Washington, DCSix former Fannie Mae and Freddie Mac executives have been charged with securities fraud, the Securities and Exchange Commission (SEC) announced on December 16, 2011. Allegations against the officials included securities investment fraud activities such as misleading statements to the SEC, investors and the media, which resulted in increasing the companies' market share. The securities fraud litigation reportedly involves statements made between 2006 and 2008 by Fannie Mae and Freddie Mac executives.
According to SEC (12/16/11) allegations, six executives at Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corporation) repeatedly and intentionally made misleading statements about the companies' mortgage loans. This included minimizing the risk of subprime loans the two organizations faced.
"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. "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."
Lawsuits against the executives include allegations that the actions of the accused caused the mortgage firms to "materially misstate their holdings of subprime mortgage loans" in filings with the SEC, interviews with the media and calls with their investors. Allegations against Fannie Mae executives cover statements made between December 2006 and August 2008, while allegations against Freddie Mac executives cover statements made between March 2007 and August 2008.
The SEC alleges that Fannie Mae executives described subprime loans as being made to borrowers with weaker credit histories but then reported less than one-tenth of the loans that fit that criteria. Meanwhile, Freddie Mac is alleged to have stated that its Single Family business was exposed to almost no subprime exposure when in fact, exposure to subprime loans made up 10 percent of the Single Family portfolio and around $140 billion of loans in December 2006, rising to almost $245 billion by June 2008.
Both Fannie Mae and Freddie Mac have entered into non-prosecution agreements with the SEC and have reportedly agreed to accept responsibility for their conduct. In its lawsuits against the executives, the SEC seeks financial penalties and disgorgement.
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