By David S. Hilzenrath
Washington Post Staff Writer
Friday, September 28, 2007
Freddie Mac, which previously paid about $540 million in settlements with investors and regulators over its alleged accounting manipulations, yesterday agreed to pay $50 million to settle new charges that its conduct amounted to securities fraud.
In addition, four former executives of the government-sponsored mortgage funding company settled charges of negligence without admitting or denying wrongdoing.
The settlements with the Securities and Exchange Commission came more than four years after Freddie Mac disclosed that it had misstated financial results by billions of dollars. The charges added little if any information to the details of the alleged manipulations spelled out in a 2003 report commissioned by Freddie Mac directors.
As with many other companies, Freddie Mac's improper accounting "was the result of a corporate culture that sought stable earnings growth at any cost," SEC enforcement director Linda Chatman Thomsen said in a news release.
Richard F. Syron, Freddie Mac's chief executive, issued a statement saying that "the Freddie Mac of today is a very different company than the Freddie Mac of the past." The company neither admitted nor denied wrongdoing.
The SEC settlements were $400,000 for former president David W. Glenn, $154,227 for former chief financial officer Vaughn A. Clarke, $136,663 for former senior vice president Nazir G. Dossani and $99,658 for former senior vice president Robert Dean.
Separately, federal regulators are still pursuing administrative charges against former Freddie Mac chief executive Leland C. Brendsel, seeking to recoup millions of dollars in penalties, compensation and other gains.
Yesterday, Freddie's chief regulator, the Office of Federal Housing Enterprise Oversight, revealed that it was no longer pursuing similar charges against Clarke after reaching an agreement with him to testify in its case against Brendsel.
The administrative case against Brendsel is scheduled to advance to a trial-like hearing Oct. 15. The administrative law judge presiding over the case in July denied Brendsel's motion to throw out the case and rejected potentially important defenses.
Brendsel had invoked the fact that, before the accounting issues came to light, OFHEO conducted examinations of Freddie Mac and gave the company favorable reports.
"A defense of finger-pointing at OFHEO will not do," administrative law Judge William B. Moran wrote. "It is a mirror that the Respondent must face," the judge wrote.
An attorney for Brendsel, Kevin M. Downey, declined to comment yesterday.
Glenn, former president, chief operating officer and vice chairman of the McLean company, reached a $125,00 settlement with OFHEO in 2003 and agreed to cooperate with its probe. He was fired in 2003 as Freddie Mac accused him of altering and ripping out pages of notebooks before turning them over to investigators.
An attorney for Glenn declined to comment.
Clarke's attorney, Steven M. Salky, said Clarke "is pleased to have concluded matters with the SEC on such favorable terms." Clarke's settlement with OFHEO "vindicates our position," Salky said.
Dean "remains proud of the body of his work at Freddie Mac and looks forward to moving on in his career," said his attorney Thomas Connolly.
Lawyers for Dossani did not return calls.
To smooth out spikes and valleys in reported profits, the SEC alleged, Freddie Mac engaged in transactions that "had little independent business purpose." In one transaction, the company transferred $16 billion of assets to a third party and then bought back 99.5 percent on the same day.
In another episode, Freddie Mac changed the method it used to measure the value of certain assets, altering the result by hundreds of millions of dollars and misleading investors, the SEC suit alleged.
The accounting scandal of 2003 brought to light flaws in Freddie Mac's internal controls and financial systems that the company is still working to correct. Alleged accounting errors and machinations caused the company to understate profit by 30.5 percent in 2000 and by 42.9 percent in 2002 and to overstate profit by 23.9 percent in 2001.
Along with similar revelations about Freddie Mac competitor Fannie Mae in 2004, the scandal revealed OFHEO's weaknesses as a regulator and prompted many policymakers to call for legislation creating a more-powerful overseer for the two companies. That effort remains stalled.