). Here, each of the alleged halftruths immediately followed statementsbroadly discussing Single Familyssubprime exposure. In the 2006 IS, thestatement regarding Structured Transactionswas preceded by the assertion that SingleFamilys subprime exposure was notsignificant. (Compl. 84.) In the 3Q07 IS,it was preceded by the Prefatory Paragraph.(Id. 107.) And in the 2007 IS, 1Q08 ISS,and 2Q08 Form 10-Q, the statementsimmediately followed the sentence, Whilewe have not historically characterized thesingle-family loans underlying our PCs andStructured Securities as either prime orsubprime, we do monitor the amount ofloans we have guaranteed withcharacteristics that indicate a higher degreeof credit risk. (Id. 114, 118, 121.)Based on this context, the Court finds that areasonable investor could plausibly havebeen misled by the disclosures into believingthat the subprime loans underlyingStructured Transactions represented theextent of Single Familys subprimeexposure.

Having found that the SECs allegationssupport the plausible inference that FreddieMac and Defendants Syron and Cookmisrepresented Single Familys subprimeexposure, the Court next turns to whether

Freddie Macs quantitative disclosurescorrected and cured that misrepresentation.

3. Freddie Macs Quantitative DisclosuresDefendants contend that even if Freddie

Macs disclosures and Syron and Cooksstatements verbally misrepresented theextent of Single Familys subprimeexposure, the quantitative tables detailingthe LTV ratios and credit scores in each ofthe disclosures refute any suggestion that areasonable investor could have concludedthat only 0.1% to 0.2% of the entireguarantee portfolio was comprised of riskyloans. (Defs. Mem. 33.) Defendants alsohighlight the risk-layering information in the2Q07 ISS and subsequent disclosures as afurther example of Freddie Macstransparency. (Id. at 35-36.) The essence ofDefendants argument is that using all thequantitative information the disclosuresprovided, investors easily could have

calculated the full extent of Single Familysexposure to loans with high-risk creditcharacteristics and understood that theexposure was not limited to the $3-6 billionof loans underlying the StructuredTransactions. (Id. at 35.)

Whatever its merits, however, thisargument is ultimately about the materialityof the alleged misrepresentations, notwhether those misrepresentations existed in

the first place. That is, Defendantsargument is really that, in light of thequantitative disclosures, the allegedmisrepresentations did not significantlyalter[] the total mix of information madeavailable and thus were immaterial. BasicInc. v. Levinson, 485 U.S. 224, 232 (1988)(internal quotation marks omitted).



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Materiality is an element of anysecurities fraud claim, see Stoneridge Inv.Partners, LLC v. Scientific-Atlanta, Inc., 552U.S. 148, 157 (2008), but the Second Circuithas cautioned that materiality presents a

mixed question of law and fact [that] . . .will rarely be dispositive in a motion todismiss, In re Morgan Stanley Info. FundSec. Litig., 592 F.3d 347, 360 (2d Cir. 2010)(internal quotation marks omitted). Thus,a complaint may not properly be dismissed. . . on the ground that the allegedmisstatements or omissions are not materialunless they are so obviously unimportant toa reasonable investor that reasonable mindscould not differ on the question of their

importance. Ganino v. Citizens Utils. Co.,228 F.3d 154, 162 (2d Cir. 2000) (quotingGoldman v. Belden, 754 F.2d 1059, 1067(2d Cir. 1985)).

In this case, the Court cannot concludethat no reasonable investor could have foundthe alleged misrepresentations andomissions to be material in light of thequantitative disclosures. Because thePrefatory Paragraph described subprime as amix of credit characteristics not limited toLTV ratios and credit scores, it is not clearthat the quantitative data would havecorrected the misimpression created byFreddie Macs disclosure that SingleFamilys subprime exposure was notsignificant and represented a negligiblepercentage of the overall portfolio. See Va.Bankshares, Inc. v. Sandberg, 501 U.S.1083, 1097 (1991) ([N]ot every mixturewith the true will neutralize the deceptive.If it would take a financial analyst to spotthe tension between the one and the other,whatever is misleading will remainmaterially so, and liability should follow.);see also Mudd, 885 F. Supp. 2d at 667(finding that quantitative disclosures wereinadequate to render immaterial FannieMaes misleading disclosures of subprimeexposures). But see Kuriakose v. Fed. Home

Loan Mortg. Corp., No. 08 Civ. 7281 (JFK),2012 WL 4364344, at *11 (S.D.N.Y . Sept.24, 2012) (finding that Freddie Macsextensive disclosures rendered the allegedmisrepresentations immaterial because a

reasonable investor, with little effort,could take his own measure of risk inFreddie Macs loan portfolio).6

* * *

Furthermore, even a reasonable and savvyinvestor might have believed, for instance,that loans to borrowers with low creditscores were nevertheless not risky becauseof other mitigating factors. Thus, it wouldbe inappropriate to dismiss the Complaint onmateriality grounds. See Ganino, 228 F.3dat 167 ([T]he corrective information must

be conveyed to the public with a degree ofintensity and credibility sufficient tocounter-balance effectively any misleadinginformation created by the allegedmisstatements. (internal quotation marksomitted)).

In sum, the Court finds that the SEC hassufficiently alleged that Freddie Macsdisclosures and Syron and Cooks

statements misrepresented the extent ofSingle Familys exposure to subprime loans.Accordingly, Defendants have failed toestablish grounds for dismissing the entireComplaint. The Court next turns to whetherclaims one and two should be dismissed forfailure to adequately allege scienter.

C. ScienterA complaint alleging securities fraud

must satisfy the heightened pleadingrequirements of Rule 9(b) by alleging factsthat give rise to a strong inference offraudulent intent. Novak v. Kasaks, 216F.3d 300, 307 (2d Cir. 2000). An inference

6 The Court discusses Kuriakose in greater depthinfraSection III.C.



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of fraudulent intent is sufficiently strongwhen it is at least as likely as any plausibleopposing inference. Tellabs, Inc. v. MakorIssues & Rights, Ltd., 551 U.S. 308, 328(2007). A plaintiff may establish a strong

inference of fraudulent intent by allegingeither (1) facts that show the defendantshad both motive and opportunity to commitfraud, or (2) facts that constitute strongcircumstantial evidence of consciousmisbehavior or recklessness. SEC v.Espuelas, 698 F. Supp. 2d 415, 426(S.D.N.Y. 2010) (quoting Acito v. IMCERAGrp. Inc., 47 F.3d 47, 52 (2d Cir. 1995)).

Here, Defendants argue that the SEC hasfailed to establish a strong inference offraudulent intent through either method.(See Defs. Mem. 42-54.) The SECsopposition memorandum effectivelyconcedes Defendants point with respect tothe first method by discussing only whetherthe Complaint sufficiently allegedcircumstantial evidence of recklessness.(SeePl.s Oppn 42-52); In re UBS AG Sec.Litig., No. 07 Civ. 11225 (RJS), 2012 WL4471265, at *11 (S.D.N.Y. Sept. 28, 2012)(holding that a plaintiff who does notrespond to a point raised by a defendant on amotion to dismiss concedes that pointthrough silence); see also Gortat v.Capala Bros., Inc., No. 07 Civ. 3629 (JLG),2010 WL 1423018, at *11 (E.D.N.Y. Apr. 9,2010) (considering an argument notaddressed in an opposition brief waived).Therefore, the Court will likewise limit itsscienter analysis to recklessness.

Reckless conduct is, at the least,

conduct which is highly unreasonable andwhich represents an extreme departure fromthe standards of ordinary care . . . to theextent that the danger was either known tothe defendant or so obvious that thedefendant must have been aware of it.Novak, 216 F.3d at 308 (internal quotationmarks omitted). [A]n allegation that a

defendant merely ought to have known isnot sufficient to allege recklessness,Hart v.Internet Wire, Inc., 145 F. Supp. 2d 360, 368(S.D.N.Y. 2001) (internal quotation marksomitted), but [a]n egregious refusal to see

the obvious, or to investigate the doubtful,may in some cases give rise to an inferenceof . . . recklessness. SEC v. Czarnik, No.10 Civ. 745 (PKC), 2010 WL 4860678, at*6 (S.D.N.Y. Nov. 29, 2010) (quotingNovak, 216 F.3d at 308)). Securities fraudclaims typically have sufficed to state aclaim based on recklessness when they havespecifically alleged defendants knowledgeof facts or access to informationcontradicting their public statements. Id.

(quotingNovak, 216 F.3d at 308). However,the Court also bears in mind that because theSEC has not demonstrated that Defendantshad a motive for fraud, it must produce astronger inference of recklessness. Kalnitv. Eichler, 264 F.3d 131, 143 (2d Cir. 2001).

Because Defendants attack thesufficiency of the Complaints scienterallegations against both Syron and Cook, theCourt will address each Defendant in turn.Starting with Syron, Defendants argue thatthe Complaint does not allege a single factthat suggests [Syron] was on notice thatFreddie Mac somehow misrepresented itsexposure to risk by not disclosing assubprime the value of loans categorizedinternally as Caution or EA. (Defs. Mem.45.) In fact, however, the Complaintcontains several allegations that Syron wasaware of particularized facts thatcontradicted his specific statements.

First, the Complaint alleges that inJanuary 2007, two months before the start ofthe Relevant Period, Syron attended anERMC meeting at which attendees were toldof the likelihood that [Freddie Mac] isalready purchasing subprime loans underexisting acquisition programs. (Compl. 56.) Subsequent ERMC reports, which



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Syron typically received, repeated thiswarning. (Id.) Furthermore, a month later,Syron attended a two-day SET meeting thatdelivered substantially the same message,only using the term subprime-like to

characterize the risky loans Freddie Macwas already purchasing in significantnumbers. (Id. 57.) A presentation at thatmeeting also noted that Freddie Mac waspurchasing a greater percentage of risklayer[ed] loans, which was leading tomore Cautions and a higher [d]efect rate.(Id. (internal quotation marks omitted).)These allegations establish a stronginference that Syron knew the termsubprime could be used to describe loans

with high credit risk; that he knew FreddieMac was already acquiring such loans; thathe knew Freddie Mac classified such loansas Caution loans; and thus that he knew ofor was willfully blind to the risk thatsweeping statements like we have basicallyno subprime exposure in our guaranteebusiness and [w]e didnt do any subprimebusiness would mislead investors.

Allegations regarding the December2006 MST meeting that Syron attendedbolster this conclusion. The Complaintalleges that at that meeting, attendeesreceived a presentation that, in its glossarydefinition of subprime mortgages, notedthat [t]here is no longer a clear-cutdistinction between prime and subprimemortgages and explained that [s]ubprimemortgages generally are mortgages thatinvolve elevated credit risk. (Id. 55.)This allegation reinforces the fact that, goinginto the Relevant Period, Syron was awarethat the term subprime generally referredto mortgages with risky creditcharacteristics. Thus, he had a sufficientbasis to know that Freddie Macs disclosuresand his own statements would misleadinvestors.

The Complaint contains similar, andsometimes identical, allegations againstCook. For example, the Complaint allegesthat, like Syron, Cook attended the boardmeeting at which attendees received a

presentation defining subprime accordingto credit risk. (Id. 55.) In addition,contrary to Defendants assertion that theComplaint never alleges that Cook heard theterm EA or knew that employees referredto EA loans as subprime (Defs. Mem. 50),the Complaint alleges that on August 20,2007, in an email to Cook and others,Bisenius described EA loans as clearlysubprime (Compl. 46). This allegationnot only suggests Cooks awareness of the

multi-billion-dollar EA program, but it alsodemonstrates that she knew that employees including ones as senior and expert incredit risk as Bisenius were ratheremphatic that such loans met the definitionof subprime.

The Complaint further alleges that, likeSyron, Cook was aware that Freddie Macwas purchasing higher-risk loans andloosening underwriting standards. (Id. 52-53.) Indeed, the Complaint allegesthat Cook attended the ERMC meetingwhere Syron and other attendees were toldof the likelihood that [Freddie Mac is]already purchasing subprime loans underexisting acquisition programs. (Id. 56.)Finally, the Complaint alleges that in June2007, Cook attended a meeting of theBoards MST Committee where it wasconveyed that certain risky loans FreddieMac had acquired were equivalent tosubprime and subprime in nature. (Id. 67.) These allegations strongly support aninference that Cook was aware of, orwillfully blind to, the misleading nature ofboth Freddie Macs disclosures and her ownstatement that, at the end of 2006, Freddiehad basically no subprime exposure in ourguarantee business. (Id. 93.)



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Defendants remaining arguments gomainly to the weight of the SECs evidence,not the sufficiency of their allegations. Forinstance, Freddie Mac executives mayindeed, on occasion, have used the term

subprime in its narrower sense of loansfrom self-described subprime originators(see Defs. Mem. 48, 51-52), but that doesnot negate the allegations that Syron andCook understood that subprime generallyreferred to the types of risky loans that theyknew Freddie Mac was already acquiring.Similarly, the fact that Freddie Macsdisclosures truthfully described the subprimeexposure of the Retained Portfolio mayweaken the inference of scienter but does

not, as a matter of law, negate it. The fewcases Defendants cite in support of thecontrary proposition that truthfuldisclosures do negate an inference ofscienter are distinguishable. The mostrecent such case, Kuriakose v. FederalHome Loan Mortgage Co., involved aputative class action against Freddie Mac,Syron, Cook, and Freddie Macs formerchief financial officer over some of the samealleged misrepresentations at issue here. See2012 WL 4364344, at *1, *12. Indismissing the plaintiffs second amendedcomplaint, J udge Keenan found that theallegations failed to establish a stronginference of recklessness in part becauseFreddie Macs disclosures negated such aninference. See id. at *14. The scienteranalysis inKuriakose, however, is not on allfours with the analysis here. To establish aninference of recklessness, the plaintiff inKuriakose relied mainly on factualallegations concerning a post hoc report bythe Federal Housing Finance Agency(FHFA), despite the fact that the reportcontained no findings suggest[ing] that the[d]efendants were reckless in not knowingthat their statements . . . were incorrect. Id.at *13-*14. In the instant case, by contrast,the SEC establishes Defendants state of

mind through allegations regarding priormeetings, emails, and presentations mostof which were not alleged in the Kuriakosecomplaint that alerted Defendants to themisrepresentations at issue; the FHFA report

is never mentioned.

Defendants also cite In re BearingPoint,Inc. Securities Litigation, in which the courtfound that truthful disclosures of negativeinformation negated scienter where thecomplaint had failed to allege any specificfact suggesting that any individual atBearingPoint knew that the internal controlswere in disarray prior to discovery of theaccounting error [at issue]. 525 F. Supp.2d 759, 769-70 (E.D. Va. 2007), affd inpart, revd in part on other grounds subnom., Matrix Capital Mgmt. Fund, LP v.BearingPoint, Inc., 576 F.3d 172 (4th Cir.2009). The court in Ferber v. TravelersCorp. reached a similar conclusion againstthe backdrop of highly general allegationsthat failed to attribute any particularknowledge or awareness to the defendants.802 F. Supp. 698, 714 (D. Conn. 1992); seealso In re Worlds of Wonder Sec. Litig., 35F.3d 1407, 1425 (9th Cir. 1994) (followingFerber). Thus, to the extent these casessuggest a rule, it is that truthful disclosuresof negative information will negate weakand generalized allegations of recklessness.That rule, however, does not apply here,where the Complaint contains numerous,mutually reinforcing allegations thatDefendants knew specific facts contradictingFreddie Macs disclosures and their ownstatements.

Thus, the Court finds that the Complainthas alleged sufficient facts to support astrong inference that Syron and Cook actedrecklessly by certifying and sub-certifying,respectively, Freddie Macs misleadingdisclosures and by personally makingmisleading statements.



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The Court next turns to Defendantsarguments concerning the sufficiency ofclaims two and five the aiding and abettingclaims against all three Defendants.

D.Aiding and Abetting Liability

The SEC asserts two claims of aidingand abetting against each Defendant: onearising from Defendants certifications andsub-certifications of Freddie Macs allegedlymisleading disclosures prior to the voluntaryregistration of its securities in July 2008, andthe other from their certifications and sub-certifications of Freddie Macs disclosuresafter July 2008. The two claims thus relateto substantially the same conduct but,because of Freddie Macs registration duringthe Relevant Period, proceed under differentportions of the Exchange Act. (See Pl.sOppn 56-58, 60-61, 63-64.) In addition, theSEC alleges that Cook aided and abettedSyrons primary violation (id. at 60-61) andthat Bisenius aided and abetted the primaryviolations of both Syron and Cook (id. at64). For the reasons set forth below, theCourt finds that the Complaint sufficientlyalleges that Defendants aided and abetted

Freddie Macs misleading disclosures.Accordingly, it does not reach the questionof whether the SECs alternate theories ofliability in fact state claims for aiding andabetting.

To state a claim of aiding and abettingsecurities fraud, the SEC must allege that(1) there was a securities violation by aprimary wrongdoer; (2) the defendant hadactual knowledge of the primary violation;

and (3) the defendant rendered substantialassistance to the primary violation. SeeArmstrong v. McAlpin, 699 F.2d 79, 91 (2dCir. 1983). Defendants contest thesufficiency of the Complaints allegationswith respect to each element, but the Courthas already held that the Complaintadequately alleges primary violations in the

form of Freddie Macs misleadingdisclosures. See supra Section III.B. Inaddition, the Court has found the allegationssufficient to support a strong inference thatSyron and Cook knew of the violations. See

supra Section III.C. Thus, with respect tothe sufficiency of the aiding and abettingclaims, the only remaining issues arewhether the Complaint has adequatelyalleged that (1) Bisenius acted with actualknowledge and (2) Defendants providedsubstantial assistance to Freddie Macsprimary violation.

1. Biseniuss Actual KnowledgeThe Complaint contains several

allegations supporting a strong inferencethat Bisenius knew of facts contradictingFreddie Macs subprime disclosures.Indeed, the allegations concerningBiseniuss involvement in managing SingleFamilys credit risk date back to the 1990s,when Bisenius approved and signed a creditpolicy document for the A-Minus Programthat described C1 loans as [m]ortgages thatgenerally comprise the first and second tierof subprime lender risk grades and that

comprise 54% to 56% of the subprimemarket. (Compl. 38 (emphasis added).)During the Relevant Period, the Complaintalleges that Bisenius continued to regardsuch risky mortgages as subprime. Infact, in April 2007, while developing theModel Subprime Offering, Biseniusproposed abolishing the A-Minus Programso as to not canabalize [sic] the newoffering. (Id. 63.) Around the same time,Bisenius received an email from Freddie

Macs then-head of external reportingwarning that the texts of speeches Syron andCook planned to give in May 2007 werepotentially problematic. In reference to thestatement that at the end of 2006, Freddiehad basically no subprime exposure in ourguarantee business, the email stated:



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We need to be careful how we wordthis. Certainly our portfolio includesloans that under some definitionswould be considered subprime.Look back at the subprime language

in the annual report and use that as aguide for what to say. Basically, wesaid we dont have a definition ofsubprime and we dont acquire loansfrom subprime lenders. We shouldreconsider making as sweeping astatement as we have basically nosubprime exposure.

(Beller Decl. Ex. 13 at 9; see id. 96.)Finally, the Complaint alleges that in August2007, in an email to Cook and others,Bisenius characterized loans under the EAprogram as clearly subprime. (Id. 46.)

All together, these allegations supportstrong inferences that Bisenius knew thatFreddie Mac internally classified risky loansas C1, C2, and EA, that he regarded suchloans as subprime, and thus that he knewFreddie Macs disclosures were misleadingas to the extent of Single Familys subprimeexposure. Accordingly, the Court finds that

the SEC has satisfactorily alleged thatBisenius had the requisite knowledge foraiding and abetting liability.7

2. Substantial AssistanceThe Second Circuit has recently clarified

the definition of substantial assistancerequired to prove aiding and abettingliability in SEC enforcement actions. Toshow substantial assistance, the SEC must

demonstrate that the defendant in some

7 Because the Court finds that the Complaintadequately alleges that Defendants had actualknowledge of the primary violation, it does not reachthe question of whether recklessness is sufficient tosatisfy the knowledge requirement for aiding andabetting liability.

sort associate[d] himself with the venture,that he participate[d] in it as something thathe wishe[d] to bring about, [and] that he[sought] by his action to make it succeed.SEC v. Apuzzo, 689 F.3d 204, 206 (2d Cir.

2012) (alterations in original) (quotingUnited States v. Peoni, 100 F.2d 401, 402(2d Cir. 1938)) (alterations in original). Inother words, the defendant mustconsciously assist[] the commission of thespecific [violation] in some active way.Mudd, 885 F. Supp. 2d at 670-71 (quotingApuzzo, 689 F.3d at 212 n.8).

As noted above, the SEC alleges thatDefendants substantially assisted FreddieMacs primary violation by certifying orsub-certifying the companys misleadingdisclosures. Defendants acknowledge thatSyrons certification was legally requiredand that Cook and Biseniuss sub-certifications, though not legally mandated,were required by Freddie Macs internalpolicy. (Defs. Mem. 20.) Thecertifications and sub-certifications thusappear to meet the standard of substantialassistance, for by providing their approval todisclosures, Defendants enabled FreddieMac to disseminate the misleadingdisclosures to investors.

Defendants, however, argue that even ifthe disclosures were misleading, merelycertifying and sub-certifying them does notrise to the level of substantial assistance.(Defs. Mem. 57-58; Oral Argument Tr.,54:11-56:13, Aug. 20, 2012.) Thatargument is unavailing. With respect toSyrons certification, several courts in this

circuit have found similar conduct sufficientto establish substantial assistance. See, e.g.,SEC v. Stanard, No. 06 Civ. 7736 (GEL),2009 WL 196023, at *26, *30-32 (S.D.N.Y.Jan. 27, 2009); see also SEC v. SpongetechDelivery Sys., Inc., No. 10 Civ. 2031 (DLI),2011 WL 887940, at *10 (E.D.N.Y. Mar.14, 2011) (holding that the SEC had



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demonstrated a substantial likelihood thatthe defendant aided and abetted violations ofthe Exchange Act by making falsestatements in public disclosures and signingfalse SEC filings). None of the cases

Defendants cite establishes the contraryproposition that such conduct is insufficient.Indeed, such a proposition would be strangein light of the fact that knowingly providingfalse certifications of corporate financialdisclosures can carry stiffcriminal penalties,including the possibility of up to ten yearsimprisonment. See 18 U.S.C. 1350(c)(1).If knowingly providing a false certificationsuffices to establish serious criminalconduct, then a fortiori it should be

sufficient in a civil context to establishsubstantial assistance to a violation of thesecurities laws. Cf. Howard v. Everex Sys.,Inc., 228 F.3d 1057, 1061-62 (9th Cir. 2000)([W]hen a corporate officer signs adocument on behalf of the corporation, thatsignature will be rendered meaninglessunless the officer believes that thestatements in the document are true. . . .Key corporate officers should not beallowed to make important false financialstatements knowingly or recklessly, yet stillshield themselves from liability to investorssimply by failing to be involved in thepreparation of those statements.).

With respect to Cook and Biseniusssub-certifications, Defendants argue thatbecause they were not legally required, thesub-certifications constitute mere reviewand approval and thus fall short of thesubstantial assistance threshold. (Defs.Mem. 61-64.) That argument, however, isbased on the pre-Apuzzo requirement thatthe aider and abettors substantial assistancehave proximately caused the primaryviolation.8

8 The Second Circuit decided Apuzzo on August 8,2012, after Defendants motion was fully briefed butbefore the Court held oral argument.

See SEC v. Treadway, 430 F.

Supp. 2d 293, 339 (S.D.N.Y. 2006) (Theaider and abettors substantial assistancemust be a proximate cause of the primaryviolation. Thus, mere awareness andapproval of the primary violation is

insufficient to make out a claim forsubstantial assistance. (citation omitted)).Apuzzo, however, unambiguously rejectedthe requirement of proximate causation inSEC enforcement actions. See Apuzzo, 689F.3d at 213 (We now clarify that, inenforcement actions brought under 15U.S.C. 78t(e), the SEC is not required toplead or prove that an aider and abettorproximately caused the primary securitieslaw violation.). Moreover, evenTreadway

appears to have understood mere awarenessand approval to be limited to inaction. SeeTreadway, 430 F. Supp. 2d at 339; see alsoSEC v. Tecumseh Holdings Corp., No. 03Civ. 5490 (SAS), 2009 WL 4975263, at *5(S.D.N.Y. Dec. 22, 2009) (discussing mereawareness and approval in the context ofthe SECs allegation that a defendantsfailure to act constituted substantialassistance). The Complaint, however, doesnot allege that Cook and Bisenius simplystood by and allowed a violation to happen.Rather, by alleging that Cook and Biseniussigned sub-certifications for disclosures theyknew to be misleading, the Complaintalleges a concrete, affirmative step by whichDefendants associated themselves with theprimary violation and acted to bring it about.See Mudd, 885 F. Supp. 2d at 671 (findingthat signing sub-certifications of financialdisclosures constitutes substantialassistance). Thus, under Apuzzo, the SEChas sufficiently pled that Defendants Cookand Bisenius gave substantial assistance toFreddie Macs primary violations.

* * *

Because the Court finds that theComplaint adequately alleges that Biseniushad the requisite knowledge and that



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Defendants all rendered substantialassistance to Freddie Macs misleadingdisclosures, the Court holds that theComplaint states claims for aiding andabetting violations of federal sec

opinin denying motion to dismiss

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