TITLE: B-306860, Office of Federal Housing Enterprise Oversight--Settlement Agreement with Freddie Mac, February 28, 2006
BNUMBER: B-306860
DATE: February 28, 2006
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B-306860, Office of Federal Housing Enterprise Oversight--Settlement Agreement with Freddie Mac, February 28, 2006

   Decision

   Matter of: Office of Federal Housing Enterprise Oversight--Settlement
   Agreement with Freddie Mac

   File: B-306860

   Date:  February 28, 2006

   DIGEST

   The terms of a settlement agreement entered into between the Office of
   Federal Housing Enterprise Oversight (OFHEO) and the Federal Home Loan
   Mortgage Corporation (Freddie Mac), in which Freddie Mac agreed to pay a
   vendor to electronically format certain documents for OFHEO, will not
   augment OFHEO's appropriations. Under the settlement agreement, OFHEO
   agreed to dismiss all administrative charges it had brought against
   Freddie Mac. In exchange, Freddie Mac agreed, among other things, to pay a
   vendor picked by OFHEO up to $1 million to electronically format and code
   certain documents belonging to Freddie Mac for OFHEO's use. No
   augmentation of OFHEO's appropriations will occur as the settlement
   agreement satisfies a prosecutorial objective, and no contractual
   relationship between OFHEO and the vendor exists with respect to the
   formatting of Freddie Mac's documents.

   DECISION

   The Office of Federal Housing Enterprise Oversight (OFHEO) has requested a
   decision under 31 U.S.C. sect. 3529 on whether the Federal Home Loan
   Mortgage Corporation's (Freddie Mac) payment to a vendor to electronically
   format and code documents as specified by OFHEO will augment OFHEO's
   appropriation. OFHEO and Freddie Mac entered into a settlement agreement
   to resolve an administrative proceeding brought by OFHEO against Freddie
   Mac pursuant to OFHEO's regulatory oversight authority. As part of this
   settlement, Freddie Mac agreed to pay the vendor up to $1 million. After
   reviewing the information provided by OFHEO, we conclude that no
   augmentation of OFHEO's appropriations will occur.

   BACKGROUND

   OFHEO has oversight responsibility for the Federal National Mortgage
   Association (Fannie Mae) and for Freddie Mac.[1] Both Fannie Mae and
   Freddie Mac are government-sponsored enterprises (GSEs)[2] that OFHEO must
   ensure are financially secure and adequately capitalized. 12 U.S.C. sect.
   4513(a); 12 C.F.R. sect. 1720.1 (2005). The Director of OFHEO may pursue
   administrative proceedings against a GSE if he determines that it is
   engaging in any conduct that threatens to deplete its core capital, will
   violate an applicable law, order or regulation, or will violate a written
   agreement entered into by the GSE with OFHEO. 12 U.S.C. sect. 4631; 12
   C.F.R. sect. 1780.1.

   On December 17, 2003, OFHEO filed a notice of charges against Freddie Mac.
   Office of Federal Housing Enterprise Oversight, In the Matter of: Federal
   Home Loan Mortgage Corporation, Notice of Charges 2003-1, Dec. 17, 2003.
   On September 9, 2005, OFHEO and Freddie Mac agreed to settle all charges
   pursuant to conditions set forth in a consent order. Office of Federal
   Housing Enterprise Oversight, In the Matter of: Federal Home Loan Mortgage
   Corporation, Consent Order No. 2005-1, Sept. 9, 2005 (hereinafter Consent
   Order); Office of Federal Housing Enterprise Oversight, Office of General
   Counsel Memorandum for Gail S. Palestine, Deputy Chief Financial Officer,
   Settlement with Freddie Mac, Nov. 3, 2005. Paragraph 11 of the Consent
   Order requires Freddie Mac to provide OFHEO with compact discs (CDs)
   containing certain documents in a manner agreeable to both parties.

   With respect to paragraph 11 of the Consent Order, OFHEO and Freddie Mac
   entered into a production agreement on September 9, 2005, that specifies
   how the documents will be formatted. OFHEO, Production Agreement, Sept. 9,
   2005 (hereinafter Production Agreement). Under the Production Agreement,
   the parties agree that "Freddie Mac shall pay a vendor (or vendors) hired
   by OFHEO" (1) to convert the documents to be produced to OFHEO to any
   different format required by OFHEO, and (2) to electronically code the
   documents with document fields chosen by OFHEO. Id. In no event is Freddie
   Mac to pay the vendor hired by OFHEO in excess of $1 million.[3] Id.

   To carry out its responsibility under the Production Agreement, OFHEO sent
   Pitney Bowes Government Solutions, Inc. (Pitney) a letter of understanding
   establishing that Pitney will begin the formatting of Freddie Mac's
   documents when Freddie Mac begins to wire up to $1 million in installments
   to the account of Pitney. Letter from David A. Felt, Acting General
   Counsel, Office of Federal Housing Enterprise Oversight, to Jon Love,
   President, Pitney Bowes Government Solutions, Inc., Re: Letter of
   Understanding, January 17, 2006 (hereinafter Pitney Letter). The letter
   states that Pitney will not seek payment from OFHEO for services
   performed, but will only look to the moneys wired to it by Freddie Mac.
   Id. To conform with the $1 million limitation that OFHEO and Freddie Mac
   agreed to, OFHEO informed Pitney that it should not incur costs exceeding
   the amount of the installment paid by Freddie Mac, nor should Pitney incur
   expenses in excess of $1 million unless OFHEO instructs Pitney to incur
   those costs at OFHEO's expense. Id.

   Before finalizing its Production Agreement with Freddie Mac, OFHEO sought
   a decision from our Office asking whether payment by Freddie Mac to Pitney
   for the formatting would augment OFHEO's appropriations. Letter from Gail
   A. Palestine, Deputy Chief Financial Officer, Office of Federal Housing
   Enterprise Oversight, to Thomas H. Armstrong, Assistant General Counsel
   for Appropriations and Budgeting, Government Accountability Office, Re:
   Request for Expedited Opinion on Appropriations, November 4, 2005. While
   OFHEO continues to assert authority to require Freddie Mac to submit
   documents in a specified format, OFHEO, in settlement of its dispute with
   Freddie Mac, agreed to accept unformatted documents that Freddie Mac would
   pay up to $1 million to format. It is the language of the Production
   Agreement ("Freddie Mac shall pay a vendor (or vendors) hired by OFHEO")
   and the possibility that OFHEO, itself, using its own appropriations, may
   decide to format additional Freddie Mac documents that give rise to an
   augmentation question. If (1) OFHEO hires the vendor, and (2) OFHEO,
   eventually, decides to format some of Freddie Mac's documents, the
   appearance, at least, is that the formatting costs are OFHEO's
   responsibility, and that Freddie Mac, individually, is paying to defray
   OFHEO's costs.

   DISCUSSION

   When Congress makes an appropriation to an agency, it directs that the
   agency may not operate beyond the level it can finance from its
   appropriation. B-300248, Jan. 15, 2004. An augmentation occurs when an
   agency supplements its appropriation from some other source. Id. A "de
   facto" augmentation occurs when an agency arranges for an outside source
   to defray an obligation of the agency. Id. At issue is whether Freddie
   Mac's $1 million payment to Pitney constitutes a de facto augmentation of
   OFHEO's appropriations. In the absence of specific statutory authority, an
   agency may not circumvent the financial limitations imposed upon it by
   Congress by augmenting, or supplementing, its appropriation from outside
   sources. Id.

   Congress charged OFHEO with oversight of Freddie Mac. 12 U.S.C. sect.
   4501. Congress prohibits current and former Freddie Mac executives
   officers from receiving excess compensation, 12 U.S.C. sections 4518,
   4637, and delegated authority to OFHEO to take enforcement action against
   Freddie Mac or the executive officers as necessary. Id.  at sections
   4631-4641. OFHEO may enforce its authority through an adjudicatory
   proceeding. Id.  at 4631. Regulations governing adjudicatory proceedings
   provide the procedures for settlement during such proceedings. See 12
   C.F.R. sect. 1780.14.

   Regulatory agencies, such as OFHEO, have authority to settle charges
   consistent with statutorily authorized prosecutorial
   objectives--correction or termination of a condition or practice,
   punishment, and deterrence. See 70 Comp. Gen. 17 (1990); B-210210, Sept.
   14, 1983. In this case, OFHEO brought administrative charges against
   Freddie Mac and the former executive officers for the undue compensation
   of those officers. Consent Order; see 12 U.S.C. sections 4518, 4631, 4637.
   In the course of discovery, OFHEO requested that Freddie Mac submit
   certain electronically formatted documents. Felt Conversation. Freddie Mac
   objected to the formatting requirement, but wanted "to avoid the expense
   and distraction of further litigation with OFHEO." Consent Order. In
   settlement of all the charges against it, Freddie Mac offered to submit
   electronically formatted documents if OFHEO agreed that Freddie Mac would
   have to pay no more than $1 million in formatting costs. Production
   Agreement. OFHEO agreed in order to pursue the prosecution of the more
   important matter--undue compensation of former executive officers. Id.

   Our case law has addressed settlement agreements in the past. In both
   cases, the Commodity Futures Trading Commission (CFTC) and the Nuclear
   Regulatory Commission (NRC) sought to accept a charged entity's donation
   to an educational or research institution in settlement of the charges. 70
   Comp. Gen. 17 (1990); B-210210, Sept. 14, 1983. While both CFTC and NRC
   had settlement authority, the charged entities' donations were not related
   to the entity's offense and therefore exceeded the agencies' prosecutorial
   discretion. Id. The agreements resulted in de facto augmentations of the
   agencies' appropriations as the donations would financially assist the
   agencies' in achieving their statutory requirements to support the
   development of educational materials and research. Id.

   Unlike the above cases, we view OFHEO's actions as consistent with its
   prosecutorial discretion to correct an improper practice. See 12 U.S.C.
   sect. 4631; 12 C.F.R. sect. 1780.14. The settlement agreement is related
   to the administrative charges, as the formatted documents will enable
   OFHEO to continue pursuing charges against Freddie Mac's former executive
   officers. See 12 U.S.C. sections 4518, 4637. As a result of the settlement
   agreement, the costs of formatting are Freddie Mac's costs, not OFHEO's
   costs, and Freddie Mac's payment to Pitney, therefore, does not constitute
   a de facto augmentation of OFHEO's appropriation. Freddie Mac is dealing
   directly with Pitney to produce the formatted documents and paying Pitney
   directly. See Pitney Letter. Thus, unlike in the cases described above,
   Freddie Mac is not defraying an obligation of OFHEO, but is fulfilling
   Freddie Mac's obligation as agreed to in settling the charges brought
   against it by OFHEO. Although the Production Agreement states that
   "Freddie Mac shall pay a vendor (or vendors) hired by OFHEO," OFHEO has
   made clear to Pitney and Freddie Mac that there is no legal relationship
   between OFHEO and Pitney with respect to the formatting of, and the costs
   of formatting, the documents. See Pitney Letter.

   To the extent that some documents remain unformatted when Freddie Mac's
   costs reach $1 million, OFHEO will have to decide whether to format those
   documents. Id. The fact that OFHEO could decide to pay for this formatting
   does not alter the character of the first $1 million of formatting costs,
   which remains an obligation of Freddie Mac, not OFHEO. Freddie Mac agreed
   to pay up to $1 million as a limit on how many documents it would format
   for OFHEO. Felt Conversation.

   CONCLUSION

   Under the terms of the settlement agreement, Freddie Mac's payment of
   formatting costs does not constitute a de facto augmentation of OFHEO's
   appropriation. The settlement agreement represents a legitimate exercise
   of OFHEO's prosecutorial discretion. Despite the language of the
   settlement agreement ("Freddie Mac shall pay a vendor (or vendors) hired
   by OFHEO"), the costs of formatting, up to $1 million, are Freddie Mac's
   costs, not OFHEO's costs.

   /signed/

   Anthony H. Gamboa

   General Counsel

   ------------------------

   [1] Federal Housing Enterprises Financial Safety and Soundness Act of
   1992, Pub. L. No. 102-550, title XIII, sect. 1302, 106 Stat. 3672, 3941-42
   (Oct. 28, 1992) (codified at 12 U.S.C. sect. 4501); see B-302825, Dec. 22,
   2004 (describing OFHEO's oversight responsibility). OFHEO is an office
   within the Department of Housing and Urban Development. 12 U.S.C. sect.
   4511.

   [2] Government-Sponsored Enterprises (GSEs) are privately owned and
   operated federally chartered financial institutions that facilitate the
   flow of investment funds to specific economic sectors. GAO, A Glossary of
   Terms Used in the Federal Budget Process, GAO-05-734SP (Washington, D.C.:
   September 2005), at 59.

   [3] OFHEO officials have advised us that the Production Agreement settled
   a dispute between Freddie Mac and OFHEO with respect to the adequacy of
   Freddie Mac's discovery production. During the discovery phase of the
   litigation, Freddie Mac had objected to OFHEO's request that Freddie Mac
   submit documents in a certain format. Telephone Conversation with David A.
   Felt, Acting General Counsel, Office of General Counsel, Office of Federal
   Housing Enterprise Oversight, with Thomas H. Armstrong, Assistant General
   Counsel for Appropriations and Budgeting, Government Accountability
   Office, January 4, 2006 (hereinafter Felt Conversation). In settlement of
   that dispute, OFHEO and Freddie Mac agreed in the Production Agreement
   that Freddie Mac would incur up to $1 million in formatting costs. Id.