Regulator Says Mudd Knew of Misdeeds

Fannie Mae chief executive Daniel H. Mudd was aware as early as the fall of 2003 of serious allegations of accounting misdeeds and failed to pass key information on to the company's board of directors, according to Fannie Mae's federal regulator.

In the first detailed account of Mudd's involvement in the management lapses at the mortgage giant, the Office of Federal Housing Enterprise Oversight also cited an instance in which Mudd asked a Treasury Department official to intervene on the company's behalf to rein in OFHEO during its examination of Fannie Mae's accounting practices.

The report was inconclusive, however, about Mudd's knowledge or participation in what OFHEO alleges was regular earnings manipulation over six years. The closest the report came was an e-mail written by another executive about a 2003 meeting Mudd attended during which earnings management appeared to be discussed, albeit obliquely. And the report said he did not adequately investigate an employee's concerns about the company's accounting.

In an interview yesterday, Mudd acknowledged that he did "miss an opportunity" to address aspects of Fannie Mae's accounting abuses in 2003, but he said he never engaged in wrongdoing.

Mudd said he never attended "any meeting where there was any discussion of shifting or falsifying income."

Mudd had been Fannie Mae's chief operating officer since 2000. The company's board selected him to replace Franklin D. Raines as chief executive shortly Raines was forced to leave the company after its accounting problems came to light in 2004.

The revelations disclosed in the new report prompted one former regulator to question whether Mudd was the right person to lead the company.

"I was disappointed to see the extent of his involvement," said Armando Falcon Jr., who as former director of OFHEO initiated the Fannie Mae investigation and approved Mudd's promotion to chief executive last June. Falcon left the agency a year ago and is now a consultant. "If I knew then what I know now from reading this report, I would have advised them to select someone from outside the company."

Among the revelations regarding Mudd is an account of his response to allegations of a Fannie Mae employee Michelle Skinner, who sent a memo to Mudd in September 2003 detailing instances in which Fannie Mae's accounting mimicked improper accounting that had then been disclosed by Fannie Mae competitor Freddie Mac.

OFHEO found that Mudd initiated a "flawed" investigation of the employee's concerns. The results of the investigation, in which the employee's allegations were validated by internal auditors, were not shared with Fannie Mae's audit committee.

"Mr. Mudd missed an opportunity to recognize that perhaps there were similarities between Freddie Mac and Fannie Mae," OFHEO concluded.

"Knowing what I know now, did I miss an opportunity? I think that's fair," Mudd said. "I thought at the time that was a fairly reasonable way to handle it."