Freddie Mac Warns of Potential Loss From Legal Claims

Beleaguered mortgage finance giant Freddie Mac said Tuesday that it was probable that the company would have to pay out large legal claims stemming from the shareholder lawsuits and various law enforcement actions probing its multibillion-dollar earnings restatement.

“Freddie Mac believes that a loss in connection with the proceedings arising from the restatement is probable,” the company said in its much-delayed 2004 annual earnings statement.

Freddie estimated $75 million to $100 million in potential losses.

Regulatory actions by the Securities and Exchange Commission, the Office of Federal Housing Enterprise Oversight and the Labor Department and inquiries by the Internal Revenue Service are still open, as is a criminal investigation by the Justice Department.

Several shareholder and antitrust lawsuits also are still pending against Freddie.

Freddie spent $588 million on professional services in 2004, up from $311 million in 2003, including fees for legal, auditing, accounting and other outside consulting expertise. Freddie has already paid the Office of Federal Housing Enterprise Oversight a $125-million fine to settle charges that the company’s accounting problems jeopardized its safety and soundness.

Freddie said it had also paid $16.8 million in legal fees for all current and former employees and board directors who were being sued or who had been called to provide testimony in legal actions stemming from the company’s restatement.

Legislation in the Senate that tightens the regulation of Freddie and fellow government-sponsored enterprise Fannie Mae would prohibit the companies from reimbursing executives for legal costs in certain situations.

A new auditor in 2002 uncovered widespread accounting problems at Freddie, forcing the company to restate its earnings from 2000 through 2002. The restatement found that executives underreported about $5.3 billion in income during that timeframe to make Freddie’s earnings appear to be smoother.