Wednesday, September 23, 2015

Former Fannie Mae Execs Escape With Mild Spanking

By John M. Jascob, J.D., LL.M.

Two former Fannie Mae executives have settled SEC charges that they misrepresented the GSE’s exposure to subprime mortgage loans. Former Chief Risk Officer Enrico Dallavecchia and former Senior Vice President Thomas A. Lund agreed to pay the Treasury amounts of $25,000 and $10,000, respectively. The two men also agreed to not sign any Sarbanes-Oxley certifications or file certain periodic reports with the Commission for a period of 12 months and to not violate the federal securities laws (SEC v. Mudd, September 21, 2015, Crotty, P.).

The announcement of the settlement follows more than three years of protracted litigation in which the SEC alleged that Dallavecchia, Lund, and former CEO Daniel H. Mudd knew and approved of misleading statements claiming that Fannie Mae had minimal exposure to subprime and Alt-A mortgage loans between December 6, 2006 and August 8, 2008. The SEC’s agreement with Dallavecchia and Lund is thought to put increasing pressure for a settlement on Mudd, against whom the litigation continues. Dallavecchia and Lund stipulated in their settlement that they would cooperate with the SEC in any related proceedings or investigations.

Subprime exposure. Among other things, the Commission has alleged that when Fannie Mae disclosed its subprime exposure for the first time in February 2007, the GSE claimed that only 0.2 percent of its single-family mortgage credit book of business consisted of subprime mortgage loans or structured Fannie Mae mortgage-backed securities collateralized by subprime mortgage loans. According to the Commission, this disclosure was materially false because it did not include an additional $57.1 billion worth of loans that fell within the company’s own subprime definition of loans made to borrowers with weaker credit histories.

After the sub-prime mortgage market collapsed, the director of Federal Housing Finance Agency placed Fannie Mae into conservatorship on September 6, 2008. On July 8, 2010, Fannie Mae's common stock was delisted from the New York Stock Exchange and the Chicago Stock Exchange.

Fannie Mae itself entered into a non-prosecution agreement with the SEC in December 2011, in which the GSE agreed to accept responsibility for its conduct and not dispute the SEC’s findings, while also agreeing to cooperate with the Commission’s litigation against the former executives. The SEC stated at the time that it had agreed to not prosecute Fannie Mae after considering the GSE’s unique circumstances, including the financial support provided to the company by the Treasury, the role of the FHFA as conservator, and the potential costs to U.S. taxpayers.

The case is No. 11-CV-9202-PAC.