Investors expand fraud claims against Freddie Mac

Freddie Mac investors have filed expanded court claims accusing the mortgage finance company and three former executives of committing fraud by misleading them about risky loan practices and manipulating financial results.

The allegations, contained in a nearly 300-page court complaint filed late on Tuesday, are based in part on interviews with more than 100 former company employees and others who are described in the lawsuit as having knowledge of Freddie Mac's operations and finances.

Both Freddie Mac and Fannie Mae, the largest providers of residential mortgage funds, were seized by the government last September to save them from massive capital shortfalls and put in a legal status known as conservatorship.

Shareholders at both companies have suffered big losses, with Freddie Mac shareholders saying they collectively lost billions when the McLean, Virginia-based company's financial troubles came to light last year. Its share price has plunged to less than $1 from nearly $28 a year ago.

The lawsuit, an amended version of an earlier case, was brought in U.S. District Court in Manhattan against the company, former Chief Executive Richard Syron, Former Chief Financial Officer Anthony Piszel and ex-Chief Business Officer Patricia Cook.

A Freddie Mac spokeswoman said the company does not comment on pending litigation. An attorney for the former executives was not available for comment.

One of the unnamed employees cited in the lawsuit is a former director of operational risk management at the company, who was quoted in the complaint as saying that Freddie Mac was an appallingly run company and that it was clear as far back as August 2007 that its capital position was inadequate.

CONFIDENTIAL WITNESSES

Other so-called confidential witnesses cited in the complaint include a former Freddie Mac vice president of investor relations and an ex-senior examiner with the Office of Federal Housing Enterprise Oversight, the company's regulator, now part of the newly formed Federal Housing Finance Agency.

The complaint was filed by the lead plaintiff in the case, Central States Southeast and Southwest Areas Pension Fund, along with another pension fund that also had bought Freddie Mac stock, the National Elevator Industry Pension Plan. The lawsuit seeks class-action, or group status.

The defendants are accused of inflating the value of Freddie Mac stock through misleading statements, failing to disclose problems with the company's capital adequacy and manipulating financial results and accounting practices to distort the truth about the company's health.

Freddie Mac was essentially a wolf in sheep's clothing, David George, an attorney for the shareholders, told Reuters.

The company misrepresented both that it was a safe haven and that its exposure to the subprime real estate market was minimal, said George, of law firm Coughlin Stoia Geller Rudman & Robbins LLP.

The government's control of Freddie Mac poses questions about how shareholder litigation against the company will be resolved. U.S. taxpayers could potentially be responsible for paying damages if the plaintiffs win their case.