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Ex-Freddie Mac, Fannie Mae CEOs Sued For Understating Loans

December 19, 2011 by staff 

Ex-Freddie Mac, Fannie Mae CEOs Sued For Understating LoansEx-Freddie Mac, Fannie Mae CEOs Sued For Understating Loans, Two former CEOs at mortgage giants Fannie Mae and Freddie Mac on Friday became the highest-profile individuals to be charged in connection with the 2008 financial crisis.

In a lawsuit filed in New York, the Securities and Exchange Commission brought civil fraud charges against six former executives at the two firms, including former Fannie CEO Daniel Mudd and former Freddie CEO Richard Syron.

The executives were accused of understating the level of high-risk subprime mortgages that Fannie and Freddie held just before the housing bubble burst.

“Fannie Mae and Freddie Mac executives told the world that their subprime exposure was substantially smaller than it really was,” said Robert Khuzami, SEC’s enforcement director.

Khuzami noted that huge losses on their subprime loans eventually pushed the two companies to the brink of failure and forced the government to take them over.

Before the SEC announced the charges, it reached an agreement not to charge Fannie and Freddie. The companies, which the government took over in 2008, also agreed to cooperate with the SEC in the cases against the former executives.

Many legal experts say they don’t expect the six executives to face criminal charges.

“If the U.S. attorney’s office was going to be bringing charges, they would have brought it simultaneously with the civil case,” said Christopher Morvillo, a former federal prosecutor now in private practice in Manhattan.

Mudd, 53, and Syron, 68, led the mortgage giants in 2007, when home prices began to collapse. The four other top executives also worked for the companies during that time.

In a statement from his attorney, Mudd said the government reviewed and approved all the company’s financial disclosures.

“The SEC is wrong,” Mudd said, “and I look forward to a court where fairness and reason — not politics — is the standard for justice.”

Syron’s lawyers said the term “subprime had no uniform definition in the market” at that time.

“There was no shortage of meaningful disclosures, all of which permitted the reader to assess the degree of risk in Freddie Mac’s” portfolio, the lawyers said in a statement. “The SEC’s theory and approach are fatally flawed.”

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