Response to Sen. Rudman's Report

Debra S. Katz, representing Roger Barnes, a former Fannie Mae accountant and whistlebower, sent a detailed letter to former Senator Warren Rudman demonstrating that the report commissioned by Fannie Mae, known as the Rudman Report, painted a false picture of the events that led to the investigation of accounting failures at the nation's second largest financial institution. Fannie Mae agreed to publish Barnes' response to the Rudman report on its website.

 Read the letter to former Senator Rudman [1,6Mb]

 Exhibits attached to the letter to former Senator Rudman [4,0Mb]

Re:    Response by Roger Barnes to Report by Paul, Weiss, Rifkind, Wharton & Garrison, LLP, on Accounting Irregularities at Fannie Mae

by Electronic Mail and Hand-Delivery
May 19, 2006

Dear Senator Rudman:

We represent Roger Barnes with respect to all matters pertaining to his former employment with the Federal National Mortgage Association ("Fannie Mae"), including the allegations he has made concerning the accounting improprieties at Fannie Mae. I am writing to note Mr. Barnes' serious objections to several aspects of the Report to the Special Review Committee of the Board of Directors of Fannie Mae by Paul, Weiss, Rifkind, Wharton & Garrison LLP, on Accounting Irregularities at Fannie Mae (Feb. 23, 2006) ("Report" or "Rudman Report") - most notably, to the skewed and stereotypical portrayal made of Mr. Barnes.1 Your investigators did not question Mr. Barnes about many of the issues concerning his employment and his allegations, which resulted in Fannie Mae's accounting restatement. Nor did your team give him an opportunity to comment on the Special Review Committee's findings prior to issuing the Report, despite the fact that the Report contains 336 references to him.2 In contrast, your team permitted Franklin Raines, former Chairman and Chief Executive Officer, to append a lengthy submission, which included a legal memorandum that branded Mr. Barnes a "disgruntled employee" and impugned his integrity.3 This report was made available on your firm's website and received massive press coverage, which unfortunately repeated many of the Company's most pernicious and unfair characterizations of Mr. Barnes.

Fannie Mae previously threatened Mr. Barnes with legal action for answering a New York Times reporter's question regarding the Office of Federal Housing Enterprise Oversight ("OFHEO") report. See Letter from Debra S. Katz to Juanita Crowley, dated September 28, 2004, attached and incorporated herein Exhibit 1. And despite all that is now in the public record about Mr. Barnes and his allegations, the Company continues to refuse to let Mr. Barnes speak publicly about his allegations or to refute the disparaging statements it has made about him. See Letter from Juanita Crowley to Debra Katz (September 29, 2004), attached and incorporated herein as Exhibit 2, and Letter from Amy Wigmore to Debra S. Katz (February 28, 2004), attached and incorporated herein as Exhibit 3.4 Apparently, Fannie Mae expects Mr. Barnes to sit idly and quietly by while the Company - and now the Rudman Report - disparage and malign him. This he is no longer willing to do.

Accordingly, I write to request that you add this letter to the Rudman Report as a Supplemental Appendix and that you make it available immediately on your firm's website and on the Fannie Mae website.

As discussed in more detail below, the Report's conclusions regarding Mr. Barnes and his central role in bringing Fannie Mae's accounting irregularities to light are flatly wrong and contradicted by the record in several key respects, most notably:

      (1)  the timing and motivation of Mr. Barnes' disclosures to Fannie Mae management about accounting irregularities at the Company;
      (2)  whether Mr. Barnes reported these issues to Fannie Mae's top management, specifically former Chief Executive Officer ("CEO") Franklin Raines and former Chief Finance Officer ("CFO") Tim Howard;
      (3)  Mr. Barnes' reporting of claims of race discrimination at Fannie Mae;
      (4)  whether Fannie Mae opted to settle Mr. Barnes' claims solely based on its perception of litigation risk, or instead was motivated in part by a desire to minimize disclosure of Mr. Barnes' allegations of accounting fraud to the Securities and Exchange Commission ("SEC") and to the public; and
      (5)  whether Fannie Mae management's explanations for the accounting irregularities disclosed by Mr. Barnes are worthy of credence.

This letter will address each of these issues in turn.

    I.  The Report's Description of the Timing and Motivations Behind Mr. Barnes' Reporting of His Concerns of Financial Mismanagement at Fannie Mae.

On September 17, 2004, the Office of Federal Housing Enterprise Oversight, following a comprehensive investigation, released a report regarding many of the financial irregularities Mr. Barnes alleged existed at Fannie Mae. The OFHEO report concluded that Mr. Barnes' allegations regarding financial mismanagement at Fannie Mae were justified, and that the Company had been engaged in numerous practices which did not comport with Generally Accepted Accounting Practices ("GAAP"). See Office of Federal Housing Enterprise Oversight, "Report of Findings to Date: Special Examination of Fannie Mae" (Sept. 17, 2004) ("OFHEO Report"), at 13, 23, 70. The Rudman Report similarly concluded that most of Mr. Barnes' allegations against Fannie Mae were correct - that some of his "underlying allegations of accounting problems ... had merit," that "the Company's response to Barnes's allegations were flawed in several respects," and that the Company's Controller Office suffered from an environment in which employees did not feel free to raise concerns about accounting issues. See Report at 28, 546, 563-64.

Despite these consistent findings that Mr. Barnes' disclosures were valid, and despite the fact that many of the accounting irregularities at issue might never have been exposed had it not been for Mr. Barnes' tenacity in identifying, documenting, reporting and pursuing these issues, the Report goes out of its way to impugn Mr. Barnes' integrity and to portray him as a disgruntled employee who raised insignificant and unsupported claims of race, gender, and age discrimination. Indeed, the Report takes great pains to catalogue and trivialize Mr. Barnes' concerns (a number of which he memorialized in private notes to himself)5 in a transparent attempt to paint him as a whiner, a chronic complainer, and a paranoid person. See Report at 548-51. One is left to wonder whether the maligning of Mr. Barnes was a deliberate attempt by your team to affect the perception of his disclosures regarding Fannie Mae's management's knowledge of the accounting improprieties that led to the Company's accounting restatement years before it (including Messrs. Raines and Tim Howard), acknowledged an awareness of these issues.

        A.  Mr. Barnes Held and Disclosed His Concerns Regarding Financial Improprieties at Fannie Mae Months and Years Before August 2003.

The Report does perhaps its greatest disservice to Mr. Barnes in its description of the timing and supposed motivation behind Mr. Barnes' whistleblowing disclosures to Fannie Mae management. The very first sentence of the section of the Report dealing with Mr. Barnes' allegations reads: "In August 2003, Roger Barnes, then a Manager in the Controller's Office, raised allegations of accounting impropriety at Fannie Mae, including potential noncompliance with FAS 91." See Report at 546 (emphasis added). The Report explains the timing of events as follows:

    During a meeting on the afternoon of July 29, 2003, Pennewell informed Barnes that Fannie Mae had promoted Juliane to Director [and that Mr. Barnes would not receive the same promotion]. As a result of this promotion Juliane became Barnes' immediate supervisor. Approximately one hour after this announcement, Barnes sent an e-mail to Sam Rajappa, Senior Vice President - Operations Risk (with responsibility for internal audit), requesting a confidential meeting 'regarding analysis and research [Barnes had] been conducting for a number of weeks.

Id at 551. The clear implication of the Report is that Mr. Barnes first raised concerns about financial improprieties at Fannie Mae in August 2003, and that his motivation for doing so was his displeasure with having been recently passed over for a desired promotion.

This was manifestly not the case and your Report has done a great disservice to Mr. Barnes in suggesting it was. As the documentary evidence - inexplicably omitted by the Report - amply demonstrates, Mr. Barnes held grave concerns about financial improprieties at Fannie Mae beginning in 2001; he raised these concerns with Fannie Mae managers on numerous occasions for at least 18 months before doing so again in August 2003; and he repeatedly recorded his belief that these improprieties were intentional and were fueled by Fannie Mae management's desire to manage income to achieve pre-determined results. For example:

  • On June 12, 2001, Mr. Barnes emailed Stephen Spivey, a Senior Developer in the Controller's Division, stating: "It was surprising to find that while I was out, management posted a $10 million On Tops entry to increase income. This, in the same month where we have already executed a factor change AND which also included an Inception To Date factor change component. This is doubly and totally contradictory to everything that management provided as indications to the auditors and others and leaves the company exposed to risk that some day, the convoluted explanations to confuse questioners (whether OFHEO, agencies, audit, etc.) will not hold muster. Per discussion with Dick this morning, the main reason was due to decisions made by management regarding callable debt, which affected margins. The Plan, which upper management operates under, led to the desire to report additional income to support The Plan and margin expectations. The problem of adjusting or creating income to match Plan concerns me. This means we are likely to see additional On Tops posted as additional income is needed in the next few months regardless of the correct and accurate numbers. I hope I am wrong." See R. Barnes email to S. Spivey (June 12, 2001) (emphasis added), attached hereto as Exhibit 4.
  • On November 6, 2001, Mr. Barnes stated in an email to Mr. Spivey: "As you know from yesterday's discussions, the AIMS led Factor change resulted in approximately a $100,000,000 increase to interest income. .. . Mary Lewers informed me this morning that senior management has decided to move forward with the factor change. Concern was sufficiently high that Mary indicated Jeff Julianne must be the one to provide the written explanation for why the results are acceptable and the files must include his explanation to provide 'cover.'. . . Per comments from Dick and Mary, no one has confidence in the results but they feel there is no capacity to turn back ... As you and I noted beforehand, the creative way the factors were being produced, the errors overlooked within the AIMS data, the number and types of exceptions, the differences from PDAMS factors, the other AIMS difficulties, etc. made it unlikely the factors would be reliable. That is one reason we insisted on executing first in Acceptance instead of Production, but as usual, we were overruled." See R. Barnes email to S. Spivey (Nov. 6, 2001) (emphasis added), attached hereto as Exhibit 5.
  • On November 15, 2001, Mr. Barnes emailed Mary Lewers regarding an ongoing review by Fannie Mae's Internal Audit Department. He stated that "[a] significant part of the discussion with Dick also included a detailed explanation and review of the entire factor change process. The same concern you and I have touched on in the past was a part of the meeting with Dick, namely, an adequate explanation for continued Inception To Date changes and On Top adjustments." See R. Barnes email to M. Lewers (Nov. 15, 2001).
  • On March 15, 2002, Mr. Barnes sent an email to Mr. Spivey, stating: "Even today at lunchtime, Dick [Stawarz] discussed with Marty Waugh, Todd Letellier and myself, the craziness involved with Guaranty fee reporting. He explained that management has been having trouble explaining why GF income is going down in recent months. He noted that management had informed Wallstreet and analysts of Plan (that GF would remain constant or increase). They are now under pressure to explain the contradiction of declining GF instead of increasing GF. . . . In order to accomplish what management WANTS, Dick stated they will flow what they what [sic] income to match Plan purely because we do not like the results. Dick even stated in the conversation that the math and source data is correct and there is no error. [H]e indicated Janet and Leanne would have to figure how to have Jeff Juliane manipulate the cashflow modeling to generate the desired factors. They just do not like the results being different from reported expectations and will change the results. I believe they are headed down another slippery road of creative accounting and questionable decision-making." See R. Barnes email to S. Spivey (Mar. 15, 2002) (emphasis added), attached hereto as Exhibit 6.
  • On June 13, 2002, Mr. Barnes stated in an email to Mr. Spivey, "I am still troubled by the impact I continue to see of the native factors generated by AIMS. Everyone keeps telling me that there is no problem. Yet the big correction due in June includes the $35 million caused by negative factors I located in the last month (April) factor change. Jeff, Dick, and Janet are not worried. I am being told Frank and Tim are happy with income where it is, as a result of the process used. Mary does not want to get involved at all and just does not respond to comment or email. I have passed along to the entire management chain the problem exists, but to no avail." See R. Barnes email to S. Spivey (June 13, 2002) (emphasis added), attached hereto as Exhibit 7.
  • On October 4, 2002, Mr. Barnes stated in an email to Mr. Spivey regarding a discussion about the use of negative amortization factors that "[t]he use of negative factors is the other sore point which I repeatedly attempted to discuss with management but was told specifically by Dick Stawarz to end any further research . .. After the strong statements from Dick on the negative factors, a recent instance where Janet [Pennewell] tried to suggest I had inappropriate contact with Internal Audit on the Realignment, etc. I am afraid of bringing this up again. Hopefully, as they see the impacts, a decision will be made to re-evaluate the entire AIM S processing for ways to correct obvious integrity issues." See R. Barnes email to S. Spivey (Oct. 4, 2002) (emphasis added), attached hereto as Exhibit 8.
  • On December 12, 2002, Mr. Barnes met with Mary Lewers, Jeff Julianne, Chris LeBel, as well as Paul Jackson and Mike Triau from Fannie Mae's Audit Department regarding his concerns about amortization figures. In an email he sent to himself on January 2, 2003, regarding this meeting, which was available to the drafters of the Report, he stated that "the net understatement of income was $20,328,965.30. Mary [Lewers] specifically stated that management does not want the income posted. There was concern that Audit may eventually disagree with use of the On Top Account but Controllers would wait to see. I was told to NOT MENTION NOR DISCUSS THE ON TOPS ACCOUNT UNLESS SPECIFICALLY ASKED BY INTERNAL AUDIT. IN ADDITION, I WAS REMINDED THAT LOWER LEVEL STAFF (SUCH AS LEVEL 4 ANALYSTS LIKE PAT WELLS) WERE NOT TO TALK WITH AUDIT UNDER ANY CIRCUMSTANCES ON ORDER FROMLEANNE SPENCER). It now is clear to me that the concerns I had all along on the proper treatment was correct. Management has decided NOT TO CORRECT the previous incorrect accounting even though the total is almost $200,000,000 in come with approximately $60,000,000 still unstated. Even with the note to executive management, no one seems to be making any changes nor concerned about correcting the previous years." See R. Barnes email to R. Barnes (Jan. 2, 2003) (emphasis in original), attached hereto as Exhibit 9.
  • On June 10, 2003, Mr. Barnes met with several representatives from Fannie Mae's Internal Audit Department - including the Director of the department, Paul Jackson - to explain his concerns regarding irregularities caused by Fannie Mae's inappropriate application of amortization data. Thereafter, Mr. Barnes drafted a memorandum to himself about the meeting. He stated that "I spent another 1.5 hours taking Audit through the complicated processes and many divergent pieces one needs to understand the entire Amortization process. I have done all I could to make sure issues of concern to me are clearly in front of the Audit Team. Hopefully, Audit will have the willingness to recommend changes. The result of my comments also led to Audit asking for additional information on the Factor Change process. I informed Leah [Malcom], to avoid trouble with my management she needed to send me a formal request for the additional data, I can respond to a request but cannot appear to be volunteering information to Audit. Janet [] inaccurately accused me of that last year when Martin Waugh was still here." See R. Barnes Memorandum (June 10, 2003), attached hereto as Exhibit 10.


The documentary evidence clearly demonstrates that Mr. Barnes' concerns about accounting improprieties at Fannie Mae were sincere, long-held, and conveyed on several occasions to his coworkers, managers, and the Fannie Mae Internal Audit department. Given this record, it is inexplicable why the Report would falsely suggest that he did not raise this issue until August 2003, and only then in response to a promotion decision.6 Unfortunately, the concerns that Mr. Barnes raised were either ignored or downplayed by his supervisors; he was told not to give assistance to any investigation performed by Fannie Mae's Internal Audit Department; and when he expressed his concerns to the Company's Audit Department which investigated these financial matters in July 2003, that Department then determined that there were no problems with Fannie Mae's accounting.

Mr. Barnes was motivated only by a strong desire to see Fannie Mae comply with the law, comply with generally accepted accounting principles, and to be honest with its investors and the public about its true financial situation. At great personal risk to his own career, Mr. Barnes tried repeatedly to have the Company live by these same principles. We request that you correct your report to add the facts and documentary evidence referenced above and to withdraw your report's conclusions that paint a false and misleading picture of Mr. Barnes' actions and motivation.

        B.  Characterization of Mr. Barnes' Counsel's Letter to Franklin Raines.

The Report grossly mischaracterizes the tenor of Mr. Barnes' allegations as conveyed by his counsel in a letter to CEO Franklin Raines dated October 16, 2003. Shockingly, the Report describes this letter as primarily asserting claims for race discrimination. The Report notes only in passing, in a half-sentence in the entire Report, that this letter related in any way to claims that Fannie Mae unlawfully retaliated against Mr. Barnes because of his opposition to serious accounting irregularities at the Company, in violation of the Sarbanes-Oxley Act of 2002. See Report at 567, n.2172. The Report does not discuss at all that, in this letter, Mr. Barnes described in great detail the financial improprieties that existed at Fannie Mae - the same financial improprieties which he had reported to Fannie Mae management on numerous prior occasions. See Letter from E. Kaplan to F. Raines (Oct. 16,2003) (emphasis added), attached and incorporated herein as Exhibit 11. And perhaps even more damning, despite your team's inclusion of thousands of pages of relevant materials in the appendices of the Report, you chose not to include the letter from Mr. Barnes' counsel, opting instead to grossly mischaracterize the letter's tenor and focus. Because you have done this, I will detail some of the relevant passages below. The letter stated the following:

    "During 2002, Mr. Barnes became increasingly concerned about serious flaws in the Company's Amortization Integration Modeling System ("AIMS") program, and several of the Controller's division's processes related to amortization. AIMS was originally designed to determine the speed at which the Company should amortize assets. Mr. Barnes suspected that the program was being used for income management purposes in violation of GAAP, and that as a result of its use, the Company was misstating its earnings. Beginning in late 1999, Mr. Barnes on several occasions - during meetings and in conversations with his managers - questioned why the AIMS system was being developed or used in ways that produced highly questionable results. For example, Mr. Barnes raised questions about repeated retroactive factor changes, why negative amortization was being allowed and factors sometimes exceeded 100%, and why AIMS was developed so that it did not retain audit trails for each modeling sensitivity run executed. When Mr. Barnes informally raised the issue with Ms. Pennewell, Ms. Lewers, Mr. Stawarz, and Mr. Juliane, they dismissed his concerns outright and told him that he did not understand the field well enough to offer an opinion, or indicated that they were working to accomplish the objectives that Ms. Spencer and Mr. Howard had provided them. After he raised these issues, they treated him in a hostile manner and excluded him from meetings where these processes were discussed.
    On September 23, 2002, Mr. Barnes sent a memorandum to you and to Tim Howard, Fannie Mae's Chief Financial Officer, regarding these serious financial improprieties. See Attachment A. Specifically, Mr. Barnes highlighted the following concerns: that reconciliation differences from systems were being input as future deferrals instead of the current periods income and expenses; that the Controller's division was intentionally limiting the AIMS system capabilities so that it would not provide audit trails for modeling; that the division had a practice of using negative factors in amortization and allowed amortization to exceed 100%; that the division routinely understated and overstated income; that the division managed income to meet the Company's desired objectives; and that the division used On Top entries in order to manage income and margin calculations. Mr. Barnes also indicated that there were serious problems with the amortization of purchased discount and premium.
    Neither you nor Mr. Howard, nor anyone from your staffs, investigated these concerns or took corrective action. Although Mr. Barnes had sent the memorandum to you as a Finance Division Manager, without providing his name, the information he provided was easily traceable to him. Further, as noted, Mr. Barnes had been raising similar concerns with his managers. It soon became apparent to Mr. Barnes that his managers were angered that he was questioning these practices, as he began to experience increased retaliation....
    In the meantime, Mr. Barnes continued to harbor concerns about Fannie Mae's accounting practices. A few months earlier, Mr. Barnes began a detailed study of the unamortized balances he had come across as part of his responsibility for 400 general ledger accounts. Over a period of weeks, Mr. Barnes painstakingly reviewed the Company's amortization transactions and found abundant evidence of the same kinds of problematic and unlawful financial practices he had identified in his September 23, 2002 memo to you. Mr. Barnes feared that his managers would ignore the results of his study and engage in further acts of retaliation against him. Therefore, on July 29, 2003, he requested a meeting with the Company's Internal Audit division.
    On the same day that Mr. Barnes requested a meeting with the Internal Audit division, Ms. Pennewell and Ms. Lewers informed him that the Company had promoted Mr. Juliane to Director, and that Mr. Barnes would report to him.... Ominously, Ms. Pennewell warned Mr. Barnes that, "if you're smart and you know what's good for your career, you'll get behind this decision." ...
    Further, section 806 of the Sarbanes Oxley Act makes it unlawful for any public company, or any officer or employee of such company to "discharge, demote, suspend, threaten, harass or in any other manner discriminate against an employee in the terms and conditions of employment" for engaging in activity protected by that Act. An employee who provides information that he reasonably believes constitutes accounting fraud to a supervisor or to a person or entity within the company that has the authority to investigate such fraud, is engaged in protected activity. Sarbanes-Oxley provides civil remedies for the injured employee, including backpay, compensatory damages, and attorney fees and costs. See 18 U.S.C. § 1514A (a)(1)©.
    As described above, beginning in 1999, Mr. Barnes informally raised concerns with his managers regarding accounting practices that he reasonably believed violated GAAP. When his managers ignored his concerns, Mr. Barnes appealed to you and Mr. Howard. However, even after Mr. Barnes sent his September 23, 2002 memorandum, the Controller's division continued to engage in the improper practices which resulted in the Company issuing incorrect financial statements. Thereafter, the retaliation against Mr. Barnes intensified, as his performance evaluation was lowered, his authority was diminished, and he was denied yet another promotion on July 29, 2003.
    Eventually, Mr. Barnes concluded that he had no other recourse but to contact the Internal Audit division, a step which his managers met with further threats and retaliation. On August 5, 2003, after they learned that Mr. Barnes had revealed his concerns to a different division, his managers convened a meeting with Mr. Barnes. During that meeting they expressed their anger that he had taken his concerns to the Internal Audit division, criticized the language he had used in describing the problems, and faulted him for allegedly "overstating the case."
    .  .  .
    Moreover, despite the fact that Mr. Barnes formally put Fannie Mae on notice of these serious violations of GAAP as early as September 2003, and again in early August, on August 14, 2003, you certified Fannie Mae's financial statements for June, which contained information generated by the Controller's division's flawed processes. See 18 U.S.C. § 1350(a)-(b)."

See Exhibit 11, passim (emphasis added).

As should be abundantly clear from the foregoing, the October 16, 2003, letter from Mr. Barnes' counsel to Mr. Raines put Mr. Raines and the Company on notice about the accounting irregularities and the management failures that led to the Company's forced restatement of earnings. This letter was not, as your Report falsely implies, an assertion of garden variety discrimination allegations by Mr. Barnes.

    II.  Mr. Barnes Reported These Accounting Irregularities to Fannie Mae's Top Management.

Mr. Barnes has testified, to OFHEO and in a statement to Congress on October 6, 2004, that, after reporting serious accounting irregularities to his supervisors in 2001 and 2002 without any corrective action being taken, he sent an anonymous letter reporting these same issues to Franklin Raines, the then CEO and Chairman of the Company, and Tim Howard, then CFO and Vice Chairman, on September 23, 2002. See Letter to F. Raines and T. Howard (Sept. 23, 2002), attached hereto as Exhibit 12. The Rudman Report investigators did not ask Mr. Barnes any questions about this letter. Instead, the Report impugns Mr. Barnes' integrity by raising questions about whether his testimony regarding this subject was false, suggesting without basis the possibility that he could have written the letter months later and falsely filled in a September 2002 date.

Such a suggestion is outrageous and is directly contradicted by the documentary evidence, which was omitted from discussion in the Report. First, the Report states that a search of Mr. Barnes' computer determined that "the letter was not found on Barnes's work computer" hard drive. See Report at 568. The Report does not discuss the obvious possibilities that the letter was written on another computer, such as Mr. Barnes' home computer, or that Mr. Barnes could have written the letter and then printed it out without saving it to the hard drive - as one attempting to send an anonymous letter might be expected to do - as actually occurred in this case. Your investigators never asked Mr. Barnes about this issue.

The written record clearly gives credence to Mr. Barnes' assertion that he wrote and sent his letter to Mr. Raines and Mr. Howard as the letter is dated.7 Mr. Barnes referenced and discussed his letter to Raines and Howard in multiple time-stamped memoranda, emails, and other documents which he drafted in the weeks and months immediately following September 23, 2002. For example, on October 5, 2002, Mr. Barnes sent an email to a coworker stating that he had recently informed "senior management, in writing, that some to these issues require careful re-evaluation and review." See R. Barnes email (Oct. 5, 2002), attached hereto as Exhibit 13. In a memorandum he drafted in April 2003, Mr. Barnes was even more explicit about this, stating:

    I sent letters to Frank Raines and Tim Howard last September regarding questionable decision-making and informing them of areas needing investigations but have seen no actions. I cannot repeat that now for definite fear of retaliation since I have to think of family impact, career, etc. It seems executive management is aware and agrees with the decisions being made which I find troubling... There are billions of dollars in balances subject to amortization and this again points to the internal practice of "managing income" to generate desired results instead of accurate and verifiable results. I was shocked. This is another of the items I mentioned in my memo to Frank Raines and Tim Howard around September 2002.

See R. Barnes Memorandum to File (Apr. 2, 2003) (emphasis added), attached hereto as Exhibit 14. The next month, Mr. Barnes again stated in a memorandum that "the memo to the Office Of The Chairman last fall also seems to have had little effect." See R. Barnes Memorandum to File (May 29, 2003), attached hereto as Exhibit 15.

All of these documents were saved on Mr. Barnes' computer, were accessible to investigators, and almost certainly would have been reviewed by the drafters of the Report. It is especially outrageous, therefore, that the Report would have presented any evidence calling into doubt the fact that Mr. Barnes sent Mr. Raines and Mr. Howard his letter in September 2002, without also presenting the clear and compelling evidence that existed indicating that the letter was, in fact, sent at that time.

The Report goes on to state that "Fannie Mae attorneys and executives believed that Barnes did not send the letter as he claimed because it was not found in the correspondence logs of the Office of the Chairman." See Report at 568. The Report does not indicate whether its drafters independently confirmed that Mr. Barnes' letter was not, in fact, found on the correspondence logs, or whether this was based solely on the testimony of Fannie Mae executives (and this section of the Report does not appear to cite to the actual correspondence logs). While Mr. Barnes is not in the position to be able to confirm whether his letter was in fact received and read by Mr. Raines and Mr. Howard, the obvious question, which was not addressed by the Report, is this: Does it seem suspicious that the one letter which would clearly demonstrate that the CEO and CFO of Fannie Mae were put on notice of the accounting improprieties of the Company more than a year before the matter was formally investigated is the very same letter which appears not to have been entered on the correspondence logs?

Finally, during the investigations into this matter, Mr. Barnes specifically informed Report investigators that some of his allegations regarding FAS 91 accounting improprieties at the Company had previously been disclosed to Daniel Mudd, the former COO and current CEO of the Company, by Michelle Skinner, another Director in the Controller's Division, in 2003. According to Mr. Barnes' testimony regarding Ms. Skinner's statements to him, Mr. Mudd informed her that he had determined that there was no cause for concern regarding accounting issues at Fannie Mae. Despite the obvious importance of this information in the Report's evaluation of whether or not top Fannie Mae management - including the current CEO - had been informed about these accounting irregularities, it does not appear that the drafters of the Report interviewed Ms. Skinner, and her name is not referenced a even once in the Report.

    III.  Mr. Barnes Did Not Make a Complaint of Race Discrimination Until After the Company Had Initiated a Complaint On His Behalf, and Against His Will.

It is unclear what, if anything, the informal complaints of discrimination by Mr. Barnes have to do with the accounting issues at Fannie Mae, especially considering that Mr. Barnes' complaints of discrimination were not an area of inquiry for the Report and were not, in fact, independently investigated by the Report. See Report at 28, 566-67. Despite this, the Report notes in passing that an internal investigation by Fannie Mae's Office of Corporate Justice ("OCJ") determined that there was no evidence of discrimination against Mr. Barnes.8 See Report at 564, 566-67. Without any commentary about this determination by OCJ, or even any hint as to why it was discussed in the Report at all, the inevitable impression one gains from reading this portion of the Report is that Mr. Barnes' allegations of discrimination against Fannie Mae were not justified and that Mr. Barnes made false accusations against the Company because he was a disgruntled employee.

Moreover, despite numerous documents to the contrary (none of them cited or referred to), the Report takes pains to create the wrong impression about how Mr. Barnes came to raise his allegations of unlawful discrimination against Fannie Mae. The Report states:

    "Early on in the [Office of Corporate Compliance] investigation (on or about August 8), Barnes told O'Connor and House that Controller's Office management repeatedly had discriminated against him on the basis of race and gender. House referred this complaint to Alan Tanenbaum of the Office of Corporate Justice ("OCJ"). Tanenbaum and his staff commenced an investigation into Barnes's discrimination allegations...."

See Report at 564. This phrasing suggests that Mr. Barnes affirmatively raised allegations of discrimination and actively pursued a discrimination complaint. This, of course, is absolutely untrue. To the contrary, although Mr. Barnes at times opposed the conduct of his supervisors which he believed constituted unlawful discrimination, he did not file a complaint of discrimination with Fannie Mae's OCJ office, or any other office at Fannie Mae, during the many years that he experienced this mistreatment. He did not do so because those events were humiliating to him, and because he correctly concluded - as your Report aptly shows - that his allegations of discrimination would be used to discredit him, impugn his motives, and overshadow his very serious reports of financial improprieties at Fannie Mae.9

The facts are as follows. In early August, 2003, Mr. Barnes spoke with Deborah House of Fannie Mae's Office of Corporate Compliance ("OCC") and Karl Chen of OCJ regarding the accounting concerns that he had raised. When asked whether he believed that the environment in the Controller's Office was conducive to employees coming forward with accounting concerns, Mr. Barnes told them that it was not. He elaborated that he did not believe employees felt that they could come forward with complaints about mistreatment, and, as an example, discussed his own experience with discrimination at Fannie Mae. Mr. Barnes then emailed Fannie Mae's OCC office, stating:

    "I have agreed to meet with you (at your request) regarding discussions arising purely out of my recent concerns about certain amortization accounting policies being in compliance with Generally Accepted Accounted [sic] Principles (GAAP)... Please understand that I, in no way am authorizing an investigation nor informal complaint nor formal complaint to be lodged or be interpreted as being lodged, at this time, on my behalf."

See Email from R. Barnes to P. O'Connor (Aug. 8, 2003), attached hereto as Exhibit 16. Despite this, Fannie Mae's OCC office forwarded Mr. Barnes' allegations of discrimination to its OCJ office. The OCJ office then informed Mr. Barnes that, despite his desire not to file a discrimination complaint, "work environment concerns raising the possibility of discrimination or harassment - once brought to the OCJ's attention as company policy requires - might become the subject of an OCJ investigation even though you have not filed an OCJ complaint." See Email from A. Tanenbaum to R. Barnes ( Aug. 13, 2003), attached hereto as Exhibit 17. It was only after being informed that OCJ would investigate as a matter of course his comments regarding discrimination at Fannie Mae, made solely in the context of the investigation into Fannie Mae's financial improprieties, that Mr. Barnes agreed to participate in such an investigation. Indeed, Mr. Barnes was told that his failure to participate in such an investigation could result in disciplinary action taken against him. Although Mr. Barnes experienced discriminatory treatment based on his race at Fannie Mae, he did not raise these issues until forced to do so by Fannie Mae.

    IV.  Fannie Mae's Motivation To Enter Into a Settlement Agreement With Mr. Barnes.

The Report concluded that "the Company's decision to reach a settlement of threatened litigation by Barnes was based on an appropriate analysis of the Company's litigation risk. It was not intended to conceal misconduct by Fannie Mae or its employees or officers." Report at 547. While the Report indicates that its drafters reviewed privileged materials relating to the settlement decision and discussed this matter with Fannie Mae's attorneys, it does not reveal the basis for this conclusion. That the Report reached this conclusion seems especially suspect, given the tremendous evidence, not discussed by the Report, that one of Fannie Mae's primary goals in entering into a settlement agreement with Mr. Barnes was to attempt to conceal Mr. Barnes' serious allegations regarding misconduct by Fannie Mae and its officers and to demand the return of documents Mr. Barnes had amassed which gave proof to his allegations that Fannie Mae was playing fast and loose with its accounting practices to manage income.

First, the timing of this settlement leads to only one conclusion: that it was entered into by Fannie Mae to cover up its wrongdoing. When Mr. Barnes' counsel first wrote to Mr. Raines on October 16, 2003, to advise Fannie Mae of his legal claims against the Company, he detailed his allegations of accounting improprieties at Fannie Mae and noted that the statute of limitations on his Sarbanes-Oxley claims was set to expire in less than two weeks, on October 27, 2003. See Letter from E. Kaplan to F. Raines (Oct. 16, 2003), at FMSE 24675.10

Mr. Barnes indicated that if the parties were not able to reach a negotiated resolution of his claims, he would have no choice but to file a complaint with the Department of Labor by that date so as to preserve his claims. See id. Such a filing would automatically be shared with the Securities and Exchange Commission ("SEC") in order to allow that agency the opportunity to conduct its own investigation into the financial improprieties disclosed. See 29 C.F.R. § 1980.1034(a). Although an investigation into such serious and complicated allegations, followed by settlement negotiation, would typically take months, following the receipt of Mr. Barnes' letter, Fannie Mae and its counsel endeavored to settle his claims on an extremely expedited schedule. On October 22, 2003, attorneys for the two sides met to discuss the matter, at which point Mr. Barnes' attorneys provided the Company's attorneys with a Draft Sarbanes Oxley Complaint they intended to file with the Department of Labor on October 27, 2003, if the matter was not resolved by that time. Fannie Mae ultimately conveyed a final settlement offer to Mr. Barnes at approximately 5:00 p.m. on October 26, 2003, the evening before Mr. Barnes' complaint was to be filed.

The Rudman Report appears to have ignored the obvious interpretation of these events: that Fannie Mae was extremely motivated to settle Mr. Barnes' claims before he filed them with the Department of Labor, which would prompt a review and potential investigation by the SEC. It does not seem plausible to believe that Fannie Mae fully investigated Mr. Barnes' claims - which alleged misconduct by dozens of Fannie Mae officers and top management and involved extremely complex accounting issues - in only one week after having been notified of them, and that the timing of Fannie Mae's efforts to settle Mr. Barnes' claims was purely coincidental.

Second, in concluding that Fannie Mae was not attempting to silence Mr. Barnes, the Report places great weight on its finding that "the settlement specifically required Barnes to cooperate with any internal, OFHEO, or other regulatory investigation into Fannie Mae." See Report at 568. During the negotiations that led to this agreement, however, it was primarily Mr. Barnes and his attorneys, rather than Fannie Mae, that insisted on such a provision. Indeed, in Mr. Barnes' initial demand letter to Mr. Raines he stated: "In addition, Fannie Mae must commit to taking corrective action to resolve the financial improprieties Mr. Barnes has identified." See Letter from E. Kaplan to F. Raines (Oct. 16, 2003), at FMSE 24675.

The language of the Settlement Agreement demanded by Fannie Mae, however, seems designed to accomplish the opposite result. The confidentiality provision of the settlement agreement specifically required Mr. Barnes to agree that "he will keep confidential and not disclose to any person or entity [aside from limited exceptions]... the allegations that he has raised ...." See Settlement Agreement between R. Barnes and Fannie Mae (Nov. 3, 2003) at ¶ 14, attached hereto as Exhibit 18. Were Mr. Barnes found to have publicly disclosed "the allegations that he has raised," Fannie Mae would require that he pay an extremely large liquidated damages penalty of $400,000. See id. The intent of this provision clearly seems to have been to attempt to silence Mr. Barnes from affirmatively disclosing or discussing his allegations outside the context of an already-initiated formal investigation by Fannie Mae or a government regulator, for which he would be subpoenaed and therefore legally compelled to testify in any event. To this date, and in spite of the tremendous public attention brought to bear on this issue, the Company has refused to relieve Mr. Barnes of his confidentiality obligation. See Exhibits 2 and 3.

Interestingly, the Settlement Agreement also states that "the Employee acknowledges that the Company examined all questions and concerns raised by the Employee about accounting practices, has consulted with its auditor regarding the Employee's questions and concerns, and that the Company has concluded that the accounting practices are in compliance with GAAP." See Exhibit 18, ¶ 8. As of the date of the parties' settlement, therefore, the Company and its legal representatives seemed determined to put forth the conclusion that the Company had done nothing wrong and that no corrective measures were required. Nearly every investigation completed since that time, including this Report, however, has reached exactly the opposite conclusion.

Third, while the settlement allowed Mr. Barnes to speak with investigators, in actual practice the Company took great pains to distance Mr. Barnes from ongoing investigations and to hamper his ability to assist OFHEO, the SEC, and others in their investigations. In October 2003, the Company notified the employees of its Controller's Office of an upcoming audit by OFHEO and of the need to preserve and retain all documents that might relate to that audit. Fannie Mae's legal department emailed almost all of the employees of the Controller's Office, nearly 50 in all, regarding this upcoming audit, but inexplicably excluded Mr. Barnes from this distribution list. See Email from D. Milton to employees of Controller's Office (Oct. 13, 2003), attached hereto as Exhibit 19. Fannie Mae also excluded Mr. Barnes from the team preparing for this audit, even though, as an amortization accounting expert and as an employee who the Company knew had specific concerns regarding accounting issues which would be reviewed by OFHEO's audit, he would represent an obvious choice for such a team. The Company's deliberate exclusion of Mr. Barnes from contact with OFHEO prompted him to seek counsel in the first place, and to insist on his right to do so following his separation from the Company. As even a cursory review of the communications exchanged between counsel will confirm, Mr. Barnes insisted upon his ability to communicate with OFHEO about his concerns.

The Company required, as a condition of settlement, that Mr. Barnes return documents which he maintained detailing his concerns about the Company's accounting improprieties. See Settlement Agreement, Exhibit 18, at ¶ 10. This begs the obvious question - if the Company was truly committed to Mr. Barnes being able to freely communicate with OFHEO and other investigators, why would it have required him to return the documents that would enable him to fully convey the concerns he had raised? On November 11, 2003, Mr. Barnes returned to Fannie Mae a box of confidential documents, contained in four binders and three large envelopes. In a letter sent to Fannie Mae's counsel on that date, counsel for Mr. Barnes indicated that "[t]he documents being returned today are relevant to the upcoming audit that will be conducted by [OFHEO] and Mr. Barnes would need to make reference to them in order to respond to any questions OFHEO might raise with him. It is crucial, therefore, that Fannie Mae properly preserve these documents, in their existing form, and that it provide them to OFHEO in connection with its audit." See Letter from E. Kaplan to J. Crowley (Nov. 11, 2003), attached hereto as Exhibit 20. Rather than maintaining these documents in the form in which he provided them to the Company, Mr. Barnes' documents were - according to OFHEO representatives - provided in a disorganized, piecemeal, and incomplete manner. Indeed, when Mr. Barnes was asked by OFHEO to provide details of his allegations, Fannie Mae failed to produce his documents in a recognizable or organized manner, thus impeding his ability to answer the Company's regulator's questions about Fannie Mae's accounting practices.

Fourth, by letter from his counsel dated November 11, 2003, Mr. Barnes . returned to Fannie Mae all documents claimed by Fannie Mae to be the property of Fannie Mae, as well as other documents related to Mr. Barnes' claims which might be considered confidential. One of the many documents which Mr. Barnes returned to Fannie Mae was a copy of his draft Sarbanes-Oxley complaint, that had been prepared to file with the Department of Labor and which had been provided to Fannie Mae's counsel during the parties' October 22, 2003, settlement meeting. Strangely, soon afterward, counsel for Fannie Mae returned this draft complaint to counsel for Mr. Barnes, claiming that it was not a Fannie Mae document, and stating that "I am returning that document to you by messenger without retaining a copy with the expectation that you will retain it and treat it in accordance with Paragraph 14 of the Settlement Agreement" - i.e., the Settlement Agreement's confidentiality provision, which prohibited Mr. Barnes from speaking publicly about "the allegations he has raised." See Letter from J. Crowley to D. Katz (Nov. 17, 2003), attached hereto as Exhibit 21. There seems to be little reason for Fannie Mae to have returned this document to Mr. Barnes "without retaining a copy" except to avoid having to produce his detailed Sarbanes-Oxley complaint to OFHEO investigators. Similarly, there seems to be little reason for Fannie Mae's counsel to have demanded that the document, which by their own admission was not a confidential Fannie Mae document, be kept strictly confidential if Fannie Mae truly wished and expected that Mr. Barnes could speak freely about his allegations, as the Report concluded.

Finally, as has been publicly reported in various media accounts, Fannie Mae's monetary payment to Mr. Barnes to settle his legal claims was quite substantial. If, as the Rudman Report seems to conclude, Mr. Barnes' discrimination claims lacked merit (and therefore represented a low litigation risk), and if Fannie Mae truly believed that Mr. Barnes would continue to be given the same opportunities to speak publicly about his allegations, what exactly was Fannie Mae acquiring in exchange for its settlement payment? If Fannie Mae was not hoping to conceal evidence of its wrongdoing, then why would it make such a sizeable payment to Mr. Barnes?

At this point, Fannie Mae's top management, including Mr. Raines and Mr. Howard, were certainly aware of this sizeable settlement payment to Mr. Barnes and the serious financial improprieties at the Company which had given rise to the course of events that had led to this settlement. Nevertheless, rather than engage in the reasonable and logical response - redouble the Company's efforts to uncover and ameliorate any such improprieties - Company management instead continued to insist to OFHEO's investigators that Fannie Mae had done nothing wrong.

    V.  The Report's Acceptance of Fannie Mae Management's Explanations of the Accounting Irregularities Disclosed By Mr. Barnes.

The value of Mr. Barnes' longstanding attempts to ensure the accuracy of Fannie Mae's accounting procedures - first from within the Company and, only after the Company repeatedly indicated that it did not intend to take his concerns seriously, from outside the Company, through OFHEO, the SEC, and Congress - cannot be overstated. Thanks in no small part to Mr. Barnes' efforts, Fannie Mae today has taken major strides to improve the reporting culture at the Company; has instituted safeguards to help ensure that future accounting and auditing improprieties do not occur; has provided its investors and the public with a much more accurate picture of the Company's financial position than it had prior to 2003; and has a new Chief Executive Officer ("CEO"), and other top leadership that has pledged to carry on these important goals.

The overall conclusion of the Rudman Report regarding the alleged financial improprieties of Fannie Mae was clear and unequivocal: "[M]anagement's accounting practices in virtually all of the areas we reviewed were not consistent with GAAP, and, in many instances, management was aware of the departures from GAAP." See Report at 4. Notably, with respect to some of the specific issues raised by Mr. Barnes, however, the Report exonerates the Company, and supports these conclusions in cursory fashion. Several of the more glaring examples concerning factor anomalies and manual factor changes are discussed below.

        A.  Factor Anomalies:

Mr. Barnes alleged that Fannie Mae had improperly used amortization factors that were either greater than 100% or negative (i.e., less than 0%), and that as a result the Company's financial statements were not in compliance with GAAP. Fannie Mae's explanation for this curious accounting is that the factor anomalies were simply the result of placing premiums and discounts in the same "buckets" in its amortization software, i.e., aggregating premiums and discounts. See Report at 560. The Rudman Report "conclude[s] that management's explanation as to why cumulative factors are sometimes above 100 percent or below zero is reasonable," id. at 561 - without any further analysis about whether this practice was in any way problematic.

OFHEO's analysis went much deeper:

    "The AIMS system produces results that are illogical or that represent mathematical anomalies. These illogical or anomalous conditions include negative amortization factors and amortization factors greater than one.... Management has asserted that such illogical and anomalous results derived from the aggregation of premiums and discounts as well as REMIC tranches with dissimilar characteristics, but that they did not translate into inaccurate financial statements. This explanation however implies, at a minimum, the presence of other potentially deeper issues regarding the aggregation of deferred price adjustments into incorrect modeling groups. In addition, it raises the question as to why edit checks and error reports on data processes did not prevent the illogical results and anomalies from occurring, or why the Enterprise was not able to sufficiently flag their existence or report their breadth.
    The improper aggregation of premiums and discounts and the illogical results and anomalies themselves posed other internal control concerns because such issues made it virtually impossible to correlate the amortization results to the actual performance of the underlying loans/securities. OFHEO believes that management would have been unable to effect such a review. In addition, the full extent to which illogical results and anomalies did, in fact, cause inaccurate financial reporting is a focus of OFHEO's continuing examination.
    Our examination has concluded that these factor anomalies were caused primarily by a lack of clear delineation of responsibility by management of the Enterprise. A breakdown clearly occurred between the business unit owners of the source systems and the personnel in the Controller's Department responsible for calculating amortization. Because neither party took responsibility for the quality of the data, amortization errors occurred.
    .  .  .
    The question of whether such anomalies represented errors did not get addressed until the concerns raised by Mr. Barnes precipitated the Office of Auditing Amortization Investigation. OFHEO has concluded that factor anomalies, in certain cases, do in fact represent errors and may also constitute departures from GAAP.
    .  .  .
    The criteria for determining whether securities can be pooled into a group are prescribed by Question 51 to the Q&A on FAS 91 ... From an accounting control perspective, the pooling of securities with dissimilar characteristics would lead to anomalies in the factor array. This could be easily assessed by a comparison of the performance of the underlying collateral to the amount of amortization recorded. As mentioned above, a number of factor anomalies existed which clearly indicated that the guidance in Q&A item 51 was not being followed appropriately."

See OFHEO Report at 69-70, 72 (emphasis in original).

The comprehensive OFHEO Report had thus already concluded in September 2004 that the factor anomalies used by Fannie Mae were "illogical," "anomalous," "improper," "errors," and "may also constitute departures from GAAP"; that Fannie Mae's explanation of its use of "bucketing" was improper because it indicated the pooling of securities with dissimilar characteristics, itself a violation of FAS 91; and that Fannie Mae's justification raised further issues with respect to the Company's failure to generate adequate error reports, clearly delineate management responsibilities, and to address these issues promptly and effectively once they were raised by Mr. Barnes. See id. The drafters of the Rudman Report had the benefit of the OFHEO Report in investigating these matters. It is therefore inexplicable why the Rudman Report would simply accept the explanation of Fannie Mae's management regarding these factor anomalies, without any further analysis, despite the fact that previous reviews of the matter had expressly found that such factor anomalies were improper and represented violations of GAAP, as Mr. Barnes had repeatedly reported to Fannie Mae management.

        B.  Manual Factor Changes:

Similarly, Mr. Barnes raised concerns that the Company used "manual factor changes," including one instance of $6.5 million, to "correct" amortization data to numbers not supported by the iPDI system. As with the factor anomalies, the Report accepts the explanation of Fannie Mae management that this change was performed simply so that the data from the Company's iPDI system could be reconciled with the data from the ostensibly more accurate AIMS system. See Report at 561. The Report further "accepted management's assessment that the amount involved in the factor change" - $6.5 million - "was immaterial." Id.

The Report misses the larger picture here - that this and numerous other manual factor changes were used to "adjust" the Company's income in whatever way was desired by Company management. In theory, Fannie Mae could have attempted to justify an amortization discrepancy of $12 million, or $65 million, or possibly even $100 million as "immaterial," given the large overall size of the Company's budget, but the fundamental question would remain: Was the amortization based on the desire of Fannie Mae management to support pre-determined earnings results, as opposed to mathematically verifiable data? The Report's acceptance of management's "materiality" and "system inadequacies" explanations for the manual factor changes is especially curious considering that, elsewhere in the Report, the Report expressly criticizes these explanations as pretextual: "Management often justified departures from GAAP based upon materiality assessments which were not comprehensive [and] the need to accommodate systems inadequacies ..." Id. at 4.

The $6.5 million manual factor change is important not only in and of itself, but also because it represented the tip of the iceberg in terms of the Company's use of "creative" accounting. Importantly, this is precisely what OFHEO's investigation concluded:

    The second entry, dated January 10, 2004 was for an additional $6.5 million. Such activity, on its face, may not raise much attention. But in retrospect, it seems suspect.... As of the date of this report, we have received no specific evidence that such adjustments were made to intentionally match the analysts' estimates. However, the existence of multiple sensitivity runs, the timing of their production and the small amounts of on-top journal entries recorded suggests that results were generated to achieve desired financial results.

See OFHEO Report at 47-48.

Moreover, whereas the Rudman Report accepts Fannie Mae management's explanation of this factor change, OFHEO concluded that, even were this explanation to be believed, Fannie Mae still violated its professional duties:

    Based on the information the OA team received from the modeling group during their investigation the OA team was not able to come to a conclusion about whether the factor change causing the $6.5 million adjustment to amortization income was in fact a valid adjustment. The procedures performed by the OA team consisted of reviewing the supporting documentation provided by the modeling group and, despite several requests, conclusive documentation was not provided by the modeling group. It was at precisely that point that the OA concluded its investigation. The lack of diligence on behalf of the OA in the matter of the manual factor change is inconsistent with their responsibility to exercise due professional care.

Id. at 91 (emphasis in original).11 Despite this abundant and pre-existing evidence from OFHEO's investigation, and despite the reported expenditure of more than $70 million for the Report, the Report's analysis of this accounting irregularity essentially adopts Fannie Mae management's explanation without significant further analysis of the issue.

    VI.  Conclusion.

In sum, we disagree strongly with many of the conclusions reached by the Report, particularly as they relate to the characterization of Mr. Barnes and his reporting of the accounting irregularities at Fannie Mae. We further believe that the information provided above is crucial to a complete and accurate understanding of the events analyzed by the Report. We request that you release this letter via the Paul Weiss website, and in the same manner that you released the Report. We will deem your refusal to do so to be a deliberate attempt by Fannie Mae and its Board to portray Mr. Barnes in a false light and to provide an incomplete and misleading account of the accounting issues at Fannie Mae.


Debra S. Katz
Katz, Marshall & Banks, LLP
Attorney for Roger Barnes


cc: Mr. Roger Barnes
Alex Young K. Oh, Esquire
Robert P. Parker, Esquire
Daniel J. Kramer, Esquire
Acting Director James Lockhart III, Acting Director, OFHEO
Honorable Richard Baker, House Committee on Financial Services

1  As discussed in further detail below, the Report suggests that Mr. Barnes raised unsubstantiated claims of discrimination against Fannie Mae and then made his allegations regarding accounting improprieties at the Company only after he became upset that he had been passed over for a desired promotion. See Defendant Fannie Mae's Memorandum of Law in Support of its Motion to Dismiss the Consolidated Class Action Complaint, appended to Letter from K. Downey to W. Rudman (Oct. 20, 2005), Supplemental Appendix to Report at 1351. Not only is such a characterization refuted by the record evidence, but it plays into the worst stereotypes of whistleblowers as nothing more than disgruntled employees. See, e.g., Kathleen Day, "Whistle-Stop Campaigns: Some Firms Are Trying to Limit Protection of Workers Who Expose Wrongdoing," Washington Post. April 23, 2006, p. Fl; Todd Wilkinson, "Whistleblowers," SEJ Journal, Winter 1999, p. 17. By disparaging conscientious employees, like Mr. Barnes, who show the moral fortitude to raise concerns about corporate misconduct, your Report will contribute to an environment in which employees are fearful of coming forward, and make corporate scandals of the magnitude we have seen in recent years at Enron, MCI and Fannie Mae more likely to occur.

2  Only Franklin Raines, the Company's Chief Executive Officer, was mentioned more times, with 526 references.

3  See Letter from K. Downey to W. Rudman (Oct. 20,2005), attached as Supplemental Appendix to Report at 1351.

4  By letter to Fannie Mae's counsel dated September 28, 2004 (Exhibit 1), I wrote:
"As you are aware, on September 17, 2004, The Office of Federal Housing Enterprise Oversight issued a Report of Findings to Date: Special Examination of Fannie Mae - a report that has widely been quoted in the press and is available in its entirety on the internet. Given this climate, we believe that paragraph 14 of the Settlement Agreement should be modified to delete the phrase 'the allegations that he has raised' from the list of matters that cannot be disclosed." The following day, counsel for Fannie Mae wrote stating: "Fannie Mae declines your request..." See Exhibit 2.

5  The Report contains more than three pages of detailed examples of the private memoranda and email Mr. Barnes wrote to himself regarding concerns about his treatment in the workplace, many of them simply noting somewhat minor events (see Report at 548-51) - even though Mr. Barnes' complaints of discrimination were expressly not a subject of the Report's investigation. See Report at 28, 566-67. In contrast, the Report does not discuss in any way or even reference the multiple memoranda and emails he sent to himself and coworkers demonstrating that he held his beliefs regarding the Company's serious accounting improprieties for at least two years preceding August 2003, and that he disclosed his concerns to Company management at least a year before August 2003 (see infra, at pp. 15-18). This issue, was of course, the ostensible focus of the Report.

6  Even the course of events in late July and early August 2003 does not support this conclusion. Mr. Barnes had begun gathering evidence regarding the amortization issues in May or June 2003. On July 18, 2003, Mr. Barnes updated Ms. Lewers on the detailed analysis he had conducted for the past several months. On July 25, 2003, Mr. Barnes then began attempting to reach Sam Rajappa of the Company's Internal Audit Department to report his findings, but Mr. Rajappa was off site at the time and unavailable. It was not until July 29, 2003, after he had been gathering evidence regarding accounting improprieties for several months and had begun to discuss this evidence with Fannie Mae managers (and months and years after his previous disclosures regarding the matter to several others managers at the Company) that Mr. Barnes was informed that he had not received the referenced promotion. If anything, therefore, it was Mr. Barnes' protected disclosures regarding financial improprieties at the Company that played a role in his not receiving the referenced promotion, not the other way around.

7  In fact, when describing the allegations of Mr. Barnes which were subsequently investigated by the drafters of the Report, the Report cites to Mr. Barnes' letter to Mr. Raines and Mr. Howard. See Report at 559, n.2134.

8  The Report fails to note that OCJ finds no discrimination in the vast majority of cases. It is not in the least bit surprising, of course, that a company's own internal investigation would fail to find discrimination against a complaining employee. It is even less surprising that this conclusion would be reached by the same company whose multiple internal investigations into the company's financial improprieties, despite overwhelming and mounting evidence to the contrary, also concluded repeatedly that no financial wrongdoing had taken place.

9  Indeed - as your Report failed to note - even as the Company refused to promote Mr. Barnes, undermined his authority and denied him professional opportunities, it used Mr. Barnes in its efforts to create a public image as an equal opportunity employer. In the Summer of 2001, Fannie Mae's Corporate Communications department decided to use a photograph of Mr. Barnes in the Company's public and employee relations materials. As a result, Mr. Barnes' photograph appeared on Fannie Mae's website and recruitment brochures, as well as on internal Company documents, until the time of his separation from the Company, when he demanded that it be removed.

10  Your Report inaccurately portrays the demand letter from Mr. Barnes' counsel as almost exclusively asserting claims of race discrimination and omits the fact that this letter unequivocally detailed Mr. Barnes' allegations of accounting improprieties and the Company's violations of the Sarbanes-Oxley Act of 2002. We urge that it be released to the public.

11  With respect to the third FAS 91-related accounting issue reviewed by the Rudman Report, "CPR Edits," the Report concludes that Fannie Mae's handling of this issue had been improper. See Report at 562-63.