Fannie Mae, accused by regulators of manipulating earnings, said yesterday that the Justice Department has asked it to preserve records relating to its accounting practices as part of a criminal investigation.
In addition, the giant mortgage funding company said investors have filed or are preparing eight lawsuits against the company, chairman and chief executive Franklin D. Raines, and chief financial officer J. Timothy Howard. The suits generally allege that Fannie's accounting violated federal securities laws, the company said in a regulatory filing. Another suit filed against members of Fannie's board of directors alleges a "breach of fiduciary duties," Fannie said.
Both Sides Critical At Fannie Hearing (The Washington Post, Oct 7, 2004)
On Fannie's Board, Many Bonds (The Washington Post, Oct 6, 2004)
Fannie Executives to Defend Accounting Practices (The Washington Post, Oct 6, 2004)
Restatement Decision Deferred (The Washington Post, Sep 30, 2004)
As Fannie, Freddie Regroup, Impact May Be Minimal (The Washington Post, Sep 29, 2004)
Regulator Says Fannie Resisted (The Washington Post, Sep 25, 2004)
Regulator Has No Confidence in Fannie Leadership (The Washington Post, Sep 24, 2004)
Fannie Employee Raised Concerns (The Washington Post, Sep 24, 2004)
Report Slams Fannie Mae (The Washington Post, Sep 23, 2004)
Warnings Shadowed Firms' Rapid Growth (The Washington Post, Sep 23, 2004)
Probe Examining Fannie's Promises (The Washington Post, Sep 23, 2004)
The private suits and criminal investigation were prompted by a report last month by the Office of Federal Housing Enterprise Oversight that alleged that Fannie "made discretionary adjustments to the financial statements, for the sole purpose of minimizing volatility and achieving desired financial results." The Securities and Exchange Commission is also examining the company's accounting practices.
The report Fannie Mae filed with the SEC yesterday said the U.S. attorney's office for the District of Columbia asked the company on Friday "to preserve certain documents, including documents relating to the matters discussed in the OFHEO report."
"Since OFHEO first announced its intention to conduct a special examination, Fannie Mae has been proactive and comprehensive in preserving records related to the subject matter of that examination, and we will adopt the same fully responsible approach in connection with any other inquiry," Fannie Mae spokesman Charles Greener said yesterday.
In testimony last week at a House hearing, OFHEO director Armando Falcon Jr. said Fannie deliberately flouted accounting rules. Perhaps the most serious allegation in his agency's report is that Fannie delayed booking $200 million of expenses in 1998, thereby enabling Raines and other top executives to receive millions of dollars of bonuses.
At the same hearing, Raines said he knew of no evidence that the federally chartered company's 1998 accounting was influenced by executive compensation considerations. Raines said the report involves interpretations of complex accounting rules.
Raines stressed at the hearing that the SEC, not OFHEO, will be the final judge of Fannie Mae's accounting. The SEC "has been enormously cooperative with us" when Fannie Mae began filing reports with the agency in recent years, he added.
"They have also worked with us on sticky accounting issues," Raines said. "And we, like other companies, have presented accounting issues to them and asked them for a judgment as to what the appropriate accounting is."
Raines and some members of the House panel used last week's hearing to criticize OFHEO for the way it has handled its examination of Fannie Mae.
In other developments, the Department of Housing and Urban Development's inspector general has completed an investigation of OFHEO requested by Sen. Christopher S. Bond (R-Mo.), but neither Bond nor the inspector general was releasing it yesterday.
In an April letter, Bond asked the inspector general to assess whether OFHEO acted improperly in releasing information about its examination of Fannie Mae earlier this year and whether the disclosures reflected "any inappropriate or undue political influence in the examination process." A spokeswoman for Bond said the senator had not had a chance to review the report.
HUD has scheduled a briefing for tomorrow to address whether Fannie and Freddie last year met federal goals that require them to devote a certain amount of their funding to affordable housing.