NEW YORK (Legal Newsline) - The Securities and Exchange Commission has charged six former executives of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) with securities fraud.

The complaint against the Freddie Mac officials, filed in U.S. District Court for the Southern District of New York on Friday states that "between March 23, 2007, and August 6, 2008 a period of heightened investor interest in the credit risks associated with subprime loans, Freddie Mac and defendants Richard F. Syron, Patricia L. Cook, and Donald J. Bisenius misled investors into believing that the Company had far less exposure to these riskier mortgages than in fact existed."

The SEC alleges that each of the defendants assisted Freddie Mac or each other to make false or misleading statements that the company "had little or no exposure to subprime loans in its Single Family Guarantee business."

Specifically, Freddie Mac disclosed during this period that the exposure of its Single Family Guarantee business to subprime loans was between $2 billion and $6 billion, or between 0.1 percent and 0.2 percent, of its Single Family Guarantee portfolio. But the exposure was substantially greater, the charges state.

The SEC complaint claims that as of Dec. 31, 2006, Freddie Mac's Single Family Guarantee business was exposed to approximately $141 billion, which was 10 percent of the portfolio in loans the company internally referred to as "subprime," "otherwise subprime" or "subprime-like." By June 30, 2008, its exposure increased to approximately $244 billion - or 14 percent of the portfolio, the SEC charges.

The SEC says Syron had ultimate authority over the subprime disclosures in Freddie Mac's Information Statements and supplements to the Information Statements published between March 23, 2007 and May 14, 2008.

It also says that Cook spoke at an investor conference on May 17, 2007, in which she told investors that Freddie Mac had "basically no subprime exposure."

Bisenius is alleged to have certified to the accuracy of the subprime disclosures in certain Information Statements and supplements and he also substantially assisted Syron and Cook in making oral misstatements.

Regarding the complaint against the Fannie Mae executives, it is similar to that of the Freddie Mac complaint. It states that between December 6, 2006, and August 8, 2008, Daniel H. Mudd, Enrico Dallavecchia and Thomas A. Lund made or participated in making "materially false and misleading statements regarding Fannie Mae's exposure to subprime and Alt-A loans."

It provides in the complaint, as an example, a February 2007 public filing, in which Fannie Mae described subprime loans as those "made to borrowers with weaker credit histories." It reported that 0.2%, or approximately $4.8 billion, of its Single Family credit book of business as of Dec. 31, 2006, consisted of subprime mortgage loans or structured Fannie Mae Mortgage Backed Securities ("MBS") backed by subprime mortgage loans.

But, what the company executives did not say to investors was that in calculating the subprime loan exposure loan products specifically targeted by them for borrowers with weaker credit histories were excluded. These included Expanded Approval (EA) loans. Approximately $43.3 billion of Fannie Mae's single-family credit business, as of Dec. 31, 2006, consisted of EA loans. Yet, these loans were not included in the companies' disclosed subprime exposure.

The SEC also alleges that Fannie Mae misled investors concerning its exposure to Alt-A loans. These were loans with reduced or alternative documentation requirements. The total percentage of its Single Family mortgage guarantee business consisting of these loans was not disclosed.

The complaint states that Mudd, Lund and Dallvecchia knew, "based on reports and internal data they received on a regular basis, that ... reported exposure to subprime and Alt-A loans was inaccurate. The misleading statements describing subprime and Alt-A loans occurred in periodic and other filings with the Commission, and public settings, including investor and analyst calls and media interviews."

The complaint further alleges that "Mudd, Lund and Dallavecchia reviewed and approved each of the false public filings. Mudd and Dallavecchia each made public statements falsely claiming that the Company's exposure to subprime loans was minimal."

The SEC maintains these actions violated and "abetted the violation" of federal securities laws.