Calling it another milestone in putting an accounting and management scandal behind it, mortgage repurchaser Freddie Mac said Thursday it had reached a $50 million settlement with government regulators over the company’s restatement of three years of earnings.

In the settlement with the Securities and Exchange Commission, Freddie Mac neither admitted nor denied allegations that the company violated federal securities law by deceiving investors about ups and downs in the company’s earnings.

The SEC’s complaint charged that senior managers, in order to project a “Steady Freddie” corporate image of smooth growth in earnings, encouraged accounting practices that smoothed out volatility in net income reported for 2000, 2001 and 2002.

In order to conceal earnings volatility, the SEC alleged, net income was understated by $1.1 billion in 2000 and $4.3 billion 2002, and understated by $989 million in 2001, the SEC alleged.

In restating its earnings for the three years at the end of 2003, Freddie Mac acknowledged that earnings showed “significantly greater volatility than previously reported,” as Freddie adopted new accounting rules requiring companies to report changes in the fair value of derivative instruments and hedging activities as profits or losses. 

Last year Freddie Mac agreed to pay $410 million to settle securities class-action and shareholder derivative lawsuits stemming from the same accounting issues.

“We take these charges seriously, and that’s why the Freddie Mac of today is a very different company than the Freddie Mac of the past,” said Richard F. Syron, Freddie Mac’s chairman and chief executive officer, in a press release.

Similar accounting practices at Fannie Mae prompted a Congressional investigation into both government-sponsored entities and led to caps on both companies’ loan portfolios. Last year the Office of Federal Housing Enterprise Oversight (OFHEO) said it would seek more than $100 million in civil penalties from three former Fannie Mae executives.

The scandals have complicated the debate over whether Fannie and Freddie can play a larger role in providing relief to troubled borrowers. The Bush administration has said it wants to see increased oversight of the GSEs before lifting the portfolio cap or allowing Fannie and Freddie to purchase loans above the $417,000 conforming loan limit.

In the mean time, Fannie and Freddie have been given some leeway to grow their portfolios and the administration might support a temporary increase in the conforming loan limit.

Freddie Mac’s agreement with the SEC resolves the last investigation of the company related to the earnings restatement issues, Syron said, and marked “another milestone enabling us to focus entirely on those things that are most important – further advancing our housing mission, effectively serving our customers and building our business for the future.”

Four former Freddie Mac executives, who had been charged with negligent conduct, also reached settlements without admitting or denying the allegations.

Former president and chief operating officer David W. Glenn agreed to pay a $250,000 civil penalty and $150,000 in disgorgement; former chief financial officer Vaughn A. Clarke agreed to pay a $125,000 civil penalty and $29,227 in disgorgement; former senior vice president Nazir G. Dossani agreed to pay a $75,000 civil penalty and $61,663 in disgorgement; and former senior vice president Robert C. Dean agreed to pay a $65,000 civil penalty and $34,658 in disgorgement.

OFHEO, which had previously reached agreements in which Freddie Mac agreed to a  $125 million fine and Glenn $125,000, said Clarke has agreed to cooperate in its administrative proceedings against other Freddie Mac executives, and give up claims to any bonuses the company had not paid him yet. OFHEO said it continues an enforcement action against former Freddie Mac Chief Executive Officer Leland Brendsel.

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