Investors Unite Teleconference: What is Risk Sharing? And how does it Work?


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Investors Unite Teleconference: What is Risk Sharing? And how does it Work?
Friday, November 11th, 2016

On Tuesday, November 15 at 10:30 am EST, Investors Unite will hold a teleconference to discuss risk sharing in the secondary mortgage market, a major policy that could affect Fannie Mae and Freddie Mac moving forward.

The teleconference will feature Investors Unite Executive Director Tim Pagliara, former Chief Financial Officer and Vice Chairman of the Board of Fannie Mae Tim Howard, and the Head of External Affairs for the Community Mortgage Lenders of America Rob Zimmer.

To join the teleconference, please RSVP to


Tim Pagliara, Investors Unite Executive Director and CapWealth                                                Advisors Chairman and CEO

Tim Howard, Former Chief Financial Officer and Vice Chairman of the Board of Fannie Mae

 Rob Zimmer, Community Mortgage Lenders of America Head of External Affairs

WHAT:           Investors Unite Risk Sharing Call 

WHEN:           Tuesday, November 15th, 10:30 am EST

DIAL IN:        800‑895-2195; Conference ID: Investors

RSVP:             Please RSVP to

About Investors Unite: Formed by Tennessee investor and CapWealth Advisors Chairman and CEO, Tim Pagliara, Investors Unite ( is a coalition of over 1,400 private investors from all walks of life, committed to the preservation of shareholder rights for all invested in Fannie Mae and Freddie Mac. The coalition works to educate shareholders and lawmakers on the importance of adopting GSE reform that fully respects the legal rights of Fannie Mae and Freddie Mac shareholders and offers full restitution on investments.

Trumping FHFA’s GSE Destroying Third Amendment Net Worth Sweep


  • Investors Unite is holding a conference call Tuesday. Investors Unite is a shareholder advocacy group for GSE shareholders both common and preferred.
  • A new presidency opens the door for reversing part of the ongoing relationship between FHFA and Treasurythat even FHFA’s current director says trumps the law.
  • Expect a ruling on the Writ in the next 30 days based on the government’s arguments that they should only need 30 days to reply to Judge Sweeney.

Wall Street Wants To Buy Fannie Mae And Freddie Mac Dirt Cheap


  • Worrisome power of financial market participants to influence a US President.
  • The privatization of FnF is the sale of FnF to Wall Street dirt cheap.
  • FnF have already repaid the Treasury, so the warrant ought to be cancelled.
  • FnF’s shareholders threaten to sue the government if it exercises the warrant.

Will the Trump administration undo the 2012 sweep of profits to the Treasury?

By Andrea Riquier

Shares of Fannie Mae and Freddie Mac have rallied this week as President-elect Donald Trump surrounds himself with advisors seen as sympathetic to shareholders of the two mortgage companies.
Shares of Fannie are up about 41% since Tuesday, and Freddie shares have risen about 46% in that time.

Fannie (FNMA) and Freddie (FMCC) were placed into federal conservatorship during the 2008 financial crisis, and in 2012 the Obama administration amended the terms of the 2008 agreement to sweep quarterly profits from the two enterprises, a move that’s been challenged in court by shareholders.

Ken Blackwell, who’s been tapped to lead the domestic transition team, wrote an op-ed ( in 2014 in which he called the Treasury arrangement “theft of private property.” In the piece, Blackwell noted that there is a “bipartisan consensus on how to wind down Fannie and Freddie.”

On Wednesday, the Wall Street Journal reported ( that hedge fund investor John Paulson had been tapped to be a Trump advisor because of his understanding of the housing market. Paulson is known ( for shorting the subprime mortgage market as the housing bubble inflated a decade ago.
Paulson’s company has donated extensively ( to nonprofits and lobbyists advocating for the release of the enterprises from government controls, according to an earlier Journal article.

Other Trump advisors have a less explicit stake in ending conservatorship, but are likely to be sympathetic to the shareholder interests. Steven Mnuchin, a Goldman Sachs veteran who’s reportedly on the short list ( to be Treasury secretary, serves on the board ( of directors of Sears Holdings(SHLD) with Bruce Berkowitz, CIO of Fairholme Capital Management, one of the firms leading the shareholder lawsuits.

Let’s talk restitution.

First we must satisfy a key requirement to prove fraud (on the path to restitution) and that is “intent”. This is easily proven. HERA provided for the FHFA to act independently (that was breached by and agreement with the Treasury) to preserve and conserve the assets of FnF (that was breached by the sweep amendment). The intent to do this was announced in the White Papers of Feb 2011 titled “Reforming America’s Housing Finance Market” authored by the Obama Administration, the US Treasury, and HUD. In this report to Congress, they lay out their plan to “wind down” FnF.

A year later, in FHFA’s Strategic Plan for Enterprise Conservatorships: The Next Chapter in a Story that Needs an Ending, Feb 21, 2012, Edward DeMarco (Director of FHFA) announces his plan to “wind down” FnF and replace them with new infrastructure, based on a commitment to the White Papers of Feb 2011 (mentioned above).

Later in August and Sept of 2012, FHFA signs an agreement with Treasury for full net worth sweep, and does so based on a commitment to the White Papers of 2011.

Clearly, intent to breach HERA is proven by the government’s own announcements.

So, lets talk restitution. I see it as unwinding everything that was based on fraud. It is illegal to let stand any actions based on fraud. This means all money in excess of that used to bailout FnF must be returned. As well, this money shall have earned an annual interest rate of 10%, the same rate acceptable to the Treasury for support of FnF.

I don’t know about punitive damages. Seems like I read somewhere that you cannot claim punitive damages when it comes to the federal government. Perhaps someone can shed some light on this.

Lastly, Writ of Mandamus is fully briefed in the United States Court of Appeals for the Federal Circuit. Speculating to hear an opinion regarding the Writ of Mandamus on or before December 14.

10/27/2016 – Petition for a Writ of Mandamus to the United States Court of Federal Claims

11/02/2016 – Opposed Motion for Extension of Time in Which to File Reply in Support of Petition for Writ of Mandamus

11/02/2016 – Order

11/03/2016 – Opposed Motion for Leave to Exceed Page Limit for Response to Mandamus Petition

11/03/2016 – Response in Opposition to Petition for a Writ of Mandamus

11/03/2016 – Unopposed Motion for Leave to File Supplemental Appendix

11/03/2016 – Opposition to Respondents’ Motion to Exceed Page Limit

11/09/2016 – Reply in Support of Petition for a Writ of Mandamus to the United States Court of Federal Claims

11/10/2016 – Defendant’s Second Motion for an Enlargement of Time…

11/10/2016 – Order



GSE Shareholder Fairholme Describes Maximum Delay Discovery Rigmarole – Glen Bradford


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GSE Shareholder Fairholme Describes Maximum Delay Discovery Rigmarole

Fairholme is trying to get the government to produce documents that the government doesn’t want to produce and a judge in the court of claims ordered to be produced.

The government appealed the judges order and Fairholme filed their response in support of Judge Sweeney’s order suggesting the government’s approach is one of maximum delay.

Fairholme openly wonders what the purpose is of discovery if one party can simply assert privilege over documents where privilege simply does not apply to prevent from handing them over.

Something wild has happened and there’s nothing you can do about what’s happened, but you can still take action and share in what is going to happen. In unprecidented fashion, Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC) were placed into conservatorship in 2008 when they had their highest levels of capital in history. Their entrance into conservatorship was not due to a liquidity crisis but was due to the board acquiescing when government employees asserted authority. Since then, they’ve continued to generate large amounts of cash in spite of their conservator justifying their conservatorship by forcing them to write down their assets to issue a related party stock.

The government, although it is taking the net worth of the companies, has not consolidated them onto its balance sheet because of private shareholders like myself continuing to own some of the publicly traded shares that are economically worthless as long as the government takes the net worth. You might be thinking to yourself that this sounds a lot like accounting fraud and indeed the smaller accounting fraud lawsuit was just settled out of court. The larger of the two remains active. The problem with Fannie and Freddie is that they make money so consistently that the government has budgeted their income as its own and has increased their fees to consumers for itself since conservatorship has begun. We have seen the actual government bailouts, where companies weren’t as good. Those were not worth keeping control over and spun back into the private markets. The main reason to invest in Fannie Mae and Freddie Mac is the same reason that the government is zeroing them out in the first place: they make too much money too consistently. Conservatorship hasn’t changed this fact and instead has drawn increasing scrutiny to it especially since the accounting trickery has been placed into the rear view mirror.

Investment Thesis: Lawsuits have been filed against various actions taken against Fannie Mae and Freddie Mac by their shareholders and if any of these puts an end to the net worth sweep or results in other shareholder positive events then shareholders stand to benefit. Reversing the net worth sweep could result in Fannie Mae and Freddie Mac eventually returning to business as usual which would eventually make their preferred shares worth par. Their common shares used to trade over $50. Part of their entrance into conservatorship was the government issuing to itself 79.9% warrant coverage. These warrants haven’t been exercised yet but I’m expecting something similar to AIG assuming the companies remain operational. Common shares trade at less than $2, leaving lots of potential upside on the table and preferred shares trade at less than 20% of par.

Court Of Appeals For The Federal Circuit

Fairholme filed their response to the government’s petition for a writ of mandamus:

We learn that plaintiffs plan to amend their complaint and that they are alleging that the government placed Fannie and Freddie into conservatorship even though an analysis of the companies’ financial statements shows that throughout the crisis their income, retain reserves, and unencumbered assets were always more than sufficient to cover their debts and other expenses. Plaintiffs highlight the questionable nature of the accounting policy decisions that resulted in massive temporary draws and reversals split by the implementation of a net worth sweep. Plaintiffs also show that the write offs were more aggressive at Fannie and Freddie than at other financial institutions that held far riskier portfolios.

Plaintiffs speak candidly about how the government has been improperly asserting privilege because when they question it, the government has a history of removing privilege designations from handfuls of the documents. Plaintiffs suggest that this is a strategy of maximum delay:

Plaintiffs show a need for these documents by demonstrating that Ugoletti’s sworn declaration was undermined by discovery which he later recanted.

Further, their intended purpose by filing discovery documents in multiple court rooms is simply to prevent the government from asserting untrue facts in other courts:

Plaintiffs go through the way a Writ is supposed to work and show that the government is misconstruing what they are for:

Plaintiffs openly wonder why the government references materials from the agency who they are claiming isn’t in charge:

Plaintiffs conclude by openly wondering that if disclosure is not supported here then where?:

It would seem that Judge Sweeney ruled favorably for Plaintiffs and rather than complying with discovery, the government decided to file a Writ to buy time while Perry Capital was ruled. Plaintiffs are looking for discovery to be completed before they amend their case and they claim that the government’s history of not been forthcoming with documents as evidence that this is simply more of the same.

Summary and Conclusion

The government doesn’t want to produce documents that they have marked as privilege. Judge Sweeney ordered the government to hand them over saying that of a sample that plaintiffs claim is effectively random 100% were improperly designated as privileged. Further, Judge Sweeney ordered the government to explain why they shouldn’t have to pay plaintiff legal expenses for making plaintiffs file the motion to compel. The government responded by appealing Judge Sweeney’s motion to compel. The government says that in effect, Judge Sweeney doesn’t understand the discovery process or how privilege designations work.

According to Plaintiffs, the government’s understanding behind what a Writ of Mandamus is for is being improperly applied in this case. If you study the accounting statements, the government has taken over $100B of cash out of Fannie Mae and Freddie Mac since conservatorship has begun. The government has done so by writing down assets and later writing them back up. The neat trick was that between the two events the government entered into the net worth sweep, thereby zeroing out existing shareholders.

I think that FHFA has fiduciary duties that it simply has chosen to ignore. There is no other explanation for why the shares remained outstanding in 2008. FHFA’s argument is that the shareholders that own these shares have no legal right to breach of contract claims, among others. If true, why did PricewaterhouseCoopers settle with a handful of such shareholders? Perhaps PricewaterhouseCoopers didn’t believe FHFA’s arguments as much as FHFA does. I don’t either.

Give Glen Bradford some Love.  Click here 



Piszel’s US Court of Appeals for the Federal Circuit Decision Leads the Charge.


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Piszel’s US Court of Appeals for the Federal Circuit Decision Leads the Charge.

While Piszel loss his case in the US Court of Appeals for the Federal Circuit, the court provided a clear and pointed decision for Mr. Hume to submit in a letter to the US Court of Appeals for the District of Columbia Circuit.

For clarification purposes, the United States Court of Appeals for the Federal Circuit is the appeals court to the United States of Federal Claims and the United States Court of Appeals for the D.C. Circuit is appeals court for the United States District Court for the District of Columbia.

A contract is a contract whether it is a stock certificate or an employment contract

Important Summary and Roadmap Clues


The government argues, and the Claims Court found, that Mr. Piszel lacked a cognizable Fifth Amendment property interest.  We disagree. 

In evaluating whether governmental action constitutes a taking for Fifth Amendment purposes, the court must determine “whether the claimant has identified a cognizable Fifth Amendment property interest that is asserted to be the subject of the taking.” Acceptance Ins. Cos., Inc. v. United States, 583 F.3d 849, 854 (Fed. Cir. 2009). When a claimant lacks such a property interest, nothing has been taken, and thus the claimant cannot maintain a takings claim. See Am. Pelagic Fishing Co., L.P. v. United States, 379 F.3d 1363, 1372 (Fed. Cir. 2004).

In general, “[v]alid contracts are property, whether the obligor be a private individual, a municipality, a state, or the United States.” Lynch v. United States, 292 U.S. 571, 579 (1934); see U.S. Tr. Co. of N.Y. v. New Jersey, 431 U.S. 1, 19 n.16 (1977) (“Contract rights are a form of property and as such may be taken for a public purpose provided that just compensation is paid.”); A & D Auto Sales, Inc. v. United States, 748 F.3d 1142, 1152 (Fed. Cir. 2014); see also United States v. Petty Motor Co., 327 U.S. 372, 380–81 (1946) (holding that plaintiff was entitled to compensation for government’s taking of option to renew a lease). Mr. Piszel’s employment contract with Freddie Mac is no exception.

In short, “there is ample precedent for acknowledging a property interest in contract rights under the Fifth Amendment.” Cienega Gardens v. United States, 331 F.3d 1319, 1329 (Fed. Cir. 2003). In Cienega Gardens, we rejected the government’s position that “enforceable rights sufficient to support a taking claim against the United States cannot arise in an area voluntarily entered into and one which, from the start, is subject to pervasive Government control.” Id. at 1330 (quoting government brief) (internal quotation marks omitted); see also A & D, 748 F.3d at 1152–53 (finding that a property interest in contract rights existed despite being subject to bankrupt- cy law). We therefore conclude that Mr. Piszel had a cognizable Fifth Amendment property interest in his contract rights.


The government argues that Mr. Piszel should be barred from pursuing a takings claim because he failed to pursue a breach of contract claim against Freddie Mac. Mr. Piszel argues that there is no requirement to pursue a breach of contract claim against a private party before bringing a takings claim. We disagree with the government that Mr. Piszel’s failure to pursue a contract remedy is an absolute bar to his bringing a takings claim against the government. 

The Supreme Court has held that a claimant must exhaust administrative or judicial remedies against the relevant government entity in order for his regulatory takings claim to be ripe. See, e.g., Williamson Cty. Reg’l Planning Comm’n v. Hamilton Bank of Johnson City, 473 U.S. 172, 186–87 (1985); see also, e.g., Palazzolo v. Rhode Island, 533 U.S. 606, 618–19 (2001); Suitum v. Tahoe Reg’l Planning Agency, 520 U.S. 725, 735 (1997); Mac- Donald, Sommer & Frates v. Yolo Cty., 477 U.S. 340, 348 (1986). The Court has explained that to demonstrate a regulatory taking, a party “must establish that the regulation has in substance ‘taken’ his property—that is, that the regulation ‘goes too far.’” MacDonald, 477 U.S. at 348 (citations omitted). But “[a] court cannot determine whether a regulation has gone ‘too far’ unless it knows how far the regulation goes.” Id. This is because “resolution of [this] question depends, in significant part, upon an analysis of the effect [of the regulation] on the value of [the] property and investment-backed profit expectation. That effect cannot be measured until a final decision is made as to how the regulations will be applied.” Id. at 349 (quoting Williamson, 473 U.S. at 200). As to the second prong of a takings claim, a failure to provide “just compensation,” “a court cannot determine whether a municipality has failed to provide ‘just compensation’ until it knows what, if any, compensation the responsible administrative body intends to provide.” MacDonald, 477 U.S. at 350.

We therefore find no basis for the government’s argument that Mr. Piszel had to pursue a breach of contract claim against Freddie Mac before bringing a takings claim, even though, as described below, the existence of a remedy for breach of contract is highly relevant to the takings analysis in this case. 


The government’s instruction to Freddie Mac did not take anything from Mr. Piszel because, even after the government’s action, Mr. Piszel was left with the right to enforce his contract against Freddie Mac in a breach of contract action. As the government correctly points out, “the only duty a contract imposes is to perform or pay damages.” F.T.C. v. Think Achievement Corp., 312 F.3d 259, 261 (7th Cir. 2002) (citing Oliver Wendell Holmes, Jr., The Common Law 300–02 (1881)). Thus, to effect a taking of a contractual right when performance has been prevented, the government must substantially take away the right to damages in the event of a breach. See Castle v. United States, 301 F.3d 1328, 1342 (Fed. Cir. 2002) (finding that because “the plaintiffs retained the full range of remedies associated with any contractual property right they possessed[,]” the government action “did not constitute a taking of the contract”).

Other similar provisions of HERA indicate that when a conservator prohibits performance of a contract, an action for breach of contract remains. Section 1367(b)(2)(H) of HERA states a general policy that the conservator “shall, to the extent of proceeds realized from the performance of contracts or sale of the assets of a regulated entity, pay all valid obligations of the regulated entity that are due and payable at the time of the appointment” of the conservator. 122 Stat. at 2738 (codified at 12 U.S.C. § 4617(b)(2)(H)). Section 1367(b)(19)(d), like the golden parachute provision, allows the conservator to “disaffirm or repudiate” contracts including “any contract for services between any person and any regulated entity” like employment contracts. 122 Stat. at 2747–48, 2750 (codified at 12 U.S.C. §4617(b)(19)(d)). That section plainly preserves a breach of contract claim, providing that the conservator will be liable for the disaffirmance or repudiation of the contract but limits the liability to “actual direct compensatory damages.” 

The statute cannot reasonably be read to preserve a breach claim when the conservator disclaims a contract providing for a payment but to eliminate a breach claim when the identical action is taken pursuant to a regulatory directive. Thus, the surrounding provisions indicate that Congress intended to preserve breach of contract claims, as the parties agree. 


“The Supreme Court . . . has made clear that in the regulatory takings context the loss in value of the adversely affected property interest cannot be considered in isolation.” Cienega Gardens, 503 F.3d at 1280. Rather, the “test for regulatory taking requires [a court] to compare the value that has been taken from the property with the value that remains in the property.” Keystone Bitu- minous Coal Ass’n v. DeBenedictis, 480 U.S. 470, 497 (1987); see also Concrete Pipe, 508 U.S. at 644; Cienega Gardens, 503 F.3d at 1281. The Supreme Court recognized this in the very case that created the regulatory takings framework, explaining that “[i]n deciding whether a particular governmental action has effected a taking, this Court focuses . . . on the character of the action and on the nature and extent of the interference with rights in the parcel as a whole.” Penn Cent., 438 U.S. at 130–31 (emphasis added). This is, of course, because “a regulatory taking does not occur unless there are serious financial consequences” that stem from the government action. Cienega Gardens, 503 F.3d at 1282.

Certainly Freddie Mac operated in a regulated environment where a court may have concluded that Freddie Mac accepted the risk of regulatory action. In a breach action, the courts might have concluded that Freddie Mac bore the risk of regulatory intervention, thus depriving it of an impossibility defense. 

As noted, we asked the parties to address whether recovery for a breach of contract claim would be limited by the sovereign acts doctrine. Both Mr. Piszel and the government take the position that the sovereign acts doctrine would not limit recovery in this case. Gov’t Supp. Br. at 6–7; Piszel Supp. Br. at 12 n.10. We agree. We also agree with the parties that HERA’s limitations on damages for breach of contract claims, 12 U.S.C. §4617(d)(3)(A), would not affect Mr. Piszel’s recovery in a breach of contract action against Freddie Mac. See Gov’t Supp. Br. at 8–9; Piszel Supp. Br. at 12 n.10.

Reference Links:

Mr. Hume’s letter submitted to the US Court of Appeals for the District of Columbia Circuit dated August 18, 2016

Mr. Piszel’s United States Court of Appeals for the Federal Circuit Opinion




HERA Section 4617(f) Does Not Bar Plaintiffs’ Claims Against FHFA When They Acted Ultra Vires.


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HERA Section 4617(f) Does Not Bar Plaintiffs’ Claims Against FHFA When They Acted Ultra Vires.

What is Ultra Vires?

Ultra Vires according to Wikipedia

Ultra vires is a Latin phrase meaning “beyond the powers“. If an act requires legal authority and it is done with such authority, it is characterized in law as intra vires (“within the powers“). If it is done without such authority, it is ultra vires. Acts that are intra vires may equivalently be termed “valid” and those that are ultra vires “invalid”.

In corporate law, ultra vires describes acts attempted by a corporation that are beyond the scope of powers granted by the corporation’s objects clause, articles of incorporation or in a clause in its Bylaws, in the laws authorizing a corporation’s formation, or similar founding documents. Acts attempted by a corporation that are beyond the scope of its charter are void or voidable.

Ultra Vires according to Cornell Law

Latin, meaning “beyond the powers.” Describes actions taken by government bodies or corporations that exceed the scope of power given to them by laws or corporate charters.  When referring to the acts of government bodies (e.g., legislatures), a constitution is most often the measuring stick of the proper scope of power.

Perry’s Appeals Court Transcript

JUDGE BROWN: Well, what if that’s not actually the question here, what if the question is not whether the conservator exercised the power, but whether the power that they exercised was the power authorized by the statute, or whether they acted ultra vires –

CAYNE: Right.


CAYNE: Yes, Your Honor, and the power that I’m suggesting that was exercised here was the power to operate the institutions, the determination was made that without these agreements the institutions couldn’t operate at all because they do into mandatory receivership, and down the road as laid out in great detail in our colleagues’ briefs from the Department of Justice, a determination was made that if we leave things as they are there may be a lot of periods —


CAYNE: — or some periods where the $19 billion dividend exceeds the amount of profits for that year, which will have the effect of reducing the Treasury commitment, and perhaps shorting the life, giving less backup support, and that was a, you know, a paradigm of a business judgment. The business judgment was made by the conservator that this new arrangement will better allow the preservation of the commitment. And for purposes of the Court’s analysis I would, the Court should say well, that was clearly a wrong judgment, maybe the Second Amendment was better, maybe a Fourth Amendment with a different paradigm would be better, but that is the heartland of what Congress said, we are a power that we are investing in the conservator that we don’t want to authorize third parties, or shareholders, or courts to challenges, we want —

JUDGE BROWN: All right.

CAYNE: — this to operate as a business.

JUDGE BROWN: Mr. Cayne —


JUDGE BROWN: — I think — did you have a question?



A finding of Ultra Vires could open doors across most if not all filed complaints against FHFA with an order denying the Motion to Dismiss.

Judge Chang unsealing the Roberts Plaintiffs’ Amended Complaint

A Direct Claim could also deny the Motion to Substitute against FHFA with the auditors complaints and FNMA books and records complaint. See Section 4617(b)(2) Does Not Apply to Direct Claims

But first, plaintiffs need to have their auditors’ complaints remanded back to State Court.

Edwards Plaintiffs are asking Judge Moreno to remand their lawsuit against PwC to state court.

Edwards Plaintiffs are asking Judge Scola to remand their lawsuit against Deloitte to state court.

Time will only tell if justice is served.

Section 4617(b)(2) Does Not Apply to Direct Claims


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The Direct Claim Argument Should Overcome Section 4617(b)(2).

Courts and the parties agree that FIRREA’s provisions regarding the powers of conservators, including the succession clause, are materially identical to those of HERA.

The Court has already accepted the Eleventh Circuit’s position construed FIRREA’s successor clause while reviewing an order from the United States Bankruptcy Court for the Southern District of Florida.

Relying on Lubin, the Court succinctly found: “Therefore, all derivative claims in the Appellant’s proposed complaint belong to [FDIC], and all direct claims belong to [Stockholder].”  Consistent with Lubin, “[n]o federal court has read” Section 4617(b)(2) or the analogous provision of FIRREA to transfer direct shareholder claims to the conservator or receiver.

HERA Does Not Strip Plaintiffs of Their Rights in Their Stock.

  • First, HERA does not bar Plaintiffs from asserting direct claims that relate to their ownership of stock, and all of the claims at issue here are direct.   
  • Second, even if Plaintiffs’ claims were derivative, courts repeatedly have recognized that shareholders may bring derivative claims during conservatorship where, as here, the conservator has a manifest (and therefore disqualifying) conflict of interest.

Plaintiffs May Bring Direct Claims.

HERA provides that FHFA as conservator succeeds to “all rights, titles, powers, and privileges of . . . any stockholder . . . of the regulated entity [i.e., Fannie] with respect to the regulated entity and the assets of the regulated entity.” 12 U.S.C. § 4617(b)(2)(A)(i) (emphasis added). Whatever implications this succession clause may have for shareholders seeking to bring derivative claims on behalf of Fannie, it does nothing to divest shareholders of their own, independent and personal economic rights in Fannie and, therefore, does nothing to prevent shareholders from maintaining direct claims on behalf of themselves to protect their own rights against any culpable party. This is why, upon imposition of the conservatorship, FHFA correctly insisted that Fannie’s shares would “continue to trade” and that its shareholders would “retain all rights in the stock’s financial worth.”

FHFA Fact Sheet, Questions and Answers on Conservatorship 3, If FHFA’s current litigating position were correct, these public assurances would have been demonstrably false.

[Adopting FHFA’s position would also render numerous conservatorship decisions nonsensical. For example, FHFA expressly suspended payment of dividends to private shareholders like Plaintiffs during conservatorship. But if FHFA had in fact succeeded to the shareholders’ contractual dividend rights, any payment of dividends would have been to FHFA itself, not to shareholders. FHFA then would have had no need to announce to itself that it was halting the payment of dividends. Moreover, FHFA entered into contractual agreements with Treasury—a shareholder in the Companies—that provided Treasury with dividend and liquidation rights, and FHFA has paid tens of billions of dollars in dividends under those agreements. If FHFA’s assertion were correct, Treasury’s dividend rights would belong to FHFA, and these payments should have been retained by FHFA rather than given to Treasury. ]

Under Delaware law, shares of stock and interests in non-corporate business entities “carry with them particular rights that a holder of the [interest] can exercise by virtue of being the owner.” Direct claims for breach of fiduciary duty arise when those rights are infringed. Moreover, even in cases involving derivative claims, the same claims can have direct aspects when the allegedly faithless transaction involves an extraction from one group of stockholders, and a redistribution to another, of “a portion of the economic value and voting power embodied in the minority interest.”

Plaintiffs must prove a breach of an underlying fiduciary duty, such as the duty belonging to FHFA. If FHFA took over Plaintiffs’ claims, it would need to prove that it breached its fiduciary duty. FHFA would have to attack its own records and depose its own officers to effectively pursue Plaintiffs’ claims. An obvious manifest conflict of interest prevents FHFA from proving Plaintiffs’ claims

Plaintiffs May Bring Derivative Claims Where the Conservator Has a Manifest Conflict of Interest.

Plaintiffs must prove a breach of an underlying fiduciary duty, such as the duty belonging to FHFA. If FHFA took over Plaintiffs’ claims, it would need to prove that it breached its fiduciary duty. FHFA would have to attack its own records and depose its own officers to effectively pursue Plaintiffs’ claims. An obvious manifest conflict of interest prevents FHFA from proving Plaintiffs’ claims.

While Section 4617(b)(2)(A) generally has been interpreted to bar derivative (but not direct) suits by shareholders during conservatorship or receivership, it does not follow that all shareholder derivative suits are barred without exception, including derivative suits involving misconduct by the conservator or receiver itself.

Two federal courts of appeals have squarely addressed this question, both in the context of 12 U.S.C. § 1821(d)(2)(A)(i), the provision of FIRREA on which Section 4617(b)(2)(A) was modeled. And both of those courts held that shareholders may maintain a derivative suit when the conservator or receiver has a manifest conflict of interest. See First Hartford Corp. Pension Plan & Trust v. United States, 194 F.3d 1279, 1283 (Fed. Cir. 1999) (finding standing to sue “because of the FDIC’s conflict of interest by which it is both alleged to have caused the breach and controls the depository institution”); Delta Sav. Bank v. United States, 265 F.3d 1017, 1024 (9th Cir. 2001) (adopting “a common-sense, conflict of interest exception to the commands of FIRREA” and permitting a shareholder to bring a derivative suit against one of the FDIC’s “closely-related, sister agencies”).

JUDGE GINSBURG: Well, they had a preexisting right to bring the lawsuit, the succession clause takes away something.

STERN: Yes, it takes away.

JUDGE GINSBURG: But does it take away a direct claim? It doesn’t take away a, just because a shareholder is a shareholder doesn’t mean that his loss of rights as a shareholder means his loss of rights in any other capacity. If he were also a tradesman he’d still retain his trade account.

STERN: I think it’s a derivative claim, Your Honor.

JUDGE GINSBURG: Insofar as they want their liquidation preference they don’t get, Fannie Mae doesn’t get anything.

HUME: Our contract claims are direct claims.

HUME: They have always been direct claims.

HUME: We litigated them as direct claims, they were analyzed as direct claims, and —

HUME: — a contract between me the shareholder and you the company. I’m the shareholder; I get to enforce the contract. It is a direct claim, look at page six of our reply brief; those kinds of claims are always analyzed under state law as direct claims. They didn’t even argue this in the District Court, or in any other case, in Kellmer, in the Barnes case, see footnote –

HUME: Let me try to be very clear. Our breach of contract claims are direct claims. I don’t mean to suggest there’s some other amorphous direct claim. Our breach of contract claims are all direct, breach of contract, breach of implied covenant. The only issue was whether we said enough for a direct fiduciary breach claim. And on that, I’ll rest on what I said before, which is we think we said enough, if not, we ask the right to amend. But on breach of contract there’s no ambiguity at all, those claims were brought –

HUME: — directly to the shareholders, directly, nothing new is through the companies. And that — just to — in the Barnes case, the Leven case, the Kellmer case, the FHFA or the FDIC, whichever it was didn’t even try to intervene on behalf of the direct claims. They admitted through their conduct that direct claims belong to the shareholders. They never even took the position in any of those cases; please see the cases in footnote six on page four of our reply, and also what happened in Kellmer. And it does, to what we discussed earlier, it does raise a serious issue of constitutional doubt to even suggest the shareholders, whom they admit have economic rights and interests, don’t have the ability to come to court to protect them, that raises serious constitutional issues as recognized by Judge Easterbrook in the Leven case, and the Plaintiffs in all Winstar case, and by Judge Edwards in the Waterview case, and in the, which is cited in the Pershing Square Amicus brief, which I —

Pagliara v. Fannie Mae case (Opening Brief in Support of Motion to Remand) are direct claims

Edwards v. Deloitte case are direct claims

Recent Updates from the Investors Unite Blog

Newly Unsealed Documents Show How Treasury Violated HERA
Tuesday, August 2nd, 2016

The more that is known about the thinking and discussions in the inner sanctums of government during the course of the conservatorship of Fannie Mae and Freddie Mac, the more obvious it is that Treasury officials exceeded their legal authority in order to hasten the dismantlement of the enterprises.

The latest evidence has come to light in unsealed documents produced in the discovery process in the U.S. Court of Federal Claims, which were cited in a complaint filed by investors in Chicago.

In addition to setting up a process by which the assets of Fannie and Freddie would be conserved and preserved, the Housing and Economic Recovery Act (HERA) explicitly delineated the powers and duties of the Federal Housing Finance Agency (FHFA) as conservator and constricted Treasury’s powers.  Top government officials intimately involved with the drafting of the statute have detailed how Congress made it a point to reinforce the independence of FHFA as the conservator, consistent laws dealing with distressed institutions going back decades. But this seemed to have little bearing on Treasury’s determination to dictate Fannie and Freddie’s fate, which ultimately led to the Net Worth Sweep in 2012 and the depletion of their capital.

For example, Jim Parrott, who was a top housing policy advisory at the White House at the time of Sweep, was asked in a deposition whether there had been outreach to Congress about the Sweep. He replied that he had not done so and commented “…this was a Treasury-driven process. So to the degree there was outreach to the Hill, it would have come from Treasury, and not from, from me.”

Parrott’s name has surfaced in several documents unsealed this spring. Recall one of them was his email to senior officials at Treasury the day the Sweep was announced, boasting that diverting Fannie’s and Freddie’s profits would eliminate “the possibility that they ever go (pretend) private again.

Treasury’s assertion of de facto control came early in the conservatorship. A heavily-redacted presentation prepared by PriceWaterhouseCoopers for Freddie to FHFA in October 2008, explained that the Preferred Stock Purchase Agreement terms “restrict the business activities” of Freddie and prevents the company from taking various steps in its own management “without prior written consent of Treasury.” Thus, the designated conservator was told early on that the buck stops with Treasury, regardless of what the statute said.

This interest by Treasury to keep Fannie and Freddie on a short leash is also evident in a draft document spelling out the terms of the PSPA s prepared for Treasury in August 2008 by the law firm of Wachtel, Lipton, Rosen and Katz and Morgan Stanley, in their capacity as independent consultants. In the section of that document titled “Transfers of Assets” the ability of the GSEs to sell assets without Treasury’s consent is restricted.  The document also reveals Treasury’s long-term calculations on the value of the warrants the government received for Fannie and Freddie’s stock. Ultimately, these terms would make it impossible for Fannie and Freddie to pay back public funds made available to them at the start of the conservatorship.

Other documents from the early months of the conservatorship provide yet more information that Ed DeMarco had been on a quest to assist Treasury in using the conservatorship to dismantle Fannie and Freddie practically from the outset. In a presentation in November 2008 to other government officials, DeMarco, then a deputy director at FHFA, said “…conservatorship is a legal process to stabilize a troubled institution with the objective of returning the GSEs to normal business operations. Structure was flawed.”  Thus he knew the statute said one thing (restore their financial footing) but he believed it was better policy to do something else (wind them down.)

On top of these documents is a March 2012 memo from Deloitte that observes that with Fannie and Freddie in conservatorship, “…the US government, and the US Treasury continue to be able to direct the Company’s business.”  Interestingly, a September 2008 memo from Freddie’s auditor, PriceWaterHouseCoopers, says “Treasury’s authority to purchase GSE debt obligations and securities will expire on December 31, 2009.” As we now know, that deadline meant nothing as Treasury engineered the Sweep in the summer of 2012.

All this serves to underscore an important claim by shareholders who have challenged the Net Worth Sweep:  Treasury controls the GSEs and FHFA’s role as independent conservator was rendered meaningless from the start of the conservatorship. As the discovery process yields more information it is a safe bet that more violations of HERA will come to light. When they do, the rationale for the Sweep will crumble and the injustice suffered by shareholders will be glaringly apparent.