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The company is hit with a $50 million penalty, and four ex-execs draw civil penalties for deceiving investors.
Stephen Taub, CFO.com | US
September 27, 2007
The Securities and Exchange Commission on Thursday settled charges that Freddie Mac and four of its former executives, including its one-time CFO, perpetrated a multibillion-dollar accounting fraud.
The four charged were David Glenn, president, chief operating officer, and vice chairman of the board; Vaughn Clarke, CFO; Robert Dean, senior vice president in the Market Risk Oversight department, and Nazir Dossani, senior vice president/investments in the Funding and Investments division.
Freddie Mac agreed to pay a $50 million penalty, which is expected to be distributed to injured investors through a Fair Fund. Glenn, Clarke, Dossani, and Dean agreed respectively to pay civil penalties of $250,000, $125,000, $75,000, and $65,000, as well as $150,000, $29,227, $61,663, and $34,658 in disgorgement. All settled without admitting or denying the allegations.
The SEC alleged that Freddie Mac engaged in a fraudulent scheme that deceived investors about its true performance, profitability, and growth trends. According to the complaint, Freddie Mac misreported its net income in 2000, 2001, and 2002 by 30.5 percent, 23.9 percent, and 42.9 percent, respectively.
Also, the SEC alleged, Freddie Mac’s senior management "exerted consistent pressure" to have the company report smooth and dependable earnings growth in order to present investors with the image of a company that would continue to generate predictable and growing earnings.
The SEC noted that the company's actions reflect a continuing trend. "As has been seen in so many cases, Freddie Mac’s departure from proper accounting practices was the result of a corporate culture that sought stable earnings growth at any cost," said Linda Chatman Thomsen, the SEC’s director of enforcement.
In its complaint, the SEC singled out a number of violations. One was the use of certain transactions to nullify the effects of the company's transition to compliance with a new derivatives and accounting standard. Another alleged violation was an improper change in valuing the company's "swaptions" portfolio at year-end 2000. A third was the improper use of derivatives to shift earnings between periods.
The SEC also charged Freddie with the improper use of a reserve linked to the company's application of an accounting rule for loan-origination costs.