Human Capital & Careers

Refunding Bonuses for Restated Earnings

At Fannie Mae, Freddie Mac, Conseco, Nortel, Computer Associates, and elsewhere, attempts to ''claw back'' compensation are part of a growing trend.
Stephen TaubJanuary 7, 2005

Now that Fannie Mae is undertaking a $9 billion restatement at the direction of the Securities and Exchange Commission, one legislator wants its former top executives to return bonuses that were based on the bogus profits.

In a letter to Armando Falcon Jr. — director of the Office of Federal Housing Enterprise Oversight, which regulates Fannie Mae — Rep. Richard H. Baker (R-La.) requested that the OFHEO “take action to recapture all bonus payments from executives that were awarded based upon the faulty and deeply flawed earnings statements of the enterprise,” according to The Washington Post.

Baker, the chairman of the House Financial Services subcommittee that oversees the government-chartered mortgage company, reasoned that the bonus plans were determined in part by the company’s profits and that the SEC has determined that Fannie Mae violated two key accounting rules. That determination, Baker reportedly wrote, “invalidates the earnings on which millions of dollars in bonuses” were based.

Under pressure from the OFHEO, Fannie Mae chairman and chief executive officer Franklin D. Raines and chief financial officer J. Timothy Howard resigned after the release of the SEC report; they are now negotiating with the company over their financial packages.

The Post asserted that Baker’s request appears to apply not only to Raines and Howard, but to many other current and former top managers, including interim chief executive officer Daniel H. Mudd, who was the company’s chief operating officer, and interim chief financial officer Robert J. Levin, who was an executive vice president. The paper added that Fannie spokesman Charles V. Greener declined to comment, so it could not determine how many executives have been paid bonuses since 2001 or the total value of those awards.

This bid to “claw back” compensation is part of a growing trend. Late last summer saw an unsuccessful attempt, when a federal judge ruled that the OFHEO could not withhold more than $50 million owed to Leland Brendsel, the former head of Freddie Mac.

In October, a judge ordered former Conseco Inc. chief executive officer Steve Hilbert and his family trusts to return $62.7 million plus interest to a subsidiary, Conseco Services. In 2003, the parent company had filed lawsuits seeking to recover a total of $670 million in stock-related loans from Hilbert, who left the company in 2000, and 10 other former directors and officers.

Another company that recently sought refunds from former officials was Nortel Networks, which is currently embroiled in an accounting scandal and has delayed restatements several times.

Shareholders, too, are increasingly seeking to “recoup funds, enforce accountability, and bring about reforms in this area of governance” when they feel that “executives are being paid millions of dollars in undeserved bonuses,” according to a recent report by the Investor Responsibility Research Center.

Last year, on the other hand, more than three-quarters of Computer Associates International Inc. shareholders voted against a resolution by an Amalgamated Bank investment fund calling for the company to recoup compensation paid to executives who have been implicated in the software giant’s accounting scandal.