Fannie Mae Avoids Criminal Charges Over Accounting
Friday, August 25, 2006
The Justice Department has told Fannie Mae that it does not plan to seek criminal charges against the company, an important step for the District-based mortgage funding giant as it tries to move beyond a multibillion-dollar accounting scandal.
Fannie Mae announced yesterday -- and a Justice Department spokesman confirmed -- that the nearly two-year-old criminal investigation of the company had ended. Coupled with settlements reached this year with two regulatory agencies, the decision clears Fannie Mae of prosecution for years of accounting mistakes that are costing hundreds of millions of dollars to correct.
The company still faces shareholder litigation over the value lost when the accounting problems were revealed and the stock price plunged.
And former Fannie Mae executives remain under scrutiny.
The Justice Department is still investigating whether former Fannie chairman and chief executive Franklin D. Raines and former chief financial officer J. Timothy Howard committed perjury when they testified about the company's accounting practices before a House of Representatives panel in 2004, said Channing Phillips, a spokesman for the U.S. attorney for the District of Columbia.
In addition, the Securities and Exchange Commission has not ruled out civil charges against individuals in the accounting matter, according to an SEC source, who spoke on condition of anonymity because it is SEC policy not to comment on pending investigations.
Another regulatory agency, the Office of Federal Housing Enterprise Oversight, said yesterday that it was reviewing potential administrative actions against former Fannie Mae executives. The agency could seek to recoup compensation that Fannie insiders received when the company's earnings were overstated, said a spokeswoman for the office, Stefanie Mullin.
Fannie Mae, which was chartered by the government to provide a steady flow of funds for home mortgages, has acknowledged overstating past profit by billions of dollars. Regulators have accused it of manipulating earnings from 1998 through 2004 to maximize executive bonuses and to deliver the smooth earnings growth that Wall Street favors. Since the problems became public in the fall of 2004, they have toppled Raines, Howard and others.
In a May enforcement action, the SEC accused Fannie Mae of fraud. Without admitting or denying wrongdoing, the company agreed to a $400 million penalty.
It was unclear whether the Justice Department's decision not to prosecute the company was based on lack of evidence or a sense that charging the company would be contrary to the public interest.
Proving criminal guilt beyond a reasonable doubt requires more than proving civil liability or negotiating a settlement.
Since the government's prosecution of Enron Corp. auditor Arthur Andersen LLP sealed the venerable accounting firm's demise -- a 2002 conviction was later overturned -- the question of whether to seek criminal charges against a corporation has been one of the more controversial ones in white-collar law enforcement.