After the U.S. government snatched Fannie Mae from the brink of collapse in 2008 and forced out its chief executive officer, Daniel H. Mudd, he headed for the river.
The 6-foot-4-inch former Marine, a onetime Olympic rowing prospect, buzzed his receding gray hair into military style and took a boat out on the Potomac — gathering strength to rebuild his career, according to his friends. Within months, he put his $9.5 million Washington mansion up for sale and took the helm at a New York hedge fund, Fortress Investment Group.
Mudd didn't really leave Fannie Mae behind. U.S. regulators sued him in December for allegedly misleading the mortgage company's investors about its stake in subprime loans. Now Mudd has lost another CEO post and again he's preparing for battle.
Fortress directors offered to let Mudd stay on if he settled the matter quickly with the Securities and Exchange Commission, according to two people with direct knowledge of the board's thinking. Instead, he left to work full time on a case that legal analysts say is far from a slam dunk for the SEC.
His stint at Fannie Mae "cost me two jobs," Mudd, 53, said in an interview. "I've told my legal team, 'If you use the word "settle," I will fire you.' "
Last month he asked a federal judge to dismiss the complaint on the grounds that during his tenure Fannie Mae filed detailed data on risky loans the company held. His lawyers also argued that the SEC failed to show that Mudd had a motive, financial or otherwise, for deceiving shareholders.
The stakes are high for Mudd and the agency. Losing the case could cost Mudd some of the millions he earned during his four years as Fannie Mae's CEO and make him a symbol of the excesses that blew up the housing market. For the SEC, a failed lawsuit would heighten criticism from lawmakers and others that the agency hasn't held enough top executives accountable for taking risks that led to the worst recession since the 1930s.
"They've got to show some scalps," said Adam Pritchard, a University of Michigan law professor who previously served in the SEC's Office of the General Counsel. "Anybody can file a case. It's another thing to win it."
Mudd is the most prominent of six former executives of Fannie Mae and its smaller cousin, Freddie Mac, who are accused in the SEC's Dec. 16 lawsuit of defrauding investors about their subprime portfolios before souring mortgages sent the companies to the verge of bankruptcy and led to their federal takeover.
Shareholders were wiped out and, so far, U.S. taxpayers have spent about $190 billion keeping the companies afloat.
"Fannie Mae and Freddie Mac executives told the world that their subprime exposure was substantially smaller than it really was," Robert Khuzami, director of the SEC's Enforcement Division, said when the suit was filed, calling the disclosures "material misstatements."
Still, the lawsuit, which also names Freddie Mac chief executive Richard F. Syron, highlights how hard it's been for the SEC to find direct evidence that top corporate executives ordered or were complicit in deception.
The SEC's court filings suggest the outcome will hinge on the technicalities of the language in the companies' public disclosures.
Veterans of some similar cases say that while Mudd's management at Fannie Mae is open to criticism, regulators may face a challenge convincing a jury that the financial statements were misleading because there's no universal agreement on the definition of subprime loans.
"It's going to be a battle of the experts," said Charles M. Carberry, a partner at the law firm of Jones, Day in New York, who isn't representing any of the parties. Of the SEC, he said, "You wonder what their ultimate theory is."
The SEC didn't respond to requests for comment.
Mudd said his reputation and future is on the line in what he considers a witch-hunt by an agency responding improperly to outside pressures.
"I worked honestly and honorably and I'm not going to roll over in the face of a baseless, politically motivated work of fiction," he said.