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News of Criminal Probe Sends Fannie Stock Down

Shares Hit 13-Month Low on Word of Justice Inquiry

By David S. Hilzenrath and Carrie Johnson
Washington Post Staff Writers
Friday, October 1, 2004; Page E01

Fannie Mae's stock took another beating yesterday after reports that the Justice Department had opened a criminal investigation of the giant mortgage finance company's accounting.

The share price fell 4.3 percent yesterday to its lowest point since August 2003.

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Federal prosecutors in the U.S. attorney's office in the District have begun a probe into possible wrongdoing at the government-chartered financial institution after receiving the findings of an examination by financial regulators, sources familiar with the inquiry said.

The Office of Federal Housing Enterprise Oversight last week issued a report that said Fannie manipulated its earnings to make them appear more predictable. The stock, which closed at $63.40 a share yesterday, was trading at almost $80 in February and above $77 earlier this month.

Two of Fannie's top executives -- chairman and chief executive Franklin D. Raines and vice chairman and Chief Financial Officer J. Timothy Howard -- are still planning to testify at a hearing next week by the House subcommittee that oversees Fannie Mae, company spokesman Brian Faith said. In addition, director Ann McLaughlin Korologos, who heads a special committee of the board appointed to examine the regulator's findings, has agreed to testify, Faith said.

Asked if they would invoke their constitutional right not to answer questions at the hearing, Faith declined to comment.

The federal criminal investigation, which the Wall Street Journal reported yesterday, is at its earliest stages, said the sources, who spoke on condition of anonymity because of the sensitive nature of the probe.

Defense lawyers pointed out that the five-year statute of limitations has expired on an accounting move that regulators say was designed to help Fannie executives release $27 million in bonuses in 1998. But criminal authorities could get around the statute of limitations issue by alleging that there was a broad, ongoing conspiracy to manipulate Fannie's earnings and enrich company officials, legal experts said.

The Securities and Exchange Commission and lawmakers at the House Financial Services subcommittee overseeing the government-chartered company had already begun investigating Fannie. Justice Department spokesman Bryan Sierra declined to comment, as did Channing Phillips, an official in the U.S. attorney's office in the District.

"We do not have knowledge of the DOJ inquiry, so I can't comment further," Faith said.

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