Freddie Mac Has An Expensive Week

While the stock market at least temporarily felt that Freddie Mac had closed the doors on some serious legal issues last week, it cost the giant mortgage corporation some serious money to do so.

On Tuesday, April 18 Freddie announced that it had agreed to pay a 3.8 million penalty to the Federal Election Commission (FEC) to settle charges that it had violated federal election financing rules during the period 2000 to 2003.

Freddie had been accused of using its corporate resources and its staff to assist in 85 fundraising events during the period in question for the benefit of members of the House Financial Services Committee and other members of Congress and to solicit contributions from company employees for candidates for federal office. The fundraisers were said to have raised 1.7 million for selected congresspersons but violated election financing rules governing its status as a Government Sponsored Enterprise (GSE).

The corporation stated that in 2003 it had retained an outside law firm to investigate its compliance with campaign finance rules and then voluntarily disclosed the firm's findings to the FEC and cooperated through the follow-up investigation.

The $3.8 million was only a small down payment on Freddie's weekly total, however, as two days later, it announced that it had settled class action suits brought by its investors in the wake of the accounting scandals that rocked the corporation - and continues to plague Fannie Mae, the other (GSE) that provides funding for home mortgages - beginning in mid 2003.

The proposed settlement of these suits includes a cash payment to shareholders of $410 million but does not include any admission of wrongdoing on the part of the corporation.

The chief class action lawsuit was brought by the Ohio Public Employees Retirement System and was followed by several "derivative" lawsuits brought against certain former executive officers and current and former members of the corporation's Board of Directors. These lawsuits were consolidated and are pending in U.S. District Court for Southern New York. The settlement must be approved by several retirement systems in Ohio and by the courts.

The corporation estimates that the $410 million settlement will reduce its first quarter 2005 income by $220 million after application of proceeds from its insurance companies. This is in addition to an estimated $200 million in adjustments and corrections which had been previously announced, brought about by Freddie's reexamination of financial statements from earlier quarters.

Freddie Mac stated that the proposed settlement does not resolve other legal proceedings related to the restatement of its earnings over a multiple year period. This includes an ongoing investigation by the Securities and Exchange Commission.

"Today's settlement, like the settlement announced earlier this week with the Federal Election Commission, enables this management team to resolve past issues so that we can focus squarely on meeting our important housing mission, running the business well and serving the needs of our customers," Richard F. Syron, Freddie Mac's chairman and chief executive officer said on Thursday. "We are pleased with the progress we are making in moving Freddie Mac forward."
Upon settlement on Tuesday of the election finance complaint Freddie Mac stock closed at $61.89, up 2.6 percent from the previous day. It rallied again after announcement of the class action suits but at mid-day Friday it was at $60.56. Before the troubles began in 2003 the stock had traded in the range of $70 but dropped at the height of the scandal to near $50.00.