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Feds Open Criminal Probe on Freddie Mac

Jun 11, 2003 | AP

Federal prosecutors have opened a criminal investigation into possible misconduct at Freddie Mac, the home-mortgage giant whose accounting already was being probed by other U.S. authorities.

The diaries of David Glenn, the company's president who was fired on Monday, are drawing interest.

Wednesday's news of the criminal inquiry came two days after the government-sponsored company shook up its top leadership because of accounting problems, jolting the stock market and raising concern about a possible impact on the housing market.

"The U.S. attorney's office in the Eastern District of Virginia has initiated an investigation involving Freddie Mac," said U.S. Attorney Paul McNulty. He declined further comment.

The McLean, Va.-based company said it was not aware of the investigation but would cooperate in all respects.

Freddie Mac, one of the biggest corporations with its stock widely traded, also is being investigated by the Securities and Exchange Commission and by the Office of Federal Housing Enterprise Oversight. The oversight agency supervises both Freddie Mac and Fannie Mae, its larger sister in the multitrillion-dollar home mortgage market.

In a surprise announcement, Freddie Mac said Monday that it had sacked Glenn, who also was chief operating officer, because he did not 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.

The company said Wednesday 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.

He said an internal company review found that no employee other than Glenn had engaged in allegedly irregular 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," O'Malley said.

The diaries were said to be missing some pages and other pages had been altered.

Details of the criminal investigation were not immediately available. But two people familiar with the situation said that at least some of the material in the diaries appeared to be related to Glenn's participation in meetings related to accounting matters. The people spoke on condition of anonymity.

Glenn's attorney, Thomas Vartanian, declined comment on the subject.

The company does not 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 and financial analysts.

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. The company fired now-fallen Arthur Andersen LLP as its auditor in March 2002, replacing it with PricewaterhouseCoopers.

Federal Reserve Governor Susan Bies said Wednesday that Freddie Mac's accounting travails have not had an immediate impact on the U.S. banking system or the housing market one of the economy's few bright spots and that consumers should not feel any negative effect.

"The housing market is still very strong," Bies said. "And banks as a whole are very liquid right now, they have plenty of room to extend credit. So I haven't seen any signs that there will be a short-run impact."

Freddie Mac shares fell $1.49 on Wednesday, to $50.01, on the New York Stock Exchange after official acknowledgment of the criminal investigation. The company's announcement that it will buy back as much as $10 billion of its own notes in the next two days helped bring a measure of stability to an edgy market Freddie Mac and Fannie Mae securities.

Under pressure from lawmakers and regulators, Freddie Mac made public Wednesday terms of separation pay deals for Glenn and Brendsel, the ousted chairman and chief executive. Brendsel is receiving an annual $1.1 million salary for two years and a partial bonus for 2003 of $860,417; he gets no bonus for 2002. Glenn will not receive special compensation benefits because he was fired for cause.

The executives signed the agreements with the company in 1990. Terms of the agreement with Clarke, the chief financial officer, were not disclosed. The Office of Federal Housing Enterprise Oversight has told Freddie Mac that it must still approve the deals.

The company is No. 32 on the Fortune 500 list with $39.7 billion in revenue last year.

On Tuesday, leaders of the House Financial Services Committee called for hearings. And Federal Reserve Chairman Alan Greenspan said Freddie Mac and Fannie Mae should not be exempt from the public disclosure requirements that apply to nearly all other publicly traded companies.

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. The companies buy mortgages from lenders to keep in their portfolios and package others into securities for sale on Wall Street.

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