'But, forget investigating Freddie Mac.... it's already had 3 investigations.....'

WASHINGTON - Freddie Mac, the nation's second-largest financer of home mortgages, is paying a $50 million fine to settle civil securities fraud charges brought by federal regulators in a four-year accounting lapse.

In addition, four former executives at the government-sponsored company settled negligent conduct charges by agreeing to pay a total of $515,000 in civil fines and to make restitution totaling $275,548. They are former president and chief operating officer David Glenn, ex-chief financial officer Vaughn Clarke, and former senior vice presidents Robert Dean and Nazir Dossani.

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McLean, Va.-based Freddie Mac neither admitted nor denied wrongdoing under the accord with the Securities and Exchange Commission announced Thursday, but it agreed to refrain from future violations of securities laws.

An accounting scandal erupted at Freddie Mac in June 2003 when it disclosed that it had misstated earnings by some $5 billion _ mostly underreporting them _ for 2000-2002 to smooth quarterly volatility in earnings and meet Wall Street expectations.
The company's top executives _ Glenn, Clarke and then-chairman and chief executive Leland Brendsel _ were ousted. The events shocked Wall Street, where Freddie Mac long had enjoyed a reputation as a steady performer and reliable corporate player.

Freddie Mac paid a then-record $125 million civil fine in 2003 in a settlement with the Office of Federal Housing Enterprise Oversight, which blamed management misconduct for the faulty accounting.

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In a lawsuit filed in federal court in Washington, the SEC said Freddie Mac "engaged in a fraudulent scheme that deceived investors about its true performance, profitability and growth trends."

"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," SEC Enforcement Director Linda Thomsen said in a statement. "Investors do not benefit when good corporate governance takes a back seat to a single-minded drive to achieve earnings targets."

The SEC said the $50 million Freddie Mac agreed to pay will be distributed to shareholders injured by the alleged accounting fraud.

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(more details at link)

Securities and Exchange Commission

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Federal Home Loan Mortgage Corporation (Freddie Mac)

On September 27, 2007, the Commission filed a settled enforcement action charging Freddie Mac with securities fraud in connection with improper earnings management. The Commission’s action also charged former Freddie Mac executives David W. Glenn, its former president, COO, and vice-chairman of the board; Vaughn A. Clarke, its former CFO; Robert C. Dean, a former senior vice president; and Nazir
G. Dossani, a former senior vice president. The Commission alleged that Freddie Mac engaged in a scheme that deceived investors about its performance, profitability, and growth trends and that the company misreported its net income in 2000, 2001, and 2002. In its settlement with the Commission, Freddie Mac agreed to pay a $50 million penalty. Glenn, Clarke, Dossani, and Dean agreed to pay penalties of $250,000, $125,000, $75,000, and $65,000, respectively, in addition to disgorgement.

Office of Federal Housing Enterprise
Oversight (OFHEO)

Enforcement Actions

As part of its enforcement activities, OFHEO entered into a consent agreement with Freddie Mac that included a $125 million penalty (subsequently an additional $50 million penalty was imposed by the SEC) and a consent agreement with Fannie Mae that included a $400 million penalty. OFHEO also entered into consent agreements in 2007 with former Freddie Mac chairman and CEO Leland Brendsel that included penalties, disgorgement, and waiver of claims totaling $16.4 million, and with former Freddie Mac CFO Vaughn Clarke that imposed a civil money penalty of $125,000. Also, a consent agreement was entered into with former Freddie Mac President & COO David Glenn, with an attendant civil money penalty of $125,000. Outstanding enforcement actions remain against former Fannie Mae CEO Franklin Raines, CFO Timothy Howard and Controller Leanne Spencer.

Members of the
Corporate Fraud Task Force:

Mark Filip
Alice Fisher
Nathan J. Hochman
Robert S. Mueller, III
Michael J. Garcia
Patrick J. Fitzgerald
Donald J. DeGabrielle, Jr.
Patrick L. Meehan
Joseph P. Russoniello
Benton J. Campbell
Thomas P. O’Brien
Henry M. Paulson, Jr.
Elaine L. Chao
Christopher Cox
Walter L. Lukken
Joseph T. Kelliher
Kevin J. Martin
James B. Lockhart, III
Alexander Lazaroff

Page 28-30:

Office of Federal Housing Enterprise
Oversight (OFHEO)

The Office of Federal Housing Enterprise Oversight (OFHEO) serves as the safety and soundness regulator for the government-sponsored enterprises Fannie Mae and Freddie Mac (the Enterprises). OFHEO provides on-site supervision through its examination force, including oversight of Enterprise efforts to resist and detect fraudulent activities from internal or external threats. When OFHEO discovers criminal activities, it refers its findings to the appropriate federal or state authorities.

Over the last few years, OFHEO’s efforts regarding corporate fraud have centered on remedial steps at the Enterprises to strengthen their internal controls, including internal audit; on adding stronger rules for corporate governance and responsibility; and on Enterprise programs to resist fraudulent activities in the mortgage markets.

The Corporate Fraud Task Force has been important to OFHEO’s supervisory program, with members providing valuable contributions such as briefings on white collar crime and foreign asset control rules for OFHEO front-line examiners, and enhancing OFHEO’s work on mortgage fraud.


Mortgage Fraud

Following litigation brought by the U.S. Attorney for the Western District of North Carolina involving mortgage fraud against Fannie Mae, OFHEO examiners analyzed the controls and operating systems for any shortcomings that permitted such a fraud to be attempted against the Enterprise. Enterprise remediation began immediately.

With the cooperation and assistance of members of the Corporate Fraud Task Force, OFHEO published a regulation for mortgage fraud reporting that brought information provided by the Enterprises to OFHEO into the reporting regime administered by the Treasury Department’s Financial Crimes Enforcement Network (FinCEN). The regulation required ongoing employee training, internal reporting improvements, and enhanced mortgage fraud detection regimes.

Following OFHEO testimony in 2005, language regarding mortgage fraud was added to bills now pending before Congress to revamp supervision of the Enterprises.
Since the creation of the regulation and a clarifying guidance, OFHEO has worked closely with law enforcement around the country on matters involving cases of suspected mortgage fraud reported by the Enterprises. OFHEO participates regularly with the Justice Department’s Mortgage Fraud Working Group to share information and experience regarding mortgage fraud with law enforcement and financial regulators.

In 2006 and 2007, OFHEO was consulted by law enforcement as a result of its filing of Suspicious Activity Reports to FinCEN based on a MOU regarding information sharing. The FBI, Department of Justice, IRS and other agencies in various localities have sought additional information on specific cases based on OFHEO reports. Further, OFHEO continues to provide public outreach through publications and public appearances and has raised concerns that the subprime lending problems of 2007 may prove to be rife with fraudulent activities.

Examination of Enterprise Accounting and Controls

From 2004 to the present, OFHEO continued overseeing the remediation of Enterprise accounting and control structures. These efforts have included putting in place new corporate risk, audit and compliance structures at the Enterprises and deploying increased resources to prevent opportunities for falsification of records or other fraud and to increase overall management control. Other structural and cultural changes were also part of the OFHEO agreements with the Enterprises.
OFHEO during the past five years has responded to the challenges of overseeing Enterprise activities by enhancing both the size and diversity of its staff and by creating two new
examination groups—the Office of Accounting and the Office of Compliance. In addition, OFHEO has published guidances relating to accounting, executive compensation and corporate governance that seek to clarify the policies of the agency regarding the responsibilities of the Enterprises in these areas.

Corporate Governance Regulation

In 2005, OFHEO amended its corporate governance regulation. In large measure, the revisions to the corporate governance rule were aimed at increasing management responsibility at the Enterprises and enhanced oversight by the Board of Directors.

The amended rule elaborated upon the corporate governance responsibilities of officers and directors at the Enterprises, including (1) mandatory, annual officer and director training on legal responsibilities, (2) enhanced rules providing for director independence, (3) executive compensation standards tied not only to revenue production but also to law and regulatory compliance and operational stability, (4) mandatory review and updating of conflict of interest standards, and (5) mandating audit partner rotation. An OFHEO guidance in 2006 went further, requiring not only rotation of audit partners, but also rotation of audit firms. That guidance also enhanced board independence by requiring a separation of the board chair and Enterprise CEO.

Finally, the amended rule called for the creation of compliance offices to oversee compliance with law and regulations related to OFHEO and corporate and financial disclosure.

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In September 2004, an equally stunning accounting scandal came to light at No. 1 mortgage finance company Fannie Mae. Regulators eventually imposed limits on the two companies' multibillion-dollar mortgage debt holdings, which they have been seeking to have lifted as a way to provide cash to the mortgage market in the recent turmoil.

Fannie Mae was fined $400 million in May 2006 in a settlement with OFHEO and the SEC _ one of the largest civil penalties ever in an accounting fraud case.

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There is no independent auditor overseeing the federal agency responsible for some $6 trillion in home mortgages, because the Department of Justice's Office of Legal Counsel ruled that the agency's inspector general didn't have authority to operate, according to internal memos obtained by the Huffington Post.

The ruling came in response to a request from the Federal Housing Finance Agency itself -- which means that a federal agency essentially succeeded in getting rid of its own inspector general.

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The FHFA is home to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, which are jointly responsible for purchasing or guaranteeing more than 80 percent of new mortgages issued since the middle of 2008, according to FHFA numbers.

In September, the Department of Justice ruled that FHFA Inspector General Ed Kelley did not have authority to investigate wrongdoing or other abuses related to the agency, according to an internal DOJ Office of Legal Counsel memo signed by Deputy Assistant Attorney General Daniel Koffsky.

The ruling was made on complicated technical grounds. The current agency was created by a 2008 act that abolished the Federal Housing Finance Board and replaced it with the FHFA. FHFB employees automatically became FHFA employees and retained their "same status, tenure, grade, and pay."

The IG for the new agency, according to the law, needed to be appointed by the president and confirmed by the Senate, but Kelley argued that the purpose of keeping the employees in the same positions was to make sure the agency could continue to operate and that therefore the law applied to him, too.

Kelley still works for the FHFA, but in a non-independent "internal auditor" position in which he must report to the agency head.

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Kelley now heads the Office of Internal Audit and he said he has two employees: an office administrator and a person who oversees the contractors who review financial records. He estimated his budget for contractors was between $100,000 and $150,000.

As IG, he ran into trouble the way most independent investigators do -- by investigating things people didn't want investigated.

Kelley's office had been working with SIGTARP Neil Barofsky, the Special Inspector General overseeing the bank bailout -- the Temporary Asset Relief Program -- when the agency head challenged his authority to operate and asked the FHFA General Counsel's office to look into it.

"I hate to use the word challenge, because the question they raised was whether the statute was clearly established at the Office of the Inspector General," said Kelley.

He declined to get into the specifics of investigations that were cut short. "I don't really want to get into some of these, but obviously there are some programs out here. There's the TARP IGs that are heavily involved in looking at criminal activity surrounding the Make Home Affordable program and different other aspects in the programs they've rolled out foreclosures and so forth," said Kelley.

"Many of those are projects that would be worth jointly investigating between the TARP office and the IG's office here at FHFA." Kelley's office was starting to do just that when "the question of whether or not we were legally the IG's office came up, and we had to withdraw," he said.

In late February, Barofsky warned that the mortgage modification plan was vulnerable to already existing fraudulent foreclosure rescue schemes. On April 6, he announced that progress was being made as part of a multiagency crackdown.

A month later -- less than four months after Obama's inauguration -- the FHFA started questioning Kelley's legal status. An internal memo -- which HuffPost did not get from Kelley, originally dated May 12, 2009 and updated on June 23, provided the FHFA's opinion that Kelley had no authority to conduct such investigations.

"It's a serious gap in oversight," Barofsky told HuffPost of Ed Kelley's loss. "It does impact what we do. Ed was a member of our TARP IG council and a partner in our investigative work." Barofsky said he still investigates areas of FHFA, but his mandate only covers "a sliver of what they do."

"Fannie and Freddie are awfully big," Barofsky said. "The idea that the agency responsible for conservatorship of Fannie Mae and Freddie Mac doesn't have an inspector general should be a serious cause of concern."

The agency put the blame on the law as written. "Congress did not intend for FHFA to have an Acting or interim IG pending the confirmation of a IG," writes Janice Kullman, assistant general counsel, in the memo, which was approved by Isabella Sammons, deputy general counsel, and forwarded to General Counsel Alfred M. Pollard.

It's been 16 months since the law took effect.

Obama has yet to nominate a new IG. Kelley said he'd heard that a few candidates were being vetted and wouldn't comment on whether he was one. He guessed there might be a nomination within the next month.

"Given the uncertainty at FHFA, it did not become clear until mid-September that the Inspector General's office required a new nominee," said a White House spokesman. "We are currently working actively to nominate an individual to the position as soon as possible. The process of announcing nominees does take some time given the rigor of the process to ensure that important positions like this one are filled by the highest quality people."

But if that's the case, the White House has been vetting candidates without consulting Sen. Chris Dodd (D-Conn.), the chairman of the Banking, Housing and Urban Affairs Committee. Dodd told HuffPost Monday night that he was unaware that FHFA had no IG and promised to look into the matter.

In the meantime, Kelley has essentially put a halt to investigations.

"We're in an internal audit office, versus an office of the inspector general, and there's a big difference between the two," he said. "An internal audit office operates at the pleasure of the head of the agency... At the end of the day, no matter how independent I am in conducting myself, we have an organizational independence problem, which anybody who looked at it, if people have problems with what we said, we would probably be viewed as not being independent, and probably not being very reliable."

In practice so far, Kelley said, no one has interfered with him as an internal auditor -- but he knows that could change at any moment. "Now, in terms in actuality of whether I'm independent, I feel like I can do what I need to do. I don't feel the discomfort, but that's until the first time you have a disagreement with the head of the agency. And over the years, I've certainly had my share of those. So at this point, there's nothing at the internal audit office I would want to do, that I feel like I can't do. But there are some things I wouldn't attempt at the internal audit office," he said.

The mortgage industry is one of the most susceptible to fraud, yet one of the areas Kelley said he doesn't get into is criminal investigation.

"We don't have the authority to do criminal investigations," he said. "It's the very reason why they set up IG offices themselves, internal audit offices."

Fannie and Freddie are burning through cash at a staggering rate. Fannie reported a loss of $18.9 billion in the third quarter of 2009, four billion more than it lost the second quarter.

FHFA requested $15 billion from Treasury to plug the hole.

What's it spending money on?

"The company continued to concentrate on preventing foreclosures and providing liquidity to the mortgage market during the third quarter of 2009, with much of our effort focused on the Making Home Affordable Program," boasts the press release accompanying the announcement of the massive loss. "As of September 30, 2009, approximately 189,000 Fannie Mae loans were in a trial period or a completed modification under the Home Affordable Modification Program."

Those are the precise programs that Kelley was looking into when his own agency shut him down.

Wild-eyed McCarthyite Ryan Grim of the Huffington Post is the one who reported that the Inspector General for Fannie and Freddie, Ed Kelley, had been removed earlier this year. Kelley’s independent authority to conduct investigations was challenged in May, and he was demoted to internal auditor shortly thereafter using a loophole in a law passed in 2008 which folded two oversight agencies (OFHEO & FHFB) into one (FHFA)...

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The law with the “loophole” that kept Kelley from operating as Inspector General at the FHFA, even though he had done so at the FHFB, was the Housing and Economic Recovery Act of 2008. Cosponsored by Rahm Emanuel. (Here’s Rahm speaking on the floor of the House in support of the bill, which bailed out Fannie & Freddie).

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As Yves Smith notes, “The Administration has taken a decidedly hostile stance towards the agency.” It’s been 16 months since the law took effect. No Inspector General has been appointed, though one has been removed. This despite the fact that the Administration has been warned multiple times by Congress, the FHFA and TARP Inspector General Neil Barofsky, who calls it “a serious gap in oversight.”

And now they want to throw $400 billion more at Fannie and Freddie. But we’re not supposed to ask for an investigation, because Jed says it “would be a massive burden on a White House that is already struggling with enormous problems with no end in sight.”

I think I heard that a couple of times during the Bush years.

I think what we’re seeing is a breakdown of the progressive online community into those who are willing to overlook extreme financial malfeasance if “our guys” are the ones doing it, and those who don’t want to be part of “our guys” if that’s the price. Count me in with the latter group, because the hypocrisy of the former is what led to the Bush dead-enders and their irrational embrace of George Bush beyond limit. A small cabal who can only interpret things through personalities is going to lose the rest of the country pretty quickly, because most people actually believe that these continuous bailouts are part of the “enormous problems” we are struggling with.

RAHM EMANUEL
Director (Freddie Mac) since February 2000

Age 40
Mr. Emanuel is a Managing Director of Wasserstein Perella & Co.,
Inc. (an investment banking Ñrm). Prior to joining the Ñrm, Mr.
Emanuel served as the Senior Advisor to the President of the United
States for Policy and Strategy in the White House. Before that,
Mr. Emanuel was Executive Director of the 1993 Presidential
Inaugural Committee and the National Finance Director for the
Clinton-Gore 1992 Presidential campaign. Mr. Emanuel also serves
on the Board of Directors of the Chicago Mercantile Exchange.

Freddie Mac Notice of Annual Meeting of Stockholders, to be held on MAY 3, 2001