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US: Regulator Says Civil Suit Likely For Raines

by Terence O'HaraWashingtom Post
September 14th, 2006

Fannie Mae's top regulator yesterday said it is "more than likely" the federal government will sue former chief executive Franklin D. Raines and other former company officers, seeking to recover bonuses and salary and perhaps impose fines for the mortgage finance company's accounting debacle.

While Fannie Mae paid a $400 million government fine in May for violating myriad accounting rules and overstating its profit by more than $10 billion from 2000 to 2004, as yet no action has been taken against Raines and his former chief financial officer, J. Timothy Howard.

"We will more than likely be filing litigation against them," Office of Federal Housing Enterprise Oversight Director James Lockhart told reporters after delivering a speech at the American Enterprise Institute. It was the strongest statement yet of the regulatory agency's intent to seek financial penalties against former Fannie Mae officials or try to claw back tens of millions of dollars in bonuses paid to the two men on the basis of what turned out to be inaccurate information about company earnings.

When asked if action was likely against Raines or Howard, Lockhart said, "They are the top two," according to an account by the Associated Press.

Lockhart declined to comment on his remarks, though a spokesman yesterday confirmed their accuracy.

Lawyers for Raines and Howard yesterday declined to comment. In past statements, lawyers for the two men have said they did nothing improper.

Lockhart's agency has power to lodge only civil or administrative complaints. The Securities and Exchange Commission is also weighing civil action against former Fannie Mae executives. The Justice Department last month said it had closed its criminal investigation of the company's accounting scandal, though it is looking at whether Raines and Howard committed perjury in congressional testimony about Fannie's accounting practices.

One lawyer with knowledge of the case, who spoke on condition of anonymity because he didn't want to publicly speculate on OFHEO's intentions, said the agency could file a lawsuit before the end of the year. One thing OFHEO may be waiting on: the completion of a mandatory investigation by Fannie's independent directors to determine whether the company itself should sue Raines, Howard or others. The results of that investigation are due at the end of next month.

Such strong statements from Lockhart are not new. In May, after his agency and the announced the $400 million fine against Fannie Mae, Lockhart took aim at the $52.8 million in bonuses Raines received during the six years the company used improper accounting.

In addition, since neither Raines nor Howard were technically fired by the company when the accounting improprieties came to light in 2004, both men took home millions of dollars in severance payments, and Raines received retirement pay of $114,000 a month for the rest of his life.

Fannie Mae, based in the District, is a congressionally chartered private company that provides ready cash to the home mortgage market by purchasing mortgages from lenders. Fannie Mae keeps some loans on its own books but sells most to investors in the form of securities. It is one of the country's biggest financial institutions.

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