Freddie Mac Agrees to $125 Million Settlement

Mortgage-finance giant Freddie Mac has agreed to pay a $125 million civil fine to settle a federal regulatory inquiry into the company's misreporting of earnings by $5 billion from 2000 to 2002, a regulatory agency said this morning.

The company's board "was complacent and failed to exercise adequate oversight," the Office of Federal Housing Enterprise Oversight (OFHEO) said in statement today accompanying a 185-page report on the results of its probe of the company.

Freddie Mac said in a news release posted on its Web site that it "strongly disagrees" with some of the inquiry's findings. Under the settlement, the McLean-based company neither admitted nor denied wrongdoing.

Freddie Mac "disregarded accounting rules, internal controls, disclosure standards, and ultimately, the public trust in the pursuit of steady earnings growth," OFHEO said.

The company's former managers "exhibited disdain for appropriate disclosure standards," the agency said, adding that the compensation incentives of senior executives contributed to the improper accounting.

The agency recommended a variety of changes at the company, including separating the jobs of chairman and chief executive. Sources say that OFHEO and Freddie Mac have agreed that Richard F. Syron, the company's newly appointed chief executive and chairman, will become executive chairman in three years, at which time Freddie Mac will hire a separate chief executive to serve under him.

"This settlement and the resulting reforms represent an important step toward the goal of restoring the full confidence of our investors and the public," Freddie Mac's current chairman, retired Price Waterhouse head Shaun F. O'Malley, said in the company's statement.

After revelations of accounting irregularities, Freddie Mac had already promised to make its operations more transparent.

The OFHEO report said Freddie Mac's board was informed of management's effort to shift income into future periods "but did not recognize red flags . . . or otherwise failed in its duty to follow up on matters brought to its attention."

The report also said Freddie Mac engineered transactions with little or no economic substance to obtain desired accounting results. Those efforts included "an essentially fictional" $30 billion asset transfer.