- The Washington Times - Monday, December 18, 2006

The government yesterday filed civil charges against former Fannie Mae Chief Executive Franklin D. Raines and two other top executives, accusing them of misconduct costing shareholders billions of dollars.

The Office of Federal Housing Enterprise Oversight (OFHEO), the D.C. mortgage giant’s regulator, announced that it is seeking fines and the return of millions of dollars in bonus money. It filed 101 charges against Mr. Raines, former Chief Financial Officer Timothy Howard and former Controller Leanne Spencer.

Mr. Raines and Mr. Howard were swept out of office two years ago in the multibillion-dollar accounting debacle at the government-sponsored company, which finances one of every five home loans in the United States. Fannie Mae earlier this month announced a long-awaited restatement for 2001 through June 30, 2004, that erased $6.3 billion in profit.

OFHEO said it is seeking civil fines of $100 million or more against the three former executives and restitution totaling more than $115 million in bonus money tied to an improper accounting scheme.

The regulator may bring similar charges against both current and former executives and directors, OFHEO General Counsel Alfred Pollard said. Fannie Mae spokesman Brian Faith declined to comment.

Attorneys for Mr. Raines, Mr. Howard and Ms. Spencer disputed the regulators’ charges and said they were politically motivated. The lawyer for Mr. Raines called OFHEO Director James B. Lockhart “a fatally biased regulator” and asked him in a letter to remove himself “immediately and completely from any further regulatory action affecting Mr. Raines.”

Mr. Lockhart’s true motivation is to get Congress to enact legislation tightening the government reins on Fannie Mae and Freddie Mac, its smaller sibling in the $8 trillion home-mortgage market, said Mr. Raines’ attorney, Kevin Downey.

Mr. Raines, a prominent Washington figure who was White House budget director in the Clinton administration, led Fannie Mae — with its legendary political clout, generosity in campaign contributions and lobbying savvy — from 1999 until his ouster by the company board in December 2004.

Mr. Lockhart said the charges “reveal how the individuals improperly manipulated earnings to maximize their bonuses, while knowingly neglecting accounting systems and internal controls, misapplying over 20 accounting principles, and misleading the regulator and the public.”

“The misconduct cost [Fannie Mae] and shareholders many billions of dollars and damaged the public trust,” he said.

OFHEO, the regulator for Fannie Mae and McLean company Freddie Mac, in May issued a blistering report charging a six-year accounting fraud at Fannie Mae, the second-largest U.S. financial institution after Citigroup Inc. The regulators said the scheme included manipulations to reach quarterly earnings targets so that company executives could pocket hundreds of millions in bonuses from 1998 to 2004.

Fannie Mae paid a record $400 million civil fine in a settlement with OFHEO and the Securities and Exchange Commission. It also agreed to limit the growth of its multibillion-dollar mortgage holdings, capping them at $727 billion, and to make top-to-bottom changes in its corporate culture, accounting procedures and ways of managing risk.

The notice of charges filed by OFHEO includes accusations that Mr. Raines, Mr. Howard and Ms. Spencer engaged in earnings manipulation and “deliberately misleading” financial reporting, and failed to establish a sound internal-controls system.

The charges will be heard by an administrative law judge, who will make a recommendation to Mr. Lockhart — not a binding decision — on whether the charges should stand. The three would have the right to appeal a final ruling in federal court.

Mr. Raines’ total compensation from 1998 through 2004 was $91.1 million, including some $52.6 million in bonuses. Mr. Howard earned $30.8 million during the period, including $16.8 million in bonuses; Ms. Spencer received $7.3 million, of which some $3.5 million was bonus money.

Mr. Howard’s attorney, Steven Salky, called the accusations against his client “a politically motivated attempt to rewrite history.”

The charges are “a work of unsubstantiated fiction, starkly at odds with both the actual facts and the conclusions reached by OFHEO during its extensive annual examinations of Fannie Mae,” he said. “We are eager for a fair and impartial adjudication of these claims, which will demonstrate the propriety in all respects of Mr. Howard’s conduct.”

Ms. Spencer’s lawyer, David Krakoff, said her annual performance reviews for the six years she was controller “found her work was nothing short of outstanding.”

“We look forward to disproving the politically motivated claims brought by OFHEO,” he said.

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