Two of the world’s largest financial institutions have been dragged into the investigation of alleged accounting irregularities at mortgage giant Freddie Mac.
The Office of Federal Housing Enterprise Oversight (OFHEO), which oversees Freddie Mac and Fannie Mae, is looking into whether Morgan Stanley and Citigroup’s Salomon Smith Barney unit helped Freddie Mac create deals to hide big gains and smooth out earnings, according to published reports.
“We are in the process of reviewing the counterparties’ roles in transactions relevant to our investigation,” said OFHEO spokeswoman Corinne Russell, according to Reuters.
The OFHEO and the Securities and Exchange Commission are already investigating possible fraud at Freddie Mac. In July, the mortgage company admitted in a report that investment officers had created trades that had no benefit for the company other than to help make it easier to meet quarterly earnings targets.
Meanwhile, on Tuesday Freddie Mac unveiled plans to improve its governance and compliance.
The company said it has retained the services of Charles M. Elson, the Edgar S. Woolard Jr. Chair in Corporate Governance and the director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. Elson will work with Freddie Mac and its board of directors to strengthen the company’s corporate governance practices, policies, and guidelines.
In addition, Freddie Mac has retained David Martin, formerly the SEC’s director of corporation finance, to help improve financial disclosures; is setting up a hotline so employees can anonymously submit complaints or concerns; and enhancing the company’s code of conduct for both employees and board members. (Read more on whistle-blower woes and on hotlines that help employees report problems.)
Deloitte Resigns as Outside Auditor for Shurgard
Shurgard Storage Centers Inc. announced that Deloitte & Touche LLP resigned as the company’s outside auditor, effective November 13. The company added that Deloitte’s resignation does not affect any of the auditor’s previously issued opinions, and that its independent audit committee is actively looking for a replacement auditor.
Shurgard also noted that it did not meet the November 14 deadline for filing its quarterly results with the Securities and Exchange Commission because Deloitte did not complete its review of the financial statements prior to its resignation. “The company expects to file its third quarter Form 10-Q as soon as practicable,” it added.
Shurgard said it believes the resignation does not reflect any issue with respect to the accuracy or reliability of past financial statements. It elaborated that Deloitte informed the Audit Committee its resignation arose solely from Deloitte’s concern with the timing of and perceived inconsistencies in the company’s communications with Deloitte regarding an overpayment of about $1.4 million made by the company in connection with the liquidation of an affiliated limited partnership formed in 1990. As part of the liquidation, the company acquired certain general partner interests from chairman and CEO Charles K. Barbo and another individual not affiliated with the company, it added.
The company said that in late October 2003, the company confirmed that an error in calculation — due to a mistake in the application of the distribution formula specified in the relevant partnership agreement — had led to overpayments for those interests.
Shurgard added that once the overpayment had been verified, Barbo reimbursed the company, and the other general partner has agreed to do so.
The balance sheet as of September 30, 2003, which was released last week, already reflected reclassification of the $1.4 million.
At the time of Deloitte’s resignation the company insists there were no pending disagreements between the company and Deloitte related to accounting principles or practices, financial statement disclosure, or auditing scope or procedure.
Shurgard said Deloitte’s letter of resignation did not state a reason for the resignation. Oral communications between Deloitte and W. Thomas Porter, the chairman of the Shurgard’s audit committee, however, indicated that Deloitte had concluded it could no longer rely on representations of the company’s management. Porter added that the audit committee had reviewed the overpayments and has “concluded there was no malfeasance.”
Oracle Acquisition Review Jumps Overseas
Oracle Corp. has a new hurdle to vault in its relentless $7.3 billion hostile takeover bid for PeopleSoft. Corp.
The European Commission said Monday it has launched a detailed investigation into Oracle’s proposed acquisition.
The EU said its initial one-month investigation has shown that the combination of two of the largest competitors in the market merited further analysis, especially as the number of key players would be reduced from three to two — Oracle and SAP — in certain application software markets.
Application software helps coordinate business functions such as budgeting and planning, customer relationship management, human resources, and supply chain management, all of which are particularly critical to multinational companies. The commission added that it may also investigate any potential effects in the relational database market, where Oracle has a particularly strong presence.
“We have said before that we felt a phase two review would be initiated, so we are not surprised by the European Commission’s decision. We continue to work closely with the EC throughout this process,” Oracle spokesperson Jim Finn told Reuters. “We are in this for the long haul and we remain committed to completing our intended acquisition of PeopleSoft.”
PeopleSoft and Oracle are based in California, but the European Commission has taken an interest since both companies sell their products in Europe. The commission is cooperating on the case with the antitrust division of the United States Department of Justice — which in July opened a “second request” in-depth probe of the deal, according to Reuters.
Oracle made its initial $5.1 billion offer in early June. Since then, PeopleSoft has pulled out a number of classic takeover defenses in attempts to discourage Oracle. For example, PeopleSoft decided to make its own purchase of a rival — J.D. Edwards — hoping that the merged firm would be too big and unwieldy for Oracle to acquire. Apparently Oracle disagrees; in October it extended its offer for a fifth time, to December 31.
PeopleSoft has also pledged under its “customer assurance program” to offer refunds of between two and five times a customer’s software-licensing fees if an acquirer fails to meet certain defined circumstances. The potential cost has been estimated at $800 million. On Friday, Oracle revised a lawsuit against PeopleSoft, arguing it was suffering “direct irreparable harm” due to the customer rebate offer from PeopleSoft.
CFOs on the Move
- BorgWarner Inc. said vice president and controller William (Skip) C. Cline was appointed acting chief financial officer. He replaces George E. Strickler, who is leaving the company to join Visteon Corp. as executive vice president and CFO, effective December 1.
Cline has been with BorgWarner for 21 years and has served as vice president and controller since 1993. Prior to joining BorgWarner he was with Ernst & Young.
- MetLife Inc. said chief financial officer Stewart Nagler would retire late next year after 40 years at the life insurer. Until his retirement, Nagler will continue to report to chairman and chief executive officer Robert H. Benmosche as vice chairman. He will also continue as a member of the board of directors of MetLife, remain chairman of the board of Reinsurance Group of America Inc., and have responsibility for MetLife Auto & Home.
Bill Wheeler, currently head of MetLife’s individual business product management, marketing and business development, will assume Nagler’s finance-related responsibilities effective December 1. Wheeler joined the company in 1997 as treasurer of MetLife.
Former Aon Corp. controller and CFO Joseph Prochaska will join MetLife in December to assume a new position, finance operations and chief accounting officer, reporting to Wheeler. He will be responsible for the finance operations center, corporate controller, and line of business controllers.
- Manufacturer Carlisle Cos. Inc. said Kirk F. Vincent resigned as vice president and chief financial officer to pursue other business opportunities. The company, which makes products for the automotive, construction, roofing, and food service markets, said Vincent’s decision had nothing to do with its accounting practices or financial reporting.
Fannie CFO Reaps $1.3 Million
Fannie Mae chief financial officer Timothy Howard recently made about $1.3 million when he exercised more than 26,000 options and then sold the shares he acquired on the same day.
Fannie Mae spokesman Jason Lobo told Reuters the executive’s options were about to expire and he sold the stock for portfolio diversification.