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Fannie Mae Bans Workers From Trading In Its Stock

By Carrie Johnson and Terence O'Hara
Washington Post Staff Writers
Thursday, May 5, 2005

Fannie Mae has barred its 5,000 employees from buying or selling company stock for the foreseeable future, as the mortgage finance giant moves ahead with a multibillion-dollar restatement and deals with federal investigations into its accounting practices.

Company officials announced the trading blackout in an e-mail sent to employees Friday evening. Spokesman Charles V. Greener confirmed the authenticity of the message and said Fannie took the step because it "felt it was the prudent course of action." He declined to comment further.

Fannie Mae told workers that the move is designed to protect them from inadvertently violating securities laws triggered when insiders trade while they are aware of material information that is not widely available in the market.

The District-based company cited its "inability to make public filings with the Securities and Exchange Commission, the increasing number of employees supporting our restatement effort, and the continuing progress of internal and external reviews and investigations" as a rationale for the ban, according to the e-mail.

A small group of Fannie executives with access to sensitive financial information had been subject to a trading blackout since September, when regulators at the Office of Federal Housing Enterprise Oversight released a report criticizing the company's accounting policies and weak internal controls. The SEC and the U.S. attorney in the District are conducting related probes.

The new policy extends the ban to employees at all levels of the company. Fannie officials did not say how long the blackout would last and have not given a timetable for the restatement. For some workers, they said, the ban could be lengthy, lifting only when the company has filed financial statements with the SEC. Other employees could be released from the restrictions as more information about the scope of the restatement becomes public.

Spokesmen for the SEC and OFHEO declined to comment yesterday. But Georgetown University law professor Donald C. Langevoort said such restrictions are not unusual, particularly when sensitive information begins to spread throughout a company.

For instance, Fannie Mae's McLean-based rival, Freddie Mac, did not allow employees to trade company stock after it announced in January 2003 that it could not file audited financial statements and anticipated an earnings restatement, a Freddie spokeswoman said. The company briefly lifted the trading ban late that year for selected employees who were not involved in the restatement process.

It is possible, Langevoort said, that employees will gain access to data "that has to do with the substance of the restatement . . . such as how good or bad it is going to be, things employees can pick up by what's going on in the halls."

"That's what they're trying to control," Langevoort said.

The e-mail also instructed recipients to "cancel any outstanding instructions you have given your broker to purchase or sell shares in the future."

Employees are also restricted on how they can exercise stock options during the blackout, the e-mail said. Usually, employees are able to cash in the value of a stock option in a "cashless exercise" in which the option holder both buys and sells the stock in one transaction, pocketing the cash difference between the exercise price and the market price. But because this is essentially a trade, it is barred during the blackout.

Any in-the-money option that expires during the blackout period would have to be exercised with the employee's own cash or existing Fannie stock, and the shares acquired in the exercise could not be sold. The company may grant temporary waivers of this restriction after consulting with outside lawyers, but only for "specified, demonstrated needs," the e-mail said.

A handful of employees have contacted Fannie officials so far with hardship requests, and the company expects more to come, Greener said. Historically Fannie Mae employees have been able to take part in a stock purchase program that has helped them pay tuition and medical expenses and boost savings accounts, among other things. In the past, the company has provided stock options as compensation to mid-level managers and higher-level executives.

Staff writer Annys Shin contributed to this report.

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