OFHEO Director to Stay on Raines Case

Lockhart Won't Withdraw From Regulatory Proceeding to Recover $84.6 Million

Former Fannie Mae chief executive Franklin D. Raines was dealt another setback in his battle with regulators yesterday when the head of the federal agency trying to recoup more than $84.6 million from Raines refused to recuse himself from deciding the case.

The agency, the Office of Federal Housing Enterprise Oversight, filed administrative charges against Raines in December to recover compensation he received while the government-chartered mortgage funding company's earnings were misstated. Fannie Mae has acknowledged overstating profit by $6.3 billion.

The dispute is playing out in the administrative law arena, which puts the agency in the position of both prosecutor and jury. An administrative law judge is to preside over a hearing and then make recommendations to the OFHEO director, who would decide the matter. The trial-like proceeding is set to begin in March 2008. The director's decision would be subject to court appeal.

Arguing that the OFHEO director, James B. Lockhart III, has prejudged the case, an attorney for Raines had called on Lockhart to withdraw. Other former executives charged in the case made similar arguments.

Lockhart said in a court filing yesterday that he was still able to make a fair decision.

"The ostensible conflict that Respondents claim disqualifies me as decision maker is simply the nature of administrative law," Lockhart wrote.

Lawyers for the former executives cited an array of public statements by Lockhart as evidence that he was biased.

Lockhart wrote that the law "allows me to express the opinion that Fannie Mae management undermined internal controls and manipulated earnings."

Charged along with Raines, who headed the Office of Management and Budget in the Clinton administration, are former chief financial officer J. Timothy Howard and former controller Leanne G. Spencer. In addition to trying to recover past compensation, the regulator is seeking penalties from the three that could exceed $100 million. They deny wrongdoing.

Still unresolved is a motion Raines has filed with a federal appeals court to have the dispute moved from the administrative law arena to a federal trial court.

"Mr. Raines's position is simple: It is not fair for him to be a defendant in a proceeding where one person serves as the prosecutor, the judge, and the politician," Mark Fabiani, a spokesman for Raines, said in a statement last night.

Earlier this year, the administrative law judge in the case rejected a request from the former executives that the evidentiary hearing begin this February. Noting that they were seeking a large volume of government documents for use in their defense, Judge William B. Moran said the request to speed up the proceedings was "specious and somewhat disingenuous."

The wrangling over document production continues. Raines's legal team has accused OFHEO of dragging its feet in giving Raines government records to use in defending himself in separate litigation brought by Fannie Mae investors. OFHEO has protested that Raines has made such broad requests for documents that it would cost the agency millions of dollars to comply.

Bloomberg News reported yesterday that OFHEO told the U.S. District Court for the District of Columbia that Raines should pay as much as $8.6 million of those costs.

A source close to Raines, who spoke on condition of anonymity because the source was not authorized to speak on the record, said Raines "offered to pay appropriate percentages ages ago."

In the end, the costs could fall to Fannie Mae, which is financially responsible for the former executives' legal expenses.