By David S. Hilzenrath
Washington Post Staff Writer
Saturday, April 19, 2008; A01
The government said yesterday it has settled its long-running effort to recoup hundreds of millions of dollars from Franklin D. Raines and two other former executives of Fannie Mae for their alleged role in an accounting scandal.
Though a federal regulator said Raines agreed to give up $24.7 million, the former Fannie Mae chairman and chief executive isn't paying anything out of pocket, sources familiar with the details said.
The cash Raines agreed to pay is covered by insurance. The stock options he agreed to relinquish are worthless at current share prices. The stock he agreed to give up is stock he doesn't have; he's been fighting a court battle to win release of the shares from Fannie Mae, which is based in the District.
"This settlement is not an acknowledgement of wrongdoing on my part, because I did not break any laws or rules while leading Fannie Mae," Raines said in a statement.
The case began with a splash in 2006, when the Office of Federal Housing Enterprise Oversight sued Raines, former chief financial officer J. Timothy Howard and former controller Leanne G. Spencer, alleging that they manipulated Fannie Mae's earnings to enrich themselves and ran the government-sponsored mortgage funding company in an unsound manner.
The administrative charges were a body blow to Raines, one of Washington's most prominent business leaders, who was director of the Office of Management and Budget in the Clinton administration and who headed a task force to restore trust in corporate governance after the Enron scandal.
OFHEO was originally seeking to recover more than $115 million of compensation it said the executives received while Fannie Mae's earnings were misstated, plus penalties that could have exceeded $100 million.
The improper accounting inflated Fannie Mae's reported profit for 2004 and prior years by $6.3 billion. Since Raines left the company in 2004, it has spent more than $1.5 billion on the fallout from the scandal, which included cleaning up its books, dealing with various investigations and repairing internal controls that were so dysfunctional that it took years for Fannie Mae to resume issuing timely financial reports.
James B. Lockhart III, OFHEO's director, said the agreements "represent a satisfactory conclusion to the enforcement actions against these individuals."
Steven M. Salky, an attorney for Howard, said the outcome "is a capitulation by OFHEO, reflecting that its concocted claims never had an ounce of merit."
The regulator said Raines agreed to give up stock options that were estimated to be worth $15.6 million at the time they were issued. The options allow Raines to buy shares at prices of $77.10 and higher; shares closed at $28.55 yesterday, so the options would not produce any benefit to Raines unless the price rose sharply, said sources familiar with the settlement who spoke on the condition of anonymity.
OFHEO said Raines's settlement also includes the payment of $2 million to the government. That sum would be covered by a Fannie Mae insurance policy, sources said.
The settlement also includes stock worth $1.8 million, to be donated to programs assisting financially strapped homeowners. Those are shares Raines sued OFHEO to allow Fannie Mae to release.
He also agreed to forgo $5.3 million in other benefits, OFHEO said.
Howard's settlement, which OFHEO valued at $6.4 million, followed a similar pattern. Spencer agreed to pay $275,000, of which a Fannie Mae insurance policy will cover all but $25,000, said a source familiar with the settlement.
The resolution of the case "was at the high end of settlements in similar matters," OFHEO spokeswoman Stefanie Mullin said by e-mail.
Spencer's attorney, David S. Krakoff, said she maintained from the beginning that the allegations had no merit.
The agreements avert a public airing of evidence at a hearing that was scheduled to begin in September.
In January, a federal district court judge presiding over related litigation held OFHEO in contempt for failing to turn over certain records for use by the former executives in their defense. The judge ordered OFHEO to give the executives documents that the regulatory agency considered privileged, but that order has been stayed pending appeal.
The litigation has been a burden for OFHEO, which has spent millions of dollars just responding to document requests. It has also been a burden for Fannie Mae, which has been obligated to pay for the former executives' defense.
Raines is now on the board of Revolution Health, a company founded by former AOL chairman Steve Case. Howard is not employed; Spencer is a real estate agent.