Mortgage giant Fannie Mae is now the target of a formal inquiry by the Securities and Exchange Commission over its accounting practices, the company said in a regulatory filing Tuesday.

The inquiry, which was previously an informal investigation, means that federal regulators may now subpoena documents from the company as well as require the testimony of company employees and executives. In its filing with the SEC, the company said it would cooperate fully with the probe. Formal investigations require a vote of approval from the SEC's commissioners.

Fannie Mae, which last week was ordered by the Justice Department to preserve documents as part of a criminal investigation, has been accused of manipulating its accounting practices in order to meet Wall Street earnings expectations.

Since word of the SEC's informal investigation broke Sept. 22, the company has also been sued by a number of shareholders, claiming that the actions of company executives has harmed shareholder value.

Testifying before Congress earlier this month, chairman and chief executive Franklin Raines and chief financial officer Timothy Howard said Fannie Mae did nothing wrong in its accounting and insisted that the regulators' allegations represent an arguable interpretation of complex rules. They specifically denied the allegation that, in an instance in 1998, accounting rules were deliberately violated so that top executives could collect full bonuses.

Washington-based Fannie Mae is the second-largest financial institution in the country behind Citigroup Inc. It and its smaller sibling Freddie Mac pump money into the home mortgage market by buying and guaranteeing repayment of billions of dollars of home loans each year from banks and other lenders, then bundling them into securities that are resold to investors. Their stock and debt are widely held by investors worldwide.

Last year, Freddie Mac restated some $4.5 billion in earnings, ousted top executives and was fined a record $125 million in a settlement with federal regulators. Its restatement of earnings, which mostly had been understated, prompted regulators to examine Fannie Mae's accounting.

Fannie Mae fell $1.04 to $67.76 on the New York Stock Exchange on Tuesday, and slumped another $1.97 to $65.79 in after-hours trading.

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