* Ex-CEO Daniel Mudd calls SEC lawsuit “misguided”
* SEC says executives underreported subprime exposure
* Spokeswoman for SEC declines to comment
* Cases vs Fannie Mae, Freddie Mac arose from 2008 crisis
By Jonathan Stempel
April 2 (Reuters) - A former chief executive of Fannie Mae urged a federal judge to throw out a U.S. Securities and Exchange Commission fraud lawsuit accusing him of misleading investors about the company’s exposure to risky mortgages.
Lawyers for Daniel Mudd and two co-defendants said the mortgage finance company had explicitly and accurately disclosed its exposure to subprime and so-called “Alt-A” home loans before the government seized the company.
“Fannie Mae provided extensive disclosures of the credit characteristics for every single loan in its single-family book of business,” according to a Friday night filing with the U.S. District Court in Manhattan. “The three defendants selected for blame by the SEC had no motive to mislead the investing public, and the SEC fails to allege that they did.”
SEC spokeswoman Florence Harmon declined to comment.
The SEC has been under fire for not cracking down harder on Wall Street and other executives accused of contributing to the 2008 financial crisis and five-year housing slump through lax underwriting and misleading marketing of mortgage securities.
The agency sued the former Fannie Mae executives -- Mudd, Chief Risk Officer Enrico Dallavecchia and Executive Vice President Thomas Lund -- on Dec. 16 after a three-year probe.
The SEC filed a similar lawsuit the same day against three former Freddie Mac officials, including Richard Syron, once its chief executive. Syron has said that case lacks merit.
Federal regulators seized Fannie Mae and Freddie Mac in September 2008 and put them into a conservatorship. Mudd ran Fannie Mae from 2005 until the seizure.
In its lawsuit, the SEC said Fannie Mae began to underreport subprime exposure in 2007, in part by excluding “Expanded Approval” (“EA”) loans targeted to borrowers with weaker credit histories and some lower-quality loans made by prime lenders.
It said that by the second quarter of 2008, Fannie Mae reported just $8 billion of its $110 billion of subprime exposure.
In their defense, lawyers for Mudd said the EA loans did not meet Fannie Mae’s definition of subprime loans, and that the company, “under full government control and new management,” even now reports loans “exactly as it did” previously.
“We respectfully request that the court dismiss this misguided complaint with prejudice,” the filing said.
“Alt-A” mortgages typically did not require documentation of income or assets, and are also considered higher-risk.
Now overseen by the Federal Housing Finance Agency, Fannie Mae and Freddie Mac agreed to cooperate with the SEC and accept responsibility, without admitting liability. They were not charged.
The government has lost $151 billion on investments in the companies, but the Obama administration has projected that the loss could fall to $28 billion by 2022.
In October 2010, Angelo Mozilo, who built Countrywide Financial Corp into one of the biggest subprime lenders, agreed to settle another SEC case for $67.5 million, without admitting wrongdoing. Bank of America Corp, which in 2008 bought Countrywide, indemnified him for $45 million of this sum.
Mudd resigned in January as chief executive of Fortress Investment Group LLC, one of a few publicly-traded U.S. hedge fund and private equity fund managers, after having taken a leave of absence in the wake of the SEC charges.
The case is SEC v. Mudd et al, U.S. District Court, Southern District of New York, No. 11-09202.