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Freddie Mac's Former Chief May Face SEC Action

Ben Protess and Azam Ahmed|The New York Times
Wednesday, 16 Mar 2011 | 4:50 AM ET

Richard F. Syron, the former chief of Freddie Mac, during House testimony in 2008. Mr. Syron may face a civil action as the government ramps up an investigation at Freddie and Fannie Mae.

Richard Syron headshot, as Freddie Mac chairman and CEO.
AP
Richard Syron headshot, as Freddie Mac chairman and CEO.

The former chief executive of Freddie Mac may face a civil action as the government ramps up an investigation of disclosure practices at the mortgage finance giant and its sister company, Fannie Mae, people briefed on the investigation said.

The executive, Richard F. Syron, a former president of the American Stock Exchange and now an adjunct professor and trustee at Boston College, has received a so-called Wells notice from the Securities and Exchange Commission, an indication the agency is considering an enforcement action against him.

Mr. Syron, who has not been accused of any wrongdoing, is the latest executive mentioned in the government’s sweeping examination of the two government-controlled companies. Three others have already been sent Wells notices, and at least two others are thought to have received them, the people briefed on the investigation said. Last week, Daniel H. Mudd, the former chief executive of Fannie Mae, received a Wells notice, and another former Fannie executive is expected to receive one as well, these people said.

The S.E.C.’s long-running investigation is now zeroing in on how Freddie and Fannie publicly disclosed their exposure to risky loans and whether those depictions were too rosy, according to the people briefed on the investigation who spoke on the condition of anonymity because the inquiry is not complete. Although the companies offered detailed snapshots of their mortgage portfolios, the S.E.C. is exploring whether they underreported their ownership of subprime loans and mortgages that required few documents from borrowers.

The government continues to examine the potential culpability of people and agencies involved in the mortgage mess and the subsequent financial crisis.

The Justice Department has investigated Fannie and Freddie but no charges have been brought.

The S.E.C., which has faced intense criticism for bringing few prominent cases stemming from the crisis, has now spent two years interviewing former and current employees at the two companies. If the case against Fannie and Freddie officials proceeds, it may shape up to be one of the most significant actions brought by the agency in recent years.

The S.E.C., however, could decline to file suit against any of those who received Wells notices. Recipients of such a notice can choose to challenge the allegations against them in hopes of heading off any civil action. After receiving his notice in mid-January, Mr. Syron offered a rebuttal to the possible accusations on Feb. 22, according to his lawyer, Mark D. Hopson.

“We have made a submission to the commission which demonstrates that Mr. Syron, as C.E.O., oversaw a very rigorous and fulsome disclosure process and that the company’s disclosures were in fact wholly accurate and complete,” Mr. Hopson, a partner at Sidley Austin, said in a statement. “Any proposed charges against our client are completely without merit.”

Mr. Mudd, now the chief executive at the publicly traded hedge fund Fortress Investment Group, is also planning to contest any allegations against him. Donald J. Bisenius, an executive vice president at Freddie Mac, and Anthony S. Piszel, the former chief financial officer at Freddie, both received notices as well and are also challenging them. Mr. Bisenius plans to leave Freddie Mac, while Mr. Piszel has resigned as chief financial officer of CoreLogic. Mr. Mudd, however, so far has the support of Fortress.

The S.E.C. investigation centers around Fannie’s and Freddie’s disclosures from 2006 to 2008. Regulators are focusing on the way both companies reported their subprime mortgage portfolios and concentrations of loans extended to borrowers who offered little documentation, also known as Alt-A loans.

The issues relate to how the two companies defined subprime. While there is no universal definition, it is often identified with characteristics that include borrowers with low credit scores and poor payment histories. Fannie Mae and Freddie Mac, however, categorized loans as prime or subprime based on the lender rather than on the loan itself. At Fannie, the company adopted lenders’ differing definitions of what constituted Alt-A loans, causing the company to underreport its exposure.

During that period, however, both companies did disclose to investors breakdowns of their loan portfolios by slicing data according to borrowers’ credit scores and how much equity they had in their homes, among other things, filings show.

Fannie Mae and Freddie Mac were public companies that operated with a Congressional mandate to foster homeownership. They do not offer loans, but instead buy up thousands of mortgages from lenders, package them and sell them as securities to investors. The lenders, for their part, use the money to offer new loans to consumers.

By 2005, lawmakers and lenders began to push the companies to delve deeper into the risky subprime markets, to enhance business and offer the chance at homeownership to a segment of the population often ignored by lenders. The companies, meanwhile, sought to regain market share that they had ceded to Wall Street.

But the billions of dollars in risky mortgages acquired at the height of the real estate bubble ultimately sank the once-mighty mortgage financiers. The Bush administration rescued Fannie and Freddie from the brink of collapse in September 2008, effectively making them wards of the federal government. The companies have since tapped more than $100 billion from their government lifelines. Fannie recently requested an additional $2.6 billion from the Treasury Department while Freddie requested $500 million.

Last month, Treasury Secretary Timothy F. Geithner called for the slow wind-down of the two companies.

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