Regulator settles with ex-Fannie Mae execs

By Lynn Adler

NEW YORK (Reuters) - Ex-Fannie Mae (FNM.N) chief Franklin Raines and two other former executives agreed to pay more than $31 million in a settlement over their roles in a 2004 accounting scandal at America's largest home financing agency, its regulator said on Friday.

The Office of Federal Housing Enterprise Oversight, or OFHEO, in 2006 leveled charges against Raines, the former chairman and chief executive officer; former Chief Financial Officer J. Timothy Howard and ex-Controller Leanne Spencer.

The charges included earnings mismanagement, failure to ensure adequate internal controls and the release of misleading financial reports.

In consent orders, the three former executives agreed to payments which OFHEO estimated at $24.7 million for Raines, $6.4 million for Howard and $275,000 for Spencer.

"OFHEO's mission is to ensure that the enterprises operate in a safe and sound manner," OFHEO Director James Lockhart said in a news release. "That cannot occur without corporate management providing prudent and responsible leadership and setting the appropriate ethical and overall 'tone at the top."'

Sources familiar with the cases played down the total costs to the former executives, saying required payments to the government would be covered by insurance and that surrendered stock options are without value.

Under the settlement, Raines will pay $2 million to the government, donate proceeds from the sale of Fannie Mae stock valued at $1.8 million, and surrender claims related to stock options valued at $15.6 million when issued.

Those options were issued with strike prices between $77 and $81, but the company's stock now trades below $29, effectively making the options worthless, a source familiar with the case said.

Of Raines' $91 million in compensation between 1998 and 2003, more than $84 million was tied to earnings per share targets and faulty accounting, OFHEO said in 2006.

Raines, in a statement, said he accepted managerial accountability but not legal culpability.

"My agreement to end this dispute ... is consistent with my acceptance of accountability as the leader of Fannie Mae and with my strong denial of the allegations made against me by OFHEO," he said.

Of the $6.4 million in fines and penalties against Howard, the former CFO, $5.2 million comes from surrendering now-worthless options and $750,000 will be paid to the government by insurance. Howard's charitable donation from the sale of Fannie Mae stock would be valued at about $200,000, OFHEO said.

"The settlement is a capitulation by OFHEO, reflecting that its concocted claims never had an ounce of merit," Howard's attorney, Steven Salky, said in a statement.

Spencer's attorney, David Krakoff, said in a news release that the OFHEO reports and allegations had no merit.

As a result of the accounting scandal at Fannie Mae, and at its sibling, Freddie Mac (FRE.N), OFHEO imposed strict capital requirements and growth limits on both companies.