OFHEO Imposes Corrective Actions and $125 Million Penalty On Freddie Mac
December 5, 2003
WASHINGTON , D.C. ? Armando Falcon , Jr., Director of the Office of Federal Housing Enterprise Oversight (OFHEO), has announced that Freddie Mac has agreed to implement corrective measures and pay a civil money penalty of $125-million dollars as part of a Consent Order with OFHEO. The actions come as OFHEO released a report detailing a pattern of inappropriate conduct and improper management of earnings that led to the company's recent restatement.
?A government sponsored enterprise like Freddie Mac lives on a public trust that should never be violated,? said OFHEO Director Falcon. ?OFHEO will take strong action against an enterprise and responsible individuals if that trust is ever broken.?
Among the findings in the OFHEO report:
- Freddie Mac disregarded accounting rules, internal controls, disclosure standards, and ultimately, the public trust in the pursuit of steady earnings growth.
- The incentive compensation plans of senior executives contributed to the improper accounting and management practices of the enterprise.
- Weaknesses existed in every aspect of Freddie Mac's accounting process.
- The Board of Directors was complacent and failed to exercise adequate oversight.
- Former management exhibited a disdain for appropriate disclosure standards.
The report also recommends specific actions for the agency to implement, including:
- Freddie Mac should be required to separate the functions of the CEO and the Chairman of the Board.
- Freddie Mac should be required to develop financial incentives for employees based on long-term goals, not short-term earnings.
- OFHEO should establish a regulatory system of mandatory disclosures for the enterprises or their securities exemptions should be repealed.
- OFHEO should consider requiring a periodic change of the external auditors at the enterprises, not just a change in engagement partner.
- OFHEO should require Freddie Mac to hold a capital surplus and should consider limiting the growth of the retained portfolio until Freddie Mac produces timely and certified financial statements.
- OFHEO should establish a ?materiality? standard to assure the provision of sufficient information to the Board of Directors.
While conducting its investigation, OFHEO took numerous actions regarding present and former executives at the enterprise. These included: the freezing of compensation packages, removal of the CEO and General Counsel, the levying of a civil money penalty on the former Vice Chairman, and beginning the process of terminating the former CEO and CFO for cause.
The $125-million dollar penalty in the Consent Order is the largest civil money penalty by a safety and soundness regulator. Some of the recommendations in the OFHEO report are also part of the Order.
- Consent Order
- Report of the Special Examination of Freddie Mac