Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) shareholder won an important decision yesterday when Judge Margaret Sweeney for the US Court of Federal Claims ruled that not only the discovery process continue in Fairholme’s case against the Federal government, but it will encompass a broader range than the government had hoped for.

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Fannie Mae, Freddie Mac: Sweeney rejects FHFA’s blanket claim to deliberative process privilege

The Federal Housing Finance Agency has been trying to halt the discovery process in this case by arguing that the courts don’t have the necessary jurisdiction to review its decisions and that the documents being requested are protected by deliberative process privilege, but Sweeney rejected both arguments.

Sweeney quoted a previous Ninth Circuit Court of Appeals ruling that the “FHFA cannot evade judicial review . . . simply by invoking its authority as conservator,” and found that Fairholme’s requests wouldn’t interfere with FHFA’s ability to continue acting as conservator, so there was no reason not to continue with discovery.

Pre-decisional documents are subject to ‘deliberative process privilege,’ the idea being that the government should be free to brainstorm and discuss policy and then only be accountable for what it actually puts into effect, but this privilege isn’t absolute and requires some justification. Amazingly, FHFA admitted that it hadn’t even reviewed all of the documents that it claimed as privileged, and Sweeney said that this blanket approach to privilege is reason enough to reject it.

Fannie Mae, Freddie Mac: Sweeney gives discovery a broader scope than FHFA had hoped for

But the rejection of two unlikely arguments isn’t why this decision is being seen as a big win. FHFA has been trying to limit discovery as much as possible, arguing that documents from September 2008 to December 2008 and January 2012 to August 2012 should provide enough information for the plaintiffs, but Judge Sweeney set the scope of discovery as April 2008 to December 2008 and June 2011 to August 2012, giving Fairholme almost entire extra year’s worth of documents to pore over.

The FHFA will be able to claim privilege on some of these documents, but it will have to create a ‘detailed privilege log’ explaining why those documents should be withheld. This case still has a long road ahead of it, but after a string of favorable rulings Fairholme should soon have a trove of government documents to analyze while continuing to build its case.