Franklin Raines to pay $24.7 million to settle Fannie Mae lawsuit

WASHINGTON — Former Fannie Mae chief Franklin Raines and two other top executives have agreed to a $31.4 million settlement with the government announced today over their roles in a 2004 accounting scandal.

Raines, former Fannie chief financial officer Timothy Howard and former controller Leanne Spencer were accused in a civil lawsuit in December 2006 with manipulating earnings over a six-year period at the company, the largest U.S. financer and guarantor of home mortgages.

Raines, a Seattle native and prominent Washington figure who was President Clinton's budget director, is relinquishing company stock options, proceeds from stock sales and other benefits. His part of the settlement is worth $24.7 million,

The stock options were valued at $15.6 million at the time they were issued to Raines, allowing him to buy shares at $77.10 and higher. Fannie Mae shares have been battered by the turbulence in the housing market — making the options that Raines was returning of negligible value, people familiar with the settlement said. They spoke on condition of anonymity because they did not publicly wish to criticize the accord.

Proceeds from Raines' sale of his company stock, valued at $1.8 million, will be donated to programs that help homeowners facing foreclosure or other initiatives designed to boost homeownership. For Howard, stock sale proceeds of $200,000 will go to such programs.

"While I long ago accepted managerial accountability for any errors committed by subordinates while I was CEO, it is a very different matter to suggest that I was legally culpable in any way," Raines said in a statement. "I was not. This settlement is not an acknowledgment of wrongdoing on my part, because I did not break any laws or rules while leading Fannie Mae. At most, this is an agreement to disagree."

Howard is settling for a total $6.4 million, including stock options valued at $5.2 million when issued, and Spencer $275,000.

The deal was announced by the Office of Federal Housing Enterprise Oversight (OFHEO), the agency that oversees Fannie Mae and Freddie Mac, the two big government-sponsored mortgage finance companies.

"OFHEO's mission is to ensure that (Fannie and Freddie) operate in a safe and sound manner," the agency's director, James Lockhart, said in a statement. "That cannot occur without corporate management providing prudent and responsible leadership and setting the appropriate ethical and overall 'tone at the top'."

Fannie and Freddie both had multibillion-dollar accounting scandals that stunned Wall Street and brought record civil fines against them in settlements with the government.

The amounts that Raines, Howard and Spencer are paying under the settlement are far less than what the government was seeking when it sued them in December 2006. OFHEO sought fines of around $100 million against the three and restitution totaling more than $115 million in bonus money tied to an improper accounting scheme.

The regulators alleged an accounting fraud at Washington-based Fannie Mae that included manipulations to reach quarterly earnings targets so that Raines, Howard, Spencer and other company executives could pocket hundreds of millions in bonuses from 1998 to 2004.

The three executives had disputed the charges and pegged them as politically motivated. Raines' attorney called Lockhart "a fatally biased regulator" and asked a federal appeals court to remove him from the case.

Spencer "was recognized as an outstanding controller for Fannie Mae where she conducted her duties with the highest integrity," her attorney, David Krakoff, said in a statement. "Ms. Spencer maintained throughout this action that the OFHEO reports and allegations had no merit."

Raines and Howard were swept out of office in December 2004 in the accounting fiasco at Fannie Mae. Two years later, the company announced a restatement for 2001 through June 30, 2004, that erased $6.3 billion in previously reported profit.

Raines' total compensation from 1998 through 2004 was $91.1 million, including some $52.6 million in bonuses, according to OFHEO. Howard earned $30.8 million during the period, including $16.8 million in bonuses; Spencer received $7.3 million, of which some $3.5 million was bonus money.

Fannie Mae paid a record $400 million civil fine in a settlement with OFHEO and the Securities and Exchange Commission in May 2006. It also agreed to make top-to-bottom changes in its corporate culture, accounting procedures and ways of managing risk.

Last November, Freddie Mac's former chief executive, Leland Brendsel, agreed in a settlement with OFHEO to pay $2.5 million in fines to the government, give back $10.5 million in salary and bonuses to the company and waive claims against the company for compensation worth $3.4 million.

Freddie's accounting scandal erupted in June 2003 when the McLean, Va.-based company said it had misstated earnings by $5 billion between 2000 and 2002 — artificially inflating results in some periods, while reducing them in others.

Raines, the first black CEO of a Fortune 500 company, has been trying to restore his reputation and challenge shareholder suits. Raised in a Seattle family that relied on welfare checks, Raines broke through racial barriers to become an adviser to President Carter and head of the U.S. Office of Management and Budget from 1996 to 1998 under Clinton.

Raines said in court filings that the White House spread rumors to undermine Fannie Mae's share price and persuaded OFHEO to condemn the company.

Fannie Mae paid a record $400 million civil fine in a settlement with OFHEO and the Securities and Exchange Commission. It also agreed to make top-to-bottom changes in its corporate culture, accounting procedures and ways of managing risk.