will pay $50 million to settle charges that it misled investors by smoothing earnings growth.
The settlement closes out the last probe tied to the accounting chicanery that saddled the mortgage firm with billions of dollars in restatements and led to the ouster of previous management.
In its complaint, the
Securities and Exchange Commission
alleged that Freddie manipulated its earnings beginning as early as 1998 and lasting through 2002. According to the complaint, Freddie Mac misreported its net income in 2000, 2001 and 2002 by 30%, 24% and 43%, respectively, the SEC said.
The mortgage finance firm "engaged in a fraudulent scheme that deceived investors about its true performance, profitability, and growth trends," the SEC said. Senior management "exerted consistent pressure to have the company report smooth and dependable earnings growth in order to present investors with the image of a company that would continue to generate predictable and growing earnings."
As a result of accounting errors and irregularities related to the mortgage finance firm's massive derivatives portfolio -- which it uses to hedge against interest rate fluctuations -- Freddie Mac was ensnared in an accounting scandal that began in 2003. While the McLean, Va.-based firm had restated earnings for the three years and replaced its senior management team, federal regulators began probing Freddie Mac and ultimately forced it to pay millions in fines.
Among the violations, the SEC alleges that Freddie Mac attempted to "nullify" the transitional effects of accounting changes related to derivative instruments and hedging activities. It also recorded an improper change in valuing the company's "swaptions" portfolio at year-end 2000, while also improperly using derivatives to shift earnings between periods. Freddie Mac also improperly used a certain reserve in connection with the accounting of loan origination costs. It also reported reserves for losses on loans that were "materially in excess of probable losses," the SEC said.
Freddie Mac agreed to pay the penalty, which will be distributed to investors through a Fair Fund, without admitting or denying the allegations.
"We take these charges seriously, and that's why the Freddie Mac of today is a very different company than the Freddie Mac of the past," Richard F. Syron, Freddie Mac's chairman and chief executive, said in a separate statement. "Today's agreement would resolve the last investigation related to the company's legacy restatement issues. This is another milestone enabling us to focus entirely on those things that are most important -- further advancing our housing mission, effectively serving our customers and building our business for the future."
The SEC also charged Freddie Mac's former president and vice chairman David Glenn, its former CFO Vaughn Clarke and two other former executives. As part of the settlement, the four executives agreed to pay penalties ranging from $65,000 to $125,000 and reimbursement to investors between $29,000 to $62,000, without admitting or denying the allegations.
Shares of the company rose 25 cents to $59.80.