WASHINGTON – The Securities and Exchange Commission announced a dramatic lawsuit on Friday alleging that six former top executives of mortgage finance titans Fannie Mae and Freddie Mac committed fraud by authorizing misleading statements about their balance sheets.
Fannie and Freddie were congressionally chartered private companies with implicit government backing until they were put into government receivership by the Bush administration in September 2008.
That move came at the start of a global financial crisis that has proved to be the worst since the Great Depression. The financial crisis was triggered by excessive subprime mortgages given to the weakest borrowers, and former Fannie and Freddie executives now stand accused of deliberately misleading about their exposure to these subprime loans.
“Fannie Mae and Freddie Mac executives told the world that their exposure was substantially smaller than it really was,” Robert Khuzami, director of the SEC’s enforcement division, said in a statement “These material misstatements occurred during a time of acute investor interest in financial institutions’ exposure to subprime loans, and misled the market about the amount of risk on the company’s books. All individuals, regardless of their rank or position, will be held accountable for perpetrating half-truths or misrepresentation about matters materially important to the interest of our country’s investors.”
In Friday’s statement, the SEC said Fannie Mae and Freddie Mac had each entered into a nonprosecution agreement with the SEC, accepting responsibility without dispute for the actions of their former executives. It frees the agencies from costly and embarrassing civil prosecution.