Regulators sue former top executives at Fannie, Freddie

NEW YORK (Reuters) - Six former top executives at Fannie Mae and Freddie Mac were sued by U.S. regulators, who said they misled investors over the mortgage finance companies' exposure to risky home loans in the lead-up to the 2008 financial crisis.

The U.S. Securities and Exchange Commission brought civil fraud charges on Friday against former Fannie Mae CEO Daniel Mudd, former Freddie Mac CEO Richard Syron and four other one-time high-level executives at the companies. Regulators say the executives made it appear that their companies had far less exposure to riskier mortgages in their loan portfolios than in fact existed.

Freddie Mac and Fannie Mae have been propped up by $169 billion in federal aid since they were rescued by the government in 2008. Both companies were chartered by Congress to foster a liquid mortgage market.

The SEC said both firms have agreed to cooperate with the agency and have agreed to admit responsibility for the alleged conduct, without agreeing or denying that they are liable. The firms have also entered into non-prosecution agreements with the agency, the SEC said.

Attorneys for Mudd and Syron did not immediately respond to requests for comment.

Mudd, 53, was CEO of Fannie Mae from June 2005 until September 2008, when the FHFA put it into conservatorship. Mudd is now chief executive of asset manager Fortress Investment Group.

Syron, 68, was chairman and CEO of Freddie Mac from December 2003 until September 2008 when the FHFA stepped in.

"Fannie Mae and Freddie Mac executives told the world that their subprime exposure was substantially smaller than it really was," said Robert Khuzami, Director of the SEC's Enforcement Division, in a statement announcing the charges.

"These material misstatements occurred during a time of acute investor interest in financial institutions' exposure to subprime loans, and misled the market about the amount of risk on the company's books," Khuzami said.

The civil charges were brought in two separate lawsuits filed in U.S. District Court in Manhattan. The SEC accused the six former executives of knowingly approving false statements to investors.

The regulator is asking the court to order the former officers to pay back alleged illegal profits, as well to impose penalties against them, court documents showed. The documents did not specify what amount the SEC would be seeking.

In the Fannie Mae complaint, the SEC said the now-former executives made misleading statements between December 2006 and August 2008. In the Freddie Mac case, the regulator said the alleged wrongdoing took place between March 2007 and August 2008.

The SEC said the CEOs' statements were at times blatantly false.

In one episode in 2006, the SEC quoted Syron as saying on an earnings conference call that "we, as you know, weren't really involved in underwriting much of that business, any of that business, directly," referring to the subprime loan market.

That statement, the SEC said, was "materially false and misleading," because by around that point Freddie Mac's single-family credit guarantee portfolio contained about $141 billion worth of subprime loans, 10 percent of its total.

The cases are SEC v. Daniel Mudd et al., No. 11-9202 and SEC v. Syron et. al No. 11-9201, U.S. District Court for the Southern District of New York.

(Reporting by Basil Katz, editing by Gerald E. McCormick, John Wallace and Gunna Dickson)

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