Freddie Mac's ex-chiefs targeted

Oversight agency seeks millions in fines, forfeiture of benefits

December 19, 2003|By BLOOMBERG NEWS

The federal regulator of Freddie Mac said yesterday that it will seek $33.9 million in fines and forfeited severance and benefits from former Chief Executive Officer Leland C. Brendsel for his role in the mortgage finance company's manipulation of earnings.

The Office of Federal Housing Enterprise Oversight will seek $3.9 million from former Chief Financial Officer Vaughn Clarke, including returned compensation, penalties and restitution, the agency said in a statement.

Yesterday's action by the regulator, which has been under fire for not detecting Freddie Mac's accounting errors, comes a week after it ordered the company to pay a $125 million fine for earnings manipulation. Much of the blame rests with a few top executives, the regulator said in a report last week.

"Companies don't make errors, people do," said James McGlynn, who bought Freddie Mac stock yesterday for Summit Investment Partners in Cincinnati. He manages $6 billion in assets. "I'd rather have the penalties directed at them than the organization," McGlynn said.

Yesterday's move "begins an administrative process that will lead to cease-and-desist orders, the monetary penalties, and other remedies" against Brendsel and Clarke, the agency said.

The regulator, know as OFHEO, also recommended in the Dec. 10 report that business growth at Freddie Mac, the second-largest source of U.S. mortgage financing after Fannie Mae, be limited until the company begins filing certified financial statements.

Freddie Mac, based in McLean, Va., said last month that it hid the volatility of its earnings from investors by under-reporting income by $5 billion for three years, beginning in 2000. The restatement of those years' results prompted the resignations of Brendsel, Clarke and two other senior executives whose pay incentives encouraged "improper" bookkeeping, the agency said.

Freddie Mac has withheld severance and other benefits from Brendsel and Clarke pending completion of OFHEO's litigation, company spokeswoman Sharon McHale said.

In September the regulatory agency detailed a seven-category benefits package for Brendsel totaling $53.7 million and indicated that if Brendsel is required to submit to its charge, he still would gain $29.4 million in benefits from Freddie Mac. From that, he would then have to pay the company $3.8 million in restitution.

`We will comply'

"Certainly if OFHEO issues valid and effective orders, we will comply," McHale said. "Right now we have contracts with Mr. Brendsel and Mr. Clarke, and outside counsel has advised us that those are valid contracts."

Brendsel's lawyers, Brendan Sullivan and Lawrence Lorber, didn't return calls seeking comment. Clarke's lawyer, Steve Salky, said the agency's move was unfair.

"Vaughn Clarke served Freddie Mac in utmost good faith," Salky said in a statement. "Freddie Mac entered into a series of severance agreements during 2002 and early 2003 that OFHEO approved with full knowledge of his conduct. Their effort to terminate the agreement is unjust."

The agency said in September that Freddie Mac should have fired Brendsel in June rather than allow him to resign, thereby denying him severance payments. It said Clarke also should have been fired.

The resignations of Brendsel and Clarke accompanied the firing of President David Glenn, who was terminated for not cooperating with the special counsel investigating accounting errors at Freddie Mac.

Glenn agreed in October to give up $13 million in severance and cooperate with the investigation. He will keep $15 million in benefits and pay a $125,000 fine.

Through its administrative charges, OFHEO would deny Brendsel $24.3 million in severance, bonus, stock options and awards of restricted stock. It also would impose a civil penalty of $5.8 million and seeks restitution of $3.8 million, the agency said.

OFHEO would deny Clarke $750,000 in company benefits and impose a civil penalty of $2.6 million and restitution of $537,000.

Repeated subpoenas

Brendsel and Clarke have failed to comply with repeated subpoenas from the agency for testimony and documents related to the investigation of Freddie Mac's accounting, according to court documents. The Justice Department this month asked federal courts in Maryland and Virginia to enforce the subpoenas.

"To try to penalize Clarke for failing to cooperate with OFHEO's effort to retroactively fire him takes incredible chutzpah," Salky said.

In an Oct. 24 petition, Salky said the agency lacked the authority to issue a subpoena because it had not begun a formal administrative proceeding against Clarke.

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