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DealBook: U.S. Suit Says Loan Giants’ Executives Misled Market

December 17, 2011 by Leave a Comment

Robert Khuzami of the S.E.C. announcing the lawsuits against six former top executives of Fannie Mae and Freddie Mac.Win McNamee/Getty ImagesRobert Khuzami of the S.E.C. announcing the lawsuits against six former top executives of Fannie Mae and Freddie Mac.

9:30 p.m. | Updated

Regulators have accused the former chief executives of the mortgage giants Fannie Mae and Freddie Mac of misleading investors about their firms’ exposure to risky mortgages, one of the most significant federal actions taken against those at the center of the housing bust.

The lawsuits filed Friday against the two chief executives and four other top executives are an aggressive move by the Securities and Exchange Commission, and come after a three-year investigation.

The agency has come under fire for not pursuing top Wall Street and mortgage industry executives who contributed to the financial crisis. In cases contending the deceptive marketing of securities tied to mortgages, the S.E.C. has been criticized for citing only midlevel bankers while settling with the Wall Street firms themselves. Recently, the agency drew criticism from a federal judge after allowing Citigroup to settle a fraud case without conceding wrongdoing.

On Friday, S.E.C. officials trumpeted their actions in the Fannie and Freddie case as part of a renewed effort to crack down on wrongdoing at the highest levels of Wall Street and corporate America.

“All individuals, regardless of their rank or position, will be held accountable for perpetuating half-truths or misrepresentations about matters materially important to the interest of our country’s investors,” said Robert S. Khuzami, the agency’s enforcement chief. “Investors were robbed of the opportunity to make informed investment decisions.”

He noted that the agency had now filed 38 separate actions stemming from the 2008 financial crisis.

The former Fannie Mae and Freddie Mac executives have vowed to challenge the government, saying that the companies repeatedly disclosed the breakdowns of their loan portfolios.

As companies that fed both the housing bubble and Wall Street’s appetite for risk, Fannie Mae and Freddie Mac came under investigation quickly by federal agencies amid the financial crisis in 2008. But Freddie Mac disclosed this summer that the Justice Department’s inquiry into the company had ended without any charges. And the S.E.C stopped short of bringing actions against the two companies.

Instead, agreements with Fannie and Freddie will allow the now government-controlled companies to evade prosecution and fines so long as they cooperate with authorities. The deal does not require approval from a federal court, unlike the proposed settlement with Citigroup.

The case against the former executives, including Daniel H. Mudd, the former chief executive of Fannie Mae, and Richard F. Syron, the former chief of Freddie Mac, centers on a series of disclosures the firms made to investors at the height of the mortgage boom. The government contends that the firms played down the extent of their exposure to subprime mortgages, loans doled out to the riskiest of borrowers.

One S.E.C. complaint contends that Freddie Mac executives falsely proclaimed that the company had virtually no exposure to ultra-risky loans, despite internal warnings admonishing against such claims.

A separate complaint contends that Fannie Mae executives described subprime loans as those made to individuals “with weaker credit histories” while only reporting one-tenth of the loans that met that criteria in 2007. Both complaints were filed in the United States District Court in Manhattan.

Mr. Mudd, who was chief executive of Fannie Mae from 2005 until the government took control of the company in 2008, said that there had been no deception.

“The government reviewed and approved the company’s disclosures during my tenure, and through the present,” he said in a statement. “Now it appears that the government has negotiated a deal to hold the government, and government-appointed executives who have signed the same disclosures since my departure, blameless — so that it can sue individuals it fired years ago.”

The S.E.C.’s commitment to the long-running investigation — more than 100 depositions were produced over its course — highlights the major roles that Fannie Mae and Freddie Mac played in the financial crisis and subsequent government bailout. The Bush administration took over the teetering mortgage giants in September 2008, and taxpayers have since pumped more than $150 billion into the two companies. The Obama administration has vowed to wind them down, although the timeline remains unclear.

The case against the former mortgage executives resembles an earlier action against one of the nation’s biggest lenders to risky, or subprime, borrowers. Angelo Mozilo, the former chief executive and founder of Countrywide Financial, agreed to pay $22.5 million to settle federal charges along the same lines. The settlement was the largest ever levied against a senior executive of a public company, though Mr. Mozilo, who also agreed to forfeit $45 million in gains, neither admitted to nor denied wrongdoing.

Success for the S.E.C. in the Fannie and Freddie case will largely hinge on the meaning of the word subprime, which the government itself has never fully defined. While the term often refers to borrowers with low credit scores, Fannie and Freddie decided to classify loans as prime or subprime based on the lender type, not the borrower’s credit score. A Wall Street bank, for instance, was usually considered a prime lender, despite extending subprime loans.

But the government’s complaint contends that this kind of disclosure masked risk. Loans not considered subprime often defaulted at higher rates than those classified as subprime.

The government contends that the executives were less than forthcoming about that extra layer of risk. Mr. Syron told an investor conference in May 2007 that the company had “basically no subprime business.”

But a lower-level executive at the firm, who reviewed Mr. Syron’s speech in advance, warned that such a statement could be misleading.

“We need to be careful how we word this. Certainly our portfolio includes loans that under some definitions would be considered subprime,” the employee said, according to the complaint. “We should reconsider making as sweeping a statement.”

Mr. Mudd, meanwhile, testifying before Congress in April 2007, broadly defined subprime as “the description of a borrower who doesn’t have perfect credit.” But at the same hearing, he told lawmakers that “less than 2.5 percent of our book of business can be defined as subprime,” which the complaint says greatly understated the firm’s exposure based on his definition that day. Mr. Mudd’s estimate omitted some $50 billion in subprimelike loans, according to the complaint.

Lawyers for the executives, however, plan to argue that the firms did in fact disclose minute details of their loan portfolios, suggesting a potential weakness in the case. During the period under scrutiny, the companies produced “monster charts” breaking down their loan portfolios by borrowers’ credit scores and how much equity they had in their homes, among other information.

Lawyers for Mr. Syron called the S.E.C.’s case “fatally flawed” and “without merit.”

“Simply stated, there was no shortage of meaningful disclosures, all of which permitted the reader to assess the degree of risk in Freddie Mac’s guaranteed portfolio,” Thomas C. Green and Mark D. Hopson, partners at Sidley Austin, said in the statement.

The lawyers note that even the federal government never settled on a definitive meaning for subprime. Indeed, in a 2007 document, multiple federal agencies declined to define it.

Lawyers for two of the other executives named in the suit have also promised to fight the allegations.

The complaints also name Fannie’s former risk officer, Enrico Dallavecchia; an executive vice president for Fannie, Thomas A. Lund; Patricia L. Cook, Freddie’s former chief business officer; and its executive vice president, Donald J. Bisenius.

Still, Mr. Mudd and Mr. Syron are the two most prominent subjects of the complaint.

Since August 2009, Mr. Mudd has been chief executive of the Fortress Investment Group, the large publicly traded private equity and hedge fund company.

Mr. Syron is a former president of the American Stock Exchange and currently an adjunct professor and trustee at Boston College.

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For Incoming I.B.M. Chief, Self-Confidence Rewarded

October 28, 2011 by Leave a Comment

That night, her husband asked her, “Do you think a man would have ever answered that question that way?”

“What it taught me was you have to be very confident, even though you’re so self-critical inside about what it is you may or may not know,” she said at Fortune’s Most Powerful Women Summit this month. “And that, to me, leads to taking risks.”

Her 30-year ascent through the ranks at I.B.M. happened during an era in which women entered corporate America in droves — with some of them, including Ms. Rometty, climbing their way to the top.

“The age group of women becoming C.E.O.’s started their careers in the early ’80s, when the huge tsunami of women were really building professional lives,” said Ilene H. Lang, chief executive of Catalyst, a research firm on women and business. Yet the fact that Ms. Rometty’s gender remains newsworthy also exposes the lengths that businesses still need to go to before women who invest their careers in companies have a shot at the corner office, or even equal representation.

“So we should be seeing more of this,” Ms. Lang said.

Ms. Rometty’s promotion also reveals something about I.B.M. and how it has developed a corporate culture that values diversity. The notable companies with women chief executives — like I.B.M., Hewlett-Packard, PepsiCo, Kraft Foods, DuPont and Xerox — are also some of the country’s oldest. Surprisingly, newer companies lag, said Jeffrey A. Sonnenfeld, founder of the Chief Executive Leadership Institute at the Yale School of Management.

“The really longstanding, traditional companies are the ones who’ve been able to unblock the once-clogged pipelines that used to atrophy the meritocracy because of bias,” he said. “These are traditional major pillars of the U.S. economy, as opposed to upstarts or professional services or finance firms with a highly fluid work force.”

The promotion of Ms. Rometty is all the more significant because she spent her career at I.B.M., in technical, strategy and sales roles, said Rosabeth Moss Kanter, a professor at Harvard Business School who studies women in business.

When she began studying these issues three decades ago, senior women were in “the three Ps,” she said — personnel, purchasing and public relations. Even recently, Anne M. Mulcahy, former chief executive of Xerox, had been vice president of human resources.

Ms. Rometty started at I.B.M. as a systems engineer in 1981 with a degree in computer science and electrical engineering from Northwestern University and is currently senior vice president for sales, marketing and strategy.

“The way she’s become C.E.O. is emblematic of a change that means women can have access to every opportunity, coming up the standard route instead of being hired from unusual places,” Ms. Kanter said.

A Catalyst research report this month found that women who build their careers inside a single company are more successful because they can prove themselves and develop sponsors to give them critical assignments.

“Earning this within the company, with your colleagues, is a little different from parachuting in Carly Fiorina or Meg Whitman from outside, where maybe they only look good because no one knows them,” Ms. Kanter said, referring to a former chief executive at Hewlett-Packard and its current chief executive.

It also gives Ms. Rometty added legitimacy, Mr. Sonnenfeld said. “There’s no cynic who can say there’s some demographic window-dressing here.”

Her career trajectory mirrors the successes of modern-day I.B.M.. An early producer of personal computers, I.B.M. has since sold off much of its hardware business to focus on higher-value software and services. Ms. Rometty’s career has been largely on the fast-growing services side, selling I.B.M. expertise to insurance and finance companies and overseeing the $3.5 billion acquisition of PricewaterhouseCoopers Consulting in 2002.

But for most companies, Mr. Sonnenfeld said, particularly finance, consulting and law firms, the biggest barrier for women remains the leaky pipeline — companies lose women before they ever near the top.

I.B.M., however, has a reputation for promoting diversity, said analysts who study the field.

I.B.M., 100 years old, hired its first professional women, 25 college seniors working in systems service, in 1935. In 1943, it named its first woman vice president. It instituted a three-month family leave policy in 1956, 37 years before the federal government made it law. And it runs the I.B.M. Women Inventors Community for filing patents.

“They see their ability to compete in today’s marketplace, to approach new markets and to make money as being tied to diversity,” said Caroline Simard, vice president of research at the Anita Borg Institute for Women and Technology, which this year named I.B.M. the top company for technical women. “It really is a business imperative and not just a responsibility of H.R.”

Analysts said that perhaps the most important strategy at I.B.M., which also had early inclusion programs for minorities, disabled and gay employees, is its formal mentorship program. “I really never felt there was a constraint about being a woman,” Ms. Rometty said at the Fortune conference. “I was always surrounded by people that wanted to mentor you.”

Ms. Kanter at Harvard said that Samuel J. Palmisano, whom Ms. Rometty will replace as chief executive, should be named “mentor of the century.”

Still, women are not equally represented at I.B.M., accounting for 28 percent of the work force and just 21 percent of executives. I.B.M. does not break out engineers by gender, but tech companies have traditionally lagged in recruiting women.

Girls are discouraged from pursuing technical education and companies have trouble retaining technical women because they are often isolated from influential social networks inside companies, Ms. Simard said. “Research shows that the majority of people have an implicit bias that associates science and technology with gender, so from a very young age, girls are not encouraged to pursue these careers,” she said.

“Women like Ginni Rometty are a powerful antidote against the stereotype.”

Quentin Hardy contributed reporting.

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Jobs Steps Down at Apple, Saying He Can’t Meet Duties

August 25, 2011 by Leave a Comment

“I have always said that if there ever came a day when I could no longer meet my duties and expectations as Apple’s C.E.O., I would be the first to let you know,” Mr. Jobs said in a letter released by the company. “Unfortunately, that day has come.”

Mr. Jobs, 56, has been on medical leave since January, his third such absence. He underwent surgery for pancreatic cancer in 2004, and received a liver transplant in 2009. But as recently as a few weeks ago, Mr. Jobs was negotiating business issues with another Silicon Valley executive.

 Mr. Jobs will become chairman, a position that did not exist before. Apple named Tim Cook, its chief operating officer, to succeed Mr. Jobs as chief executive.

Rarely has a major company and industry been so dominated by a single individual, and so successful. His influence has gone far beyond the iconic personal computers that were Apple’s principal product for its first 20 years. In the last decade, Apple has redefined the music business through the iPod, the cellphone business through the iPhone and the entertainment and media world through the iPad. Again and again, Mr. Jobs has gambled that he knew what the customer would want, and again and again he has been right.

“The big thing about Steve Jobs is not his genius or his charisma but his extraordinary risk-taking,” said Alan Deutschman, who wrote a biography of Mr. Jobs. “Apple has been so innovative because Jobs takes major risks, which is rare in corporate America. He doesn’t market-test anything. It’s all his own judgment and perfectionism and gut.”

Mr. Cook, an expert in logistics, has been instrumental in locking up contracts in advance for critical parts in the company’s devices. It has had the effect of securing favorable prices, keeping Apple’s profit margins high. But it also has prevented rival companies from producing competing products at significantly lower prices.

While Mr. Cook is well respected in the industry, he is little known outside of it. Analysts and Silicon Valley experts said new Apple products were in the pipeline for the next few years, but the company’s success beyond that was already being debated.

Tim Bajarin, president of the technology research firm Creative Strategies, said the news about Mr. Jobs was “a shock because it’s abrupt.” But Mr. Bajarin said that “while there’s definitely concern for Steve as a person,” he had little concern for the company.

“Steve has built a very deep bench of managers, including the leadership of Tim Cook, who clearly understands Steve’s vision, goals and direction,” said Mr. Bajarin, who has followed Apple for 30 years. 

Others were not so sure.

“You could make the case that Steve has injected so much of his DNA into Apple that Apple will continue,” said Guy Kawasaki, who was an Apple executive in the late 1980s. “Or you can make the case that without Steve, Apple will flounder. But you cannot make the case that Apple without Steve Jobs will be better. Hard to conceive of that.”

The technology world has never been short of strong-willed leaders (think Bill Gates at Microsoft or Larry Ellison at Oracle). But even in this select group, Mr. Jobs was noted for the control he exerted and the loyalty he commanded. Without him, his devoted team might soon fracture.

“I think the key question is whether the Apple team will continue to work as effectively as a collaborative without the single person to rely on for the final decision,” said Charles Golvin, a Forrester Research analyst.

Mr. Cook, 50, joined Apple in 1998. He was promoted to chief operating officer in 2007, overseeing the day-to-day operations.  Wall Street had long assumed the soft-spoken Mr. Cook, who was raised in Alabama and is an Auburn University graduate, would be the successor to Mr. Jobs.  While Mr. Jobs convalesced, Apple thrived with the continuing rise in iPhone sales and huge growth in the iPad, the dominant tablet computer.

The company and Mr. Jobs had been criticized in the past for revealing little information about his health to investors. The news of Mr. Jobs’s resignation came after the market closed Wednesday. In after-hours trading, the stock fell 5 percent.

Contributing reporting were Verne G. Kopytoff, Claire Cain Miller and Nick Bilton in San Francisco, and Sam Grobart in New York.

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