Regulation

Ohio Attorney General Sues Fannie Mae

Federal regulators of the mortgage buyer also reportedly tussled among themselves about how hard to go after the company.
Stephen TaubNovember 23, 2004

Ohio Attorney General Jim Petro on Friday filed a securities fraud class-action lawsuit in federal court on behalf of his state and all other shareholders in Fannie Mae, alleging that the mortgage buyer manipulated its earnings to artificially inflate the price of its common stock.

Petro filed his suit against Fannie Mae and its three top executives—chief executive Franklin Raines, CFO Timothy Howard, and controller Leanne Spencer—on behalf of the Ohio Public Employees Retirement System, the State Teachers Retirement System of Ohio, the Ohio Bureau of Workers’ Compensation, and all other purchasers of Fannie Mae common stock from Oct. 11, 2000, through Sept. 22, 2004.

“These defendants manipulated earnings in a fraudulent scheme to deceive investors about Fannie Mae’s true financial state. This deception could cost shareholders billions of dollars,” Petro said.

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The complaint alleges that Fannie Mae and the executives artificially inflated the company’s publicly traded common stock through false public financial statements. “Because these executives were compensated primarily on Fannie Mae’s stock performance, this artificially high stock price allowed the executives to get rich at the expense of the company’s shareholders,” Petro said in his statement.

He also charged that in violation of SEC rules, Fannie Mae and its officers did not disclose that the company failed to apply generally accepted accounting principles, lacked sufficient internal auditing controls, and failed to report the volatility of the company’s earnings. Reuters reported that it could not reach A Fannie Mae spokesman for comment..

Petro is also suing Freddie Mac, which last year admitted it manipulated earnings to smooth its results.

Meanwhile, Dow Jones reported over the weekend that The Office of Federal Housing Enterprise Oversight (OFHEO), which oversees Fannie and Freddie, often used the media to hype problems at Fannie Mae. Further, OFHEO’s staff increasingly fought over how aggressively it should police the company, the wire service added. The news service cited a report released Friday by the inspector general of the Department of Housing and Urban Development.

OFHEO Deputy Director Steve Blumenthal told investigators the agency’s slow response to Freddie’s accounting scandal was “a humiliating experience,” according to Dow Jones. He admitted OFHEO examiners knew there were brewing problems at Freddie, but “didn’t take any action. They were being collegial. Well that’s over now,” the news service said.

Several current and former OFHEO employees as well as several anonymous sources faulted OFHEO’s top managers for its dealings with the press and Congress, according to Dow Jones.

In fact, OFHEO Director Armando Falcon canceled two interviews with investigators and cut others short, the news service reported. However, HUD didn’t find any reasons for taking formal action against OFHEO.

“I am pleased that a determination has been made that I followed the law, acted wholly within my authority as director and that this is now a closed matter,” OFHEO Director Armando Falcon told Dow Jones through a spokeswoman. “We will continue to do the important work of OFHEO and not divert our attention from the serious matters before the agency.”