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SEC sues former Fannie Mae, Freddie Mac execs

Lawsuits allege that six former officials of the mortgage finance giants misled investors about subprime risk.

December 17, 2011|By Jim Puzzanghera and Nathaniel Popper, Los Angeles Times
  • Robert Khuzami, director of the U.S. Securities and Exchange Commission's Enforcement Division, announces that the SEC has accused six former top executives of Fannie Mae and Freddie Mac with securities fraud.
Robert Khuzami, director of the U.S. Securities and Exchange Commission's… (Win McNamee, Getty Images )

Reporting from Washington and New York — More than three years ago, the government rescued the nation's housing finance giants, Fannie Mae and Freddie Mac, from collapse in the wake of the mortgage market meltdown.

On Friday, federal officials went after the executives who led the companies to the brink. In twin lawsuits, the Securities and Exchange Commission accused six former Fannie and Freddie officials of misleading investors and the public about how much money they had sunk into risky subprime mortgages.

Taxpayers have pumped more than $150 billion into Fannie and Freddie in one of the largest bailouts, fueling widespread anger against the firms and accusations that they were the major cause of the subprime market meltdown.

"They could really have a showcase trial," said James Cox, a professor of securities law at Duke University. "The charges couldn't be more central to the financial crisis."

As financing companies, Fannie Mae and Freddie Mac help provide billions of dollars for home mortgages by buying loans made by banks, pooling them into securities and selling them to investors. When the underlying mortgages soured, so did the securities.

"Fannie Mae and Freddie Mac executives told the world that their subprime exposure was substantially smaller than it really was," said Robert Khuzami, director of the SEC's Enforcement Division.

"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," Khuzami said.

In an 18-month stretch ending in August 2008, for example, Freddie Mac told investors that the exposure of its single-family subprime loans was $2 billion to $6 billion. The SEC alleged the real exposure was $141 billion at the end of 2006, and about $244 billion by mid-2008.

The former chief executives, Daniel H. Mudd at Fannie and Richard F. Syron at Freddie, became two of the highest-ranking figures to face legal action in the wake of the financial crisis. Both were dismissed when the government put the firms into conservatorship.

The executives face financial penalties, repayment with interest of ill-gotten gains and a ban on serving as an officer or a director of a public company. Mudd is chief executive of Fortress Investment Group in New York. Syron is a director at Genzyme Corp. in Cambridge, Mass.

Lawyers for the former executives said that their clients did nothing wrong and that the SEC cases were flawed.

The securities fraud case is similar to those filed by the SEC against two key players in the subprime market — Angelo R. Mozilo, former head of Countrywide Financial Corp. in Calabasas, and Michael W. Perry, former chief executive of failed IndyMac Bancorp in Pasadena. Mozilo agreed to pay a record $22.5-million fine as part of a $73-million settlement last year. The suit against Perry is pending.

John Coffee, a law professor at Columbia University, said a settlement in the Fannie and Freddie suits would not satisfy the public desire to see financial executives pay for their misdeeds if SEC officials fail to recover a large amount. "They would be courting disaster if they settled this for a hollow recovery," Coffee said.

Friday's suits came after a lengthy investigation by the SEC, which has faced criticism for not bringing more cases stemming from the financial crisis. Fraud cases typically are difficult to investigate and take more time to develop.

The suits, filed in U.S. District Court in Manhattan, alleged that the Fannie and Freddie executives intentionally and repeatedly misled investors about the exposure of the companies to risky subprime loans.

Executives at both companies were issuing their rosy financial conditions as they tried to increase their share of the housing finance market during the run-up to the 2007-08 mortgage market meltdown, the SEC said.

"Throughout this period, as they were driving up their market share, Fannie, Freddie and their executives sought to maintain the illusion that their business involved minimal and manageable credit risk," Khuzami said.

The other Fannie Mae executives named in the suits were Enrico Dallavecchia, former chief risk officer, and Thomas A. Lund, former executive vice president of the company's single-family mortgage business. The other Freddie Mac officials were Patricia L. Cook, former executive vice president and chief business officer, and Donald J. Bisenius, former executive vice president for the single-family guarantee business.

Tom Green, a lawyer for Syron, said that Freddie Mac had made the required disclosures to investors and that "the SEC's theory and approach are fatally flawed." Lund's lawyer, Michael Levy, said his client "did not mislead anyone." Lawyers for the other executives did not respond to requests for comment.

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