SEC Charges Stick for Former Fannie Mae CEO

A former ""Fannie Mae"":http://www.fanniemae.com/portal/index.html executive now finds himself facing charges from the SEC of misleading investors about the GSE's loans.

According to a complaint filed in the United States District Court for the Southern District of New York, ex-CEO Dan Mudd, along with two other defendants, allegedly misled investors into thinking the company had far less exposure risky loans than it actually had.

SEC accuses Mudd, Enrico Dallavecchia, and Thomas Lund of creating ""materially false and misleading statements regarding Fannie Mae's exposure to subprime and Alt-A loans"" between 2006 and 2008.

The complaint cites a February 2007 public filing in which Fannie Mae reported that subprime loans made up approximately $4.8 billion of its book of business as of the end of 2006.

In this estimation, the company allegedly left out Expanded Approval (EA) loans, which were targeted at borrowers with weak credit histories and made up approximately $43.3 billion of Fannie Mae's book at the end of 2006.

""Fannie Mae's exclusion of loans such as EA from its subprime disclosures was particularly misleading because EA loans were exactly the type of loans that investors would reasonably believe Fannie Mae included when calculating its exposure to subprime loans,"" SEC said in its complaint.

""In addition, all of the Defendants knew that EA loans had higher average serious delinquency rates, higher credit losses, and lower average credit scores than the loans Fannie Mae included when calculating its disclosed subprime loan exposure.""

Following a rejected attempt by the defendants to dismiss the case, U.S. District Judge Paul Crotty wrote that the defendants ""must have known that Fannie Mae's disclosed subprime and Alt-A exposure calculations were materially misleading.""

James Wareham, an attorney for Mudd, wrote in an email that the evidence proving the adequacy of the company's disclosures is ""overwhelming"" and called the case ""shameful.""