Criminal probe of mortgage giant launched

Matthew Barakat

Wednesday, June 11, 2003 | 9:50 a.m.

ALEXANDRIA, Va. -- Federal prosecutors have opened a criminal investigation of Freddie Mac, two days after the mortgage-market giant shook up its top leadership because of accounting problems.

U.S. Attorney Paul McNulty said today that federal prosecutors in the Eastern District of Virginia had begun the investigation. He declined to comment further.

The company said Monday that it had dismissed the president and chief operating officer, David Glenn, because he didn't fully cooperate with an internal review of the company's books. Chairman and chief executive Leland Brendsel and Vaughn Clarke, the company's executive vice president and chief financial officer, resigned.

David Palombi, a spokesman for Freddie Mac, said today that the company was not aware of an investigation by the U.S. attorney.

"We've been cooperating openly with our regulator, and if we're contacted by (the U.S. attorney), we'll certainly cooperate with them as well," Palombi said.

No. 32 on the Fortune 500 list with $39.7 billion in revenue, Freddie Mac also is being investigated by the Securities and Exchange Commission and the Office of Federal Housing Enterprise Oversight.

The company said today that since January it has ordered full cooperation with an informal inquiry by the SEC. "We will continue to cooperate in all respects as the investigation continues," said Shaun O'Malley, chairman of Freddie Mac's board of directors.

McLean, Va.-based Freddie Mac restated its earnings for 2000-2002 in January, after its new auditor recommended changes to its accounting policies to reflect higher earnings from the complex financial instruments called derivatives.

O'Malley said a company review found that no employee other than Glenn engaged in allegedly irregularly activities involving documents. "We can also confirm that the conduct we disclosed on Monday related to Mr. Glenn's diaries and not to company accounting records," he said.

Glenn's diaries were said to be missing some pages while others had been altered.

However, the company doesn't believe that fraud or criminal misconduct were involved, Gregory Parseghian, Freddie Mac's new chief executive officer and president, said in a conference call Monday with shareholders, financial analysts and reporters

Glenn, who was fired as president, received $5.3 million in 2001, including an $850,000 salary, according to the publication Inside Mortgage Finance.

On Tuesday, leaders of the House Financial Services Committee called for hearings into Freddie Mac's accounting troubles over the past three years.

Federal Reserve Chairman Alan Greenspan said the company and its larger sister Fannie Mae, major players in the multibillion-dollar home mortgage market, shouldn't be exempt from the public disclosure requirements that apply to nearly all other publicly traded companies.

"There's no reason to differentiate Fannie and Freddie from the rest of the securities industry as far as I'm concerned," Greenspan told lawmakers at a House hearing on an unrelated matter.

Some senior lawmakers expressed concern about the possible impact of Freddie Mac's troubles on the housing market, one of the economy's few bright spots. Banks could sell fewer mortgages to the company and the international stream of capital into the U.S. mortgage market could be reduced.

Congress created Freddie Mac and Fannie Mae to buy home loans from banks and other lenders to supply ready cash to the home mortgage market. They buy mortgages from lenders to keep in their portfolios and package others into securities for sale on Wall Street.

Investors from around the globe buy the securities, with a large chunk of them held by Japanese and other Asian investors.

Fannie Mae and Freddie Mac enjoy some special benefits, such as the ability to borrow directly from the Treasury. But they are not directly guaranteed by the government.

Earlier this year, Greenspan expressed concern that Freddie Mac and Fannie Mae may not have adequate capital and that many investors have the misperception that they are backed by the government.