WASHINGTON - Federal prosecutors have opened a criminal investigation into possible misconduct at Freddie Mac, the home-mortgage giant whose accounting already was being investigated by the Securities and Exchange Commission and the Office of Federal Housing Enterprise Oversight.
The diaries of David Glenn, the company's president who was fired Monday, are also drawing interest.
Wednesday's news of the criminal inquiry came two days after the government-sponsored company shook up its top leadership because of accounting problems raised some concern about the housing market.
"The U.S. attorney's office in the Eastern District of Virginia has initiated an investigation involving Freddie Mac," said U.S. Attorney Paul McNulty. He declined further comment.
One of the biggest corporations with its stock widely traded, Freddie Mac said it was not aware of the investigation but would cooperate in all respects.
In a surprise announcement Monday, Freddie Mac said that it had sacked Glenn, who also was chief operating officer, because he did not fully cooperate with an internal review of the company's books. Chairman and chief executive Leland Brendsel and Vaughn Clarke, the company's executive vice president and chief financial officer, resigned.
The company disclosed Wednesday that the SEC's informal inquiry begun in January has now become a formal investigation, allowing the agency to issue subpoenas for witnesses and documents. "We will continue to cooperate in all respects as the investigation continues," said Shaun O'Malley, chairman of Freddie Mac's board of directors.
He said an internal company review found that no employee other than Glenn had engaged in allegedly irregular activities involving documents. "We can also confirm that the conduct we disclosed on Monday related to Mr. Glenn's diaries and not to company accounting records," O'Malley said.
The diaries were said to be missing some pages, while other pages had been altered.
Glenn's attorney, Thomas Vartanian, declined comment on the subject.
The oversight agency supervises both Freddie Mac and Fannie Mae, its larger sister in the multitrillion-dollar home mortgage market.
The company does not think fraud or criminal misconduct were involved, Gregory Parseghian, Freddie Mac's new chief executive officer and president, said in a conference call Monday with shareholders and financial analysts.
Freddie Mac restated its earnings for 2000-2002 in January, after its new auditor recommended changes to its accounting policies to reflect higher earnings from the complex financial instruments called derivatives. The company fired now-fallen Arthur Andersen LLP as its auditor in March 2002, replacing it with PricewaterhouseCoopers.
Federal Reserve governor Susan Bies said Wednesday that Freddie Mac's accounting travails have not had an immediate impact on the U.S. banking system or the housing market - one of the economy's few bright spots - and that consumers should not feel any negative effect.
"The housing market is still very strong," Bies said. "And banks as a whole are very liquid right now - they have plenty of room to extend credit. So I haven't seen any signs that there will be a short-run impact."
Freddie Mac shares fell $1.49 on Wednesday, to $50.01 on the New York Stock Exchange after official acknowledgment of the criminal investigation. The company's announcement that it will buy back as much as $10-billion of its own notes in the next two days helped bring a measure of stability to an edgy market in Freddie Mac and Fannie Mae securities.
And Freddie Mac's director of government relations, Lauren Tennes, left to join student loan company Sallie Mae, where she will have a similar position.
- Information from Bloomberg News Service was used in this story.
