Friday, August 25, 2006

Fannie Mae Dodges a Criminal Bullet

Mortgage giant Fannie Mae, a federally-chartered corporation, avoided being charged with any crimes related to accounting problems at the company dating back to 1998.  The Department of Justice concluded its criminal investigation of the company and notified it that charges would not be file in the case, and apparently none will be pursued against individuals.  Fannie Mae settled a civil securities fraud action in May 2006 filed by the SEC and the Office of Federal Housing Enterprise Oversight,  and agreed to pay a $400 million civil penalty.  According to the SEC's press release (here) issued at the time of the settlement:

At the end of 1998, senior management manipulated the company's earnings in order to obtain bonuses they otherwise would not have received. Senior management of the company directed employees to record only $240 million of amortization expenses. By not recording the full amount of the calculated expenses, Fannie Mae understated its expenses and overstated its income by a pre-tax amount of $199 million. The company's management made two additional adjustments in the fourth quarter of 1998 that had the effect of offsetting nearly half the $240 million amortization expense adjustment. This resulted in the company not only exceeding Wall Street expectations but also hitting the earnings per share target necessary to trigger maximum bonuses. Fannie Mae has agreed, without admitting or denying these allegations, to a fraud injunction for violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.

From at least 1998 through 2004, the company's financial results were smoothed as a result of the misapplication of certain Generally Accepted Accounting Principles (GAAP); namely rules relating to the amortization of loan fees, premiums and discounts, known as SFAS 91, and rules relating to hedge accounting, known as SFAS 133. In both instances, while Fannie Mae recognized that the company was departing from GAAP, it failed properly to consider whether the departures were material.

Unlike many criminal investigations of corporations pursued in the past few years, this case ends without a deferred or non-prosecution agreement.  A Reuters story (here) discusses the decision to end the criminal investigation. (ph)

http://lawprofessors.typepad.com/whitecollarcrime_blog/2006/08/fannie_mae_dodg.html

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