Freddie Mac, Four Former Executives Settle SEC Action Relating To Multi-Billion Dollar Accounting Fraud - Freddie Mac Agrees To Pay $50 Million Penalty

The Securities and Exchange Commission today charged the Federal Home Loan Mortgage Corporation (Freddie Mac) with securities fraud in connection with improper earnings management beginning as early as 1998 and lasting into 2002. To settle the SEC’s charges, Freddie Mac agreed to pay a $50 million penalty, which is expected to be distributed to injured investors through a Fair Fund.

The SEC’s complaint alleges that Freddie Mac engaged in a fraudulent scheme that deceived investors about its true performance, profitability, and growth trends. According to the complaint, Freddie Mac misreported its net income in 2000, 2001 and 2002 by 30.5 percent, 23.9 percent and 42.9 percent, respectively. Furthermore, Freddie Mac’s senior management exerted consistent pressure to have the company report smooth and dependable earnings growth in order to present investors with the image of a company that would continue to generate predictable and growing earnings.

“As has been seen in so many cases, Freddie Mac’s departure from proper accounting practices was the result of a corporate culture that sought stable earnings growth at any cost,” said Linda Chatman Thomsen, the SEC’s Director of Enforcement. “Investors do not benefit when good corporate governance takes a back seat to a single-minded drive to achieve earnings targets.”

Additional materials: http://www.sec.gov/litigation/litreleases/2007/lr20304.htm