Compensation packages at Freddie Mac are being probed for evidence that senior executives stood to make big personal gains by understating profits at the US housing finance group.
Freddie Mac replaced its top three executives last month and has since said it under-reported earnings for the past three years by up to $4.5bn.
Federal regulators want to know if cash bonuses and option pay-outs were structured in a way that rewarded executives for holding back profits from one year so that their subsequent declaration would boost compensation in following years.
The investigations, being conducted by a number of agencies in Washington including the justice department and Securities and Exchange Commission, are at an early, fact-finding, stage. There is no current suggestion that present or former executives were motivated by greed or deliberately mis-stated accounts.
The issue of incentives and compensation will be discussed in a report to be released this month which is being prepared for Freddie Mac by Baker Botts, a Washington law firm.
Federal regulators have asked Freddie Mac to send details of option schemes. The company says it is complying.
The company has referred repeatedly to instances of misconduct by the departed executives without explaining how that behaviour was tied to the multiple accounting errors.
People close to the investigations said executive bonuses were sometimes fixed once certain thresholds “above plan” were met so that executives could not make further personal gains in that particular year.
Freddie Mac’s regulator on Thursday turned on Baker Botts, casting doubt on its integrity before the firm’s report is delivered.
Armando Falcon, the outgoing director of the Office of Federal Housing Enterprise Oversight, told a Senate committee that his agency was briefed by Baker Botts at the end of May.
“In response to a direct question, Baker Botts expressed no concerns regarding the management team of inappropriate or improper management behaviour,” he said.
Mr Falcon said his office later learned of “very troubling information” regarding management conduct and integrity which indicated that Baker Botts “had not been fully forthcoming”.
The law firm said it regretted what seemed to be a misunderstanding. It said it was dismayed and surprised by the comments.
Freddie Mac said on Thursday that cash and option bonuses were set annually by the board’s compensation committee. Materials for its 2002 annual meeting the last available – say cash bonuses for 2001 were made on a “graduated scale”.
On June 9, Freddie Mac said it had fired David Glenn, chief operating officer, and that Leland Brendsel, chief executive, and Vaughn Clarke, finance director, had been replaced.