Fortress Investment Group LLC (FIG) Chief Executive Officer Daniel Mudd received notice from U.S. regulators that he may face claims for misleading investors about Fannie Mae’s exposure to subprime loans when he ran the mortgage firm during the financial crisis.
Mudd, who was ousted when Fannie Mae and Freddie Mac were seized by regulators in September 2008, confirmed in a statement to Bloomberg News that he received the so-called Wells notice from the Securities and Exchange Commission today. Mudd said he plans to submit a written rebuttal to the allegations.
“I have the highest respect for the commission. Nevertheless, I could not disagree more with this turn of events,” Mudd said in the statement. “The disclosures and procedures that are the subject of the staff’s investigation were accurate and complete. These disclosures were previewed by federal regulators, and have been issued in the same form since the company went into government conservatorship.”
Mudd will remain CEO of the New York-based buyout and hedge-fund firm, according to a person with direct knowledge of the matter.
The SEC’s investigation involves several individuals who were executives at Fannie Mae during the crisis and centers on how the firm represented its exposure to subprime mortgages to investors, according to two people with direct knowledge of the investigation who spoke on condition of anonymity because the matter isn’t public.
Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac were placed under U.S. control in 2008 as losses on soured loans pushed them to the brink of insolvency. The two government-sponsored mortgage firms have been sustained by more than $150 billion in U.S. aid. Congress and the Obama administration are examining plans for winding down the companies and building a new system for housing finance.
The SEC previously notified one current and one former executive of Freddie Mac that the agency may file similar allegations against them. Donald Bisenius, Freddie Mac’s executive vice-president for single-family credit guarantee, will leave the company April 1, according to a regulatory filing. Anthony “Buddy” Piszel, who served as CFO from November 2006 to September 2008, resigned as CFO of CoreLogic Inc. (CLGX) last month.
Mudd, 52, took over from Franklin Raines as CEO of Fannie Mae in 2004, four years after he had joined the company as chief operating officer and as the company tried to recover from an $11 billion accounting restatement and securities fraud charges. He was appointed CEO of Fortress in August 2009, almost a year after he was ousted from Fannie Mae.
Gordon Runte, head of investor relations at Fortress, declined to comment. A phone call and e-mail to Fannie Mae spokeswoman Amy Bonitatibus after normal business hours were not immediately returned.
The SEC’s probe echoes the agency’s July case against Citigroup Inc. The bank agreed to pay $75 million after the SEC accused the bank and two executives of failing to disclose $40 billion in subprime assets before losses surged. U.S. District Judge Ellen Huvelle faulted the agency for only sanctioning two executives for their roles in the matter.
In 2008, Freddie Mac was informed that the U.S. Attorney’s Office for the Eastern District of Virginia was investigating “accounting, disclosure, and corporate governance matters,” according to a regulatory filing. The SEC informed the company that it was under investigation for possible securities violations, and employees were interviewed.
Fannie Mae and Freddie Mac were created by Congress to encourage homeownership by making it easier for people to get loans. The firms now own or guarantee more than half of all U.S. mortgage debt, most of which they pool and sell on the secondary market.