SEC Charges Six Former GSE Execs with Securities Fraud

Sixrnformer top executives of Fannie Mae and Freddie Mac were charged with securitiesrnfraud Friday morning in connection with mortgage backed securities issued byrnthe firms.  The Securities and ExchangernCommission filed separate suits against each of the government sponsoredrnenterprises (GSEs) in the U.S.rnDistrict Court for the Southern District of New York while at the same timernrevealing non-prosecution agreements with Fannie Mae and Freddie Mac in returnrnfor the cooperation of the GSEs in the upcoming litigation.</p

Named in the Fannie Mae suit were formerrnFannie Mae Chief Executive Officer Daniel H.rnMudd, its former Chief Risk Officer Enrico Dallavecchia, and the formerrnExecutive Vice President of Fannie Mae’s Single Family Mortgage business, ThomasrnA. Lund.  The three former Freddie Mac executives are Chairman of the Board and CEO Richard F. Syron, Executive VicernPresident and Chief Business Officer Patricia L. Cook, and former ExecutivernVice President for the Single Family Guarantee business Donald J. Bisenius.   Thernirony of the suits is that most if not all of the executives were hired by therncompanies to clean house following accounting scandals that cost theirrnpredecessors their jobs. </p

The lawsuits allege that the formerrnexecutives caused their respective companies to materially misstate theirrnholdings of risky loans, including subprime loans, in periodic and otherrnfilings with the SEC and in public statements, investor calls, and mediarninterviews.  The Fannie Mae suit containsrnsimilar allegations about Alt-A mortgage loans. rnThe time period covered by the Fannie Mae suit is December 2006 tornAugust 2008 and the Freddie Mac suit covers the period between March 2007 andrnAugust 2008.  </p

According to the complaint againstrnFannie Mae’s executives, Fannie Mae reported its exposure to subprime loans inrn2007 but described the loans as those “made to borrowers with weaker creditrnhistories” and claimed that less than one-tenth of its loans met thatrndescription.  This, the suit alleges, wasrndone with the “knowledge, support, and approval” of the three executives.  At the end of 2006 the company reported itsrnexposure to subprime loans was 0.2 percent of its single family portfolio orrnapproximately a $4.8 billion share. rnInvestors were not told, according to the SEC, that Fannie Mae did notrninclude in this calculation loan products specifically targeted towardrnborrowers with weaker credit histories including more than $43 billion ofrnExpanded Approval loans.</p

Similar claims were allegedly madernby Fannie Mae officers about the company’s exposure to Alt-A loans which wasrndisclosed on March 31, 2007 as 11 percent of its portfolio.  In reality at that juncture the exposure wasrnapproximately 18 percent of all single family loan holdings.  </p

The suit against the former FreddiernMac executive alleges that they and the company used a narrow definition ofrnsubprime loans when they publicly proclaimed that the company had basically nornsubprime exposure when the single family part of the business was, at the endrnof 2006, actually exposed to $141 billion of loans which the company referredrnto internally as subprime or subprime-like which was 10 percent of thernportfolio at that time.  This eventuallyrngrew to $244 billion or 14 percent of the portfolio.  </p

“Fannie Mae and Freddie Macrnexecutives told the world that their subprime exposure was substantiallyrnsmaller than it really was,” said Robert Khuzami, Director of the SEC’srnEnforcement Division. “These material misstatements occurred during a timernof acute investor interest in financial institutions’ exposure to subprimernloans, and misled the market about the amount of risk on the company’s books.rnAll individuals, regardless of their rank or position, will be held accountablernfor perpetuating half-truths or misrepresentations about matters materiallyrnimportant to the interest of our country’s investors.”</p

Under the Non-Prosecution Agreementsrnentered into by Fannie Mae and Freddie Mac each company agreed to acceptrnresponsibility for its conduct and not dispute a Statement of Facts but did notrnhave to admit or deny liability.  EachrnGSE also agreed to cooperate with SEC’s investigation against the company’srnformer executives. SEC said it entered into the Agreements in light of therncompanies’ current status and considering that any damages the court leviedrnagainst the companies would be paid by taxpayer funds.</p

The SEC is seeking financialrnpenalties, disgorgement of ill-gotten gains with interest, permanent injunctivernrelief and officer and director bars against Mudd, Dallavecchia, Lund, Syron,rnCook, and Bisenius. </prn<prnrnrnrnrnrnrnrnrnrnrn

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