SEC Charges Former Fannie Mae, Freddie Mac Execs With Fraud

Companies agree to cooperate on securities fraud charges

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The Securities and Exchange Commission announced Friday that it has charged six former executives from the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac) with securities fraud. The companies have entered into a Non-Prosecution Agreement with the SEC, and also agreed to cooperate in SEC litigation against its former executives.

In an SEC complaint filed in U.S. District Court for the Southern District of New York, Daniel H. Mudd, former Fannie Mae CEO, Enrico Dallavecchia, former Fannie Mae chief risk officer and Thomas A. Lund, former executive vice president of Fannie Mae’s Single Family Mortgage business were charged with securities fraud; the SEC alleged that they knew and approved of misleading statements claiming the companies had minimal holdings of higher-risk mortgage loans, including subprime loans.

In a separate complaint filed in the same court, Richard F. Syron, Freddie Mac’s former chairman of the board and CEO, Patricia L. Cook, former Freddie Mac executive vice president and CBO, and Donald J. Bisenius, former Freddie Mac executive vice president for the Single Family Guarantee business were also charged.

Robert Khuzami of the SECRobert Khuzami (left), director of the SEC’s Enforcement Division, said in a statement, “Fannie Mae and Freddie Mac executives told the world that their subprime exposure was substantially smaller than it really was. These material misstatements occurred during a time of acute investor interest in financial institutions’ exposure to subprime loans, and misled the market about the amount of risk on the company’s books.”

He added, “All individuals, regardless of their rank or position, will be held accountable for perpetuating half-truths or misrepresentations about matters materially important to the interest of our country’s investors.”

The SEC seeks financial penalties, disgorgement of ill-gotten gains with interest, permanent injunctive relief and officer and director bars against Mudd, Dallavecchia, Lund, Syron, Cook, and Bisenius. Both lawsuits allege that the former executives caused the federal mortgage firms to materially misstate their holdings of subprime mortgage loans in periodic and other filings with the commission, public statements, investor calls and media interviews.

The suit involving the Fannie Mae executives also includes similar allegations regarding Alt-A mortgage loans, and alleges the executives made misleading statements, or aided and abetted others to do so, between December 2006 and August 2008. The former Freddie Mac executives are alleged to have made misleading statements, or aided and abetted others, between March 2007 and August 2008.

In the complaint, the SEC says that in 2007, Fannie Mae described its subprime loans as those “made to borrowers with weaker credit

histories,” and then reported, with the knowledge, support, and approval of Mudd, Dallavecchia and Lund, less than a tenth of such loans.

Fannie Mae reported that its 2006 year-end Single Family exposure to subprime loans was just 0.2%, or approximately $4.8 billion, of its Single Family loan portfolio, while in actuality it did not include loan products specifically targeted by Fannie Mae toward borrowers with weaker credit histories, including more than $43 billion in Expanded Approval loans.

Freddie Mac similarly concealed the truth about its exposure to subprime loans. Investors were not told that, as of Dec. 31, 2006, Freddie Mac’s Single Family business was exposed to approximately $141 billion of loans internally referred to as “subprime” or “subprime like,” accounting for 10% of the portfolio, and grew to approximately $244 billion, or 14% of the portfolio, as of June 30, 2008.

At a news conference to discuss the matter, the SEC said officers repeatedly made statements such as “We didn’t do any subprime business” or that the companies had “basically no subprime business” when in actuality such loans made up a huge proportion of their business–and were made in the name of increasing market share.

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