Ohio's attorney general sued

Fannie Mae

(FNM)

, alleging that the company manipulated earnings in an effort to boost its share price and line the pockets of executives whose pay was linked to stock performance.

Attorney General Jim Petro filed the suit Friday in federal court on behalf of the Ohio public workers' pension plans and other buyers of the stock between Oct. 11, 2000, and Sept. 22, 2004.

"The complaint alleges that Fannie Mae and its top executives -- Franklin D. Raines, J. Timothy Howard and Leanne G. Spencer -- artificially inflated the company's publicly traded common stock through false public financial statements," the attorney general said in a press release after the market closed Friday. "Because these executives were compensated primarily on Fannie Mae's stock performance, this artificially high stock price allowed the executives to get rich at the expense of the company's shareholders."

Fannie Mae said it had no comment. Its shares fell 94 cents in Friday action to $68.10.

The news comes at the end of an eventful week for the nation's leading mortgage company. On Monday, Fannie told investors it wouldn't be able to file its quarterly report with regulators in a timely fashion, saying its auditor needs more time to comb through its books.

That news came just months after Fannie's regulator, the Office of Federal Housing Enterprise Oversight, issued a scathing report taking issue with the company's accounting for derivatives. Fannie has since had discussions with the

Securities and Exchange Commission

regarding its accounting. The company said it stands by its bookkeeping but would agree to a restatement if the SEC directs it to.

Fannie admitted in its filing Monday that if the SEC takes issue with its accounting, Fannie could be on the hook for $9 billion in unrecorded derivatives losses. The loss would reduce Fannie's regulatory capital, requiring the finance firm to come up with more cash to satisfy OFHEO's demands.

In September, OFEHO told Fannie to increase its surplus capital to 30% above the regulatory minimum, after the regulator found serious flaws with Fannie's accounting practices as well as evidence of earnings management. The regulatory minimum represents the amount of cash needed to guard against the risk of a big loss on an investment or in the value of the company's enormous mortgage portfolio.

As of June 30, Fannie reported $36.1 billion in capital. That's roughly $4.9 billion, or 16%, above the current required minimum capital level of $31.2 billion. Using those numbers, Fannie would need to raise just $4.46 billion to get to its new target, the 30%-plus threshold of $40.1 billion.

But if Fannie incurs a $9 billion shortfall, it would need to raise a little more than $13 billion to meet the regulators' standard.