Feds Charge Three Ex-Fannie Mae Execs

The former CEO, CFO, and controller face 101 civil charges related to the mortgage giant's $7.9 billion accounting scandal.

The U.S. Office of Federal Housing Enterprise Oversight has filed a notice of charges against three former Fannie Mae executives, accusing them of misconduct and recklessness. Former chairman and CEO Franklin Raines, former vice chairman and CFO J. Timothy Howard, and former senior vice president and controller Leanne Spencer are named in the suit, which seeks restitution and civil money penalties.

OFHEO made the announcement on Monday and noted that its general counsel is continuing to review other employees of the mortgage giant, which has disclosed $7.9 billion in accounting errors stemming from its derivatives and hedging activities and has undergone a massive restatement process over the past few years.

OFHEO has been looking into the Fannie Mae case for the past two years and concentrated on the period between 1998 and 2004. The agency accuses the three former executives of malfeasance, misconduct, and recklessness while working at the company.

The former executives are further accused of deliberately using misleading financial reports and disclosures and failing to establish a sound internal controls process, which resulted in defective accounting policies and practices. OFHEO has charged Raines with 79 counts, Howard with 89, and Spencer with 73.

“The 101 charges reveal how the individuals improperly manipulated earnings to maximize their bonuses, while knowingly neglecting accounting systems and internal controls, misapplying over 20 accounting principles and misleading the regulator and the public,” said OFHEO director James Lockhart. “The notice explains how they submitted six years of misleading and inaccurate accounting statements and inaccurate capital reports that enabled them to grow Fannie Mae in an unsafe and unsound manner.”

Howard’s attorney, Steven Salky, told CFO.com that the allegations are inaccurate. “We are eager for a fair and impartial adjudication of these claims, which will demonstrate the propriety in all respect of Mr. Howard’s conduct,” he wrote in a prepared statement. He also noted that a pattern of violations does not exist.

In a letter for Lockhart dated December 18 and shared with CFO.com, Kevin Downey, who represents Raines, wrote that the accusations against his client are “false.” He also wrote that “we look forward to refuting them in a fair and impartial forum.”

The attorney representing Spencer did not immediately return CFO.com’s request for comment.

The civil money penalties that OFHEO seeks could exceed $100 million, disgorgement of bonuses totaling more than $115 million, loss of indemnification, and debarment.

Fannie Mae announced in August that the U.S. Attorney’s Office for the District of Columbia had discontinued its investigation and did not plan to file charges against the company. Still facing civil lawsuits, however, the company made progress recently when it announced its long-awaited restatement of financial results for 2002, 2003, and the first two quarters of 2004, noting that it will reduce retained earnings by $6.3 billion.

A breakdown of the three former executives’ compensation packages from 1998 to 2003 is included on OFHEO’s website, along with the notice of charges.

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