SEC Sues Former Fannie, Freddie Executives
By CHAD BRAY
NEW YORK—The Securities and Exchange Commission has sued the former chief executives of Fannie Mae and Freddie Mac, accusing them of misleading investors about risks of subprime-mortgage loans.
The lawsuits, filed in Manhattan federal court, also accused four other former executives at Freddie Mac and Fannie Mae of making false and misleading statements about the firms' exposure.
Former Freddie Mac CEO Richard Syron, left, and former Fannie Mae CEO Daniel Mudd, in 2008.
Former Freddie Mac CEO Richard F. Syron and former Fannie Mae CEO Daniel H. Mudd, are among the six executives. None of them has reached settlement agreements with the SEC.
Earlier this year, the SEC had sent Wells notices, indicating it planned to pursue enforcement actions, to Mr. Syron, Mr. Mudd and several other former executives.
The move came as Fannie Mae and Freddie Mac entered into agreements with the securities regulator to avoid civil prosecution. In the civil non-prosecution agreements, the firms said they would accept responsibility for the conduct and not dispute the SEC's allegations, without admitting or denying wrongdoing, the SEC said.
As part of those agreements, the government-sponsored firms will cooperate in the securities regulators' litigation against the former executives, the SEC said. Neither firm is paying a fine.
"Fannie Mae and Freddie Mac executives told the world that their subprime exposure was substantially smaller than it really was," said Robert Khuzami, director of the SEC's Enforcement Division.
"These material misstatements occurred during a time of acute investor interest in financial institutions' exposure to subprime loans, and misled the market about the amount of risk on the company's books. All individuals, regardless of their rank or position, will be held accountable for perpetuating half-truths or misrepresentations about matters materially important to the interest of our country's investors."
The SEC alleged that the Fannie Mae executives misled the public about the government-sponsored firm's exposure to subprime mortgages and so-called Alt-A loans between December 2006 and August 2008. Freddie Mac executives allegedly did the same regarding its exposure to subprime loans between March 2007 and August 2008.
Lawyers for Mr. Syron and Mr. Mudd couldn't immediately be reached for comment Friday.
In its complaint against the former Fannie Mae executives, the SEC alleged that Fannie Mae, when it began reporting its exposure to subprime loans in 2007, broadly described the loans as being made to "borrowers with weaker credit histories" and that less than one-tenth of its loans that met that description.
The allegedly misleading disclosures were made as Fannie Mae was seeking to increase its market share through increased purchases of subprime and Alt-A loans and gave false comfort to investors about the extent of its exposure to high-risk loans, the SEC said. Alt-A loans are riskier loans for borrowers with good credit, but little documentation of income or assets.
The firm also reported that its 2006 year-end single-family exposure to subprime loans was just 0.2%, or about $4.8 billion, of its single-family loan portfolio, the SEC said. This was done with knowledge, support and approval of Mr. Mudd and other executives, the SEC said.
In its report, Fannie Mae didn't include loan products that specifically targeted borrowers with weaker credit histories, including more than $43 billion of so-called expanded approval loans, the SEC said. Company executives also underreported Fannie Mae's exposure to Alt-A loans, saying its exposure in March 2007 was 11% of its single-family loan portfolio when it was actually 18%, the SEC said.
In its Freddie Mac lawsuit, the SEC alleged that former Freddie Mac executives led investors to believe that the firm was disclosing all of its single-family subprime loan exposure and Mr. Syron and another executive publicly proclaimed that the single-family business had "basically no subprime exposure."
However, the single-family business, as of Dec. 31, 2006, had exposure to about $141 billion of loans that were referred to internally as "subprime" or "subprime like," or about 10% the portfolio, the SEC said. That grew to about $244 billion, or 14% of the portfolio, as of June 30, 2008, the SEC said.
