SEC Sues Former Fannie, Freddie CEOs For Misleading Investors On Subprime Risk

Tyler Durden's picture

So with just a 3 years delay, the SEC has finally put down the porn channel remote, and decided to do what it should have done back in 2008, which is to sue the former heads of Fannie and Freddie for "misleading investors about risky mortgages" in the case below, former Fannie CEO Daniel Mudd, who was paid $13.4 million in 2007. With MF Global telling everyone it had no European exposure as recently as September 30, this appears to be a recurrent theme. So at this pace, Corzine should expect the SEC to sue him... about 8 years after he passes away? Per Reuters: "The U.S. Securities and Exchange Commission sued three former executives at Fannie Mae and three at Freddie Mac, including former chief executives of both companies. The civil charges were filed in two separate lawsuits. The SEC said both firms have agreed to cooperate with the agency and have entered into non-prosecution agreements." Yes, your honor, we don't admit or deny that we got paid tens of millions to blow up the companies at the backbone of the American mortgage industry by lying what we were investing in, but we will cooperate... We promise. In the meantime, we won't hold our breath for the SEC to clawback even one cent from Mudd in this purely theatrical spectacle, of which we will see many more as the US enters election year. Incidentally, any and all LPs of Fortress Group may want to ask themselves what else  (if anyhting) the current CEO of the company, who just happens to be Dan Mudd, is misrepresenting these days.

From the lawsuit:  

This action arises out of a series of materially false and misleading public disclosures by the Federal National Mortgage Association ("Fannie Mae" or the "Company") and certain of its former senior executives concerning the Company's exposure to subprime mortgage and reduced documentation Alt-A loans. Eager to promote the impression that Fannie Mae had limited exposure to- subprime and Alt-A loans during a period of heightened investor interest in the credit risks associated with these loans, Fannie Mae and its executives misled investors into believing that the Company had far less exposure to these riskier mortgages than in fact existed.


Between December 6, 2006, and August 8, 2008, (the "Relevant Period"), Daniel H. Mudd ("Mudd"), Enrico Dallavecchia ("Dallavecchia") and Thomas A. Lund ("Lund") (collectively, "Defendants"), made or substantially assisted others in making materially false and misleading statements regarding Fannie Mae's exposure to subprime and Alt-A loans.


For example, in a February 2007 public filing, Fannie Mae described subprime loans as loans "made to borrowers with weaker credit histories" and reported that 0.2%, or approximately $4.8 billion, of its Single Family credit book of business as of December 31, 2006, consisted of subprime mortgage loans or structured Fannie Mae Mortgage Backed Securities ("MBS") backed by subprime mortgage loans.


Fannie Mae did not disclose to investors that in calculating the Company's reported exposure to subprime loans, Fannie Mae did not include loan products specifically targeted by the Company towards borrowers with weaker credit histories, including Expanded Approval ("EA") loans. As ofDecember 31, 2006, the amount ofEA loans owned or securitized in the Company's single-family credit business was approximately $43.3 billion, yet none of these loans were included in the Company's disclosed subprime exposure.


Fannie Mae's exclusion of loans such as EA from its subprime disclosures was particularly misleading because EA loans were exactly the type of loans that investors would reasonably believe Fannie Mae included when calculating its exposure to subprime loans. In fact, the Company identified EA as its "most significant initiative to serve credit impaired borrowers" in response to regulatory requests for information on its subprime loans. In addition, all of the Defendants knew that EA loans had higher average serious delinquency rates, higher credit losses, and lower average credit scores than the loans Fannie Mae included when calculating its disclosed subprime loan exposure.


In a November 2007 public filing, Fannie Mae described subprime loans as a loan to a borrower with a "weaker credit profile than that of a prime borrower," classified mortgage loans as "subprime" if the mortgage loans were originated by a "specialty" subprime lender or a "subprime division of a large lender," and again represented that only 0.2%, or approximately $4.8 billion, of its Single Family credit book of business consisted of subprime mortgage loans or structured Fannie Mae MBS backed by subprime mortgage loans as of both March 31, 2007, and June 30, 2007.


Fannie Mae did not tell investors that in calculating the Company's exposure to subprime loans reported in this filing, Fannie Mae again did not include at least $43 billion of EA loans, included loans from only fifteen loan originators of the approximately 210 lenders listed on the HUD Subprime Lender list, and did not even have the capacity to track whether loans were originated by a subprime division of a large lender.


Fannie Mae made similarly misleading disclosures concerning its exposure to subprime loans in public filings throughout the Relevant Period. The result of these disclosures was to mislead investors into seriously underestimating Fannie Mae's exposure to subprime loans.


Similarly, Fannie Mae misled investors concerning its exposure to Alt-A loans with reduced or alternative documentation requirements. Fannie Mae did not disclose the total percentage of its Single Family mortgage guarantee business consisting of reduced documentation loans as reflected in its own internal reporting, which Defendants routinely received throughout the Relevant Period.




The result of these disclosures was to mislead investors into materially underestimating Fannie Mae's exposure to reduced documentation loans. Fannie Mae made similarly misleading disclosures concerning its exposure to reduced documentation loans in public filings throughout the Relevant Period.


By engaging in the misconduct described herein, Mudd violated and aided and abetted the violation of the antifraud and reporting provisions of the federal securities laws; Dallavecchia violated the antifraud provisions and aided and abetted the violation of the antifraud and reporting provisions of the federal securities laws; and Lund aided and abetted violations of the antifraud and reporting provisions of the federal securities laws. The Commission seeks injunctive relief, disgorgement of profits, prejudgment interest, civil  penalties and other appropriate and necessary equitable relief from both defendants.

Full filing:


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ucsbcanuck's picture

Agreed. Nothing will come out of this.

Popo's picture

"Non-prosecution agreements."  ?!

Seriously:  Under what justification would such an agreement be made?  In order to get them to cooperate???  I'm sorry -- who has the mandate of authority here?  

How about:  "If you do not cooperate, we will have you arrested.  Are we clear?"

Mark123's picture

At least we arn't offering them awards to cooperate....or are we????

The Big Ching-aso's picture




I think nowadays this really stands for:    Sustaining Enterprise Corruption.  



SheepHerder's picture

Let's think about this...a taxpayer backed agency is suing another taxpayer backed agency.  So if one agency wins what do they get?  Oh that's right, unless they are going after personal assets...a shuffling of taxpayer money.  All the while the litigation and legal process will cost more taxpayer money.  Brilliant!  The one thing the American government is efficient at is wasting the 30% plus of my salary I give up on an annual basis.  Kudos, kudos!

john39's picture

agency wasn't sued, just the individuals.

SheepDog-One's picture

There are no individuals, only Corporations.

Oh regional Indian's picture

Very purseptive of you to notice that.

Yes, purseptive. it's like pursepective, only different.



FreedomGuy's picture

40% for me last year. And they want more. Put on top of your 30% that we run about a 40% annual deficit...meaning to balance the books you should pay about 40% than you do now. It only gets worse with time. Someone beside Ron Paul in the Republican party might want to note and address this.

Buzz Fuzzel's picture

Manthong, you risk being called a racist or even worst, a right wing conservative republican for asking that question.  I hope you are not expecting a meaninful answer.

smlbizman's picture

now we know why that disgusting nose picking ass eater quit.....

SWRichmond's picture

Too little much too late.

Yes, only this, and since the "resititution," if any, would come out of the taxpayers' pockets anyway, since these companies are on taxpayer life support anyway, if there is not crminal prosecution then this is merely a show for the election cycle: "Look, we're doing something!  Regulation works!"

economics1996's picture

Why do we have a SEC?  Fucking useless jerk offs.

PrintingPress's picture

Haven't you heard, government creates jobs! 

chipshot's picture

perfect holiday diversion for the JD/SEC off of fast and furious

navy62802's picture

The SEC exists to make people believe that there is some sort of regulation going on.

SheepDog-One's picture

Yes and then when things like MF Global go up in flames, it gives great cover to guys like Bawney Fwank to bluster about needing more wegwoowations.

Never been more overlapping wegwoowations, but each failure to catch any outright criminality simply proves we need more.

dwdollar's picture

Sort of... Just like any government regulatory, they are institutionalized 'muscle' to keep the peasants from engaging in the same crimes the oligarchs are privileged to engage in.

HelluvaEngineer's picture

Time to wheel out Arthur Levitt to explain why the SEC should never take anyone to court.  His reason: if they lose a case in court, that sets a precedent, thereby reducing their capacity to enforce the law.  Make sense? 


No, didn't to me either.

scatterbrains's picture

Lets elect Ron Paul, declare these banksters terrorist and hold them indefinitely or until they return to dust so we can clean this shit show up.

FreedomGuy's picture

They need to trace this thing all the way back to the prime movers of this fiasco, i.e., politicians! That will not happen because the majority are democrats. Frank is retiring and Dodd wisely got out before it came back on him. We need to go back 30 maybe 40 years for all of them. If anything good comes out of this (and I don't think anything really will) it would be that central planning always fails. Always.

bonddude's picture

Does anyone find it amazing that Former FNMA CEO Franklin Raines (Yes, O bam a's former head of his campaign's finances) who made $100 MM is strangely missing from this suit ?

FreedomGuy's picture

Not amazing. Predictable. Tony Rezco is in jail in Chicago, though so who knows?

Surly Bear's picture

About damned time.

LawsofPhysics's picture

What about the folks at Goldman?  It seems like the folks at Fannie and Freddie are small fish here.  What the fuck?

spekulatn's picture

Pattsy, bitchez!

Theta_Burn's picture

3 yrs delay? thier not slow just helping where they can


azusgm's picture

Is there a time limit on the officers and directors insurance coverage?

Scalaris's picture

That didn't take long. 

(That's sarcasm, 'cause it did take long)

WonderDawg's picture

It's funny because it's not true.

Caviar Emptor's picture

Window dressing. THey may collect a nickel in 20 years. But since president Newt wants to downsize the court system, it could take longer. But a nickel will truly be worth more than 5cents!

Vincent Vega's picture

They were doing God's work.

Mark123's picture

Sure am glad we voted in Obama to clean up the mess left behind by Bush.  Wow, he really showed them who's boss!  What a farce....can't wiat for the next stooge to come in and take control.....


Anyone have any comments on today's conflicted markets?  French market trading down (DAX flat), Bond yields in US way down, US stocks up?????  WTF???  Like a squirrel on the road darting back and forth in confusion as a car races towards it...

Strut's picture


If you think Obama's bad, just wait until any one of these GOP "candidates" gets elected. Even if Ron Paul were electable, he would be powerless to implement any of his reforms. Nothing changes without a constitutional amendment to get ALL MONEY out of politics.


Fíréan's picture

"The SEC said both firms have agreed to cooperate with the agency and have entered into non-prosecution agreements".


So what's the point ? Lots of investigation at high cost, SEC can feel good they're doing something about something ( and can report that they're doing it ), and some report gets released at the end of the day, whenever . . . whatever.

SheepDog-One's picture

Is this our good news for excuse to ramp equity stawks today?

BluPoint's picture

Anyone remember the Fannie Mae CFO that offed himself at home back in 2009?  The story was pretty hushed.  Nice family, nice house, nice salary and bonuses too.  All gone.  what did he know and when did he know it? 

JR's picture

Funny how many placed people flick the “off” switch.  Vince Foster set a “suicide” trend?

Widowmaker's picture

Only justice served so far in my opinion.

He knew the shit was systemic, an epidemic and presidential.

To those involved in the mortage gutting of the United States and the poisoning of liberty using 9/11 as a shield, you have a lot to be ashamed of.

By the time history is done with the George W Fuckin Bush administration of war criminals, just the sound of the name will make US citizens vomit.



LeBalance's picture

very poorly played. this action is an implicit admission of incompetence/complicity by the SEC.

if they were ever going to bring this action it had to have been done in a timely fashion after the event, by say mid 2009 at the latest.

bringing the action now makes it obvious that they knew there was illegality, but chose not to exercute their function for approximately 3 years.

at this point this is the worst gambit to make.

not only does it roil the waters, it destroys the SEC by their own hand.

Mark123's picture

Like all other authorities their prime directive is to support the overall markets and encourage confidence - their excuse to justify their lack of enforcement.  The way they do that is to make sure all evidence that the markets are rotten is swept under the carpet, and at a senior level the offenders are given a stern warning (e.g. - you better clean things up or we will have to really intervene).

If one applied this to the rest of the world, we would have no prisons or courts.  The police would visit the bank robbers house and give him a stern talking to.


FreedomGuy's picture

You have to realize that with leftist-collectivist democrats there is no concept of personal responsibility. That is the connection between Obama, Corzine, Frank, Holder and government, in general. None of them takes responsibility for anything. The FBI can illegally sell illegal weapons to people in an illegal business, have one of their own killed and it's not the Director's fault. In fact, he didn't even know. Obama will not own the economy. It is Bush's fault still. Corzine is innocent because he doesn't know where a billion went. Frank said Fannie and Freddie were solid on video and defended them and even though he controlled that committee it's not his fault. See the theme? These guys may take the fall...maybe but it will not get back to the prime movers. They all had good intentions and that is enough.

monopoly's picture

It is a start. Lets see if it is just window dressing. But ya gotta start somewhere.

G_T_A_44's picture

Was Mary Schapiro the Lead Blocker for Corzine?


"Corzine, I know from (an) inside source at the SEC, there were going to be rules to prevent them from doing exactly what they are doing.

Corzine went down (to the SEC), met with Mary Schapiro, she personally revoked it. That's information I have from inside the SEC. So the whole thing is a joke. When I speak to people on the (Capitol) Hill, they even say the SEC is bought and paid for."


OK. Back to shredding and Porn.

NuYawkFrankie's picture

I hope you're not suggesting that Franklin Raines be held accountable?

Surely you must be aware that Mr. Raines is an esteemed FOB (Friend of Bill)? Nothing untowards ever happens to Slick Willie's buddies.

BTW Jonny "I'm Dreaming of a Re-hypothecated Christmas" Corzine is also a Friend of Bill's - and also pretty snug with Hillary, from what I hear. So fuggedabout him as well.