Federal regulators lacked the authority to block payment of more than $50 million in compensation to former Freddie Mac chief executive Leland C. Brendsel while awaiting the outcome of actions they have brought against him, a federal judge here has ruled.
U.S. District Judge Richard J. Leon wrote that the Office of Federal Housing Enterprise Oversight was "simply overreaching" last year when it ordered that the executive compensation payments to Brendsel be withheld.
"OFHEO's actions in this case rest upon an unreasonable and untenable interpretation" of the law, the judge said in his opinion, which was dated Monday. He also suggested that OFHEO might face significant legal hurdles in recovering all the money it seeks from Brendsel.
Brendsel and other executives were forced out last year after Freddie Mac disclosed accounting irregularities. The mortgage giant subsequently said it would restate earnings upward by some $5 billion. OFHEO announced in December that it would seek to recover severance payments to Brendsel and bonuses paid him in 2000 and 2001 and to impose penalties on him. The total came to just under $34 million, but more than $50 million owed to Brendsel under his contract has been frozen as a result of OFHEO's actions, according to the judge's opinion.
Judge Leon said his decision will not affect OFHEO's ability to continue administrative proceedings against Brendsel, in which it is arguing that he left his job "for cause" and thus would have to surrender a large portion of his compensation. And if the regulator prevails, it would still be able to "enforce a ruling adverse to Brendsel," he said.
But in explaining why he ruled that OFHEO could not freeze the assets while the proceeding is underway, Leon hinted that he sees possible future problems for the regulator in the case. He observed that the "plain language" of the law "puts into question" OFHEO's ability to reach back and recover compensation that is awarded but later found to be unreasonable. He also questioned whether the agency could use "any wrongdoing on the part of Brendsel" to review his compensation.
OFHEO said in a statement that it was reviewing Leon's decision and consulting with the Justice Department about it. It added, though, that it will continue its efforts to recover from Brendsel and said "the court acknowledged the [regulator's] ability to seek remedies against Mr. Brendsel through [its] ongoing administrative process."
A Freddie Mac spokesman said the firm was reviewing the decision and had no immediate comment.
Brendsel could not be reached, and his attorney did not respond to a message seeking comment.
Freddie Mac, which buys mortgages from original lenders to provide additional capital for housing, announced early last year that its 2002 financial statements would be delayed and earlier periods reaudited. Ultimately, the review resulted in one of the largest corporate financial restatements in history, and a subsequent study by OFHEO concluded that the company had used improper accounting techniques to smooth its earnings so as to show steady growth.
In December, Freddie Mac paid a civil fine of $125 million to settle OFHEO's inquiry into management lapses connected with the accounting irregularities.
OFHEO is also seeking some $3.9 million in returned compensation and penalties from former chief financial officer Vaughn A. Clarke. Clarke has also brought suit to have his money released. That case is pending.
Former Freddie Mac president David W. Glenn paid a $125,000 fine to settle with the regulator.
In a separate proceeding in a federal court in Virginia, Brendsel has been fighting OFHEO's efforts to subpoena him to testify in its investigation of the earnings restatement.
OFHEO, an independent office within the Department of Housing and Urban Development, was created in 1992 to oversee the operations of Freddie Mac and its similar but larger rival, Fannie Mae. Both are "government-sponsored enterprises," meaning that they hold federal charters but are owned by private stockholders.
Both have grown enormously in recent years and are viewed in the marketplace as carrying implicit government backing, should they get into trouble. Critics have been complaining that the two represent a serious risk to taxpayers and should be carefully overseen or even scaled back. The accounting scandal at Freddie Mac has added fuel to those criticisms.