Thanks to a two-year-old corporate responsibility law, regulators and directors have powerful new tools at their disposal if their investigations uncover misconduct at Fannie Mae.
Congress passed the Sarbanes-Oxley Act of 2002 after top executives at scandal-ridden companies, including Enron Corp. and WorldCom Inc., said they were unfamiliar with the details of company accounting practices that resulted in devastating losses by investors.
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The law requires chief executives and financial officers to certify the accuracy of corporate financial statements.
Officials who "willfully" sign off on faulty financial reports knowing they are incorrect could be sentenced to 20 years in prison and fined $5 million.
Another provision of the law allows corporate boards of directors to seize the bonuses and stock profits of chief executives and finance chiefs whose companies restate financial results because of "misconduct."
If Justice Department and Securities and Exchange Commission investigations turn up evidence against chief executive Franklin D. Raines or Chief Financial Officer J. Timothy Howard, they could be subject to both measures, legal experts said.
Raines received a $4.2 million bonus and stock options valued at $3 million in 2003.
Howard received a $1.2 million bonus and options worth $2.35 million that year, according to SEC filings.
Last week the SEC's top accountant directed Fannie Mae to restate its financial statements from 2001 to 2004, which could erase 38 percent of the company's reported profit during that time.
A federal judge in Birmingham recently upheld the constitutionality of the executive certifications, rejecting an argument by HealthSouth Corp. founder Richard M. Scrushy that the law was so vaguely worded, it failed to put defendants on notice about how they might break the law.
Scrushy is scheduled to go on trial next month on securities fraud and other charges.
Legal experts said the bonus forfeiture language in the Sarbanes-Oxley Act raises questions about the definition of "misconduct" and whether it would make top executives responsible for the actions of subordinates.
-- Carrie Johnson