- The Washington Times - Wednesday, June 11, 2003

ASSOCIATED PRESS

Federal prosecutors have begun a criminal investigation into potential misconduct at Freddie Mac, the nation’s second-largest player in the home-mortgage market.

Paul McNulty, U.S. attorney for the Eastern District of Virginia, said yesterday that an investigation has been initiated, but declined further comment.

Freddie Mac on Monday fired its president and chief operating officer, David Glenn, because he didn’t fully cooperate with an internal review of the company’s books. Chairman and Chief Executive Leland Brendsel resigned, along with Vaughn Clarke, the company’s executive vice president and chief financial officer.

Freddie Mac officials said pages out of Mr. Glenn’s personal business diaries were missing and that other pages appeared to have been altered.

Yesterday, Shaun O’Malley, chairman of Freddie Mac’s board of directors, said a company review found no employee other than Mr. Glenn engaged in any irregularities involving documents.

“We can also confirm that the conduct we disclosed on Monday related to Mr. Glenn’s diaries and not to company accounting records,” he said.

Freddie Mac said the Securities and Exchange Commission was conducting its own investigation. And the federal agency that oversees Freddie Mac, the Office of Federal Housing Enterprise Oversight, is also investigating the company’s accounting.

David Palombi, a spokesman for Freddie Mac, said yesterday that the company was not aware of an investigation by the U.S. attorney.

“We’ve been cooperating openly with our regulator, and if we’re contacted by [the U.S. attorney], we’ll certainly cooperate with them as well,” Mr. Palombi said.

Freddie Mac’s new chief executive officer and president, Gregory Parseghian, said Monday that the company did not believe any criminal misconduct was involved.

McLean-based Freddie Mac and its larger sister company, Fannie Mae, were created by Congress to buy home loans from banks and other lenders to supply ready cash. They buy mortgages from lenders to keep in their portfolios and package others into securities for sale on Wall Street.

Fannie Mae and Freddie Mac enjoy some special benefits, such as the ability to borrow directly from the Treasury. But they are not directly guaranteed by the government.

Federal law also shields Freddie Mac and Fannie Mae from the annual and quarterly reporting rules required by the SEC of other publicly traded companies. Legislation in Congress would end that exemption, and on Tuesday Federal Reserve Board Chairman Alan Greenspan told a congressional committee that he would favor an end to the exemption.

Freddie Mac, also known as the Federal Home Loan Mortgage Corp., employs 3,900 people and reported operating earnings of $3.2 billion in 2001. But the company is auditing its past statements and expects to publish revised earnings statements for the years 2000 through 2002 at the end of the month. Company officials said earlier this week that the earnings would actually increase in 2001 and 2002 as a result of the audit. It ranked No. 32 on the most recent Fortune 500 list.

On Tuesday, leaders of the House Financial Services Committee called for hearings into Freddie Mac’s accounting troubles over the last three years.

Freddie Mac shares fell $1.03, or 2 percent, to $50.47 a share yesterday on the New York Stock Exchange. Before Monday’s announcement, shares traded at nearly $60.

Mr. Glenn, because he was fired, is not eligible for a severance package. Mr. Brendsel and Mr. Clarke are both eligible for severance pay.

In 2001, Mr. Glenn receive compensation, including stock options, valued at $7.8 million, according to the company’s informal proxy statement. Mr. Brendsel received a compensation package valued at $12,180,558.

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