Remember when the SEC accused Fannie Mae of participating in a massive accounting fraud, involving violations of the financial accounting standard for hedges and derivatives? Well, as it turns out, the SEC repudiated that position, for obvious reasons.  

In fact, scores of other large companies, and every major accounting firm, had been applying the relevant accounting standard, FAS 133, in precisely the same manner. Everyone else, like Fannie and its management, believed that they had been acting in good faith.

All the top accounting experts contended that Fannie's interpretation of the rule was correct. So PriceWaterhouse Coopers, Ernst & Young, KPMG, and Deloitte & Touche all got together and collaborated on a white paper concerning the application of FAS 133, which they then presented to the chief accountant of the SEC. The white paper showed examples of how FAS 133 was being properly applied, in precisely the same manner used by Fannie Mae. In 2007, about a year after the agency filed a lawsuit accusing Fannie of committing an accounting fraud to the tune of $11 billion, the SEC said that it agreed with the interpretations of the four large accounting firms.

This embarrassing reversal may explain why the SEC refused to allow its former chief accountant, Donald Nicolaisen, to testify in a private class action lawsuit alleging instances of accounting fraud that mirrored the charges brought by the SEC and Fannie's regulator, the Office of Federal Housing Enterprise Oversight, or OFHEO. In December 2004, Nicolaisen asserted, on behalf of the SEC, that Fannie's interpretation of FAS 133 could not be deemed acceptable by any professional accountant, and insisted that Fannie restate its earnings.  

Here's what The Wall Street Journal reported eight years ago:

[Fannie CEO Franklin] Raines took issue with the accounting rule for derivatives, known as FAS 133, at the center of the controversy.

"Many companies can and do comply with the rules," Donald Nicolaisen, the SEC's chief accountant, shot back, according to two participants. "Sir, hedge accounting is a privilege, not a right," he continued. "[It] is applied only under strict circumstances, and you did not comply."

Mr. Raines seemed shocked, participants say. He then asked how far off Fannie's books had been in relation to FAS 133. In response, according to one participant, Mr. Nicolaisen held up a sheet of paper and told Mr. Raines that if it represented the four corners of the rule, "you were not even on the page."

That, "not even on the page," soundbite went viral, like George Tenet's supposed "slam dunk," explanation of Iraq's WMD.

But when compelled to testify, under an order handed down by Judge Richard Leon, Nicolaisen reversed himself with a standard, "perhaps I misspoke" disclaimer. His stated excuse, which, strains credulity, was that he didn't realize that so many others interpreted the standard differently from the way he did.

KPMG's lawyer, Scott Fink of Gibson, Dunn & Crutcher, laid it all out in front of Judge Leon back on June 5, 2012. His singular objective was to demonstrate that the defendants had no intent to deceive anyone. The disconnect--between the SEC's original accusations against Fannie Mae and its current position on FAS 133--wasn't really relevant, which is why he glossed over the agency's lack of candor. Fink explained:

MR. FINK: There was confusion out in the profession about this whole question [about interpreting FAS 133] that Fannie Mae faced and the SEC chief accountant, not Mr. Nicolaisen but the new SEC chief accountant three years later said I would like a white paper from the accounting profession to talk about this issue....

So we asked the big four, of which KPMG is one, to write a white paper and they did. All the big four signed it. PriceWaterhouse Coopers, Ernst & Young, KPMG and Deloitte & Touche, which was Fannie Mae's auditor. They signed. And  this white paper gave examples and it said here are different ways you could interpret this language and we are going to tell you, Mr. Chief Accountant, that this would be a reasonable interpretation the way Fannie Mae did it, or, you know, the way the SEC chief accountant originally did it, that would also be a reasonable interpretation. It is not that one is black and the other is white and one is right or one is wrong. It is just that both of them are reasonable. You just need to decide and tell people basically so they know what to do.

And they put in examples and some of the examples were very much like what Fannie Mae was doing...

So the SEC came out with this interpretation in 2007. They read the white paper and they said the interpretation that Fannie Mae was using all along was acceptable. It was okay. They weren't saying the other one was wrong. They were just saying this one was also okay. If people are out there doing it, it is okay...

The words of FAS 133 hadn't changed, but the SEC's interpretation of FAS 133 had evolved.   There had been confusion. People had come in and said are you sure this doesn't work? And the SEC said, you  know, on reflection those words are susceptible to that interpretation.

That cannot have been fraud in 2001 for somebody to read those words and say, you know, I think this is what it means; and the SEC ultimately said, yeah, gee, I am a little bit late, but that's a reasonable interpretation...

Plaintiffs stand up usually with great drama and they talk about how Mr. Nicolaisen said the accounting was not even on the page. They want the Court to believe that what Mr. Nicolaisen meant by that was that it was crazy, it was an extremely ridiculous interpretation.