Mortgage finance giant Freddie Mac said that it expects to post a loss because of anticipated claims likely to stem from various lawsuits and enforcement actions related to its multi-billion-dollar earnings restatement.
"Freddie Mac believes that a loss in connection with the proceedings arising from the restatement is probable," the company said in its long-delayed 2004 annual statement, filed this week.
The company estimated a minimum loss of $75 million to $100 million, but cautioned that, "It is not possible for the company to reasonably estimate the upper end of the range of any additional losses that might result from the adverse resolution of any of these legal proceedings, or their potential effect on the company's financial condition or results of operations."
The company established a reserve of $75 million for the loss contingency in the second quarter of 2003, when many of its legal troubles began.
Widespread accounting problems uncovered in 2002 forced the company to restate its earnings from 2000 through 2002. The restatement found that executives underreported more than $5 billion in income to smooth out earnings during that period.
The government-sponsored enterprise faces various legal proceedings -- including class-action and stockholder lawsuits and investigations by the Securities and Exchange Commission, the Department of Labor and the U.S. Attorney's Office -- arising from its restatement.
Freddie Mac was also recently named in lawsuits alleging violations of federal and state antitrust laws and state consumer protection laws in connection with the setting of its guarantee fees.
Freddie Mac said that during 2003, it incurred expenses associated with the restatement totaling $172 million, which consisted of approximately $149 million of professional services expenses due to increased accounting, auditing, consulting and legal services; $15 million of compensation costs; and $8 million of other costs. In 2003, it also paid a $125 million civil penalty in connection with an agreement with its regulator, the Office of Federal Housing Enterprise Oversight.
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