What’s the Over/Under on Freddie Mac?

Company's $5 billion restatement has some ups and downs. Also: CFO resigns as Duke Energy reorganizes at the top; in Sooner State, Ebbers won't face charges till later; Hollinger earnings off the mark, pending restatement; and more.

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In a widely anticipated announcement, mortgage finance company Freddie Mac announced Friday that it will restate earnings upward by $5 billion, about what it had previously anticipated.

The government-sponsored mortgage financer said it will increase net income by $4.4 billion for the period covering 2000, 2001 and 2002, and another $600 million related to periods prior to 2000.

Before Friday’s announcement, wrote the Associated Press, Freddie Mac had acknowledged understating its earnings “to smooth out volatility in profits and uphold its image on Wall Street as a steady performer.” That $4.4 billion understatement for 2000 through 2002, however, contains both ups and downs.

According to The New York Times, Freddie Mac understated earnings by $1.12 billion in 2000 and by $4.35 in 2002 — and overstated earnings by $989 million in 2001. This is the first time the company has admitted inflating results, wrote the AP. The wire service also noted Freddie Mac’s claim that the cause of the overstatement was failure to properly account for losses from derivatives.

The restatement also resulted in a net increase in regulatory core capital for each of the year-ends affected and in a cumulative increase of $5.2 billion in the company’s regulatory core capital as of December 31, 2002. (For Freddie Mac, core capital equals stockholders’ equity excluding accumulated other comprehensive income.)

The company did not provide information on 2003 results.

“The bottom line is that the restatement did not affect the fundamental strength of Freddie Mac’s balance sheet,” said Martin Baumann, executive vice president-finance and chief financial officer, in a statement.

“The Board’s Governance Committee is directing a remediation program to ensure the integrity of Freddie Mac’s financial reporting and prevent these types of problems from recurring,” said George Gould, presiding director and chairman of the committee. “The company has brought in a host of experienced accounting professionals and a new Senior Vice President for Compliance, conducted Sarbanes-Oxley training for our employees and retained leading experts to assist us in implementing exemplary disclosure and governance practices.”

The company said the restatement and re-audit arose from Freddie Mac’s re-evaluation, in conjunction with PricewaterhouseCoopers LLP, of numerous accounting policies and their application to the company’s transactions.

PwC was appointed in March 2002, replacing Arthur Andersen LLP.

The Securities and Exchange Commission and the Office of Federal Housing Enterprise Oversight are already undertaking investigations at Freddie Mac.

CFO Resigns as Duke Energy Reorganizes at the Top

Duke Energy announced that chief financial officer Robert Brace has resigned as part of a reorganization of the company’s finance and risk management functions as well as changes in executive leadership.

Brace had held the position since 2001. David Hauser was named interim CFO.

“Robert served Duke Energy during a time of great change and increased regulation of financial reporting,” said chairman and chief executive officer Paul Anderson, in a statement. “Among his contributions, he brought a disciplined approach to capital management and a detailed certification process for financial statements.”

Hauser has most recently served as the company’s senior vice president and treasurer, a role he will continue to fill until the company finds a permanent CFO, which is expected before the end of the year, the company added. Anderson said Hauser will be a candidate.

Hauser’s responsibilities will include certifying financial statements consistent with all applicable regulatory requirements and leading the finance functions of treasury, tax, accounting and financial planning. In addition, the company’s risk management organization, which currently reports to Richard Osborne, will begin reporting to the CFO.

Osborne will continue as executive vice president with responsibility for Crescent Resources, Duke’s real estate company, as well as internal audit, insurance, crisis and business continuity planning.

As part of the reorganization, Paul Barry, vice president of merger and acquisitions, and his group will move from the CFO organization to report to Richard Blackburn, executive vice president, general counsel, and chief administrative officer. The change is designed to more closely align the M&A group with the strategy and planning function, which reports to Blackburn, the company said.

And Greg Ebel, vice president of investor and shareholder relations, will no longer report to the CFO. Instead, he will now report directly to the CEO. The change reflects Anderson’s increased emphasis on the company’s communications with the investment community, the company noted.

Earlier in the week, Duke said its board’s compensation Committee approved an employment agreement for Anderson, which is stock-based and tied directly to the performance of the company. Anderson will receive no base cash salary. The agreement covers the period from November 1, 2003, through January 1, 2007, and requires Anderson to hold all shares of Duke Energy stock he receives under it until that latter date.

In Sooner State, Ebbers Won’t Face Charges Till Later

Bernie Ebbers is off the legal hook in Oklahoma, at least for now.

The state’s attorney general filed a motion to drop criminal charges against the former chief executive of WorldCom, now called MCI. The filing followed a rejected motion to delay Ebbers’ December 1 preliminary hearing until after the federal trial of former WorldCom CFO Scott Sullivan, which is set for February. Sullivan is also a defendant in Oklahoma’s case.

The state had charged WorldCom, Ebbers, and five other former executives with violating state securities laws by knowingly giving false information to investors. These were the first criminal charges against Ebbers, who pleaded not guilty.

Ebbers and the other former executives face up to 10 years in prison if convicted, according to reports.

“We have an agreement with United States Attorney James Comey that we will not call any witnesses in our case until those people have testified in Scott Sullivan’s federal trial,” Edmondson said, according to Reuters. “I intend to honor that agreement. This dismissal is purely a strategic move and I have every intention of refiling these charges early next year.”

Ebbers’ attorney, Reid Weingarten, told the wire service he believes Oklahoma dropped the charges due to a lack of evidence, rather than a scheduling conflict. “We know that no investigators anywhere have found evidence of criminal wrongdoing by Mr. Ebbers. We believe these charges were brought with absolutely no evidence to back them up,” said Weingarten.

Edmondson scoffed at the accusation, telling Reuters that “We have sufficient evidence to convict, or we would not have brought the case.”

Hollinger Earnings off the Mark, Pending Restatement

In what has developed into a daily soap opera, Hollinger International Inc. announced in a quarterly earnings filing that it overstated retained earnings by about $17 million.

Hollinger warned investors to disregard the financials, however, since necessary restatements have not yet been made. The company added that KPMG LLP, its independent accountant, is currently unable to complete its review of its quarterly report, and that once the review and various investigations are completed, it will make any amendments that are deemed necessary.

Needless to say, the company’s new chief executive officer and chief financial officer did not certify the results as required by Sarbanes-Oxley.

Last week the media company announced the resignations of chief executive Conrad Black, COO and Chicago Sun-Times publisher F. David Radler, and Hollinger vice president and corporate counsel Mark Kipnis, after an internal investigation uncovered $32 million in unauthorized and undisclosed payments to Black and other executives.

Those payments resulted in a shortfall of income tax payments of $17 million, Hollinger stated in its filing.

Polish Subsidiaries of Another Big Drug Maker Probed by SEC

Schering-Plough Corp. announced that it has been notified that the Securities and Exchange Commission has launched a formal order to investigate compliance by Polish subsidiaries of certain pharmaceutical companies with the U.S. Foreign Corrupt Practices Act of 1977.

The act bars U.S. businesses and individuals from bribing foreign officials.

The SEC had previously asked the drug maker to voluntarily furnish documents related to its Polish subsidiary, Schering-Plough said in a regulatory filing, before the company received this latest, formal notice on November 14.

Last week Eli Lilly & Co. also announced in a government filing that the SEC has requested documents related to Lilly’s Polish subsidiary, regarding the same inquiry.

Short Takes

  • Venture capital fund-raising is still come back slowly. Nineteen venture funds raised a total of $1.4 billion in the third quarter, well down from the nearly $2.9 billion raised by 50 VC firms in the same quarter a year earlier, according to the National Venture Capital Association and Thomson Venture Economics.

In 2000, the year that the late-1990s bubble burst, 631 venture funds raised a record $107 billion, said the NVCA and Thomson.

  • Investors poured $306 million into U.S. junk bond mutual funds in the week ended November 19, up from $258 million the week before, according to AMG Data Services.
  • Mattel Inc. said it raised its annual dividend to 40 cents a share from 5 cents and doubled its stock buyback plan. “By increasing the cash dividend and the share repurchase program, the Mattel board of directors has demonstrated its commitment to a balanced return of excess funds to shareholders,” Robert Eckert, chairman and chief executive, said in a statement.

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