SEC Sues Former GSE Execs -- But Will the Agency Follow Through?

Last week the SEC filed two civil lawsuits against six former executives of Fannie Mae and Freddie Mac:  Former Fannie Mae CEO Daniel Mudd, former Fannie Mae chief risk officer Enrico Dallavecchia, and former Fannie Mae EVP Thomas Lund; and, former Freddie Mac CEO Richard Syron, former Freddie Mac chief business officer Patricia Cook, and former Freddie Mac EVP Donald Bisenius. The SEC seeks disgorgement of profits and financial penalties in addition to a permanent bar against serving as an officer or director of a public corporation.

The SEC sued under Rule 10b-5 for securities fraud, alleging that the named defendants intentionally misled investors by understating the GSEs exposure to "subprime loans."  The litigation will turn on the definition of "subprime loan"  -- so the SEC's ultimate success is far from assured.

Law Professor Peter Henning, writing for the New York Times DealBook says that by filing this litigation, the SEC signals "an aggressive turn in the pursuit of cases tied to the subprime mortgage crisis."

Link to article:  http://dealbook.nytimes.com/2011/12/19/closer-look-at-s-e-c-s-mortgage-fraud-charges/

I wish I could be as optimistic about the ultimate outcome of this litigation.  

• Remember that the SEC desperately wants to settle the Citigroup litigation for peanuts compared to the initial amount claimd.  (See my previous blog posts.)
• Remember also that the Justice Department has not pursued criminal actions against either GSE. 
• Note that these GSE execs are likely entitled to insurance coverage for these claims. In the meantime, the GSEs in conservatorship (so translate: the U.S. taxpayers) are obligated to front litigation expenses incurred by these defendants unless and until they are found guilty of wrongdoing.
• Even Professor Henning recognizes that:  "Filing fraud charges creates a big splash, but like any enforcement action, a number of questions remain."   My biggest question is whether the SEC has the will to see this litigation through.  The proof is in the pudding.

(ag) Dec. 19, 2011, in Securities Law, Subprime/Predatory Lending, Secondary Mortgage Market, Fannie Mae/Freddie Mac, SEC