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12.16.11

SEC Sues Six Former Freddie, Fannie Executives Over 'Ill-Gotten Gains'

Three years after the mortgage crisis crippled the U.S. economy, the SEC is suing six former mortgage executives from Fannie Mae and Freddie Mac, accusing them of misleading investors and seeking the return of ‘ill-gotten gains.’

Since the economic collapse three years ago, calls have been increasing for heads to roll. At the government-backed Fannie Mae and Freddie Mac mortgage giants, which lost hundreds of billions of dollars in the subprime mortgage security market, some former officials are finally being held to account, at least in civil court.

The Securities and Exchange Commission filed a lawsuit Friday alleging that at the very height of the crisis, six executives at Freddie Mae and Fannie Mac knowingly misled investors about the depth of the problem and that they should repay their “ill-gotten gains.”

In September 2008, the government spent hundreds of billions to take over the two government-backed companies, essentially putting taxpayers in possession of $5 trillion in home mortgages the companies owned and repackaged. The Bush administration said at the time that it acted to prevent the companies’ collapsing from the near worthless assets they then held, a mix of securities from troubled mortgages bundled together.

The six executives named in the lawsuits Friday were in charge until that time, and they took home sky-high compensation at the government-affiliated agencies, even as the U.S. government took a bath on the mortgages.

As for Freddie Mac and Fannie Mae themselves, the SEC says the agencies agreed to cooperate and “accept responsibility,” though they would not “accept or deny liability.”

The executives who are being sued include former Freddie Mac CEO Richard F. Syron, who earned $14.7 million in 2006 and $18.3 million in 2007. Those years are covered in the lawsuits, and it was during that period that Freddie Mac allegedly was acquiring much of the subprime debt that caused the problems.

The complaint says Freddie Mac told investors it had between $2 billion and $6 billion in subprime loans, while its true exposure was “approximately $141 billion.”

Also sued is Daniel H. Mudd, the former CEO of Fannie Mae who now runs Fortress Investment Group, which has assets of $43 billion. Mudd “violated and aided and abetted the violation of the antifraud and reporting provisions of the federal securities laws,” according to the lawsuit. He was paid $6.16 million in 2006, and his compensation soared to $10.64 million in 2007, the SEC complaint says.

Fortress Investments said Friday that Mudd had no immediate comment.

From the Occupy Wall Street protests to the op-ed sections of newspapers to a recent 60 Minutes story, a furor has been brewing over the government’s failure to prosecute any top executives for the subprime mortgage securities mess that caused the 2007 and 2008 financial collapse.

In this case, executives have not been charged criminally. But the civil case does extend to the mortgage securities that were so critical to the economy’s trouble. The SEC says it will seek financial penalties as well as “disgorgement of ill-gotten gain.” (It’s unclear if those allegedly ill-gotten gains include the executives’ sizable compensation.)

Nor does the SEC’s complaint allege that there was anything intrinsically illegal about the subprime investments. Instead, the SEC says the executives and the companies misled investors about the quality of their loan portfolios. The complaint says Freddie Mac told investors it had between $2 billion and $6 billion in subprime loans, while its true exposure was “approximately $141 billion.”

As for Fannie Mae, the SEC says the company had “approximately $43 billion” in mortgage loans to people with bad credit, but it failed to disclose most of those to investors. Instead, the lawsuit says, Fannie May said it had $4.8 billion in subprime assets.