The Securities and Exchange Commission has launched a formal investigation of troubled mortgage giant Fannie Mae, the company stated in an SEC form it filed Tuesday. Fannie Mae previously announced the SEC was conducting an informal inquiry.

The company said it would continue to fully cooperate with the SEC’s ongoing investigation.

The investigation was spurred by controversies surrounding Fannie Mae’s accounting that became public last month after its federal regulator issued a scathing 211-page report that outlined misapplications of Generally Accepted Accounting Principles, or GAAP for short. The report found that the company had used improper “cookie jar” reserve accounting – setting aside large cash reserves to reduce revenues in some years so they could be used in other years when the company needed them.

The report, released by the Office of Federal Housing and Enterprise Oversight, also alleges that in 1998, the company willfully violated generally accepted accounting principles in order to maximize executive bonuses.

Since the release of the report, Fannie Mae has been targeted by several class-action shareholder lawsuits, as well as a Congressional hearing and an informal investigation by Ohio Attorney General Jim Petro, who tried for lead plaintiff status in a similar suit against Freddie Mac last year.

Fannie Mae is one of the largest financial institutions in the world, with $1 trillion in reported assets and $961 billion in reported debt as of Dec. 31, 2003. Both Fannie Mae and Freddie Mac, its smaller rival, are shareholder-owned but chartered by the U.S. Congress to maintain a constant flow of mortgage funds for the nation’s housing market.

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Send tips or a Letter to the Editor to jessica@inman.com or call (510) 658-9252, ext. 133.

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