Freddie Mac Paying
$125M Civil Fine
December 10, 2003 11:44 AM
EST
WASHINGTON - Mortgage giant Freddie Mac has agreed to pay a $125
million civil fine to settle federal regulators' allegations of management
misconduct and directors' complacency, blamed for the company's $5 billion
understatement of earnings that led to the ouster of four top executives.
The Office of Federal Housing Enterprise Oversight, which supervises
government-sponsored Freddie Mac and its larger rival Fannie Mae, also
released Wednesday a critical report citing "a pattern of inappropriate
conduct and improper management of earnings" at the company and even "a
disdain for appropriate disclosure standards" among former executives.
The second-largest U.S. buyer of home mortgages "disregarded accounting
rules, internal controls, disclosure standards, and ultimately, the public
trust in pursuit of steady earnings growth," the agency's report found.
Helping fuel the accounting breaches was the compensation of top
executives, which was partly based on annual targets for earnings per
share, the report said. A series of recommendations made in the report
includes a requirement that Freddie Mac reward its executives on the basis
of long-term goals rather than short-term earnings.
And, it said, management was able to push the accounting envelope
unchecked because the company's board of directors "was complacent and
failed to exercise adequate oversight."
Freddie Mac, a publicly traded corporation with $40 billion revenue a
year, has acknowledged understating its earnings by $5 billion for
2000-2002 to smooth out volatility in profits and uphold its image on Wall
Street as a steady performer. In addition, the company last month admitted
inflating 2001 earnings by nearly $1 billion and said it may not be able
to complete its accounting for 2003 until next June.
The company on Sunday named Richard Syron, a Wall Street veteran and
former Federal Reserve official, as its new chairman and chief executive.
The board of directors in June forced out Freddie Mac's then-chairman and
CEO, Leland Brendsel, along with the company's president and chief
financial officer. In August, the federal regulators ordered the ouster of
Brendsel's replacement, Gregory Parseghian, who they said had played a
role in some of the company's questionable financial transactions.
The company did not admit to or deny wrongdoing in the settlement,
involving the first such fine in the agency's 10-year history. McLean,
Va.-based Freddie Mac also said it did not consent to any part of the
agency's report.
The agreement with the regulators still leaves to be resolved a
criminal investigation by the Justice Department and a civil inquiry by
the Securities and Exchange Commission.
The $125 million fine will be paid out of the company's revenues,
thereby potentially affecting its bottom line. The restatement by company
auditors of Freddie Mac's 2000-2002 earnings, a massive project first
announced in January and completed last month, cost the company $100
million. A company spokesman said Wednesday it was not known whether
Freddie Mac would try to recoup such costs through changes in its
operations.
Under the settlement, Freddie Mac also agreed to strengthen its
internal controls and accounting practices and to improve its disclosure
of information to the investing public - steps the company already had
undertaken after its accounting and management turmoil came to light in
early June.
"This settlement and the resulting reforms represent an important step
toward the goal of restoring the full confidence of our investors and the
public," said Freddie Mac chairman Shaun O'Malley said in a statement.
"The reforms to be implemented as part of today's settlement build upon
and enhance the company's ongoing remediation program to address its
accounting and disclosure weaknesses."
Armando Falcon, director of the Office of Federal Housing Enterprise
Oversight, said a government-sponsored company such as Freddie Mac -
created by Congress to pump money into the home-mortgage market - "lives
on a public trust that should never be violated."
Falcon said his agency "will take strong action against an enterprise
and responsible individuals if that trust is ever broken."
The agency also has been examining accounting at Fannie Mae, which
disclosed in October a $1.2 billion accounting error for the third
quarter. The error was due to a change in accounting rules and does not
affect net income, the company said. Some critics say that Fannie Mae does
not adequately hedge against swings in interest rates.
---
On the Net:
Freddie Mac: http://www.freddiemac.com
Office of Federal Housing Enterprise Oversight: http://www.ofheo.gov
Fannie Mae: http://www.fanniemae.com |
