SEC Sues Former Fannie Mae and Freddie Mac Executives for Securities Fraud

The Securities and Exchange Commission (SEC) on Friday sued six former executives of Fannie Mae and Freddie Mac with securities fraud, alleging that they knew and approved of misleading statements related to the companies' holdings of subprime loans.

The lawsuit, filed in the U.S. District Court for the Southern District of New York, targets Fannie's former CEO Daniel Mudd, the former chief risk officer Enrico Dallavecchia, and Thomas Lund, the executive vice president of Fannie's single family mortgage business.

Freddie's former chairman and CEO Richard Syron, its former executive vice president and chief business officer, Patricia Cook, and its former executive vice president for single family guarantee business, Donald Bisenius, were named in a separate suit filed in the same court.

The officials oversaw Fannie and Freddie as the government-sponsored enterprises increased guarantees of subprime mortgage loans prior to the 2008 economic crisis. The agencies have collectively cost taxpayers over $160 billion since a government takeover in 2008, and losses from bad mortgages made during that period have continued to drag down the companies' performance.

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 statement. 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. All individuals, regardless of their rank or position, will be held accountable for perpetuating half-truths or misrepresentations about matters materially important to the interest of our country's investors.

Fannie and Freddie agreed to a non-prosecution agreement with the SEC and have agreed to cooperate in the litigation.

The SEC has also sued banks for their role in the subprime mortgage crisis, alleging that they mislead investors about mortgage-backed securities. Most recently, the SEC came to a $285 million agreement with Citigroup to settle claims, but it was rejected by U.S. District Judge Jed Rakoff. The SEC appealed the decision earlier this week.