Freddie Settles Investor Lawsuits
Friday, April 21, 2006
Mortgage finance giant Freddie Mac said yesterday that it has agreed to pay $410 million to settle outstanding shareholder lawsuits against the company and former officials stemming from accounting errors that forced it to restate earnings by $5 billion from 2000 to 2002.
The shareholder settlement, which must be ratified by a federal judge, means the company has cleared another hurdle in its effort to put the accounting scandal behind it. McLean-based Freddie Mac remains under investigation by the Securities and Exchange Commission. And it continues to work toward making its financial statements current so it can file them with the SEC, as other publicly traded companies do.
The Justice Department also opened an inquiry into Freddie Mac when the company announced the accounting mistakes, but sources familiar with that probe say it has not been active.
The $410 million is not as large as some other shareholder settlements in recent years. Enron Corp. shareholders won $7.2 billion, for example, much of it coming from third parties such as investment banks that aided Enron in the activities the suits alleged were fraudulent. WorldCom Inc.'s shareholders won $6.2 billion, and AOL Time Warner's won $2.5 billon, according to figures from Cornerstone Research, a securities litigation consulting firm.
The settlement follows Freddie Mac's agreement Tuesday to pay a record $3.8 million fine to the Federal Election Commission to settle civil charges that the firm and former executives broke the law by using company resources to raise $1.7 million for political fundraisers, many of them involving House Financial Services Committee Chairman Michael G. Oxley (R-Ohio).
Richard F. Syron, Freddie Mac chairman and chief executive, said in a prepared statement that the agreement, "like the settlement announced earlier this week with the Federal Election Commission, enables this management team to resolve past issues so that we can focus squarely on meeting our important housing mission, running the business well and serving the needs of our customers."
Charged by Congress with keeping money flowing to the housing market, Freddie Mac buys mortgages from banks and other lenders and, after holding onto some loans for investment purposes, pools the rest into securities for sale to investors. The shareholder suits allege that the company's previous management manipulated earnings to create the impression of regular earnings growth that gave rise to its nickname "Steady Freddie." Steady earnings helped boost the company's stock price.
Ohio Attorney General Jim Petro, who represented the lead plaintiffs in the case, the Ohio Public Employees Retirement System and State Teachers Retirement System of Ohio, also praised the agreement. "We have sent an important message to companies who receive money from investors: We will protect our citizens' savings with tenacity," he said.
The agreement announced yesterday includes Freddie Mac, some former and current board members, and several top executives who were ousted in the wake of the scandal. In addition to former chief executive Leland C. Brendsel, the executives include Gregory J. Parseghian, who replaced Brendsel briefly before being forced to resign; former president and chief operating officer David Glenn; and former chief financial officer Vaughn Clarke. As part of the settlement, the company does not admit or deny any wrongdoing.
Lawyers for Brendsel and Glenn did not return telephone calls. Lawyers for Parseghian and Clarke declined to comment.
Freddie Mac said the shareholder payout will cut its 2005 earnings by $220 million, reducing its estimated profit for the year to $2.3 billion.
The company said it has current and accurate financial statements through the end of 2004 and plans to release full-year 2005 figures in May.