Ex-Fannie Mae, Freddie Mac Execs Charged with Securities Fraud
The Securities and Exchange Commission has charged six former top executives of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) with securities fraud, alleging they knew and approved of misleading statements claiming the companies had minimal holdings of higher-risk mortgage loans, including subprime loans.
The SEC’s investigation of Freddie Mac was conducted by Senior Attorneys Giles T. Cohen and David S. Karp and Assistant Chief Accountant Avron Elbaum of the SEC’s Division of Enforcement under the supervision of Assistant Director Charles E. Cain and Associate Director Stephen L. Cohen.
Fannie Mae and Freddie Mac each entered into a Non-Prosecution Agreement with the SEC in which each company agreed to accept responsibility for its conduct and not dispute, contest, or contradict the contents of an agreed-upon Statement of Facts without admitting nor denying liability. Each also agreed to cooperate with the SEC’s litigation against the former executives, which will be led by Kevin O’Rourke and Suzanne Romajas.
Three former Fannie Mae executives — former Chief Executive Officer Daniel H. Mudd, former Chief Risk Officer Enrico Dallavecchia, and former Executive Vice President of Fannie Mae’s Single Family Mortgage business, Thomas A. Lund — were named in the SEC’s complaint filed in U.S. District Court for the Southern District of New York.
The SEC also charged three former Freddie Mac executives — former Chairman of the Board and CEO Richard F. Syron, former Executive Vice President and Chief Business Officer Patricia L. Cook, and former Executive Vice President for the Single Family Guarantee business Donald J. Bisenius — in a separate complaint filed in the same court.
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. The suit against the former Fannie Mae executives alleges they made misleading statements — or aided and abetted others — 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.
The SEC’s complaint against the former Fannie Mae executives alleges that, when Fannie Mae began reporting its exposure to subprime loans in 2007, it broadly described the 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 one-tenth of its loans that met that description.
Fannie Mae reported that its 2006 year-end Single Family exposure to subprime loans was just 0.2 percent, or approximately $4.8 billion, of its Single Family loan portfolio. Investors were not told that in calculating the Company’s reported exposure to subprime loans, Fannie Mae did not include loan products specifically targeted by Fannie Mae towards borrowers with weaker credit histories, including more than $43 billion of Expanded Approval, or “EA” loans.
Fannie Mae’s executives also knew and approved of the decision to underreport Fannie Mae’s Alt-A loan exposure, the SEC alleged. Fannie Mae disclosed that its March 31, 2007 exposure to Alt-A loans was 11 percent of its portfolio of Single Family loans. In reality, Fannie Mae’s Alt-A exposure at that time was approximately 18 percent of its Single Family loan holdings.
The misleading disclosures were made as Fannie Mae’s executives were seeking to increase the Company’s market share through increased purchases of subprime and Alt-A loans, and gave false comfort to investors about the extent of Fannie Mae’s exposure to high-risk loans, the SEC alleged.
In the complaint against the former Freddie Mac executives, the SEC alleged that they and Freddie Mac led investors to believe that the firm used a broad definition of subprime loans and was disclosing all of its Single-Family subprime loan exposure.
Syron and Cook reinforced the misleading perception when they each publicly proclaimed that the Single Family business had “basically no subprime exposure.”
Unbeknown to investors, as of December 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 percent of the portfolio, and grew to approximately $244 billion, or 14 percent of the portfolio, as of June 30, 2008.
The SEC is seeking 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.