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The Honolulu Advertiser

Posted on: Thursday, June 12, 2003

Freddie Mac faces criminal inquiry

 •  Experts fear fallout from investigation

By James Rowley
Bloomberg News Service


WASHINGTON — Freddie Mac, the second-biggest buyer of U.S. mortgages, is the subject of criminal and securities investigations after ousting its top three executives amid a restatement of earnings for the past three years.

The criminal probe was announced by U.S. Attorney Paul J. McNulty in Alexandria, Va., two days after Freddie Mac said it fired President David Glenn for altering notes given to internal investigators. The chief executive and chief financial officer also were forced to resign. Freddie Mac said the Securities and Exchange Commission opened a formal investigation.

"Given that the top three officers were fired in the midst of an audit, the likelihood something is amiss is greater than not," said W. Shannon Reid, who manages the $1 billion Evergreen Strategic Growth Fund. The fund sold its 267,721 shares of Freddie Mac in the first quarter, according to Bloomberg data.

The investigations add to the challenges facing a new management team seeking to re-audit results since 2000, fend off calls in Congress for greater regulation, and rebuild investor confidence after a 16 percent plunge in the shares this week. The Mc-Lean, Va.-based firm's borrowing costs may rise, putting it at a disadvantage to its principal rival, Fannie Mae.

Shares of both companies — chartered by Congress to make money more widely available to the housing industry — fell. Freddie Mac shares fell $1.50 to $50 at the close of New York Stock Exchange composite trading. Fannie Mae shares slipped 17 cents to $69.70 in NYSE composite trading.

The company said Glenn altered personal business diaries and removed pages before giving them to an independent counsel hired by the company's audit committee. The tampering "related to Mr. Glenn's diaries and not to the company's accounting records," the company said.

The speed of the criminal investigation "reflects the seriousness of the charges, Freddie Mac's central importance to the economy today given that it's the housing market that's keeping the economy afloat these days, and the post-Enron fervor for investigating corporate wrongdoing," said Michael A. Perino, professor at St. John's University School of Law in New York.

Freddie Mac and Fannie Mae own or guarantee 42 percent of the $6 trillion U.S. mortgage market. By purchasing mortgages from banks and savings and loans, they provide money that lenders can use to make new loans.

Freddie Mac said it has cooperated with the SEC since it informed the agency of the need to restate earnings in January.

Chairman and Chief Executive Officer Leland C. Brendsel and Chief Financial Officer Vaughn Clarke resigned, the company said Monday. Gregory Parseghian, formerly chief investment officer, was named chief executive.

"As of this date" the company's investigation "does not indicate that any employee of Freddie Mac other than Mr. Glenn" altered documents, the company said.

The House Subcommittee on Capital Markets, Insurance and the Government Sponsored Enterprises plans hearings on Freddie Mac's accounting. The hearings will be led by Rep. Richard Baker, a Louisiana Republican who has introduced bills to remove the government chartered benefits of Freddie Mac and Fannie Mae.

Freddie Mac's regulator, the Office of Federal Housing Enterprise Oversight, launched an investigation and informed the company that severance payments for the ousted executives are subject to approval.

Freddie Mac today said Brendsel's contract entitles him to receive his $1.18 million base salary for two years, to keep $21.1 million of options and stock grants, and to get an $860,417 bonus for 2003. Glenn will receive no pay and will forfeit $11.2 million in unvested stock grants. Glenn retains $6.18 million of grants and accrued dividends that vested before he was fired.