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Last Updated: Thursday, 12 June, 2003, 10:28 GMT 11:28 UK
New probe into US housing giant
Freddie Mac backs one in six US homeowners

A criminal investigation has begun into Freddie Mac, the second-biggest US mortgage lender already embroiled in an accounting probe.

The government-chartered group said the Securities and Exchange Commission (SEC) had now opened a formal investigation into its accounting problems.

The news comes just days after Freddie Mac said it was replacing top management amid concerns over its internal corporate ethics.

It has fired its chief operating officer David Glenn, whose diaries are now believed to be a key part of the federal prosecutors' criminal investigation.

Misleading investors?

Freddie Mac's investigation began in January after its auditor PriceWaterhouseCoopers raised questions about its accounting.

PriceWaterhouse suggested Freddie Mac may have wrongly accounted for some items and asked the group to restate its earnings.

The initial news spooked some people...but I don't see a lot of panic in the street
Steve Mahoney, Glenmede Trust

But last week, the group admitted it had not fully cooperated with auditors and sacked Mr Glenn for failing to cooperate with the investigation.

According to a report in the Houston Chronicle, Mr Glenn revealed to the counsel leading the investigation that he had altered and removed pages from a notebook which included handwritten notes about company meetings.

It is Mr Glenn's diaries that are believed to be drawing interest from federal prosecutors.

Meanwhile, a New York law firm has begun a class action against the firm on behalf of investors, alleging they bought shares in the group when its earnings were overly inflated and therefore misleading.

Ongoing care

Freddie Mac's chairman Shaun O'Malley said the company was cooperating fully with the investigations.

He added that an internal company review had found no other employee than Mr Glenn had been involved in 'irregular activities'.

The news came as a separate statement revealed outgoing chairman and chief executive Leland Brendsel, who resigned on Friday, would receive stock options and shares worth $2.1m as part of his resignation.

His severance package also includes $3.2m in salary and bonus payments over the next two years, and life insurance and health care for the next five years.

Housing knock

Freddie Mac and the larger lender Fannie Mae are dubbed government-sponsored groups because of government benefits, including multibillion dollar credit lines which allow them to borrow at lower interest rates than other companies.

Some analysts had feared the current blot on Freddie Mac's copybook would dent enthusiasm for the housing market, one of the few bright spot in the US economy.

But federal reserve governor Susan Bies downplayed the economic effect of the case.

"Obviously Freddie stock got hit but the securities which would affect home buyers seem to still be very liquid and we know the housing market is still strong," said Ms Bies.

Analyst Steve Mahoney at Glenmede Trust agreed.

"The initial news spooked some people...but I don't see a lot of panic in the street."

Freddie Mac shares closed down $1.50 at $50 on Wednesday and have lost more than 15% of their value in the past week.

The BBC's Chris Carnegy
"Freddie Mac's numbers are very big indeed..."

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