Public Pension Fund Moves to Stop Million Dollar Payouts to Former Fannie Mae Executives
Attorneys for a Michigan public pension fund today asked a federal judge to stop multi-million dollar payouts to Federal National Mortgage Association’s former Chief Executive Officer and Chief Financial Officer who left the Company in connection with a massive accounting scandal at Fannie Mae.
The TRO asks that payments authorized by Fannie Mae’s board as “golden parachutes” for CEO Franklin D. Raines and Chief Financial Officer Timothy Howard be kept in the corporate treasury in order to shore up the company’s sagging value and restore investor confidence and public trust in Fannie Mae.
“Many Wayne County (Michigan) retirees depend on the Fund’s investments in companies like Fannie Mae to support their retirement and their families’ well-being. We take a dim view of rich rewards for executives who defraud and mismanage the companies owned by the Fund,” said Darren Robbins of Lerach Coughlin Stoia Geller Rudman & Robbins LLP, counsel to the Wayne County Employees’ Retirement System.
Fannie Mae’s board agreed to allow Raines and Howard to “resign” in December after the Company’s federal regulator, the Office of Federal Housing Enterprise Oversight, and the Securities and Exchange Commission issued written opinions on Fannie Mae’s false earnings reports and improper accounting practices. Those findings left them no choice but to go. The “resignations” triggered millions of dollars in payments to Raines and Howard in accrued salaries, unpaid bonuses, the vesting of stock options and payment of incentive bonuses and a minimum base annual salary for Raines’ lifetime amounting to more than $1 million a year. (Raines is 55 years old.)
The request for a temporary restraining order stopping the payments was filed today with Judge Richard J. Leon in U. S. District Court for the District of Columbia. The request details the Fannie Mae board’s “reckless breaches of fiduciary duty” and says Fannie Mae’s officers engaged in one of the largest accounting frauds in history: an overstatement of Fannie Mae’s earnings by $9 billion, or 40% of the company’s total reported earnings between 2001 and 2004.
According to the TRO application, the Board seems to be trying to purchase Raines’ and Howard’s silence by allowing them to resign and receive funds to which they are not entitled. As a result, the court filings say, Raines and Howard “stand to gain another $31 million if the vesting of stock options and payment of employment related benefits is not enjoined.”
In passing the Sarbanes-Oxley Act in 2002, Congress tried to prevent the payment of executive bonuses and insider trading profits when those payments were based upon reported earnings, which were false. However, even in today’s environment many boards of directors and executives remain steadfast in their refusal to comply with the provisions of the Sarbanes-Oxley Act.
The underlying suit also seeks to force Raines, Howard and other Fannie Mae insiders to disgorge tens of millions of dollars in bonuses paid over five years and authorized by the Board as incentive payments linked to Fannie Mae’s false financial statements, which led to a $9 billion earnings restatement for Fannie Mae, the nation’s single largest source of mortgage money.
The shareholder action names as defendants Raines and Howard, as well as the Board of Directors and the accounting firm KPMG LLP, which oversaw the Company’s books during the years in which Fannie Mae executives are alleged to have manipulated quarterly earnings, using improper accounting techniques to assure growth on a schedule that produced hundreds of millions of dollars in executive compensation.
“Such misbehavior by the officers, Board and accounting firm of this unique Company created during the New Deal to make it easier for ordinary Americans to own their homes cannot be tolerated. These officers have subverted that lofty public purpose and turned Fannie Mae into a veritable treasure trove for senior insiders,” said Robbins. “Had the departure of the Fannie Mae’s former executives been treated as ‘for-cause’ terminations rather than resignations, Fannie Mae could have saved tens of millions of dollars.”