Political India: Engaging America

In a move that marked one of the U.S. government's first major legal actions against company executives for their role in causing the 2008 financial meltdown, the Securities and Exchange Commission on Friday charged six former bosses of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) with securities fraud.

In its lawsuit against them, SEC authorities alleged that the federally-backed mortgage giants “knew and approved of misleading statements claiming the companies had minimal holdings of higher-risk mortgage loans, including subprime loans”.

In an odd twist to the case, however, the SEC hinted that the investigation and prosecution of wrongdoing may be limited to the lawsuits against the executives, rather than the corporate entities themselves. It did so when it noted that both companies had entered into a “Non-Prosecution Agreement” with the SEC.

As per this agreement, each company would accept responsibility for its conduct and not dispute, contest, or contradict the contents of an agreed-upon Statement of Facts without admitting or denying liability.

In committing to cooperate with the SEC's litigation against the former executives the concession that the two companies won was that the SEC would consider the “unique circumstances presented by the companies' current status, including the financial support provided to the companies by the U.S. Treasury, the role of the Federal Housing Finance Agency as conservator of each company, and the costs that may be imposed on U.S. taxpayers.”

The SEC named three former Fannie Mae executives – former Chief Executive Officer Daniel Mudd, former Chief Risk Officer Enrico Dallavecchia, and former Executive Vice President Thomas Lund — in the complaint filed in District Court for the Southern District of New York.

Robert Khuzami, Director of the SEC's Enforcement Division commented on the case against the executives saying, “Fannie Mae and Freddie Mac executives told the world that their subprime exposure was substantially smaller than it really was,” adding however that such material misstatements occurred during a time of acute investor interest in financial institutions' exposure to subprime loans, and misled the market about the amount of risk on the company's books.

Emphasising that all individuals, regardless of their rank or position, would be held accountable for “perpetuating half-truths or misrepresentations about matters materially important to the interest of our country's investors,” Mr. Khuzami and his colleagues said that when Fannie Mae began reporting its exposure to subprime loans in 2007, it admitted that the loans as those “made to borrowers with weaker credit histories”.

According to court documents stating the case against Freddie Mac, the SEC further alleged that the company led investors to believe that the firm had used a broad definition of subprime loans and was disclosing all of its Single-Family subprime loan exposure.

However former Freddie Mac Chairman and CEO Richard Syron and former Executive Vice President and Chief Business Officer Patricia Cook had reinforced the “misleading perception when they each publicly proclaimed that the Single Family business had ‘basically no subprime exposure,'” the SEC said.