Press Release: Freddie Mac, Four Former Executives Settle SEC Action Relating to Multi-Billion Dollar Accounting Fraud (Press Release No. 2007-205; September 27, 2007)
summary
Freddie Mac and four former executives settled SEC charges for a multi-billion dollar accounting fraud from 1998 to 2002, misreporting net income by up to 42.9% in 2002 through improper derivatives and reserve manipulation to create false earnings stability, resulting in a $50 million company penalty and combined individual penalties and disgorgement of over $790,000.
paragraph
Freddie Mac agreed to pay a $50 million penalty to settle SEC charges of securities fraud involving systematic earnings manipulation from 1998 to 2002, misreporting net income by 30.5%, 23.9%, and 42.9% in 2000, 2001, and 2002 respectively. The fraud involved improper use of derivatives, misleading loan loss reserves, and manipulation of accounting standards such as SFAS 133 and SFAS 91 to smooth earnings under pressure to maintain the 'Steady Freddie' image. Four former executives—David Glenn, Vaughn Clarke, Robert Dean, and Nazir Dossani—settled without admitting guilt, paying combined civil penalties of $515,000 and disgorgement of $275,548, and were permanently enjoined from violating securities anti-fraud provisions.
narrative
Freddie Mac and four former executives settled SEC charges related to a multi-billion dollar accounting fraud that spanned from 1998 to 2002, during which the company systematically misreported net income by 30.5%, 23.9%, and 42.9% in 2000, 2001, and 2002 to create an illusion of steady earnings growth. The SEC alleged that senior management fostered a corporate culture obsessed with the 'Steady Freddie' brand, pressuring employees to manipulate financial results through improper use of derivatives, inflated loan loss reserves, and exploitation of accounting standards like SFAS 133, SFAS 91, and EITF 99-20. To resolve the charges, Freddie Mac agreed to pay a $50 million penalty, to be distributed to injured investors via a Fair Fund, without admitting or denying the allegations. Former CEO David Glenn paid $250,000 in civil penalties and $150,000 in disgorgement; CFO Vaughn Clarke paid $125,000 in penalties and $29,227 in disgorgement; Nazir Dossani paid $75,000 in penalties and $61,663 in disgorgement; and Robert Dean paid $65,000 in penalties and $34,658 in disgorgement. All four executives settled without admitting guilt and were permanently enjoined from violating Sections 17(a)(2) and (3) of the Securities Act. The SEC emphasized that the fraud stemmed from a corporate culture that prioritized earnings targets over proper governance, undermining investor trust. This case exemplified how institutional pressure for predictable financial performance can lead to widespread accounting misconduct.
Classified accounting-fraud(confidence 100%). EDGAR detection: forms 10-K/10-Q/8-K/NT 10-K· recall 80% / precision 48%. detection rule →
Statutes
Parties
david w. glennfreddie macnazir g. dossanirobert c. deanSecurities and Exchange Commission
Keywords
freddiemacsecaccountingagreedformer executivescivil penaltypenalty disgorgementearningscompanyformerpaypenaltyexecutives settleaction relating
Extracted insights
Dollar amounts 10
- $50.00M $50 Million $10M–$100M
- $50.00M $50 million $10M–$100M
- $250K $250,000 $100K–$1M
- $150K $150,000 $100K–$1M
- $125K $125,000 $100K–$1M
- $75K $75,000 $10K–$100K
- $65K $65,000 $10K–$100K
- $62K $61,663 $10K–$100K
- $35K $34,658 $10K–$100K
- $29K $29,227 $10K–$100K
Entities 6
- person david w. glenn
- person freddie mac
- scheme_term freddie mac with securities fraud
- person nazir g. dossani
- person robert c. dean
- agency Securities and Exchange Commission
Triples 12
- Securities And Exchange Commission charged Freddie Mac with securities fraud
- Freddie Mac agreed to pay $50 million penalty
- Freddie Mac misreported net income in 2000, 2001 and 2002
- David W. Glenn agreed to pay $250,000 civil penalty and $150,000 in disgorgement
- Vaughn A. Clarke agreed to pay $125,000 civil penalty and $29,227 in disgorgement
- Nazir G. Dossani agreed to pay $75,000 civil penalty and $61,663 in disgorgement
- Robert C. Dean agreed to pay $65,000 civil penalty and $34,658 in disgorgement
- Freddie Mac agreed to entry of a final judgment that permanently enjoins the company from violations
- David W. Glenn agreed to entry of a final judgment that permanently enjoins them from violating Sections 17(a)(2) and (3)
- Vaughn A. Clarke agreed to entry of a final judgment that permanently enjoins them from violating Sections 17(a)(2) and (3)
- Nazir G. Dossani agreed to entry of a final judgment that permanently enjoins them from violating Sections 17(a)(2) and (3)
- Robert C. Dean consented to entry of a Commission Order requiring him to cease and desist
Extracted body text (4,388c)
Freddie Mac, Four Former Executives Settle SEC Action Relating to Multi-Billion Dollar Accounting Fraud Freddie Mac Agrees to Pay $50 Million Penalty FOR IMMEDIATE RELEASE 2007-205 Washington, D.C., Sept. 27, 2007 — The Securities and Exchange Commission today charged the Federal Home Loan Mortgage Corporation (Freddie Mac) with securities fraud in connection with improper earnings management beginning as early as 1998 and lasting into 2002. To settle the SEC’s charges, Freddie Mac agreed to pay a $50 million penalty, which is expected to be distributed to injured investors through a Fair Fund. The SEC’s complaint alleges that Freddie Mac engaged in a fraudulent scheme that deceived investors about its true performance, profitability, and growth trends. According to the complaint, Freddie Mac misreported its net income in 2000, 2001 and 2002 by 30.5 percent, 23.9 percent and 42.9 percent, respectively. Furthermore, Freddie Mac’s senior management exerted consistent pressure to have the company report smooth and dependable earnings growth in order to present investors with the image of a company that would continue to generate predictable and growing earnings. “As has been seen in so many cases, Freddie Mac’s departure from proper accounting practices was the result of a corporate culture that sought stable earnings growth at any cost,” said Linda Chatman Thomsen, the SEC’s Director of Enforcement. “Investors do not benefit when good corporate governance takes a back seat to a single-minded drive to achieve earnings targets.” The charged former Freddie Mac executives are David W. Glenn (president, chief operating officer, and vice chairman of the board); Vaughn A. Clarke (chief financial officer); and former senior vice presidents Robert C. Dean and Nazir G. Dossani. According to the Commission’s complaint, Freddie Mac’s violations were the direct result of a corporate culture that placed great emphasis on steady earnings, and a senior management that fostered a corporate image that was touted as “Steady Freddie” to the marketplace. Among the violations alleged in the complaint is the use of certain transactions to nullify the transitional effects of the company’s implementation of accounting standard SFAS 133 (which relates to accounting for derivative instruments and hedging activities); the improper change in valuing the company’s “swaptions” portfolio at year-end 2000; the improper use of derivatives to shift earnings between periods; the improper use of a reserve in connection with the company’s application of SFAS 91 (which relates to accounting for loan origination costs); the use of certain transactions to nullify the effects of an accounting pronouncement known as Emerging Issues Task Force Issue 99-20; and the maintenance and reporting of a reserves for losses on loans materially in excess of probable losses. The four former executives, who were charged with negligent conduct, agreed to settle the case without admitting or denying the allegations. Glenn agreed to pay a $250,000 civil penalty and $150,000 in disgorgement. Clarke agreed to pay a $125,000 civil penalty and $29,227 in disgorgement. Dossani agreed to pay a $75,000 civil penalty and $61,663 in disgorgement. Dean agreed to pay a $65,000 civil penalty and $34,658 in disgorgement. In its settlement with the Commission, the company agreed, without admitting or denying the allegations, to the entry of a final judgment that permanently enjoins the company from violations of the anti-fraud provisions of the federal securities laws. Without admitting or denying the allegations in the Commission’s complaint, Glenn, Clarke, and Dossani agreed to the entry of a final judgment that permanently enjoins them from violating Sections 17(a)(2) and (3) of the Securities Act. In a separate proceeding, Dean consented to the entry of a Commission Order requiring him to cease and desist from committing or causing any violations and any future violations of Sections 17(a)(2) and (3) of the Securities Act. # # # For more information, contact: Linda Chatman Thomsen Director, SEC Division of Enforcement (202) 551-4894 Peter Bresnan Deputy Director, SEC Division of Enforcement (202) 551-4597 Additional materials: Litigation Release No. 20304; Administrative Proceeding 33-8850 http://www.sec.gov/news/press/2007/2007-205.htm Home | Previous Page Modified: 09/27/2007
OCR text (4,388c · plain-text · 99% conf)
Freddie Mac, Four Former Executives Settle SEC Action Relating to Multi-Billion Dollar Accounting Fraud Freddie Mac Agrees to Pay $50 Million Penalty FOR IMMEDIATE RELEASE 2007-205 Washington, D.C., Sept. 27, 2007 — The Securities and Exchange Commission today charged the Federal Home Loan Mortgage Corporation (Freddie Mac) with securities fraud in connection with improper earnings management beginning as early as 1998 and lasting into 2002. To settle the SEC’s charges, Freddie Mac agreed to pay a $50 million penalty, which is expected to be distributed to injured investors through a Fair Fund. The SEC’s complaint alleges that Freddie Mac engaged in a fraudulent scheme that deceived investors about its true performance, profitability, and growth trends. According to the complaint, Freddie Mac misreported its net income in 2000, 2001 and 2002 by 30.5 percent, 23.9 percent and 42.9 percent, respectively. Furthermore, Freddie Mac’s senior management exerted consistent pressure to have the company report smooth and dependable earnings growth in order to present investors with the image of a company that would continue to generate predictable and growing earnings. “As has been seen in so many cases, Freddie Mac’s departure from proper accounting practices was the result of a corporate culture that sought stable earnings growth at any cost,” said Linda Chatman Thomsen, the SEC’s Director of Enforcement. “Investors do not benefit when good corporate governance takes a back seat to a single-minded drive to achieve earnings targets.” The charged former Freddie Mac executives are David W. Glenn (president, chief operating officer, and vice chairman of the board); Vaughn A. Clarke (chief financial officer); and former senior vice presidents Robert C. Dean and Nazir G. Dossani. According to the Commission’s complaint, Freddie Mac’s violations were the direct result of a corporate culture that placed great emphasis on steady earnings, and a senior management that fostered a corporate image that was touted as “Steady Freddie” to the marketplace. Among the violations alleged in the complaint is the use of certain transactions to nullify the transitional effects of the company’s implementation of accounting standard SFAS 133 (which relates to accounting for derivative instruments and hedging activities); the improper change in valuing the company’s “swaptions” portfolio at year-end 2000; the improper use of derivatives to shift earnings between periods; the improper use of a reserve in connection with the company’s application of SFAS 91 (which relates to accounting for loan origination costs); the use of certain transactions to nullify the effects of an accounting pronouncement known as Emerging Issues Task Force Issue 99-20; and the maintenance and reporting of a reserves for losses on loans materially in excess of probable losses. The four former executives, who were charged with negligent conduct, agreed to settle the case without admitting or denying the allegations. Glenn agreed to pay a $250,000 civil penalty and $150,000 in disgorgement. Clarke agreed to pay a $125,000 civil penalty and $29,227 in disgorgement. Dossani agreed to pay a $75,000 civil penalty and $61,663 in disgorgement. Dean agreed to pay a $65,000 civil penalty and $34,658 in disgorgement. In its settlement with the Commission, the company agreed, without admitting or denying the allegations, to the entry of a final judgment that permanently enjoins the company from violations of the anti-fraud provisions of the federal securities laws. Without admitting or denying the allegations in the Commission’s complaint, Glenn, Clarke, and Dossani agreed to the entry of a final judgment that permanently enjoins them from violating Sections 17(a)(2) and (3) of the Securities Act. In a separate proceeding, Dean consented to the entry of a Commission Order requiring him to cease and desist from committing or causing any violations and any future violations of Sections 17(a)(2) and (3) of the Securities Act. # # # For more information, contact: Linda Chatman Thomsen Director, SEC Division of Enforcement (202) 551-4894 Peter Bresnan Deputy Director, SEC Division of Enforcement (202) 551-4597 Additional materials: Litigation Release No. 20304; Administrative Proceeding 33-8850 http://www.sec.gov/news/press/2007/2007-205.htm Home | Previous Page Modified: 09/27/2007