Former Fannie Mae chairman and chief executive Franklin D. Raines has agreed to a multimillion settlement with a federal regulator over his alleged responsibility for improper accounting at the mortgage finance giant.
The regulator, the Office of Federal Housing Enterprise Oversight, said Raines had agreed to forgo stock, cash and other benefits worth $24.7 million in exchange for dismissing the charges against him. However, the regulator's estimate wasn't the only way of looking at the value of the settlement.
The agreement includes stock options worth $15.6 million at the time they were issued; those options are currently under water. They entitled Raines to buy shares at prices of $77.10 and higher. Fannie Mae's shares are currently trading at about $29, so the options Raines is surrendering would not produce any benefit to him unless the share price rose dramatically, according to sources familiar with the settlement who spoke on the condition of anonymity because they did not want to be seen as criticizing the regulator.
OFHEO said Raines's settlement also includes the payment of $2 million to the federal government. That sum would be covered by a Fannie Mae insurance policy, the sources said.
The settlement also includes proceeds from the sale of stock worth $1.8 million, to be donated to programs aimed at assisting financially strapped homeowners. Those are shares Raines had been fighting in court to obtain from Fannie Mae.
He also agreed to part with $5.3 million in other unspecified benefits, OFHEO said.
Raines was one of three former Fannie Mae executives to settle.
Former chief financial officer J. Timothy Howard agreed to a settlement OFHEO valued at $6.4 million -- $5.2 million in stock options -- and former controller Leanne G. Spencer agreed to pay $275,000.
Howard's cash payment of $750,000 is also being covered by a Fannie Mae insurance policy, and his options are similarly under water, one source said.
All three are barred from receiving compensation from Fannie Mae in the future or from working for a firm that does business with the company.
OFHEO sued the former executives in 2006, seeking to recoup more than $115 million of compensation the agency said they received while Fannie Mae's earnings were misstated, plus penalties that could have exceeded $100 million.
In court papers, the agency said the former executives were unjustly enriched.
"OFHEO's mission is to ensure that the Enterprises operate in a safe and sound manner," OFHEO Director James B. Lockhart said in a statement. "That cannot occur without corporate management providing prudent and responsible leadership and setting the appropriate ethical and overall 'tone at the top.' "
"The Consent Orders announced today represent a satisfactory conclusion to the enforcement actions against these individuals," he said in another statement.
In his own statement, Raines said the "process invoked against me by OFHEO was fundamentally unfair."
"While I long ago accepted managerial accountability for any errors committed by subordinates while I was CEO, it is a very different matter to suggest that I was legally culpable in any way. I was not," he said. "This settlement is not an acknowledgment of wrongdoing on my part, because I did not break any laws or rules while leading Fannie Mae. At most, this is an agreement to disagree."
Howard's attorney, Steven Salky, was more blunt.
"The settlement is a capitulation by OFHEO, reflecting that its concocted claims
never had an ounce of merit," Salkey said in a statement.
Spencer's attorney, David S. Krakoff, said the former controller was pleased to resolve the matter.
"Ms. Spencer maintained throughout this action that the OFHEO reports and allegations had no merit," he said in a statement.
A hearing on the charges were scheduled to be heard by an administrative law judge in September.
The case reached an important juncture in January, when a federal district court judge presiding over related litigation held OFHEO in contempt for failing to turn over certain records for use by the former executives in their defense.
The judge ordered OFHEO to give the executives documents that the regulatory agency considered privileged, but that order has been stayed pending an appeal. OFHEO recently reported that it has spent more than $6 million responding to document requests it said were "overly burdensome."
Raines, who headed the Office of Management and Budget in the Clinton administration, left Fannie Mae in 2004 after the Securities and Exchange Commission determined that it had used improper accounting. The federally chartered mortgage-funding company later corrected its books, wiping out $6.3 billion of previously reported profit.
District-based Fannie Mae reached a settlement with regulators in 2006, agreeing to pay $400 million.
Announcing the administrative charges in December 2006, OFHEO Director James B. Lockhart III said the former executives "improperly manipulated earnings to maximize their bonuses . . . misleading the regulator and the public." These charges cover 1998 to 2004.
Raines's lawyer, Kevin M. Downey, has alleged that Lockhart was using the case to advance the argument that Congress should give regulators more power over Fannie Mae and its rival Freddie Mac of McLean.
OFHEO brought administrative charges against former Freddie Mac chairman and chief executive Leland C. Brendsel in connection with a separate accounting scandal. Though the agency contended that Brendsel could have been held responsible for more than $1 billion of damages and fines, it settled with Brendsel last fall for $16.4 million.
That settlement came weeks into an administrative trial before the same judge who was slated to hear the former Fannie Mae executives' case, and Brendsel was represented by the same lawyer who has been defending Raines.
Brendsel's settlement did not include any admission of wrongdoing, and he continued to deny OFHEO's charges.
In the absence of a settlement in the case of former Fannie Mae executives, an administrative law judge would have presided over a trial-like hearing and issued an opinion. However, the judge's opinion would have been advisory, and the OFHEO director would have decided the matter. That decision is subject to appeal.
In the months leading up to a hearing, Fannie's former executives had sought to turn the tables on the regulator by challenging its oversight of Fannie Mae. But in a recent order Administrative Law Judge William B. Moran rejected that approach.
"OFHEO is not on trial," Moran wrote in a court order
