Opinion

Alison Frankel

Fannie, Freddie shareholders demand lost dividends from U.S. in new class action

By Alison Frankel
July 10, 2013

In August of 2012, the U.S. Treasury and the Federal Housing Finance Agency announced that they had amended the terms of Treasury’s investment in Fannie Mae and Freddie Mac, the government-sponsored mortgage lenders under FHFA’s conservatorship. After Fannie and Freddie went into conservatorship in the economic crisis of 2008, Treasury invested more than $100 billion in a new class of senior preferred stock that guaranteed the government first dibs on a percentage of Fannie or Freddie profits. Those seemed like a distant hope in 2008, but by 2012, Fannie and Freddie were, in fact, making money. Preferred shareholders junior to the government believed the mortgage lenders were generating enough profits to pay Treasury’s dividend and leave something for them as well. But in August, FHFA and the government – without consulting Fannie and Freddie junior preferred shareholders – disclosed that under a newly executed “net worth sweep,” Treasury would be receiving all of the profits kicked out by Fannie Mae and Freddie Mac, then and in the future.

On Wednesday, junior preferred shareholders filed a class action in the U.S. Court of Federal Claims, asserting that the August 2012 agreement between FHFA and the Treasury amounted to an illegal seizure of their property in violation of the Takings Clause of the Fifth Amendment of the U.S. Constitution. The preferred shareholders, represented by Boies, Schiller & Flexner and Kessler Topaz Meltzer & Check, point to the $66.3 billion dividend Fannie and Freddie paid to the government in the second quarter of 2013, arguing that more than $60 billion of that money was misappropriated from them.

The new shareholder class action follows an injunction suit filed Sunday in federal court in Washington by Perry Capital and its lawyers at Gibson, Dunn & Crutcher. The Perry suit, which claims that the August 2012 agreement between Treasury and FHFA “enriches the federal government through a self-dealing pact, and destroys tens of billions (of dollars) of value in the companies’ preferred stock,” seeks a declaratory judgment that the amended agreement violates the Administrative Procedures Act, as well as an injunction against implementing the new agreement. In addition, the mutual fund Fairholme Funds and several insurance companies that own Fannie Mae and Freddie Mac junior preferred shares filed a Takings Clause case on Tuesday night in the Court of Federal Claims. Cooper & Kirk, which represents the Fairholme plaintiffs, raises allegations that parallel those in the new class action but brought the case only on behalf of the named shareholders.

There’s also a month-old class action for holders of Fannie Mac and Freddie Mac common shares under way in the Court of Federal Claims. As I’ve reported, that case asserts that the government’s 2008 takeover of the mortgage lenders and the FHFA’s subsequent operation of Fannie Mae and Freddie Mac was an illegal taking under the Fifth Amendment. The new class action, which only involves preferred shareholders and focuses on the 2012 amendment rather than the 2008 takeover, does not overlap with the previously filed case.

It’s notable that the new class action was filed by Boies Schiller, which innovated the technique of suing for lost shareholder value under the Takings Clause in litigation for former AIG chief Hank Greenberg, who claims that the government’s 2008 bailout of AIG wrongfully deprived shareholders of tens of billions of dollars in equity. Though the new Fannie Mae and Freddie Mac case involves alleged government overreaching four years after the economic crisis, said Boies partner Hamish Hume, it raises similar allegations that Treasury violated the Fifth Amendment and ran roughshod over shareholders.

Boies’s co-counsel in the case, Kessler Topaz, has been exploring the possibility of a Takings Clause case for several months, said partner Lee Rudy. The firm, which can normally be found in securities class actions and shareholder derivative suits, got in touch with Cooper & Kirk, a boutique that has Takings Clause expertise. Cooper was researching the suit it filed Tuesday for Fairholme, but said it was not prepared to bring a class action, Rudy said. It referred him to Hume at Boies Schiller. The new class action was filed on behalf of two individual preferred shareholders but Rudy and Hume said that they’re hoping other preferred shareholders in Fannie Mae and Freddie Mac join the case as name plaintiffs.

The Fannie Mae and Freddie Mac Takings Clause litigation presents an odd sort of reunion for Boies Schiller and Cooper & Kirk, which were on opposite sides of the California marriage equality case that was decided by the U.S. Supreme Court last month. Now they’re on the same side of a Constitutional issue – and so is Boies Schiller’s gay marriage co-counsel, Gibson Dunn. (Hume said that he hasn’t yet been in touch with Gibson Dunn about its Perry complaint but expects he soon will be.) If the Fannie Mae and Freddie Mac preferred shareholder cases ever get to the Supreme Court, there will certainly be no shortage of talent to argue against the government.

FHFA put out a statement about the new suits: “”We are reviewing each lawsuit carefully, but it is important to remember that Fannie Mae and Freddie Mac remain in conservatorship and their financial future remain uncertain except for support from the American taxpayer.”

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Comments
One comment so far | RSS Comments RSS

Interesting, but I’d be surprised if the taking clause were successful even though it doesn’t seem right to me four years after the bailout. There seems to be many of these bailout lawsuits and I can’t recall any successful ones. Can you or any readers?

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