“A federal judge on Tuesday approved an unusual resolution to the case: The Securities and Exchange Commission and the former Freddie Mac executives agreed “that no party is the prevailing party.”, New York Times, April 15, 2015
“As I have said consistently on this blog, crisis era allegations that securities disclosure fraud (intentional or negligent actions resulting in misleading or omitted information in securities filings) was a primary factor in the financial crisis, whether these allegations were made by the S.E.C. or private securities class action attorneys or both, are bogus (a red herring) and, as far as I am aware, remain to this day unproven in any court of law. P.S. Yesterday on this blog, I said that I thought the Fannie and Freddie executives did not commit securities disclosure fraud.”, Mike Perry, former Chairman and CEO, IndyMac Bank
Ex-Freddie Mac Leaders Reach Deal With S.E.C.
At a news conference in Washington three years ago, federal regulators trumpeted their case against former executives at the mortgage giant Freddie Mac, proclaiming that “all individuals, regardless of their rank or position, will be held accountable for perpetuating half-truths or misrepresentations.”
Now a case that began with such fanfare has ended with a whimper.
The deal requires modest payments to Freddie Mac investors rather than stiff financial penalties. And in another twist, it explained that “the parties agree, without conceding the strengths or weaknesses of their respective claims and defenses, that it is not in the interest of justice to continue to litigate this matter” — a phrase that has rarely, if ever, appeared in an S.E.C. settlement.
The settlement with the executives — Richard F. Syron, the former chief executive; Patricia L. Cook, who served as chief business officer; and Donald J. Bisenius, who was a senior executive in the mortgage guarantee business — is a bookend to one of the most prominent S.E.C. actions stemming from the financial crisis.
In taking aim at Freddie Mac and its sister company Fannie Mae, symbols of the crisis that fed the housing bubble, the case brought by the S.E.C. seemed to offer a moment of catharsis for the public.
The S.E.C. settlement with the former Freddie executives, one of its last items of unfinished business from the crisis, shows that actually winning a complex securities case is an altogether different challenge. It also could foreshadow a settlement with former Fannie Mae executives whom the S.E.C. sued, though no such deal is imminent.
The case against the Freddie executives started to crumble after the S.E.C. took more than 30 depositions from witnesses, according to people briefed on the matter. Many of the witnesses did not support the theory of the case put forth by the S.E.C., the people said. And with lawyers on both sides expecting the case not to go to trial for at least another two years, they chose to open settlement talks about six weeks ago.
The Fannie and Freddie cases were hardly the only S.E.C. actions arising from the crisis. It has charged more than 170 individuals and companies, including big banks like Goldman Sachs and Citigroup.
The Freddie Mac cases stem from the height of the financial crisis. The federal regulator of Freddie Mac and Fannie Mae, the Federal Housing Finance Agency, took over both entities in September 2008, after rising mortgage defaults undermined their financial conditions. As losses piled up, the companies received $189.5 billion from the government. As of September last year, the companies had paid back $219 billion to the Treasury Department. Last year, Freddie Mac and Fannie Mae guaranteed half of all new mortgages in the United States, according to a survey by Inside Mortgage Finance, an industry publication.
The case against the Freddie executives never struck legal experts as a slam dunk. The S.E.C. accused them of misleading investors about their company’s exposure to risky subprime mortgages, saying they played down the true extent to which they had guaranteed the loans. Whereas the S.E.C. estimated that Freddie Mac had some $250 billion in subprime holdings, the company pegged its figure at $6 billion.
The case hinged on the meaning of the word subprime. While the term generally refers to borrowers with low credit scores, lawyers for the executives had emphasized that even financial regulators never clearly defined subprime. And in the settlement on Tuesday, both sides stipulated that “there was no one universally accepted definition of subprime that was used by market participants.”
The final settlement reflects that challenge. Mr. Syron, who was awarded over $50 million in compensation during the nearly five years that he led Freddie Mac, according to the company’s pay disclosures, must donate $250,000 to investors. Mr. Bisenius, who is represented by Daniel Beller of Paul Weiss, is responsible for $10,000 and Ms. Cook $50,000.
But the former executives will not make these donations out of their own pockets. As Mr. Bisenius explained in a statement, “I am not making any payment to the S.E.C. or to anyone in connection with this case; rather, the insurance carriers for Freddie Mac are making a nominal donation to an unrelated fund to benefit investors on my behalf.”
While the deal prevents them from signing certain documents as the chief executive or chief financial officer of a publicly traded company for a brief period, it does not go as far as the S.E.C. once wanted. When the agency filed the case, it sought to ban them from being officers or directors of any company.
Steven M. Salky of Zuckerman Spaeder, Ms. Cook’s lawyer, explained that “while at Freddie Mac or elsewhere, Ms. Cook has never signed the forms she now has agreed not to sign.”
And Mr. Syron, who was represented by Thomas C. Green at Sidley Austin, said, “I remain proud of the work we did at Freddie Mac.” He added: “It has been a long, tough road, and I am happy for the opportunity to move on with my life.”
Andrew J. Ceresney, the S.E.C. head of enforcement, said, “The settlement’s limitations on future activities and financial payments reflect an appropriate resolution of the matter.”
Mr. Ceresney and the S.E.C.’s current chairwoman, Mary Jo White, were not at the agency when the case was filed in 2011.
A version of this article appears in print on April 15, 2015, on page B3 of the New York edition with the headline: Ex-Freddie Mac Leaders Reach Deal With S.E.C..