Fannie, Freddie Execs Charged with Securities Fraud
Hey, lookie here, someone finally got indicted charged with civil fraud
Phoney & Fraudie had a long history of fraud, bad execs, fake accounting.
Next up: AIG. They are the no brainer, with zero reserves against $3 trillion in potential liability.
There are cases to be made against Countrywide, Citigroup, Bank of America, Lehman Brothers, Bear Stearns, etc., but you take the low hanging fruit first.
~~~
SEC release below
SEC CHARGES FORMER FANNIE MAE AND FREDDIE MAC EXECUTIVES WITH SECURITIES FRAUD
Companies Agree to Cooperate in SEC Actions
FOR IMMEDIATE RELEASE 2011-267
Washington, D.C., Dec. 16, 2011 — The Securities and Exchange Commission today 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.
Additional Materials
- SEC complaint vs. Freddie Mac executives
- SEC complaint vs. Fannie Mae executives
- Non-Prosecution Agreement – Freddie Mac
- Non-Prosecution Agreement – Fannie Mae
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.
Three former Fannie Mae executives – former Chief Executive Officer Daniel H. Mudd, former Chief Risk Officer Enrico Dallavecchia, and former Executive Vice President of Fannie Mae’s Single Family Mortgage business, Thomas A. Lund – were named in the SEC’s complaint filed in U.S. District Court for the Southern District of New York.
The SEC also charged three former Freddie Mac executives — former Chairman of the Board and CEO Richard F. Syron, former Executive Vice President and Chief Business Officer Patricia L. Cook, and former Executive Vice President for the Single Family Guarantee business Donald J. Bisenius — in a separate complaint filed in the same court.
“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 is seeking financial penalties, disgorgement of ill-gotten gains with interest, permanent injunctive relief and officer and director bars against Mudd, Dallavecchia, Lund, Syron, Cook, and Bisenius. Both lawsuits allege that the former executives caused the federal mortgage firms to materially misstate their holdings of subprime mortgage loans in periodic and other filings with the Commission, public statements, investor calls, and media interviews. The suit involving the Fannie Mae executives also includes similar allegations regarding Alt-A mortgage loans. The suit against the former Fannie Mae executives alleges they made misleading statements — or aided and abetted others — between December 2006 and August 2008. The former Freddie Mac executives are alleged to have made misleading statements — or aided and abetted others – between March 2007 and August 2008.
The SEC’s complaint against the former Fannie Mae executives alleges that, when Fannie Mae began reporting its exposure to subprime loans in 2007, it broadly described the loans as those “made to borrowers with weaker credit histories,” and then reported — with the knowledge, support, and approval of Mudd, Dallavecchia, and Lund — less than one-tenth of its loans that met that description. Fannie Mae reported that its 2006 year-end Single Family exposure to subprime loans was just 0.2 percent, or approximately $4.8 billion, of its Single Family loan portfolio. Investors were not told that in calculating the Company’s reported exposure to subprime loans, Fannie Mae did not include loan products specifically targeted by Fannie Mae towards borrowers with weaker credit histories, including more than $43 billion of Expanded Approval, or “EA” loans.
Fannie Mae’s executives also knew and approved of the decision to underreport Fannie Mae’s Alt-A loan exposure, the SEC alleged. Fannie Mae disclosed that its March 31, 2007 exposure to Alt-A loans was 11 percent of its portfolio of Single Family loans. In reality, Fannie Mae’s Alt-A exposure at that time was approximately 18 percent of its Single Family loan holdings.
The misleading disclosures were made as Fannie Mae’s executives were seeking to increase the Company’s market share through increased purchases of subprime and Alt-A loans, and gave false comfort to investors about the extent of Fannie Mae’s exposure to high-risk loans, the SEC alleged.
In the complaint against the former Freddie Mac executives, the SEC alleged that they and Freddie Mac led investors to believe that the firm used a broad definition of subprime loans and was disclosing all of its Single-Family subprime loan exposure. Syron and Cook reinforced the misleading perception when they each publicly proclaimed that the Single Family business had “basically no subprime exposure.” 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 alleges that Mudd violated Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rules 10b-5(b) and 13(a)14(a) thereunder, and Section 17(a)(2) of the Securities Act of 1933 (the “Securities Act”); and that Mudd aided and abetted Fannie Mae’s violations of Sections 10(b) and 13(a) of the Exchange Act and Exchange Act Rules 10b-5(b), 12b-20, 13a-1, and 13a-13 thereunder. The SEC complaint also alleges that Dallavecchia violated Section 17(a)(2) of the Securities Act and aided and abetted Fannie Mae’s violations of Sections 10(b) and 13(a) of the Exchange Act and Exchange Act Rules 10b-5(b), 12b-20, 13a-1, and 13a-13 thereunder. Finally, the SEC complaint alleges that Lund aided and abetted Fannie Mae’s violations of Sections 10(b) and 13(a) of the Exchange Act and Exchange Act Rules 10b-5(b), 12b-20, 13a-1, and 13a-13 thereunder.
The SEC’s complaint alleges that Syron and Cook violated Exchange Act Section 10(b) and Rule 10b-5(b) thereunder and Securities Act Section 17(a)(2); that Syron violated Exchange Act Rule 13a-14; and that Syron, Cook and Bisenius aided and abetted violations of Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5(b), 12b-20 and 13a-13 thereunder.
The SEC’s investigation of Fannie Mae was conducted by Senior Attorneys Natasha S. Guinan, Christina M. Marshall, Liban Jama, Mona L. Benach, and Associate Chief Accountant, Peter Rosario, under the supervision of Assistant Director Charles E. Cain, and Associate Director Stephen L. Cohen. Sarah Levine and James Kidney will lead the SEC’s litigation efforts.
The SEC’s investigation of Freddie Mac was conducted by Senior Attorneys Giles T. Cohen and David S. Karp and Assistant Chief Accountant Avron Elbaum of the SEC’s Division of Enforcement under the supervision of Assistant Director Charles E. Cain and Associate Director Stephen L. Cohen. Kevin O’Rourke and Suzanne Romajas will lead the SEC’s litigation efforts.
# # #
For more information about these enforcement actions, contact:
Robert S. Khuzami, Director
(202) 551-4894
Lorin L. Reisner, Deputy Director
(202) 551-4781
Stephen L. Cohen, Associate Director
(202) 551-4472
Charles E. Cain, Assistant Director
(202) 551-4911
http://www.sec.gov/news/press/2011/2011-267.htm
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December 16th, 2011 at 10:43 am
What happened to the real SEC? Where did this fake one come from?
This is what needs to happen in the financial sector. There is no point in punishing companies that are on government life support, since most companies are insensitive to pain as they lack nerve endings.
However, the executives who conduct business in a fraudulent, unethical, and immoral manner while reaping signifcant rewards need to know that they risk jail time, financial destruction, and being publicly dragged through the mud of a legal morass for years. That is the only way to innoculate other executives against following in the same footsteps.
I am sure that a high percentage of the people in the financial sector are actually moral and ethical people who want to do the right thing. They are being harmed by people who are willing to blow up their own companies for personal gain. The msot recent example is MF Global. I am pleased to see that its employees have filed suit against Jon Corzine and the BoD since most of the employees probably just went to work each day and did their job the way they were supposed to blissfully unaware that their CEO was about to demolish their company.
December 16th, 2011 at 10:46 am
[...] Fannie Mae and Freddie Mac. What, you thought they’d indict REAL bankers? LOL Bookmark It [...]
December 16th, 2011 at 10:58 am
” 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”
well this is at least a new riff on company admissions? rather than no admissions at all?
December 16th, 2011 at 10:59 am
So what. Election year theatrics. In a year or two we’ll read about some sort of blameless settlement which involves relative pocket change for a fine. Mudd made about 13.5 million his last year. I;m guessing his exit package was enormous. He’s probably sitting on a beach or in a ski hill hot tub right now chuckling at the news.
December 16th, 2011 at 11:41 am
Must be an election year. This same business model was used all over the country. We have several firms in a city of 100k where the during the obvious bubble, owners raped their own companies by piling on debt, while extracting what they could. So you end up with a few multimillionaires, debt offloaded on others, and masses of unemployed. Ah-the American way. Behind every fortune there’s a crime that doesn’t get prosecuted. The people that really got it were those that actually put real money back into their business. I know someone who took $1M profit, and put it back in their business. Now they can’t make any money, and the value of their company has plummeted. And now the suckers get to drive by the mansions of the pirates, as escalating expenses push their own businesses ever closer to the abyss.
December 16th, 2011 at 11:49 am
BR, if any of the posts you’ve offered about the respective activities of the other financial enterprises compared to Fannie and Freddie have a shred of truth about them, this SEC action shows that they’re going after the most difficult case first, not the low hanging fruit. About the only thing which identifies Fannie and Freddie as deserving the privilege of entering the prisoner’s dock first is that they’re quasi-government agencies. That hardly qualifies as low hanging fruit. When this case craters, as so many cases handled by our government legal agencies have over the recent past, they’ll just say that it’s too difficult to prove fraud in these cases and walk away, claiming they made a good faith effort to secure a conviction. All the banksters have just been inoculated against criminal cases.
December 16th, 2011 at 11:51 am
PrahaPartizan:
I disagree – they are going after the execs, and they will compare the public statements made by CEO/CFO etc versus the reality at the time.
“We are buying hi quality bonds we have full confidence in” and it turns out they were junk, knew it was junk, and emailed concerns about the junk, its a slam dunk.
December 16th, 2011 at 12:05 pm
If I understand this right it disturbs me. The fraud is not the mortgage fraud but the reporting of the degree of exposure. So I imagine the fact that only F and F are being charged with fraud will be morphed into F and F were the worst offenders of sub-prime, etc. This effectively would cover up any interest in the remaining problems in the financial sector.
December 16th, 2011 at 12:06 pm
Lets see what sticks to Mudd.
They should ALL be banned from the industry. That would be one way to cleanse the crony capitalism hegemony.
December 16th, 2011 at 12:27 pm
>but you take the low hanging fruit first
First after sitting on their hands for 3 years. The point is just sit tight and watch the Statutes of Limitations expire.
December 16th, 2011 at 12:27 pm
There are cases to be made against Countrywide, Citigroup, Bank of America, Lehman Brothers, Bear Stearns, etc., but you take the low hanging fruit first.
–
Is there a statute of limitations on these types of cases?
December 16th, 2011 at 1:18 pm
Sounds like an old lawyer joke:
What do you call 1,000 banksters at the bottom of the ocean? A Good Start!
The most infuriating part of the banking crisis is that nobody is in jail. Madoff you say, well he is a nobody. What about the top executives from Countrywide, Citi, Merrill, AIG. What abnout the mortgage fraud at the top ten underwriters from 2006? Arrest them, prosecute them, persecute them, and claw back the billions in phony bonuses paid on phony profits.
And then go get the MF’ers from MF Global.
Does anyone have a spreadsheet or chart of the political contributions (Bribes and corruption) made by the top financial firms to shape or defeat Dodd-Frank? I propose that while buying politicians to shape Dod-Frank, the top firms were also paying for immunity from prosecution for crimes committed in 2005-2008.
December 16th, 2011 at 1:43 pm
As I recall, the accounting scandals at Fannie and Freddie began in 2003. They actually went into radio silence on financial reporting for several quarters, while an army of accountants (1,200 of them at Fannie) rooted through the books. Meanwhile, incredibly, they continued to be NYSE listed.
Daniel Mudd et al were actually the new crew, brought in to replace the previous screw-ups.
How is it that their executive predecessors — backslapping glad-handers like Franklin Raines who helped steer these mortgage Leviathans onto the rocks — skate free, while the clean-up crew gets nailed with narrower, technical violations?
December 16th, 2011 at 1:58 pm
I still don’t believe they are doing this- they may indeed have a case, but if I were to compile a list of the thugs who put the economy into the stone age, these guys would be way down at the bottom. This will only give aid and comfort to the wingnut believers who absolve Lehman, JPMChase, Bear, Goldman and Morgan and think Barney Frank caused the crisis.
And like the Citi case, which the SEC has already cheesed out on, these suits will come to nothing.
December 16th, 2011 at 3:48 pm
Interesting,
one of your arguments about fannie freddie not being a cause of sub-prime was that they weren’t in sub-prime. Now that argument is a little weaker, as Fannie & Freddie were sued by the SEC for unstating by hundeds of billions of dolars the subprime loans held by the firms.
~~~
BR: Thats not remotely my argument. Only a liar or an idiot would suggest as much.
For those of you who want to see the actual argument made:
http://www.ritholtz.com/blog/2011/11/examining-the-big-lie-how-the-facts-of-the-economic-crisis-stack-up/
December 16th, 2011 at 4:00 pm
@BR: Good comments, and I agree 100%. These guys have cost us $150 Billion so far and are by far the largest cost of all bailouts. But the point here is not who caused what, but Fraud. It’s clear cut.
@flocktard & AnnaLee: You can’t be serious. Take off your partisan hack hats and think clearly for once. You are saying you would not prosecute fraud by these guys because of political implications? Really? By your logic, we shouldn’t prosecute all bank robbers, just the ones who hit certain cities. And we should have let Bernie Madoff alone, since he didn’t cause the financial crisis. Fruad is fraud.
BR, I tip my hat to you for being neutral.
December 16th, 2011 at 4:24 pm
Machinehead, you are 100% correct on all points.
I was always amazed F&F were allowed to remain NYSE-listed during that time period. I also find it curious that Franklin Raines has not been pulled into all of this… I guess it doesn’t hurt to have friends in high places. As Orwell said, “All animals are equal, but some animals are more equal than others.”
December 16th, 2011 at 6:23 pm
@ Irwin-
I’m not saying that at all. But out of the entire deck of cards that played a hand in the crisis, these targets are only the jokers. Let’s face it- the GSEs DON’T ORIGINATE LOANS.
I think the SEC is going after F&F in an attempt to get the funding that the Republicans have deliberately held back from them. And that friend, ain’t partisan. I think it’s calculated. Deliberately.
December 16th, 2011 at 7:02 pm
Wow! That’s all I can say.
December 16th, 2011 at 7:02 pm
The only downside to this is that the MSM is already running with the RightWing slant on this story, that Fannie & Freddie were the epicenter of the sub-prime mortgage mess.
RightWing Zombie Propaganda Never Dies.
December 16th, 2011 at 7:28 pm
Daniel, your name is Mudd.
December 16th, 2011 at 7:55 pm
I have to agree with Joe Friday’s assessment. Given that this is the first newsworthy enforcement related to the financial crisis, all this does is validate “The Big Lie” for the believers and likely convert some of the non-believers.
I happened to catch a portion of the MSM evening news and after reporting the SEC charges they showed a debate clip of Michelle Bachmann charging that F&F were at the epicenter of the crisis. I didn’t think there was any way that Frau Bachmann could be made to sound credible. Congratulations to the SEC!
December 17th, 2011 at 8:21 am
[...] Yes, we know: The usual liars and assclowns have latched onto the SEC litigation against the F&F execs for their the own biased reasons, as if lying executives somehow vindicates their own lies ab out the causes of the crisis. The suit is about statements made after housing peaked in both price and sales volume and was already heading south. [...]
December 17th, 2011 at 8:51 am
I am glad that lying about risk exposure is being prosecuted. But are F&F really the worst cases of such lying, or is there a political motive behind prosecuting this case and letting thousands of other CEO fraudsters live happily ever after. I know that the SEC is underfunded by 10-fold relative to the task at hand; but this is basically sending the message that only if politically convenient will the fraud be prosecuted.
December 21st, 2011 at 12:33 pm
So – no jail time for these guys. Just take some of their money.
Also appears they have more on Fannie than Freddie. I am certain this happened only because Freddie took better precautions.