Ohio's lawsuit filed Friday against mortgage lending giant Freddie Mac alleges the company's accounting "manipulations" cost Ohio public pension funds more than $25 million. Though owned by investors, Freddie Mac has a federal charter to finance housing and owns or insures almost 20 percent of U.S. mortgages.
Ohio Attorney General Jim Petro's lawsuit is only the latest he has filed against fraudulent corporate practices. Last month, he sued AOL Time Warner to recover hundreds of millions lost by five Ohio public employee pension funds because of that company's bogus financial reports.
Petro says we still need to see more corporate accountability, and he's right. The 2002 Sarbanes-Oxley Act required more disclosure from companies and auditors, but some reforms urged after Enron's collapse have been blunted. States and other big investors have the clout to demand greater truth in reporting, and they should wield it.
Ohio joined a class-action lawsuit against Enron after state pension funds lost $124 million. Cincinnati employee pension funds lost $8 million. Petro thinks Ohio stands to recover more from AOL Time Warner by filing its own lawsuit. But he has filed a class-action against Freddie Mac and asked that Ohio be granted lead plaintiff status. West Virginia also asked to be lead plaintiff, but lost only $1.7 million. As lead plaintiff, Ohio could better shape negotiations and a final settlement.
Freddie Mac was rocked in recent months by financial scandals, the firing of its president David W. Glenn and resignations of its chairman Leland C. Brendsel and chief financial officer Vaughn Clark. A 107-page outside report prepared for its board found Freddie Mac's accounting misled investors. Fraudulent financial reports usually conceal losses. Freddie Mac officials tried to "smooth" out a one-time gain by shifting it to a reserve against future losses so the company could report the strong, steady gains loved by financial analysts and Wall Street investors.
If Freddie Mac was manipulating its public image at the expense of Ohio employees' and teachers' pension funds, it should be made to part with some of its $600 billion in assets.
Chance for peace
Ohio right to sue
Cruelty in Cleveland