Former Fannie Mae CEO Daniel Mudd was in court again last week, where his attorney urged a federal judge to toss out a lawsuit by the U.S. Security and Exchange Commission (SEC) against Mudd once and for all. Mudd is the last remaining holdout among former Fannie Mae and Freddie Mac exec’s, all accused of concealing subprime mortgages from investors in advance of the 2008 financial crash.
SEC’s lawsuit against Fannie Mae CEO Daniel Mudd
The SEC filed suit against Mudd and others, including Chief Risk Officer Enrico Dallavecchia and Executive Vice President Thomas A. Lund, in December 2011, alleging the men had excluded two types of high-risk loans from financial statements. The loans, called Expanded Approval and MyCommunityMortgage loans, were not included in subprime investment disclosures because they did not technically qualify as such under Fannie Mae’s self-classified subprime guidelines even though these loans were specifically targeted to weak-credit borrowers.
In a February 2007 public filing, Fannie Mae disclosed only $4.8 billion in subprime single-family loan holdings, even though it had over $57 billion in EA and MyCommunityMortgage loans in December 2006 and $90 billion by February 2008, according to the SEC lawsuit. The defendants have argued that the company provided all relevant information about its loan portfolio to investors, and that reasonable investors would have made informed decisions about the company’s entire loan portfolio—not just what was reported specifically as subprime.
Last September, Dallavecchia and Lund agreed to pay $25,000 and $10,000, respectively, to settle their SEC cases. Mudd, who ran the company from 2005 to 2008, has refused to do so.
John Keker, Mudd’s attorney, pleaded for the dismissal of the civil fraud case in a hearing before U.S. District Judge Paul A. Crotty this past Wednesday based upon the SEC’s lack of evidence. “They have to come up with hard evidence, and they haven’t been able to do that because it’s not there,” Mudd said, despite the SEC having conducted more than 110 dispositions and having full access to four terabytes of documents and data from Fannie Mae. Through more than three years of discovery, the SEC has failed to find any evidence of false or misleading statements made to investors.
SEC attorneys urged Crotty to allow the case to go to trial, saying Mudd knew Fannie Mae was using an overly narrow definition of what constituted a subprime loan, allowing it to understate its exposure. “He independently knew when he was making these public disclosures that they were contrary to his understanding,” Hong said in court this week. Hong said the agency would use Mudd’s public statements, including congressional testimony and interviews, to prove he was a “hands on” CEO that was well aware of the company’s risky portfolio and intentionally concealed such risk.
For instance, Mudd told Reuters in February 2007 that its subprime loans were granted to borrowers with “damaged credit,” and later told NPR’s Diane Rehm Show that loans were being issued to those who “had a credit problem in the past”.
Keker called those statements “hogwash” in court, saying that Mudd was simply describing the loans in a way that would be understood by “laypeople” in the audience.
Crotty reserved decision on Mudd’s motion for summary judgment at the end of the hearing.