By David Glovin and Joshua Gallu
December 16, 2011 9:58 AM PT

Daniel Mudd, the former chief executive officer of Fannie Mae, and Richard Syron, ex-CEO of Freddie Mac, were sued by the U.S. Securities and Exchange Commission for understating by hundreds of billions of dollars the subprime loans held by the firms.

The lawsuits filed today in Manhattan federal court were followed by an SEC statement that it had entered into non- prosecution agreements with each company. Fannie Mae, the government-sponsored enterprise which issues almost half of all mortgage-backed securities, and Freddie Mac, the McLean, Virginia-based mortgage-finance company, had “agreed to accept responsibility” for their conduct, the SEC said.

In the lawsuits, the SEC said Syron, Mudd and other executives understated exposure to subprime mortgage loans. From 2007 to 2008, Freddie Mac executives said the company’s exposure was between $2 billion and $6 billion when it was actually as high as $244 billion, according to one SEC complaint.

From 2006 to 2008, Washington-based Fannie Mae executives said the firm’s exposure to subprime mortgage and reduced documentation loans was about $4.8 billion when it was almost 10 times greater, according to the regulator.
‘Told the World’

“Fannie Mae and Freddie Mac executives told the world that their subprime exposure was substantially smaller than it really was,” Robert Khuzami, direct of the SEC’s enforcement division, said today in a statement. “These material misstatements occurred during a time of acute investor interest in financial institutions’ exposure to subprime loans, and misled the market about the amount of risk on the company’s books.”

The lawsuits, which together name six former executives at the government sponsored entities, come amid criticism from judges and lawmakers that the SEC hasn’t done enough to hold individuals responsible for misconduct related to the housing crisis and financial-market collapse that followed.

Washington-based Fannie Mae and Freddie Mac were seized and placed under U.S. control in 2008 as losses on soured loans pushed them to the brink of insolvency. The two have been sustained by more than $150 billion in U.S. aid. Congress and the Obama administration are examining plans for winding down the firms and building a new system for financing housing debt.
Non-Prosecution

The two non-prosecution agreements require Freddie Mac and Fannie Mae to “accept responsibility” for their conduct and to cooperate with the SEC probe of the former executives.

“Under the agreement, without admitting or denying liability, Fannie Mae has offered to accept responsibility for its conduct and to not dispute, contest or contradict a set of factual statements regarding the disclosures,” Fannie Mae said today in a securities filing.

Michael Cosgrove, a spokesman for Freddie Mac, declined to comment. Fannie Mae said in a statement that it is “pleased to bring the SEC inquiry to a close.”

In the lawsuits against the former executives, the SEC is seeking financial penalties and disgorgement, as well as an order barring them from serving as officers or directors of other companies.

Also named as defendants are Patricia Cook, Freddie Mac’s former executive vice president; Donald Bisenius, ex-senior vice president at Freddie Mac; Enrico Dallavecchia, who was chief risk officer for Fannie Mae; and Thomas Lund, Fannie’s Mae’s former executive vice president.
Fortress Investment Group

Mudd, now CEO of Fortress Investment Group LLC (FIG), was ousted when Fannie Mae and Freddie Mac were seized by regulators in September 2008. In a statement today, he said the federal government and investors were aware of “every piece of material data about loans held by Fannie Mae.”

To read entire story, click here.