Article: Ex-Fannie CEO Gained $40 Mln From Fraud, Ohio Alleges (Update1)

Ex-Fannie CEO Gained $40 Mln From Fraud, Ohio Alleges (Update1) Nov. 29 (Bloomberg) -- Former Fannie Mae Chief Executive Officer Franklin Raines received more than $40 million in bonuses and other pay as a result of inflated earnings at the biggest U.S. mortgage finance company, according to a supplement of a lawsuit filed by Ohio Attorney General Jim Petro. Fannie Mae added ``tens of millions of false revenue'' to meet ``Raines' 1999 publicly announced goal to double'' earnings over the next five years, Petro alleged in a Nov. 23 filing with the U.S. District Court in Washington. ``Raines personally profited by over $40 million by this false earnings history.'' The filing echoes concerns expressed by lawmakers and regulators that pay arrangements provided Fannie Mae executives with incentives to violate accounting rules. The Washington- based, government-chartered company disclosed last year that it committed $10.8 billion in accounting errors Petro represents the Ohio Public Employees Retirement System and the State Teachers Retirement System of Ohio, both based in Columbus. The two pension funds in January were named lead plaintiffs in shareholder lawsuits against Fannie Mae alleging the company engaged in securities fraud by manipulating earnings in an effort to inflate its stock. Company shares are down 31 percent this year after falling 5.1 percent in 2004. In court filings Nov. 23, Fannie Mae, Raines, former Chief Financial Officer J. Timothy Howard and former Controller Leanne Spencer denied Petro's allegation that they engaged in what Petro described was ``a classic case of federal securities fraud.'' ``Plaintiffs have failed to identify any accounting judgment that Mr. Raines made or any accounting policy that he developed,'' Raines' attorney, Kevin Downey, said in a filing. `Heap of Allegations' Referring to Raines, Downey said, the plaintiffs ``have sought to tarnish his reputation by cobbling together a heap of allegations and arguing that such allegations create a strong inference that he intended to commit fraud.'' Fannie Mae ousted Raines and Howard in December after the Securities and Exchange Commission and the company's federal regulator said the company made mistakes in accounting for contracts designed to protect its $727.8 billion of securities from swings in interest rates. Fannie Mae plans during the second half of next year to restate profit from 2001 to mid-2004. A total of 91 percent of Raines' pay and 67 percent of Howard's pay was based on the earnings per share and stock performance at Fannie Mae, Petro said. Raines in 2003 earned $20 million in base salary, bonus, stock grants and long-term incentive payments, an 8 percent increase from 2002, according to regulatory filings. `Perverse Incentives' A Harvard University study released in March concluded that Fannie Mae gave Raines ``perverse incentives to inflate earnings,'' allowing him and other executives to keep bonuses even if the earnings that prompted the rewards later required a restatement. Fannie Mae earlier that month changed the target of an executive compensation incentive plan from earnings growth to one based on fixing its accounting and expanding homeownership. Lawmakers such as Representative Barney Frank, a Democrat from Massachusetts, criticized the company's pay packages as the extent of the mistakes came to light. Fannie Mae and Freddie Mac, its rival with headquarters in McLean, Virginia, own or guarantee almost half the $7.6 trillion U.S. mortgage market. They make money on the difference between their financing costs and the returns on the mortgages they buy from lenders. Regulator's Report The companies' regulator, the Office of Federal Housing Enterprise Oversight, reported in September 2004 that Fannie Mae used improper ``cookie jar'' reserves and deferred expenses to smooth its earnings and meet executive bonus targets. The SEC in December ordered a restatement. Petro in his court submission primarily based his allegations on Ofheo's 2004 report. Raines and other defendants deferred $200 million in expenses in order to trigger bonuses in 1998, Petro said. The company also used accounting systems that enabled ``employees to falsify signatures on unauthorized accounting entries'' and allowed executives to deceive auditors. Petro and other plaintiffs ``have no specific facts or proof of any securities fraud,'' Fannie Mae said in its filing. The mortgage finance company for years detailed its accounting policies to Ofheo and KPMG International, its former auditor, Fannie Mae said. The company's ``undisputed transparency to auditors and regulators is inconsistent with an intent to commit fraud.'' To contact the reporter on this story: James Tyson in Washington at jtyson@bloomberg.net. Last Updated: November 29, 2005 17:27 EST