SEC Opens Formal Probe into Fannie Mae

The Securities and Exchange Commission is formally investigating allegations of accounting tricks by the mortgage giant Fannie Mae.

In a disclosure filed with the SEC late Tuesday, Fannie Mae said the SEC “has initiated a formal order of investigation," Dow Jones Newswires reported.

The commission has been making informal inquiries into accounting practices at Fannie Mae, but after a scathing report by its federal regulator, the SEC decided on a formal probe, which allows the SEC to issue subpoenas for information and file charges for failure to comply.

The regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), last month released a report accusing the mortgage finance company of manipulating accounting to achieve desired financial results, operating with weak financial controls, ignoring a whistle-blower and more. OFHEO Director Armando Falcon Jr. has said “broad cultural and operational changes” are needed at the company.

Stock prices fell 10 percent after the report's release. A Bloomberg report suggested stocks may decline further.

“The overall market is skittish about anything that has a subpoena in front of it,” said Paul Miller, an analyst at Friedman, Billings Ramsey Inc. in Arlington, Va., Bloomberg reported. “There is such a thin line between informal and formal, but this just brought it back to the headlines.”

Fannie Mae also is delaying the release of its third-quarter financial results, prompting former SEC Chief Accountant Lynn Turner to speculate that Fannie Mae's longtime auditor, KPMG LLP, is waiting for the conclusion of various investigations before signing off on the company's financial statements. KPMG spokesman Tom Fitzgerald said client confidentiality prohibits the firm from commenting on Fannie Mae's earnings delay.

Turner also said Fannie Mae executives have been trying to portray the accounting issues highlighted by OFHEO as merely different viewpoints on complex financial issues.

"The issues are more black-and-white than Fannie Mae would lead you to believe," he said.

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