The Securities and Exchange Commission (SEC) on Friday, December 16, 2011, charged six former top executives of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) with securities fraud, alleging they knew and approved of misleading statements claiming the companies had minimal holdings of higher-risk mortgage loans, including subprime loans.
Fannie Mae and Freddie Mac each entered into a Non-Prosecution Agreement with the Commission in which each company agreed to accept responsibility for its conduct and not dispute, contest, or contradict the contents of an agreed-upon Statement of Facts without admitting nor denying liability. Each also agreed to cooperate with the Commission’s litigation against the former executives. In entering into these Agreements, the Commission considered the unique circumstances presented by the companies’ current status, including the financial support provided to the companies by the U.S. Treasury, the role of the Federal Housing Finance Agency as conservator of each company, and the costs that may be imposed on U.S. taxpayers.
In the complaint filed in the U.S. District Court for the Southern District of New York (S.D.N.Y.), the SEC alleges that Fannie Mae and three former executives of Fannie Mae, Daniel Mudd, former CEO, Enrico Dallavecchia, former CRO, and Thomas Lund, former EVP of the Single Family business made or substantially assisted others in making materially false and misleading statements regarding Fannie Mae’s exposure to subprime and Alt-A loans.
In a separate complaint filed in the U.S. District Court for the Southern District of New York (S.D.N.Y.), the SEC alleges that Freddie Mac and three of its former executives, Richard F. Syron, former Chairman and CEO of Freddie Mac, Patricia Cook, Former Executive Vice President of Investments and Capital Markets and Chief Business Officer, and Donald Bisenius, former Senior Vice President for Single Family Guarantee, led investors to believe that the firm used a broad definition of subprime loans and was disclosing all of its subprime loan exposure in its Single-Family guarantee portfolio. Unbeknown to investors, as of December 31, 2006, Freddie Mac’s Single Family business was exposed to approximately $141 billion of loans internally referred to as “subprime” or “subprime like,” accounting for 10 percent of the portfolio, and grew to approximately $244 billion, or 14 percent of the portfolio, as of June 30, 2008.
The SEC’s complaint also alleges that, among other things, Syron, Cook and Bisenius made, or substantially assisted Freddie Mac or each other in making, materially false and misleading statements regarding the company’s subprime exposure. In particular, the complaint alleges that Syron and Cook each personally made public speeches or statements that led investors to believe that Freddie Mac, in words or in substance, had “basically no subprime exposure.” As the most-senior credit risk officer for the Single Family business, Bisenius had personal knowledge of the company’s exposure to high risk loans internally characterized as “subprime,” “subprime-like” or “otherwise subprime.” Despite this knowledge, each of the defendants certified or sub-certified to the company’s written disclosures, including its materially misleading subprime disclosures.