Denver Bar Association
September 2012
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Inspector General’s Report: What Does $100 Million in Legal Fees Look Like?

by Frank Schuchat

 

I

found the title intriguing: “Evaluation of FHFA’s Management of Legal Fees for Indemnified Executives.”

The Office of Inspector General’s dry and to-the-point designation for this little tome announced something promising. It was certainly high time for somebody to evaluate this situation. I was eager to know what the inspector general of the Federal Housing Finance Agency (FHFA) had turned up.

As a lawyer, a taxpayer, and a comedian, I craved an explanation of how it could be that Fannie Mae, and the U.S. government in its role as Fannie Mae’s conservator, has actually paid several law firms $100 million from Jan. 1, 2004, to February 2012, to defend Fannie Mae’s disgraced former CEO, its former CFO, and former controller.

Breakout Box: Read the full report at fhfaoig.gov/Content/Files/EVL-2012-002.pdf.

That’s a lot of dough for defending just three former executives. Should be an interesting tale here. I was looking forward to a good read.

The backstory was irresistible and very contemporary. The three former executives are currently defendants in a shareholder class action lawsuit that is based on a special examination by the Office of Federal Housing Enterprise Oversight (OFEO), the predecessor of FHFA, which found in 2004 that these same three former executives had “knowingly manipulated Fannie Mae’s earnings to maximize their own bonuses, while improperly neglecting accounting systems and internal controls and misleading the regulator and the public.”

To be fair, the $100 million in legal bills is not only for the shareholder class action. It also includes defense costs in connection with various investigations and administrative actions. Indeed, the three former executives had even agreed back in April 2008 to hand over significant amounts of cash, stock, or other consideration to settle administrative actions brought by OFEO charging each of them with having used improper accounting methods to generate unearned bonuses.

In the 2008 OFEO settlement, former Fannie Mae CEO Franklin Raines agreed to pay $24.5 million to resolve the administrative action. Former CFO Timothy Howard agreed to pay $6.4 million. Former Controller Leanne Spencer agreed to pay $275,000. The taxpayers paid the legal fees.

And Fannie Mae, at the time still a publicly traded government-sponsored enterprise, paid a fine of $400 million in restitution and penalties to settle SEC and OFEO enforcement actions based on the misconduct by the three executives. So why are millions of federal dollars still being used to pay the lawyers hired by the very same people who created such havoc and losses to their shareholders and to taxpayers?

The inspector general gives us a clue: the obligation to indemnify for legal fees is cut off only if there is a “final adjudication” that the executive acted in “bad faith.” And apparently the administrative action initiated by OFEO was settled by OFEO before OFEO had obtained a “final adjudication of bad faith” or any concession of such by Raines, Howard, and Spencer.

In other words, OFEO could have cut off the indemnity by allowing the administrative action to proceed to a final adjudication, but didn’t do so. And now, OFEO asserts to the inspector general that it must continue to advance payment of legal fees because there was never a “final adjudication” of bad faith.

And the inspector general buys it.

I was hopeful that the inspector general’s evaluation would illuminate how it is that notwithstanding all the money it pays its bright legal talent, Fannie Mae finds itself shoveling $100 million dollars, so far, to outside lawyers to defend three former executives who, to be kind and not overly judgmental, did not do well by their employer. Who approved of this? Who are the law firms? Does anybody look at the bills? And what does $100 million in legal bills for three people look like?

In terms of literary promise, this is a story that could have been a masterpiece in the hands of a Raymond Chandler, John Grisham, or Mel Brooks. Instead, it is like a Victorian-era Victoria’s Secret catalogue. Everything is covered up.

Now I will have to wait for Newt Gingrich to publish that history of Fannie Mae for which he received a multimillion dollar advance. What a shame. Is this inspector general named Clouseau? D


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