Fortress Investment Group chief executive officer Daniel Mudd could face civil charges brought by the Securities and Exchange Commission related to his prior role as president and chief executive of the government-sponsored mortgage giant, Fannie Mae.
On Friday, the SEC filed a Wells notice against Mudd, recommending “civil enforcement action against him in connection with his service at his previous employer, Fannie Mae”. A Wells notice warns individuals that the SEC is considering action against them, providing them with an opportunity to challenge possible enforcement. Fortress added in an SEC filing Monday that Mudd would challenge the notice as it sought to “persuade the SEC that no such action should be commenced”.
The SEC is investigating the role of the government-sponsored entities (GSEs), Fannie Mae or Freddie Mac, in the run-up to the financial crisis, and is believed to be focusing on public disclosures by the two institutions of their exposure to subprime mortgages.
Fortress' board and principals are standing behind Mudd “100 percent”, added people familiar with the matter. Mudd said in an emailed statement to Bloomberg that he had the “highest respect for the commission”, but strongly disagreed “with this turn of events. The disclosures and procedures that are the subject of the staff’s investigation were accurate and complete. These disclosures were previewed by federal regulators, and have been issued in the same form since the company went into government conservatorship”.
Mudd is the most senior executive from either of the GSEs to have been served a notice by the SEC. In February, Freddie Mac chief financial officer Anthony Piszel and executive vice president Don Bisenius reportedly also were served notices.
Since taking over as Fortress chief executive in July 2009, Mudd has focused on managing the firm's existing private equity and real estate funds, co-investment vehicles and credit vehicles, and in the past year, raising new funds.
In June, the New York-based firm raised $800 million for its first Asia-focused fund, the Fortress Japan Opportunity Domestic Fund. According to Fortress’ annual report, released on 1 March, the firm also was raising a net lease fund and a global opportunities fund last year, with $30 million and $147 million of assets under management, respectively.
Some of Fortress' funds have struggled in the financial downturn. One of the firm's worst performing vehicles was its first credit opportunities vehicle, FICO, which reportedly raised $3 billion in 2008. According to the annual filing, the vehicle posted IRRs since inception of -100 percent in 2010.
However, some of Fortress’ largest buyout vehicles – which invest in private equity and real estate – have improved over the past two years, including the $2.5 billion Fortress Fund IV. Fund IV posted IRRs since inception of negative 21.4 percent and negative 11 percent in 2008 and 2009, respectively, with returns improving slightly, albeit still remaining negative, to negative 5 percent in 2010. The firm’s Fund III, which raised $2.8 billion in 2004, reported 1.9 percent IRRs since inception in 2010.