Mudd, Syron et. al.,
U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 22201 / December 20, 2011
Securities and Exchange Commission v. Mudd, 11-Civ.-9202 (Carter, J.) (S.D.N.Y. filed Dec. 16, 2011)
Securities and Exchange Commission v. Syron et. al., 11-Civ.-9201-RJS (Sullivan, J.) (S.D.N.Y. filed Dec. 16, 2011)
SEC CHARGES FORMER FANNIE MAE AND FREDDIE MAC EXECUTIVES WITH SECURITIES FRAUD
FANNIE MAE AND FREDDIE MAC AGREE TO COOPERATE IN SEC ACTIONS
The Securities and Exchange Commission (SEC) on Friday, December 16, 2011, charged six former top executives of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) with securities fraud, alleging they knew and approved of misleading statements claiming the companies had minimal holdings of higher-risk mortgage loans, including subprime loans.
Fannie Mae and Freddie Mac each entered into a Non-Prosecution Agreement with the Commission in which each company agreed to accept responsibility for its conduct and not dispute, contest, or contradict the contents of an agreed-upon Statement of Facts without admitting nor denying liability. Each also agreed to cooperate with the Commission's litigation against the former executives. In entering into these Agreements, the Commission considered the unique circumstances presented by the companies' current status, including the financial support provided to the companies by the U.S. Treasury, the role of the Federal Housing Finance Agency as conservator of each company, and the costs that may be imposed on U.S. taxpayers.
Fannie Mae
In the complaint filed in the U.S. District Court for the Southern District of New York (S.D.N.Y.), the SEC alleges that Fannie Mae and three former executives of Fannie Mae, Daniel Mudd, former CEO, Enrico Dallavecchia, former CRO, and Thomas Lund, former EVP of the Single Family business made or substantially assisted others in making materially false and misleading statements regarding Fannie Mae's exposure to subprime and Alt-A loans.
For instance, in February 2007, Fannie Mae for the first time disclosed its subprime exposure and claimed that 0.2% (approximately $4.8 billion) of its Single Family mortgage credit book of business consisted of subprime mortgage loans or structured Fannie Mae MBS backed by subprime mortgage loans. This disclosure did not, at minimum, include an additional $57.1 billion worth of loans that fell squarely within the company's broadly stated subprime definition of loans made to borrowers with weaker credit histories. Nothing in Fannie Mae's disclosure alerted investors about the excluded subprime loans.
Similarly, in Fannie Mae's 2006 Form 10-K, the company reported that approximately 12% of its Single Family mortgage credit book of business consisted of Alt-A loans with lower or alternative documentation. That disclosure did not include an additional $238 billion worth of undisclosed reduced documentation Alt-A loans, which would have put the company's Alt-A disclosure at 22% of its Single Family mortgage credit book of business.
Freddie Mac
In a separate complaint filed in the U.S. District Court for the Southern District of New York (S.D.N.Y.), the SEC alleges that Freddie Mac and three of its former executives, Richard F. Syron, former Chairman and CEO of Freddie Mac, Patricia Cook, Former Executive Vice President of Investments and Capital Markets and Chief Business Officer, and Donald Bisenius, former Senior Vice President for Single Family Guarantee, led investors to believe that the firm used a broad definition of subprime loans and was disclosing all of its subprime loan exposure in its Single-Family guarantee portfolio. Unbeknown to investors, as of December 31, 2006, Freddie Mac's Single Family business was exposed to approximately $141 billion of loans internally referred to as "subprime" or "subprime like," accounting for 10 percent of the portfolio, and grew to approximately $244 billion, or 14 percent of the portfolio, as of June 30, 2008.
The SEC's complaint also alleges that, among other things, Syron, Cook and Bisenius made, or substantially assisted Freddie Mac or each other in making, materially false and misleading statements regarding the company's subprime exposure. In particular, the complaint alleges that Syron and Cook each personally made public speeches or statements that led investors to believe that Freddie Mac, in words or in substance, had "basically no subprime exposure." As the most-senior credit risk officer for the Single Family business, Bisenius had personal knowledge of the company's exposure to high risk loans internally characterized as "subprime," "subprime-like" or "otherwise subprime." Despite this knowledge, each of the defendants certified or sub-certified to the company's written disclosures, including its materially misleading subprime disclosures.
Mudd, Dallavecchia and Lund
As a result of their conduct, the SEC alleges that Mudd violated Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rules 10b-5(b) and 13(a)14(a) thereunder, and Section 17(a)(2) of the Securities Act of 1933 (the "Securities Act"); and that Mudd aided and abetted Fannie Mae's violations of Sections 10(b) and 13(a) of the Exchange Act and Exchange Act Rules 10b-5(b), 12b-20, 13a-1, and 13a-13 thereunder. The SEC complaint also alleges that Dallavecchia violated Section 17(a)(2) of the Securities Act and aided and abetted Fannie Mae's violations of Sections 10(b) and 13(a) of the Exchange Act and Exchange Act Rules 10b-5(b), 12b-20, 13a-1, and 13a-13 thereunder. Finally, the SEC complaint alleges that Lund aided and abetted Fannie Mae's violations of Sections 10(b) and 13(a) of the Exchange Act and Exchange Act Rules 10b-5(b), 12b-20, 13a-1, and 13a-13 thereunder. The SEC is seeking injunctions, disgorgement with prejudgment interest, civil money penalties, and officer and director bars.
Syron, Cook and Bisenius
As a result of their conduct, the SEC alleges that Syron and Cook violated, and Syron, Cook and Bisenius aided and abetted violations of, the antifraud and reporting provisions of the federal securities laws, including Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5(b) thereunder. Syron and Cook violated Section 17(a)(2) of the Securities Act of 1933 ("Securities Act"). Syron violated Exchange Act Rule 13a-14. Moreover, in connection with Freddie Mac's filing of its quarterly report on Form 10-Q for the quarter ended June 30, 2008, Syron, Cook and Bisenius aided and abetted Freddie Mac's violation of Exchange Act Section 13(a) and Exchange Act Rules 12b-20 and 13a-13. The SEC is seeking injunctions, disgorgement with prejudgment interest, civil money penalties, and officer and director bars.