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Freddie Mac Faces Federal Investigation Into Disclosure of Risks to Investors

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By Zachary A. Goldfarb and Jerry Markon
Washington Post Staff Writers
Thursday, April 23, 2009

Federal prosecutors in Alexandria are leading a criminal investigation into Freddie Mac, in part focusing on whether the company properly disclosed the risks associated with mortgage-related investments, law enforcement sources familiar with the investigation said yesterday.

A parallel civil investigation into disclosure, accounting and corporate governance issues at Freddie Mac is also underway at the Securities and Exchange Commission, the company said in a March regulatory filing, which also disclosed the U.S. attorney's investigation. The SEC has subpoenaed documents and deposed employees at the mortgage finance giant, but the investigation is still in an early stage, according to a source familiar with the matter.

Investigators had hoped to question David B. Kellermann, the Freddie Mac acting chief financial officer who police said was found dead yesterday in an apparent suicide, but he was not a target of the probe, sources said.

It could not be determined if Kellermann had been questioned before his death. His death is not expected to affect the probe, sources said, because other Freddie Mac executives could provide similiar information.

A focus on disclosure is common in investigations into potential corporate wrongdoing. The key factor in determining whether to file criminal charges is whether executives knew they should have disclosed certain information but did not.

The investigation into Freddie Mac is focused on a period from January 2007 to the government's takeover in September 2008. During that time, Freddie Mac bought tens of billions of dollars in securities backed by subprime and other risky home loans.

Sources described the investigation as complex and said no charges are imminent. Any such charges would likely be filed against Freddie Mac executives rather than the firm itself, law enforcement sources said.

The criminal probe began in New York in the fall but moved to Alexandria because Freddie Mac is located in Northern Virginia -- and because the U.S. attorney's office in Alexandria led an earlier investigation of the company.

A Freddie Mac spokeswoman declined to comment.


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