Former Fannie Mae (FNMA) Chief Executive Officer Daniel Mudd must face a lawsuit in which the U.S. Securities and Exchange Commission accuses him of misleading investors about the company’s exposure to risky loans.

U.S. District Judge Paul Crotty in New York today rejected a request to dismiss the case by Mudd and Enrico Dallavecchia and Thomas Lund, two other ex-Fannie Mae executives.

The SEC alleged in its lawsuit that Fannie Mae, the biggest backer of U.S. home loans, underrepresented its exposure to subprime and so-called Alt-A mortgages, which require little or no documentation from borrowers. The executives played a role in the misrepresentations from December 2006 through Aug. 8, 2008, the SEC said.

“The SEC has plausibly alleged that Mudd, Dallavecchia and Lund consciously assisted the venture to misstate FNMA’s subprime and Alt-A exposure in an active way,” Crotty wrote.

James Wareham, a lawyer for Mudd, said in an e-mail that “nearly all” of the SEC’s allegations in the case are false, and the evidence will demonstrate that Fannie Mae’s executives acted in good faith and its disclosures were adequate.

“This is a shameful case,” he said. “The defense will prevail.”

Michael Levy, a lawyer for Lund, and Andrew Levander, a lawyer for Dallavecchia, didn’t immediately return messages seeking comment.

Fannie Mae, which helps provide funding for mortgages by purchasing loans from lenders and packaging them into securities, allegedly failed to include as much as $441 billion in risky loans in its exposure calculations, according to judge’s order.

The case is SEC v. Mudd, 11-cv-09202, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Christie Smythe in New York at csmythe1@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.