But Wednesday evening, the Securities and Exchange Commission, the stock market's main cop, gave Fannie's regulator its backing by saying that Fannie had violated accounting rules. The agency took particular issue with the way Fannie accounts for derivatives, which are financial instruments the company uses to insure itself against adverse movements in interest rates. The SEC, speaking through its chief accountant, also told the government-sponsored mortgage giant to restate its financial reports. That's a deeply humiliating demand for Fannie CEO Franklin Raines, because he had fought the accounting charges and staunchly defended the integrity of Fannie's books before Congress in October. The fact is, Fannie's dubious accounting allowed it to keep a stunning $9 billion worth of losses out of earnings, making a closely watched measure of regulatory capital look much stronger than it actually was. Fannie will now face the prospect of having to quickly raise as much as $11 billion in fresh capital. It could do that by liquidating over $300 billion of mortgages or by issuing new stock. Neither option is good for Fannie's stock, which has stubbornly remained in the high $60s since the scathing Sept. 20 report from Fannie's regulator, the Office of Federal Housing Enterprise Oversight, or OFHEO. It slipped 5% early Thursday on news of the setback.