Freddie Settles with SEC for $50 Million

Between 1998 and 2002, the Federal Home Loan Mortgage Corp. deceived investors about performance, profitability and growth trends, the Securities and Exchange Commission announced today.

“Steady Freddie,” as the securities regulator said the company was known in the marketplace, allegedly nullified the effects from SFAS 133 — related to derivatives and hedging activities, manipulated the value of its “swaptions” portfolio at year-end 2000, and improperly used derivatives to shift earnings between periods. It was also accused of misapplying SFAS 91 reserves in relation to loan origination costs, improperly nullifying the effects from an accounting pronouncement known as Emerging Issues Task Force Issue 99-20, and keeping more reserves on its books than was needed.

“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 Director of Enforcement Linda Chatman Thomsen said in today’s statement. “Investors do not benefit when good corporate governance takes a back seat to a single-minded drive to achieve earnings targets.”

Freddie, which announced the settlement is still subject to court approval, agreed to the settlement with the top securities regulator without admitting or denying the allegations. The proceeds are earmarked for injured investors through a Fair Fund.

“Freddie Mac of today is a very different company than the Freddie Mac of the past,” Richard F. Syron, chairman and chief executive officer of the McLean, Va.-based secondary lender, said in Freddie’s statement. “We take these charges seriously.”

Individuals who settled with the SEC without admitting or denying the allegations included former president and chief operating officer David W. Glenn, who paid $400,000 for a civil penalty and returned compensation; former chief financial officer Vaughn A. Clarke, who paid $154,227; and former senior vice presidents Robert C. Dean and Nazir G. Dossani, who collectively paid $236,321.

An enforcement action against former CEO Leland Brendsel by the company’s regulator, the Office of Federal Housing Enterprise Oversight, is still active before an Administrative Law Judge, according to another press release. OFHEO noted it already entered into consent agreements with Freddie in 2003 and 2005 that included a $125 million civil penalty.

“Senior management exerted consistent pressure to have the company report smooth and dependable earnings growth in order to present investors with the image of a company that would continue to generate predictable and growing earnings,” the release stated.

Syron said the settlement resolves the final investigation related to the company’s restatement.

Treasury Secretary Henry Paulson last week testified in Washington, D.C., that Freddie’s and Fannie Mae’s requests for an increase to their investment portfolio caps are bad from a public policy perspective — echoing prior administration statements that it would be irresponsible to expand the GSEs without addressing problems in their regulatory structure. He told the House Financial Services Committee that the limits could be lifted when the companies bring their SEC filings current.