Fannie Mae Ex-Officials Are Sued for Disputed Pay

Federal regulators yesterday sued three former Fannie Mae executives, including former chairman and chief executive Franklin D. Raines, to recoup more than $115 million in pay they received while the company's earnings were misstated.

In an administrative complaint, regulators said Raines and the others engaged in a variety of ruses to meet profit goals and boost their compensation. For example, they delayed booking $200 million of expenses one year and used transactions with no economic purpose in other periods simply to shift income into the future, the complaint alleged.

The regulators' discovery of accounting problems in 2004 ultimately led Fannie Mae to pay a $400 million penalty and correct years of financial results, erasing $6.3 billion of previously reported profit.

Charged with Raines were J. Timothy Howard, former chief financial officer of the government-chartered mortgage finance company, and Leanne G. Spencer, former controller.

The former executives "improperly manipulated earnings to maximize their bonuses, while knowingly neglecting accounting systems and internal controls, misapplying over twenty accounting principles and misleading the regulator and the public," James B. Lockhart III, director of the Office of Federal Housing Enterprise Oversight, said in a statement.

The three "did very serious harm to this company," Lockhart said in a conference call with reporters.

Lawyers for the former executives said the allegations were false and politically motivated. OFHEO's director had been warning for weeks that he planned to take action against former Fannie Mae executives, and he has cited the company's problems in calling on Congress to pass legislation giving Fannie's regulators greater power.

Lockhart is using Raines as a prop in his legislative campaign, and his agency has distorted evidence that it has kept from public view, Kevin M. Downey, an attorney for Raines, wrote in a letter yesterday to the OFHEO director.

Lawyers for Howard and Spencer noted that the agency now bringing the charges once vouched for Fannie's soundness, adding that the company's annual financial results were certified by auditor KPMG.

OFHEO's charges are to be reviewed by an administrative law judge, who is to recommend a final decision to the agency's director. Raines's lawyer called on Lockhart to withdraw from the matter, saying he was "fatally biased" because he repeatedly accused Raines of wrongdoing before bringing charges.

The agency is seeking to recoup $84.6 million in bonuses, stock option grants and other awards from Raines alone. In addition, OFHEO is seeking penalties from the three former executives that could total more than $100 million.

Before Fannie's problems came to light, Raines was one of Washington's most prominent businessmen, widely viewed as a potential Treasury secretary. His résumé traced his rise from humble roots to the heights of government and finance: graduate of Harvard College and Harvard Law School, Rhodes Scholar, junior aide to President Jimmy Carter, investment banker at Lazard Freres, chairman of Harvard's Board of Overseers, director of President Bill Clinton's Office of Management and Budget.