Government Wants Brendsel to Pay Costs
Tuesday, October 16, 2007
Former Freddie Mac chairman and chief executive Leland C. Brendsel should be held liable for more than $1 billion of costs incurred by the company in connection with a massive restatement of earnings, the government said yesterday at the outset of Brendsel's administrative trial on charges of overseeing elaborate accounting manipulations.
Brendsel participated in a scheme to distort financial results, allowed Freddie Mac to function with inadequate computer systems and accounting expertise and should be held responsible "for placing the financial integrity of Freddie Mac at risk," government lawyer Stephen E. Hart told the court.
In an opening statement, Kevin M. Downey, an attorney for Brendsel, said the charges were false and the trial would present a picture of the former executive "acting in good faith" and "trying to do the right thing."
The trial-like proceeding, which is scheduled to unfold over the next 4 1/2 months, is a battle over money and reputation in one of the biggest accounting blowups since the watershed scandals at Enron and WorldCom.
The case pits Brendsel against the Office of Federal Housing Enterprise Oversight, a government agency whose mission is to oversee the financial "safety and soundness" of Freddie Mac and its competitor Fannie Mae, the government-chartered mortgage funding companies based in McLean and the District, respectively.
Hart told the court that OFHEO does not have to prove Brendsel committed fraud, only that he ran the company in an unsafe and unsound manner.
Downey assured the court that Brendsel would take the stand.
The process differs from that followed in civil and criminal trials, putting Brendsel at a particular disadvantage: After hearing the testimony, the administrative law judge presiding over the case will make a recommendation to the OFHEO director, who has the power to decide the outcome.
Four years after he was pushed out as head of Freddie Mac, Brendsel sat with his legal team yesterday and listened as Richard F. Syron, the company's chairman and chief executive, testified about the problems he inherited.
Syron, the government's first witness, provided observations that each side could find useful. He said there were "significant problems" with the company's internal controls when he arrived at the beginning of 2004. Freddie Mac essentially had to rebuild its accounting and information technology systems, Syron said.
But Syron, who formerly worked at the Treasury and the Federal Reserve, said under questioning by Downey that he was nonetheless impressed by Freddie's economic condition.
"I thought Freddie Mac was well capitalized and safe and sound," Syron said.