While the stock market at least temporarily felt that Freddie Mac
had closed the doors on some serious legal issues last week, it cost the giant
mortgage corporation some serious money to do so.
On Tuesday, April 18 Freddie announced that it had agreed to pay a 3.8 million
penalty to the Federal Election Commission (FEC) to settle charges that it had
violated federal election financing rules during the period 2000 to 2003.
Freddie had been accused of using its corporate resources and its staff to
assist in 85 fundraising events during the period in question for the benefit
of members of the House Financial Services Committee and other members of Congress
and to solicit contributions from company employees for candidates for federal
office. The fundraisers were said to have raised 1.7 million for selected congresspersons
but violated election financing rules governing its status as a Government Sponsored
The corporation stated that in 2003 it had retained an outside law firm to
investigate its compliance with campaign finance rules and then voluntarily
disclosed the firm's findings to the FEC and cooperated through the follow-up
The $3.8 million was only a small down payment on Freddie's weekly total,
however, as two days later, it announced that it had settled class action suits
brought by its investors in the wake of the accounting scandals that rocked
the corporation - and continues to plague Fannie Mae, the other (GSE)
that provides funding for home mortgages - beginning in mid 2003.
The proposed settlement of these suits includes a cash payment to shareholders
of $410 million but does not include any admission of wrongdoing
on the part of the corporation.
The chief class action lawsuit was brought by the Ohio Public Employees Retirement
System and was followed by several "derivative" lawsuits brought
against certain former executive officers and current and former members of
the corporation's Board of Directors. These lawsuits were consolidated
and are pending in U.S. District Court for Southern New York. The settlement
must be approved by several retirement systems in Ohio and by the courts.
The corporation estimates that the $410 million settlement will reduce its
first quarter 2005 income by $220 million after application of proceeds from
its insurance companies. This is in addition to an estimated $200 million in
adjustments and corrections which had been previously announced, brought about
by Freddie's reexamination of financial statements from earlier quarters.
Freddie Mac stated that the proposed settlement does not resolve other legal
proceedings related to the restatement of its earnings over a multiple year
period. This includes an ongoing investigation by the Securities and Exchange
"Today's settlement, like the settlement announced earlier this week with
the Federal Election Commission, enables this management team to resolve past
issues so that we can focus squarely on meeting our important housing mission,
running the business well and serving the needs of our customers," Richard
F. Syron, Freddie Mac's chairman and chief executive officer said on Thursday.
"We are pleased with the progress we are making in moving Freddie Mac forward."
Upon settlement on Tuesday of the election finance complaint Freddie
Mac stock closed at $61.89, up 2.6 percent from the previous day. It
rallied again after announcement of the class action suits but at mid-day Friday
it was at $60.56. Before the troubles began in 2003 the stock had traded in
the range of $70 but dropped at the height of the scandal to near $50.00.