Aug. 18 (Bloomberg) -- Freddie Mac, the government-chartered mortgage company that restated earnings by $5 billion, said it may be the target of a civil action by the U.S. Securities and Exchange Commission.

The SEC may pursue a permanent injunction and a possible fine, McLean, Virginia-based Freddie Mac said in a statement distributed by PR Newswire. The SEC is investigating possible violations of a regulation that covers fraud and deceptive practices, the company said.

It is the latest setback for Chief Executive Richard Syron, who was hired in December to overhaul the company's senior management and regain investor confidence. The restatement has already resulted in a $125 million fine for Freddie Mac and Treasury Secretary John Snow has called for tighter regulation for the company.

``It's certainly not something that helps Freddie Mac as an organization,'' said Kevin Jackson, a senior mortgage analyst at RBC Dain Rauscher Inc. in Chicago. ``It doesn't help build confidence from a shareholder's standpoint,'' he said in a phone interview.

Freddie Mac shares rose 99 cents to $67.55 in New York Stock Exchange composite trading and have risen 16 percent this year. The company released its statement on the SEC probe after the official close of U.S. exchanges.

Wells Notice

Freddie Mac received the so-called Wells Notice from the SEC today, spokeswoman Sharon McHale said in a telephone interview. She declined to comment beyond the company's statement, including the time frame of any possible violations. SEC spokesman John J. Nester declined to comment.

Freddie Mac agreed to a $125 million fine and fired its top executives for their roles in the accounting errors from 2000 to 2002 that resulted in the earnings restatement last November.

Two U.S. representatives wrote a letter to SEC Chairman William Donaldson last year, urging an investigation of share sales by five current and former Freddie Mac officials.

A Well Notice advises that SEC staff members have completed a review of the case and may recommend action by the full commission. Freddie Mac said in November it underreported income to hide earnings volatility from investors.

Freddie Mac's regulator, the Office of Federal Housing Enterprise, on Dec. 10 ordered the company to pay a $125 million fine for sidestepping accounting rules. Then on Jan. 29, it ordered Freddie Mac to keep 30 percent more capital on reserve than previously required.

More Scrutiny

The restatement and the ouster of three top officials have increased scrutiny by Congress because the company's charter bestows benefits. Freddie Mac enjoys exemptions from state and local income taxes, and as much as $2.25 billion of its debt can be purchased by the Treasury.

Freddie Mac was started by Congress in 1970 to make funds more widely available for home loans. The company went public in 1989.

Freddie Mac and larger competitor Fannie Mae own or guarantee about half of the $7.3 trillion U.S. mortgage market. They make money on the difference between the interest cost of debt they sell and the return received from home mortgages they buy from lenders. They also profit from their investments in bonds backed by pools of mortgages.

To contact the reporter on this story: Dan Reichl in San Francisco at dreichl@bloomberg.net.

Last Updated: August 18, 2004 22:16 EDT