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Fannie Mae, auditor to pay $153m

NEW YORK — Fannie Mae, the government-sponsored mortgage finance company, and KPMG, its former auditor, have agreed to pay $153 million to investors who bought Fannie’s stock from 2001 to 2004, a period when Fannie’s regulator determined the firm had overstated its income and violated generally accepted accounting principles.

The settlement was announced Tuesday by the Ohio attorney general, who had served as lead plaintiff in the case, representing state pension funds that owned the stock.

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The settlement stemmed from a time when Fannie Mae was led by Franklin D. Raines, a former director of the Office of Management and Budget under President Bill Clinton and a man who was deemed to be quite powerful in Washington.

The regulator of Fannie Mae had usually deferred to it, and Raines initially insisted the regulator was wrong about the accounting issues. He drew support from both the Fannie Mae board and from KPMG, the auditing firm that had certified the books that the regulator criticized.

Raines asked that the staff of the Securities and Exchange Commission review the accounting, but stuck to his position even after the SEC concluded Fannie had erred. It was not until the regulator, then known as the Office of Federal Housing Enterprise Oversight, demanded his ouster that the board fired him. At the same time, it dismissed KPMG.

The SEC and oversight office reports concluded that Fannie had run roughshod over accounting rules in order to report profits that were not volatile, which it believed would reassure investors. The regulator said that in one case KPMG had concluded Fannie was wrong, but evidently yielded on the basis that the amount involved, about $200 million, was not material.

The settlement came after the federal judge hearing the case, Richard J. Leon, urged the parties to enter mediation. A statement by the regulator said the mediator had recommended the settlement terms.

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