- SEC Sues Former Fannie, Freddie Executives
1The Securities and Exchange Commission has sued the former chief executives
of Fannie Mae and Freddie Mac, accusing them of misleading investors about
risks of subprime-mortgage loans.
WSJ law reporter Ashby Jones stops on Mean Street to discuss the SEC's suit
brought against former Fannie Mae and Freddie Mac chief executives.
The lawsuits, filed in Manhattan federal court, also accused four other
former executives at Freddie Mac and Fannie Mae of making false and
misleading statements about the firms' exposure. The government took over
Fannie and Freddie in September 2008 as investors pulled back from the firms
, which took heavy losses on souring mortgages they guaranteed. Taxpayers
have since provided $151 billion of support.
Former Freddie Mac CEO Richard F. Syron and former Fannie Mae CEO Daniel H.
Mudd, are among the six executives. None of them has reached settlement
agreements with the SEC.
Complaints: SEC v. Fannie Mae | SEC v. Freddie Mac
Nonprosecution Agreements: Fannie Mae | Freddie Mac
Earlier this year, the SEC had sent Wells notices, indicating it planned to
pursue enforcement actions, to Mr. Syron, Mr. Mudd and several other former
executives. Those other executives were: Fannie's Enrico Dallavecchia, a
former chief risk officer, and Thomas Lund, a former executive vice
president; and Freddie's Patricia Cook, a former executive vice president
and chief business officer; and Donald Bisenius, a former senior vice
The move came as Fannie Mae and Freddie Mac entered into agreements with the
securities regulator to avoid civil prosecution. In the civil non-
prosecution agreements, the firms said they would accept responsibility for
the conduct and not dispute the SEC's allegations, without admitting or
denying wrongdoing, the SEC said.
As part of those agreements, the government-sponsored firms will cooperate
in the securities regulators' litigation against the former executives, the
SEC said. Neither firm is paying a fine.
"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.
Former Freddie Mac CEO Richard Syron, left, and former Fannie Mae CEO Daniel
Mudd, in 2008.
"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 alleged that the Fannie Mae executives misled the public about the
government-sponsored firm's exposure to subprime mortgages and so-called Alt
-A loans between December 2006 and August 2008. Freddie Mac executives
allegedly did the same regarding its exposure to subprime loans between
March 2007 and August 2008.
Lawyers for Mr. Syron and Mr. Mudd couldn't immediately be reached for
In its complaint against the former Fannie Mae executives, the SEC alleged
that Fannie Mae, when it began reporting its exposure to subprime loans in
2007, broadly described the loans as being made to "borrowers with weaker
credit histories" and that less than one-tenth of its loans that met that
The allegedly misleading disclosures were made as Fannie Mae was seeking to
increase its market share through increased purchases of subprime and Alt-A
loans and gave false comfort to investors about the extent of its exposure
to high-risk loans, the SEC said. Alt-A loans are riskier loans for
borrowers with good credit, but little documentation of income or assets.
The firm also reported that its 2006 year-end single-family exposure to
subprime loans was just 0.2%, or about $4.8 billion, of its single-family
loan portfolio, the SEC said. This was done with knowledge, support and
approval of Mr. Mudd and other executives, the SEC said.
In its report, Fannie Mae didn't include loan products that specifically
targeted borrowers with weaker credit histories, including more than $43
billion of so-called expanded approval loans, the SEC said. Company
executives also underreported Fannie Mae's exposure to Alt-A loans, saying
its exposure in March 2007 was 11% of its single-family loan portfolio when
it was actually 18%, the SEC said.
In its Freddie Mac lawsuit, the SEC alleged that former Freddie Mac
executives led investors to believe that the firm was disclosing all of its
single-family subprime loan exposure and Mr. Syron and another executive
publicly proclaimed that the single-family business had "basically no
However, the single-family business, as of Dec. 31, 2006, had exposure to
about $141 billion of loans that were referred to internally as "subprime"
or "subprime like," or about 10% the portfolio, the SEC said. That grew to
about $244 billion, or 14% of the portfolio, as of June 30, 2008, the SEC
Separately, Mr. Dallavecchia has stepped down as the chief risk officer of
PNC Financial Services Group Inc. and is on administrative leave, the
Pittsburgh bank said. Mr. Dallavecchia was chief risk officer at Fannie Mae
from June 2006 to August 2008. Michael Hannon, currently PNC's executive
vice president and chief credit officer, will become interim chief risk
officer, PNC said.