Justice Said to Drop Criminal Investigation Of Freddie Mac

After laying dormant for two years, the Justice Department's criminal probe into accounting transgressions at Freddie Mac is apparently over, according to company officials.

"The U.S. attorney's office has not initiated contact with us in well over two years, and it is our understanding that the matter is inactive," said David R. Palombi, a spokesman for the McLean-based mortgage finance company. "Accordingly, we expect no further action in this matter."

The inactivity at the U.S. attorney's office in Alexandria also extends to investigations of several former Freddie Mac executives, including chief executive Leland C. Brendsel, president David Glenn and chief financial officer Vaughn A. Clarke. Sources familiar with the investigation, who spoke on condition of anonymity because they did not want to be seen as speaking for the department, said lawyers for the ousted officials have not been contacted by the Justice Department since 2004.

Palombi's statements appear to resolve one of the final issues that have been dogging the company since its accounting problems became public in 2003.

In 2003, Freddie Mac admitted it had improperly managed its earnings through a series of transactions that smoothed out earnings growth. The company reduced its reported earnings by $5 billion between 2000 and 2003, hoping to defer those earnings to later years.

Freddie Mac is still working to produce an up-to-date and accurate set of books. But the company has cleared itself of most of the liability from the matter in the past three years. It has paid a $125 million fine to federal regulators, more than $400 million in shareholder lawsuit settlements, and $3.8 million in civil fines to settle Federal Election Commission charges of improper political fundraising.

But the possibility of a criminal action remained. In recent weeks, the company sought clarification from the Justice Department over whether its long silence meant the case was closed -- particularly after the department issued a statement in August that it had closed its criminal investigation of similar accounting problems at Freddie Mac rival Fannie Mae.

"It is Freddie Mac's understanding that it is the practice of the U.S. attorney's office for the Eastern District of Virginia neither to issue official notices nor to confirm publicly the conclusion of an investigation," Palombi said.

A spokesman for Chuck Rosenberg, U.S. attorney for the Eastern District of Virginia said only: "We cannot comment on that issue."

The lack of federal interest in bringing a criminal case is no surprise. Experts on white-collar crime say prosecutions of accounting malfeasance are notoriously difficult and risky, given the complexity of the issues. In Freddie's case, there is the added issue that the company understated, rather than inflated, its earnings.

Brendsel's attorney, Brendan V. Sullivan, and Clarke's attorney, Steven Salky, could not be reached for comment. Glenn's attorney, Thomas P. Vartanian, declined to comment.

The sources familiar with the investigation, however, said none of the attorneys expects further action by the Justice Department in the matter.