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One D.C. attorney involved in the fast-moving Freddie Mac situation calls it “the perfect storm.” As soon as news broke on June 9 that the mortgage giant had announced an exodus of three top executives, D.C. lawyers shifted into scandal mode. Freddie Mac’s president and chief operating officer had been dismissed, and its CEO and its top financial officer shown the door. It’s not surprising that Freddie Mac, the nation’s second largest financier of home mortgages, is drawing a host of lawyers in its direction. Government regulators have vowed to figure out how the Federal Home Loan Mortgage Corp., which employs 3,800 people in the D.C. area, had come up with highly questionable revenue numbers for the past three years and been forced to revise its earnings data. U.S. Attorney Paul McNulty of the Eastern District of Virginia has announced a criminal probe, and a congressional oversight committee also plans to investigate the McLean-based company. As clouds gathered last week over Freddie Mac, David Glenn, its fired president and chief operating officer, hired banking maven Thomas Vartanian of the D.C. office of Fried, Frank, Harris, Shriver & Jacobson. The departing CEO, 21-year company veteran Leland Brendsel, brought in Lawrence Lorber, an employment law specialist from the D.C. office of Proskauer Rose, to negotiate his severance deal. Brendsel’s severance package is already drawing fire on Capitol Hill and from regulators. Freddie Mac itself is working with several lawyers at the D.C. office of Cleary, Gottlieb, Steen & Hamilton, including David Becker, a former Securities and Exchange Commission general counsel. According to a source with knowledge of the matter, the company may also turn to Williams & Connolly, one of the city’s top litigation firms. (Monica Shah, a Williams & Connolly spokeswoman, declines comment.) The company’s longtime executive vice president, general counsel, and secretary, Maud Mater, is also helping call the shots, according to a source familiar with the case. Mater, who leads a team of nearly 100 in-house lawyers, did not return calls. And six lawyers in the D.C. office of Baker Botts, led by James Doty, another former SEC general counsel, continue to pursue the assignment they were given five months ago by the company’s 16 outside directors — to conduct an internal investigation and figure out where the accountants had gone wrong and what the right numbers should be. “We are conducting an investigation into the audit and the restatement of earnings,” Doty confirms. He declines further comment. Doty was called in last January, well before the sudden management shake-up, when Freddie Mac’s new accountants at PricewaterhouseCoopers concluded that the company and its former auditor, Arthur Andersen, had not properly accounted for some of the complex derivatives in Freddie Mac’s portfolio. Doty declines to say how long it will take his group to complete its work, but Freddie Mac officials have said it may not be done until September. Doty’s team at Baker Botts includes partners J. Bradley Bennett, David Powers, and Michael Barta, as well as associates Sarah Kropf and Ama Adams. Meanwhile, Freddie Mac’s lawyers at Cleary, Gottlieb are coordinating the company’s response to the regulators and to shareholder class actions while defending the company’s severance arrangements with its one-time three highest-ranking employees. The Freddie Mac storm struck — and Cleary, Gottlieb’s plate began to fill up — on June 9, when the company announced that it had fired Glenn, its president. The company had just learned that Glenn told Doty he had altered or torn out pages of his notebooks in which he kept notes of business meetings. Although there’s no indication that Brendsel knew about the alterations, he was asked to retire, and Chief Financial Officer Vaughn Clarke resigned in the wake of the accounting discrepancies. The restated numbers are expected to reflect an increase rather than a decrease from the previously announced earnings, but still the re-examination and the management changes have shaken public confidence in Freddie Mac. “We are advocates for the company. We are doing a variety of things for the company,” says Becker, whose firm has been outside counsel to Freddie Mac for about a year. Working with Becker are Cleary, Gottlieb New York partner A. Richard Susko, a specialist in executive compensation and golden parachutes, and D.C. securities partner Robin Bergen. Freddie Mac also brought in two lawyers from Covington & Burling, a firm that has long done legal work for the company. Financial services partners Stuart Stock and John Dugan are coordinating the company’s response to the Office of Federal Housing Enterprise Oversight (OFHEO), the federal agency that oversees Freddie Mac. Stock and Dugan decline comment. OFHEO has already begun to question some of Freddie Mac’s actions. Armando Falcon Jr., the outgoing director of OFHEO, wrote to Freddie Mac’s board of directors on June 12 and ordered the company not to make the payouts to any of the former executives until OFHEO has reviewed them. Stefanie Mullin, a spokeswoman for Falcon, told The Washington Post last week that OFHEO believes it has the authority to review the compensation packages, which, including stock options, could amount to about $40 million for Brendsel and $6 million for Glenn. Freddie Mac is not releasing information about Clarke’s compensation since he is not one of the company’s five highest-paid executives and, under law, the company need not make disclosures about him. Freddie Mac permitted Brendsel to keep his stock options and severance pay, while Glenn forfeited his severance and his unvested options since he was fired for cause. Brendsel’s lawyer says the payments simply follow the terms of the executives’ employment contracts signed in 1990 and are not “golden parachutes” that squander shareholders’ money. “We made sure that everything was within the four corners of the 1990 contract,” says Lorber, the Proskauer partner who represents Brendsel in employment matters. Fried, Frank’s Vartanian, who represents Glenn, declines comment. “There have been misunderstandings about the role of various people in this. It’s unfortunate that they’re all being lumped together,” says Lorber. “My client is unhappy that this all happened.” Brendsel has not yet hired a white collar defense lawyer but is expected to do so soon. Clarke, the former CFO, has not yet retained counsel, several lawyers in the case say. Clarke could not be reached for comment.

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