Freddie Mac 2004 Annual Report Download - page 215

The complaint was purportedly brought on Freddie Mac's behalf (as a nominal defendant) as a derivative
action by a purported shareholder to recover damages Freddie Mac allegedly suÅered in connection with
certain events underlying the restatement of its Ñnancial statements. The defendants in the action include
former oÇcers, the current Board of Directors, ten former Directors, and Ñve counterparties to transactions
Freddie Mac executed. The plaintiÅ subsequently has amended its complaint by, among other actions,
dropping Messrs. Syron and McQuade from the list of defendants. The plaintiÅ alleges claims for breach for
Ñduciary duties, indemniÑcation, waste of corporate assets, unjust enrichment, and aiding and abetting breach
of Ñduciary duties. The Special Litigation Committee of Freddie Mac's Board of Directors is considering the
allegations raised by this complaint.
Freddie Mac was also served on February 11, 2005, with an amended derivative complaint Ñled by
shareholder E.L. GreenÑeld against the lead engagement partner of Arthur Andersen, Freddie Mac's former
outside auditor, alleging breach of contract for failing to properly conduct audits of the company's Ñnancial
statements. No ruling is sought against Freddie Mac, which is named as a nominal party to that suit.
ERISA Lawsuits. Two class action lawsuits were Ñled in 2003 in the U.S. District Court for the
Southern District of Ohio against Freddie Mac, certain individuals, and the company's Retirement Committee
alleging violations of the Employee Retirement Income Security Act (""ERISA''). Both actions were
consolidated and transferred to the same judge in New York who is handling the securities and derivative
lawsuits described above. In July 2004, Freddie Mac and the other defendants Ñled a motion to dismiss the
consolidated ERISA lawsuit. That motion was denied on February 7, 2005, and the company along with the
individual defendants have Ñled a motion for interlocutory appeal which is pending.
OFHEO Proceedings. In June 2003, OFHEO commenced a special investigation of the company in
connection with the restatement. As part of this investigation, OFHEO took the testimony of certain Freddie
Mac employees and directors, external third parties and former employees. OFHEO also requested and
received documents from the company.
On December 9, 2003, Freddie Mac and OFHEO entered into a consent order and settlement which
concluded OFHEO's investigation of the company. Under the terms of the consent order, Freddie Mac agreed
to pay a civil money penalty of $125 million, which was recorded in the second quarter of 2003 (the period in
which OFHEO commenced its special investigation), as well as to undertake certain remedial actions relating
to governance, corporate culture, internal controls, accounting practices, disclosure and oversight. In agreeing
to the consent order, Freddie Mac made no admission regarding any wrongdoing or any asserted or implied
Ñndings.
In December 2003, OFHEO Ñled administrative notices of charges against Freddie Mac and
Messrs. Brendsel and Clarke, two former executive oÇcers of Freddie Mac. In its charge against Freddie Mac,
OFHEO seeks to have Freddie Mac take certain actions in connection with these individuals' salaries and
compensation as well as their termination status with the company. Freddie Mac and Messrs. Brendsel and
Clarke moved, among other things, to dismiss the OFHEO administrative charges. These motions are
pending. On February 18, 2005, OFHEO Ñled an amended notice of charges against Messrs. Brendsel and
Clarke, who opposed the amended notice on several grounds. On April 26, 2005, the Administrative Law
Judge presiding over the OFHEO administrative proceeding ruled that the amended notice of charges against
Messrs. Brendsel and Clarke did not clearly identify the factual and legal issues, and consequently ordered
OFHEO to Ñle a second amended notice of charges that must clearly set forth the factual and legal bases for
the charges and satisfy several other requirements identiÑed by the judge. The parties are also engaged in the
discovery phase of the case.
In a separate action, the U.S. District Court for the District of Columbia issued orders Ñnding that
OFHEO lacked the authority to freeze the compensation and beneÑts provided under Mr. Brendsel's and
Mr. Clarke's employment agreements. Freddie Mac was not a party to these actions. OFHEO has appealed
these orders. Freddie Mac has paid Messrs. Brendsel and Clarke the compensation and beneÑts that were due
them in accordance with the U.S. District Court's orders.
SEC Investigation. In June 2003, the SEC initiated a formal investigation of Freddie Mac in
connection with the restatement. As part of the investigation, the SEC subpoenaed company documents and
took the sworn testimony of various present and former Freddie Mac employees and directors, as well as third
parties.
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