Plaintiffs in the Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) litigation are requesting discovery to prove some of the claims made by Treasury in their briefs asking for dismissal of the case are accurate (this was IMO a large tactical error by the gov’t). I have long opined that this case not only does not go to trial but will not pass the discovery stage. Why?

Take a look at the snippet below. This memo was obtained without discovery.

Fannie Mae FHFA Federal National Mortgage Assctn Fnni Me (FNMA)

From the NYT

This month, an internal United States Treasury memo that outlined this restriction came up at a forum in Washington.

The memo was addressed to Timothy F. Geithner, then the Treasury secretary, from Jeffrey A. Goldstein, then the under secretary for domestic finance. In discussing Fannie and Freddie, the beleaguered government-sponsored enterprises rescued by taxpayers in September 2008, the memo referred to “the administration’s commitment to ensure existing common equity holders will not have access to any positive earnings from the G.S.E.’s in the future.”
The memo, which was produced in a lawsuit filed by Fannie and Freddie shareholders, was dated Dec. 20, 2010. Securities laws require material information — that is, information that might affect an investor’s view of a company — to be disclosed.

That the government would deny a company’s shareholders all its profits certainly seems material, but the existence of this policy cannot be found in the financial filings of Fannie Mae. Neither have the Treasury’s discussions about the future of the two finance giants mentioned the administration’s commitment to shut common stockholders out of future earnings.

Federal Home Loan Mortgage Corp (OTCBB:FMCC)’s filings do refer, albeit incompletely, to the administration’s stance, noting that the Treasury “has indicated that it remains committed to protecting taxpayers and ensuring that our future positive earnings are returned to taxpayers as compensation for their investment.” Note that this reference does not say all earnings.

There is serious discussion now on whether or not, since this was not disclosed to investors if in fact Treasury committed securities fraud. Legal folk can debate whether or not it constitutes it or not, but prior to this memo being obtained the question was not even being asked. Here is the proposed order in the case before Judge Lambert (Wilkins, the original Judge has been promoted to the Appeals Court):

Upon consideration of Plaintiffs’ Motion for Supplementation of the Administrative  Records, for Limited Discovery, and for Suspension of Briefing on Defendants’ Dispositive Motions, it is hereby ORDERED that Plaintiffs’ Motion is GRANTED, and it is further hereby  ORDERED that:

1. Defendants shall promptly supplement their administrative record submissions so as to include all materials that were directly or indirectly considered by Defendants in connection with their decision to enter into the “Net Worth Sweep” implemented by the “Third Amendment” to the Preferred Stock Purchase Agreements, including, without limitation, (a) all financial projections and associated data and analyses; and (b) the Department of Justice materials to which the “decision memorandum” found at page 4332 of the Treasury Defendants’ record submission refers. In addition, to the extent Defendants have excluded from their compilation of record materials documents that they claim are protected by applicable privileges, they shall promptly produce to Plaintiffs a privilege log identifying those documents and the nature and basis for any such claim of privilege. To the extent any such privileged materials  contain purely factual information, Defendants shall promptly produce redacted versions of such materials to Plaintiffs. The productions required under this paragraph shall be made as soon as is reasonably possible, and in no event later than February __, 2014.
2. Plaintiffs are authorized to take limited discovery into the completeness of the administrative records produced by Defendants.
3. Plaintiffs are authorized to take discovery, pursuant to Federal Rule of Civil Procedure 56(d), necessary to allow Plaintiffs to present facts essential to their opposition to the motion by Defendants Federal Housing Finance Agency (“FHFA”) and the FHFA Director to dismiss Plaintiffs’ claim for breach of fiduciary duty, which motion the Court shall treat, under Federal Rule of Civil Procedure 12(d), as a motion for summary judgment.
4. Briefing on Defendants’ pending dispositive motions is suspended until such supplementation of the records and limited discovery is completed. Plaintiffs’ response to Defendants’ dispositive motions, and any cross-motion Plaintiffs decide to file, shall be filed no later than 14 days following the completion of the discovery authorized under this Order.

Treasury/FHFA cannot allow discovery. Discovery will reach to ALL communications with everyone involved with the decision. Depositions will be done under oath as we have seen many times the willingness of lower level folks to throw decision makers under the bus rather than commit perjury.   Their entire case rests on their claim that FHFA acted alone, as Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) ‘s regulator in enacting the Net Worth Sweep. Plaintiffs claim they acted as the gov’t in which case a host of laws were violated and the very sweep itself is more likely than not a 5th Amendment Violation. Thus is my thesis that should they lose this motion, we start to see events put in motion to end the net worth sweep. Remember, Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) was put into conservatorship under Bush/Paulson and Geither/DeMarco were heads of Treasury/FHFA in 2010 when The Net Worth Sweep was enacted.

Obama is now in the White House and Lew/Watt are now the heads of Treasury/FHFA. Rather than risk messy and potentially embarrassing discovery/trial to their agencies in this case, they can instead take a victory lap by setting aside the Net Worth Sweep amendment. How? Simple. At the end of Q1 Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and  Fresenius SE & Co KGaA (FRA:FRE) will have most likely completely paid off the US Gov’t’s investment in them. Obama/Lew/Watt can claim success in the bailout repayment, still hold 80% of the common giving the gov’t future profits from their involvement and end this case by setting aside the Net Worth Sweep and the dozens of additional lawsuits discovery will inevitably spawn.  Once the NWS amendment is set aside, the basis for the suits against them now evaporates.

Obama/Lew/Watt can “return these entities to the pension funds (think teachers, police, fire, auto unions etc), small banks and individual investors who own their securities” and pat themselves on the back for another successful government action. The dramatic rise in the value of securities held by these pension funds will be nice positive PR boost for the President and Democrats before the fall elections. A public trial on the legality of their actions will stall any potential reorganization of them as plaintiffs will ask surely for a stay in any potential changes to the entities structure. Should they return to public market with Treasury holding 80% of the common (after exercising warrants) Treasury can then still push for changes to the entities as majority shareholders without the cloud of a trial hanging over them.

So, now the question is “when”. Impossible to tell but I think we get something this spring either from Judges Lambert or Sweeney. I’m think Sweeney issues a decision first as she seems to have been less willing to

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