Updated from 12:36 p.m. EDT
Federal regulators have ordered
to prohibit three former executives of the mortgage-finance firm from selling millions of dollars of company stock, amid a controversy over a stock sale by one of the executives just days before an accounting scandal erupted.
The government-ordered freeze could impact more than 800,000 Freddie shares with a current value of $41 million. The freeze applies to all shares the former executives have in their company-sponsored brokerage accounts at Smith Barney, the brokerage division of
"We have instructed them to prohibit the making of any sale, transfer or otherwise disposing of these shares until such restrictions are removed," said an official with the Office of Federal Housing Enterprise Oversight, which regulates activities at Freddie and its close cousin
The three former executives were ousted from Freddie two weeks ago in a top-level management shake-up amid a widening accounting scandal at the nation's second-biggest buyer of home mortgages. The shake-up at Freddie has sparked investigations by the
Securities and Exchange Commission
and federal prosecutors, as well as a call for congressional hearings.
The most recent stock-ownership records for three former executives reveal that most of the stock in question is owned by Leland Brendsel, Freddie's former chairman, and David Glenn, Freddie's former president. Brendsel owns 549,562 shares valued at $28 million, while Glenn owns 255,566 shares with a current market value of $13 million. Vaughn Clarke, Freddie's former chief financial officer, has 15,804 shares valued at $806,004.
The three executives had acquired the shares over the past several years as part of a Freddie program to compensate top managers with grants of restricted stock. The stock grants are separate from the lucrative severance packages Freddie had negotiated with the executives; the packages also are being blocked pending the outcome of the various investigations.
Officials at the Office of Federal Housing Enterprise Oversight, which ordered the freeze on June 17, couldn't say how many shares actually remain in the Citigroup brokerage accounts. It's possible that the former executives may have transferred some of those shares into other personal brokerage accounts.
Officials at Freddie declined to comment. But in a letter it sent to regulators late Thursday, Freddie said it already had taken steps to prevent the former executives from selling any shares in their company-sponsored brokerage accounts.
Regulators took that action after learning that Glenn had sold 4,228 shares on June 5 to pay the taxes associated with the vesting of 13,130 shares of restricted stock. In the transaction, Glenn's stock was sold back to Freddie in a transaction valued at $253,680. After the sale, Glenn was left with a net total of 8,802 shares of restricted stock valued at $440,000.
The timing of the stock sale and the vesting process upset regulators because it occurred just days before Glenn was fired from the nation's second-largest mortgage buyer amid allegations of misconduct and a widening accounting scandal at the Virginia-based company. Freddie's board discovered the alleged misconduct on June 4, a day before Glenn sold the 4,228 shares as of part of the company's restricted stock vesting program.
In a related development, two congressmen have asked the SEC to look into the sale of stock by Glenn and similar tax-related stock sales on June 5 by several other current Freddie executives.
In firing Glenn, Freddie accused its former president of altering some entries in several personal diaries he kept. Freddie maintains that the diaries -- black-and-white composition notebooks -- were akin to being corporate records because Glenn discussed company business in them and he had no right to tamper with them.
In a June 17 letter to Freddie, regulators at OFHEO directed Freddie to reverse the June 5 sale of the stock by Glenn and undo the vesting of the additional 13,130 shares on his behalf. In a letter dated June 19, Freddie informed OFHEO that the June 5 sale had never been completed and was merely a "bookkeeping" entry.
But Freddie's explanation differs from one it provided to
a June 10 article that discussed the Glenn stock sale. At that time, a Freddie official said the sale had been allowed to proceed because it was a routine procedure associated with the company's stock vesting program.
Freddie and Fannie only recently began disclosing the stock holdings of their top executives within the past few months. That's because the two government-sponsored enterprises are exempt from most securities laws reporting requirements. But the firm's voluntarily agreed last year to begin making the kind of routine corporate disclosures and filings that other public companies are required to do.
It's not known then if Freddie executives sold any shares in the past before the company began filing periodic updates on its executive stockholdings. One person who knows Glenn said he sold some Freddie shares several years ago to buy land in Utah for a home.
The stock controversy, meanwhile, adds to the list of woes for Freddie, which is under fire because of questions about the accounting treatment the company uses for its massive derivatives portfolio. Freddie and Fannie both rely on derivatives -- sophisticated financial instruments -- to both speculate on, and protect themselves from, fluctuations in interest rates.