The SEC charged six former executives of Fannie Mae and Freddie Mac with securities fraud Friday, saying they misled the public about the companies’ exposure to subprime loans during the mortgage meltdown.
The executives charged in the civil suits include Daniel H. Mudd, former chief executive of Fannie Mae, and Richard F. Syron, who was chairman and chief executive at Freddie Mac.
SEC charges former executives
The executives are among the most prominent individuals the Securities and Exchange Commission has accused of wrongdoing related to the financial crisis, and the legal action comes at a time when the SEC and the Justice Department are facing criticism for not doing more to hold executives accountable.
The SEC accused the companies of understating their vulnerability to the housing downturn by concealing the amount of risky mortgages on their books, robbing investors of the chance to make informed decisions about whether to stake their money on the firms.
In 2007, when Fannie Mae began reporting its exposure to subprime loans, or loans “made to borrowers with weaker credit histories,” it disclosed less than one-tenth of the total volume that met that description, the government said.
Fannie Mae and Freddie Mac, which came to symbolize the housing bubble and its painful aftermath, were taken over by the federal government in September 2008 and have received billions of taxpayer dollars to keep operating.
None of the six defendants agreed to settle with the SEC, and attorneys for some of them issued statements Friday vowing to fight the charges.
The SEC said it was not prosecuting the companies themselves, because they are essentially wards of the government. Both firms entered agreements accepting responsibility for their conduct and promising to help the SEC sue the former executives, the agency said.
The repercussions from the case, which was three years in the making, reach beyond the six former executives. The charges cast a harsh new light on the role of the government-chartered companies — which provide funding for mortgage lenders and play a central role in housing finance — as extensions of federal housing policy. The case also reflects poorly on a federal regulatory agency dedicated to overseeing the companies. Then known as the Office of Federal Housing Enterprise Oversight, it was responsible for reviewing the companies’ financial disclosures.
A spokeswoman for the agency, now called the Federal Housing Finance Agency, declined to comment.
The SEC said it is trying to force the former executives to pay fines and give up “ill-gotten gains,” and to bar them from serving as officers or directors of public companies. The SEC, which polices Wall Street and corporate financial disclosures, does not have the authority to pursue criminal charges or prison sentences.
At a time when anxious investors were focusing on the hazards of subprime loans, Fannie and Freddie made public statements and filed regulatory disclosures sharply understating the extent to which they owned or guaranteed those mortgages, the SEC said.
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