SEC Charges Former GSE Execs with Securities Fraud

Six former executives at Fannie Mae and Freddie Mac are now facing securities fraud charges for misleading statements regarding subprime loans. The Securities and Exchange Commission (SEC) filed the charges Friday in a U.S. District Court for the Southern District of New York.

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""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,"" Khuzami stated.

The former Fannie Mae executives who allegedly either made or approved misleading statements between March 2007 and August 2008 include former CEO Daniel H. Mudd, former chief risk officer, Enrico Dallavecchia, and former EVP of single family mortgage, Thomas A. Lund.

For example, Fannie Mae reported subprime loans made up 0.2 percent, $4.8 billion, of its single family portfolio. At the time, the company also held $43 billion in ""expanded approval"" loans made to borrowers with weak credit histories.

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Similarly, the SEC says Freddie Mac stated publicly its single-family portfolio had ""basically no subprime exposure,"" while internally it acknowledged it held $141 billion in subprime or ""subprime like"" loans at the end of 2006, making up 10 percent of its single-family portfolio.

In mid-2008, subprime or ""subprime like"" loans made up 14 percent, or $244 billion of Freddie Mac's single-family portfolio.

The former Freddie Mac executives facing charges include former chairman of the board and CEO, Richard F. Syron, former EVP and chief business officer Patricia L. Cook, and former EVP for single-family guarantee business, Donald J. Bisenius.

The SEC alleges the individuals either made or approved untrue portrayals of their subprime exposure to the public, investors, and the media.

The former Fannie Mae executives are also facing charges for misrepresentations of its Alt-A loans. While claiming Alt-A loans made up 11 percent of its single-family portfolio, Alt-A loans actually made up 18 percent of the portfolio.

""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,"" Khuzami said.

Both GSEs entered a non-prosecution agreement with the SEC ""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,"" stated a press release from the SEC Friday.

Both GSEs also agreed to cooperate in the litigation against their former executives.