Fannie Mae 2004 Annual Report Download - page 59

OFHEO Special Examination and Settlement
In July 2003, OFHEO notified us that it intended to conduct a special examination of our accounting policies
and internal controls, as well as other areas of inquiry. OFHEO began its special examination in November
2003 and delivered an interim report of its findings in September 2004. On May 23, 2006, OFHEO released
its final report on its special examination. OFHEO’s final report concluded that, during the period covered by
the report (1998 to mid-2004), a large number of our accounting policies and practices did not comply with
GAAP and we had serious problems in our internal controls, financial reporting and corporate governance.
The final OFHEO report is available on our Web site (www.fanniemae.com) and on OFHEO’s Web site
(www.ofheo.gov).
Concurrently with OFHEO’s release of its final report, we entered into comprehensive settlements that
resolved open matters with OFHEO, as well as with the SEC (described below). As part of the OFHEO
settlement, we agreed to OFHEO’s issuance of a consent order. In entering into this settlement, we neither
admitted nor denied any wrongdoing or any asserted or implied finding or other basis for the consent order.
Under this consent order, in addition to the civil penalty described below, we agreed to undertake specified
remedial actions to address the recommendations contained in OFHEO’s final report, including actions relating
to our corporate governance, Board of Directors, capital plans, internal controls, accounting practices, public
disclosures, regulatory reporting, personnel and compensation practices. We also agreed not to increase our net
mortgage assets above the amount shown in our minimum capital report to OFHEO for December 31, 2005
($727.75 billion), except in limited circumstances at OFHEO’s discretion. The consent order superseded and
terminated both our September 27, 2004 agreement with OFHEO and the March 7, 2005 supplement to that
agreement, and resolved all matters addressed by OFHEO’s interim and final reports of its special examination.
As part of the OFHEO settlement, we also agreed to pay a $400 million civil penalty, with $50 million
payable to the U.S. Treasury and $350 million payable to the SEC for distribution to stockholders pursuant to
the Fair Funds for Investors provision of the Sarbanes-Oxley Act of 2002. We have paid this civil penalty in
full. This $400 million civil penalty, which has been recorded as an expense in our 2004 consolidated financial
statements, is not deductible for tax purposes.
SEC Investigation and Settlement
Following the issuance of the September 2004 interim OFHEO report, the SEC informed us that it was
investigating our accounting practices.
Concurrently, at our request, the SEC reviewed our accounting practices with respect to hedge accounting and
the amortization of premiums and discounts, which OFHEO’s interim report had concluded did not comply
with GAAP. On December 15, 2004, the SEC’s Office of the Chief Accountant announced that it had advised
us to (1) restate our financial statements filed with the SEC to eliminate the use of hedge accounting, and
(2) evaluate our accounting for the amortization of premiums and discounts, and restate our financial
statements filed with the SEC if the amounts required for correction were material. The SEC’s Office of the
Chief Accountant also advised us to reevaluate the GAAP and non-GAAP information that we previously
provided to investors.
On May 23, 2006, without admitting or denying the SEC’s allegations, we consented to the entry of a final
judgment requiring us to pay the civil penalty described above and permanently restraining and enjoining us
from future violations of the anti-fraud, books and records, internal controls and reporting provisions of the
federal securities laws. The settlement, which included the $400 million civil penalty described above,
resolved all claims asserted against us in the SEC’s civil proceeding. Our consent to the final judgment was
filed as an exhibit to the Form 8-K that we filed with the SEC on May 30, 2006. The final judgment was
entered by the U.S. District Court of the District of Columbia on August 9, 2006.
OTHER LEGAL PROCEEDINGS
Former CEO Arbitration
On September 19, 2005, Franklin D. Raines, our former Chairman and Chief Executive Officer, initiated
arbitration proceedings against Fannie Mae before the American Arbitration Association. On April 10, 2006,
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