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Thursday, December 23, 2004

SEC to probe Fannie’s Sarbanes compliance

US regulators are set to investigate possible violations of the Sarbanes-Oxley legislation on accounting and corporate governance by former senior management at Fannie Mae, the US mortgage finance company.

The Securities and Exchange Commission, the chief US financial regulator, is expected to determine whether Franklin Raines, former chief executive, and Timothy Howard, former chief financial officer, infringed the legislation's requirements to certify the accuracy of the accounts. Mr Raines and Mr Howard who were ousted by Fannie Mae's board on Tuesday certified that the company's 2002 and 2003 accounts “fairly present in all material respects” its financial condition, in signed statements filed with the SEC.

Last week Donald Nicolaisen, SEC chief accountant, ruled that Fannie Mae had violated US accounting rules between 2001 and mid-2004 and called on it to restate its accounts.
Fannie Mae, which agreed to restate, estimated last month that the move could lower its earnings by $9bn (£4.7bn). Mr Raines announced his retirement on Tuesday, but the Office of Federal Housing Enterprise Oversight, the company's regulator, said it would review the severance package given to him. It may seek to have him dismissed, which would curtail his benefits, if the SEC or a separate Department of Justice investigation finds wrongdoing.

The SEC and the Department of Justice are co-ordinating their inquiries. An important element of the inquiries is expected to be whether Mr Raines and Mr Howard infringed the Sarbanes-Oxley legislation's provisions on certification of accounts, according to people familiar with the situation. They said no conclusions had been reached about the conduct of the two men. The SEC investigation is also expected to involve close scrutiny of KPMG which was Fannie Mae's auditor until its dismissal by the company on Tuesday. Infringements of the Sarbanes-Oxley certification requirements can lead to criminal as well as civil penalties.

A report by the Office of Federal Housing Enterprise Oversight said in September that Fannie Mae's violations of accounting rules were “pervasive and reinforced by management”. It alleged Fannie Mae's management clashed with KPMG in 1998 over a decision to defer recognition of $200m expenses related to its mortgage portfolio. It said the decision let management receive all of their annual bonuses.

Mr Raines said on Tuesday that “to my knowledge, the company has always made good faith efforts to get its accounting right”. A spokeswoman for Mr Raines and Mr Howard, who said on Tuesday he had resigned, declined to comment further. The SEC and Department of Justice declined to comment.

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