Mortgage Daily

Published On: September 13, 2005
Freddie May Help Gov go after Former ExecsGSE settles with OFHEO over accounting

September 13, 2005


A settlement between Freddie Mac and its regulator over bad accounting includes an agreement that the secondary lender will assist the government in the investigation of two former senior executives.

The Office of Federal Housing Enterprise Oversight announced Monday the agreement with Freddie to settle the action it brought against the secondary lender in late 2003, which involved former employees allegedly engaging in improper accounting practices and failing to maintain proper internal controls.

“This settlement with the company is a significant step forward and allows us to focus our resources on the cases against former officers,” said OFHEO Acting Director Stephen Blumenthal in a written statement.

The settlement follows a related action in which the enterprise paid a civil money penalty of $125 million in connection with the alleged inadequate practices that led to a $5 billion misstatement of mostly underreported earnings in the early years of the new millennium, in addition to investigations by the Justice Department and the Securities and Exchange Commission.

Freddie’s accounting woes broke out in 2003 when the company announced it would restate earnings for years 2000 through 2002, fired its then president David Glenn and saw the voluntary exits of CFO Vaughn Clarke and CEO Leland Brendsel.

The McLean, Va.-based company, without admitting or denying any wrongdoing, agreed to the stipulated consent order reportedly “to avoid the expense and distraction of further litigation with OFHEO,” according to the order.

As part of the stipulated consent order, Freddie agreed to assist OFHEO in its ongoing administrative actions against Brendsel and Clarke and to seek recovery of severance benefits and stock awards it gave to the two.

The government-sponsored enterprise agreed to convert the June 2003 termination of Brendsel to a termination “for cause” and Clarke’s to a termination “for loss of confidence” and to halt any payments that exceeds those which would be made to the former officers if they had exited under those conditions.

Amongst the additional steps Freddie has agreed to are providing OFHEO with names and information of all present and former employees or individuals who or may have information relevant to the alleged improper accounting and governance practices, as well as facilitating interviews for OFHEO with the individuals, and providing copies of all documents that have been produced to the plaintiffs in the civil securities litigation pending against Freddie.

Coco Salazar is an assistant editor and staff writer for [email protected]

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