The legal proceedings against the Federal government over its treatment of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) shareholders looks like it’s going to heat up in the next few months as hundreds of thousands of documents are released to plaintiffs. An administrative hearing is being held today, and it seems that the government has mostly agreed to release 500,000 documents this summer or early fall with as many as 300,000 more documents to follow as part of the discovery process of the trial.

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

‘Dream team of legal experts’ will go pore over documents once released

“Once these documents are received, there is a so-called ‘dream team’ of legal experts who will be parsing the data document-by-document to see if there is a basis for the case against the government,” writes Rafferty Capital Management VP of equity research Richard X. Bove. “Investors (the American public) will discover if the government had knowingly used them as foils through the conservatorship mechanism so that the GSE debt would not be added to the Federal debt.”

Bove thinks that the documents could shed light on two key issues surrounding the conservatorship of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC). First, if the government officially setup a conservatorship but always intended to liquidate the government sponsored entities (GSE), then Bove argues that it is in violation of the Housing & Economic Recovery Act of 2008, which requires the conservatorship to end when the GSEs are healthy, among other laws.

FHA may have sold Fannie Mae, Freddie Mac stocks with no intention of returning them to public markets

If the Federal Housing Agency sold Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) stock to the public knowing that the companies were effectively worthless then it could be in violation of any number of securities laws. Quarterly SEC filings that left out material information could become a major issue; if the FDIC knew that the third amendment would sweep all of the GSEs profits then it could be accused of insider trading. Right now this is still speculation, but a previously leaked memo from Treasury discussing the full income sweeps long before they became public knowledge has convinced many people that the speculation is going to become well-grounded once the relevant documents are made public.