Freddie Mac to pay $50 million

0 Comments | Deseret News (Salt Lake City), Sep 28, 2007 | by Marcy Gordon Associated Press

WASHINGTON -- Mortgage finance company Freddie Mac on Thursday agreed to pay $50 million to settle Securities and Exchange Commission charges that it fraudulently misstated earnings over a four-year period.

Four former Freddie Mac executives settled negligent conduct charges by agreeing to pay a total of $515,000 in civil fines and to make restitution totaling $275,548. They are former president and chief operating officer David Glenn, ex-chief financial officer Vaughn Clarke, and former senior vice presidents Robert Dean and Nazir Dossani.

"We take these charges seriously, and that's why the Freddie Mac of today is a very different company than the Freddie Mac of the past," said Richard Syron, Freddie Mac's chairman and chief executive officer.

Freddie Mac neither admitted nor denied wrongdoing in the accord but agreed to refrain from future violations of the securities laws.

An accounting scandal erupted at the government-sponsored company in June 2003 when it disclosed that it had misstated earnings by some $5 billion -- mostly underreported -- for 2000-2002 to smooth quarterly volatility in earnings and meet Wall Street expectations.

The company's top executives -- Glenn, Clarke and then-chairman and chief executive Leland Brendsel -- were ousted. The events shocked Wall Street, where Freddie Mac, the nation's second-largest buyer and guarantor of home mortgages, long had enjoyed a reputation as a steady performer and reliable corporate player.

Freddie, based in McLean, Va., paid a then-record $125 million civil fine in 2003 in a settlement with the Office of Federal Housing Enterprise Oversight, which blamed management misconduct for the faulty accounting.

In September 2004, an equally stunning accounting scandal came to light at No. 1 mortgage finance company Fannie Mae. Regulators eventually imposed limits on the two companies' multibillion-dollar mortgage debt holdings, which they have been seeking to have lifted as a way to provide cash to the mortgage market in the recent turmoil.

Fannie Mae was fined $400 million in May 2006 in a settlement with OFHEO and the SEC -- one of the largest civil penalties ever in an accounting fraud case.

Fannie and Freddie were created by Congress to make mortgages affordable and pump cash into the market by buying blocks of home loans from lenders and bundling them into securities for sale to investors worldwide.

In a lawsuit filed in federal court in Washington, the SEC said Freddie Mac "engaged in a fraudulent scheme that deceived investors about its true performance, profitability and growth trends."

"As has been seen in so many cases, Freddie Mac's departure from proper accounting practices was the result of a corporate culture that sought stable earnings growth at any cost," SEC Enforcement Director Linda Thomsen said in a statement. "Investors do not benefit when good corporate governance takes a back seat to a single- minded drive to achieve earnings targets."

The SEC said that the $50 million Freddie Mac agreed to pay will be distributed to shareholders injured by the alleged accounting fraud. The settlement with the company is subject to court approval.

In a separate action Thursday, OFHEO issued a consent order against Clarke, under which he agreed to cooperate with the agency in its proceedings against other former Freddie Mac executives. Clarke also agreed to pay a $125,000 civil fine -- which OFHEO deemed to have been satisfied by his payment of the same amount under the SEC accord -- and to forego any bonuses owed him by Freddie Mac.

OFHEO previously fined Glenn $125,000 and is pursuing action against Brendsel.

Clarke agreed to pay $29,227 in restitution under the settlement with the SEC. Glenn is paying a $250,000 civil fine and $150,000 in restitution, Dean is paying a $65,000 fine and $34,658 in restitution, and Dossani is paying a $75,000 fine and $61,663 in restitution.