Mortgage-finance giant Freddie Mac has agreed to pay a $125 million civil fine to settle a federal regulatory inquiry into management lapses that resulted in the company misreporting earnings by $5 billion from 2000 to 2002, sources said.
Freddie Mac's board, in a conference call, last night agreed to a consent decree with its regulator, the Office of Federal Housing Enterprise Oversight. Without admitting or denying wrongdoing, the McLean-based company also agreed to strengthen internal accounting controls and to beef up its public disclosure, according to sources familiar with the agreement. The company has agreed to hire a third party to monitor its progress and report back to the OFHEO.
After revelations of accounting irregularities, Freddie Mac had already promised to make its operations more transparent.
Both parties worked yesterday to reach the settlement in time to announce it this morning, when the OFHEO is scheduled to release the results of its probe of the company. That inquiry has been underway since Freddie first acknowledged accounting problems in January.
The fine is the first that the OFHEO has imposed in its 10-year history.
Freddie Mac officials had initially suggested a penalty of $50 million, sources said, while OFHEO officials suggested a figure three to four times that amount.
While Freddie Mac officials believe a $50 million fine would be in line with similar penalties for other large financial institutions, sources say that OFHEO Director Armando Falcon Jr. pushed a larger penalty.
Neither side would comment publicly yesterday.
The regulator’s inquiry intensified in June, when Freddie Mac ousted its chairman and chief executive, Leland C. Brendsel, and two other top executives in connection with accounting errors.
Freddie Mac officials expect the OFHEO report to be highly critical of the circumstances that led to the accounting mistakes, especially of departing chief executive Gregory J. Parseghian and also of the board of directors, who have so far have escaped much blame. In June, the board named Parseghian as Brendsel’s replacement, but in August, under pressure from the OFHEO, Parseghian said he would step down as soon as a replacement was found. This week Freddie Mac announced that Richard F. Syron will become the new chairman and chief executive at the end of the year.
A settlement with the OFHEO still leaves open a probe by the Securities and Exchange Commission, which company officials hope will be settled in February or March, and a more narrow probe of possible criminal conduct by the Justice Department.