- The Washington Times - Wednesday, July 23, 2003


Housing finance giant Freddie Mac violated accounting rules as executives withheld information from company directors and investors, according to an investigation made public yesterday.

The inquiry found numerous accounting errors and manipulations of internal accounts that resulted in the government-sponsored company, which is publicly traded, underreporting its 2000-02 earnings by $1.5 billion to $4.5 billion. That puts it among the biggest corporate accounting failures of recent years.

Some of the questionable transactions “may have gone beyond simple error,” said James Doty, a Washington lawyer who led the six-month-long review conducted at the request of Freddie Mac’s board of directors.

The report paints, in many cases, “an unflattering and critical portrait” of company practices, new Freddie Mac Chairman Shaun O’Malley told analysts in a conference call.

“This is a painful day for Freddie Mac,” he said.

The 100-page report details breaches of accounting rules in an effort by executives to smooth out volatility in earnings, meet analysts’ expectations and maintain the image of a well-managed, reliable company dubbed “Steady Freddie” on Wall Street.

The company, one of the nation’s biggest and the second-largest player in the multitrillion-dollar home mortgage market, has come under scrutiny since it announced in early June that it had ousted three top executives and the Justice Department confirmed that it was conducting a criminal investigation. The disclosures stunned the financial world and threatened to shake the housing market, a rare bright spot in the gloomy economy.

The Securities and Exchange Commission (SEC), which is investigating Freddie Mac’s accounting, generally frowns on deliberate bending of accounting rules to smooth turbulence in earnings.

In their zeal to maintain the company’s image of steadiness, Freddie Mac’s top managers withheld information from company directors and investors and shrouded some complex transactions in secrecy — sometimes by using an outside broker in the deals, the inquiry found.

But, Mr. Doty said, “This is not a story of rampant criminal conduct or abuse of authority for personal gain.”

According to the report: “The events exhibit an approach by senior management to maintaining a public corporate image at the expense of good management practices and effectiveness of internal controls.”

In that regard, it cited Leland Brendsel, the company’s now-deposed former chairman and chief executive officer, for setting the corporate tone.

And it suggested that Mr. Brendsel and former President David Glenn — fired for what the company said was his failure to cooperate fully with the inquiry — may not have been truthful in their interviews with the investigating lawyers.

Freddie Mac’s new chief executive officer, Gregory Parseghian, was involved in several of the questionable transactions in his former role as chief investment officer, Mr. Doty said during the conference call.

“He was aware that the objective of the transactions was to manage earnings,” said Mr. Doty, who was a general counsel at the SEC during the first Bush administration. “However, he relied in good faith on corporate accounting and Arthur Andersen to provide the necessary accounting advice,” a reference to the now-bankrupt accounting firm.

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