In the United States Court of Federal Claims

No. 13-465 C

(Filed: October 15, 2014)

FAIRHOLME FUNDS, INC. et al.,

Plaintiffs,

v.

THE UNITED STATES,

Defendant.

Fannie Mae: Limiting Access to Protective Order; Risk of Disclosure; Valid Risk of Harm

Charles J. Cooper, Washington, DC, for plaintiffs.

Kenneth M. Dintzer, United States Department of Justice, Washington, DC, for defendant.

OPINION AND ORDER

SWEENEY, Judge

Plaintiffs, shareholders of the Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) (collectively “the enterprises”), have sued the United States, claiming that it engaged in a taking of their property without just compensation, in violation of the Fifth Amendment to the United States Constitution. By way of background, after the national economy collapsed in 2008, the Federal Housing Finance Agency (“FHFA”) placed the enterprises into conservatorship. At the time, the United States Department of the Treasury (“Treasury”) provided the enterprises with capital and entered into agreements to purchase securities from them (“government stock”). Plaintiffs allege that while serving as conservator, defendant implemented the so-called “Net Worth Sweep” for the government stock, which changed the dividend due on the stock to defendant from 10% to 100% of all current and future profits, directing all such profits to the Treasury, rather than to plaintiffs.

Defendant responded to the complaint by filing a motion to dismiss for lack of jurisdiction and for failure to state a claim. Defendant contends that the court lacks jurisdiction because the enterprises are independent entities and not controlled by the federal government, that plaintiffs’ claims are not ripe, and that plaintiffs have failed to state a claim for a regulatory taking. Plaintiffs subsequently moved for discovery in aid of jurisdiction, which the court granted. Because of the sensitive nature of the information responsive to plaintiffs’ discovery requests, on August 8, 2014, the court entered a protective order to safeguard that material.

Now pending before the court is plaintiffs’ motion to admit one of its experts to the protective order. Defendant filed an opposition to the admission and plaintiffs submitted a reply.

Briefing concerning this motion is complete and the court deems oral argument unnecessary. Because serious injury could flow from the intentional or inadvertent disclosure of the sensitive material that is the subject of the protective order, the court denies plaintiffs’ motion.

Plaintiffs seek the admission of J. Timothy Howard to the protective order. Mr. Howard is the former Chief Financial Officer, and former Vice Chairman of the Board of Directors, of Fannie Mae. He resigned in 2004, defendant explains, “in the face of allegations of financial improprieties and ongoing investigations into Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA)’s accounting practices.” Def.’s Opp’n 1. Defendant states that in 2006, the Office of Federal Housing Enterprise Oversight (“OFHEO”) charged Mr. Howard and two other senior Fannie Mae executives with, among other things, earnings mismanagement, failure to ensure adequate internal controls, and the release of misleading financial reports. Id. at 2. According to defendant, the charges were “settled pursuant to consent orders” in which Mr. Howard and his two former colleagues agreed to pay the OFHEO over $31 million. Id. Of that settlement amount, Mr. Howard’s share was $6.4 million. Def.’s Ex. C at 1.

Defendant further states that in late 2013, Mr. Howard authored a book that “offers his take on the demise of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and the collapse of the United States home mortgage market.” Def.’s Opp’n 2. Defendant contends that Mr. Howard “makes clear in his book that he believes [that] he is the victim of the [g]overnment’s overregulation of the [e]nterprises[,] and that the 2006 charges against him were unfounded.” Id. In addition, defendant notes that Mr. Howard has stated publicly that he “desires ‘to be part of the debate over the future of Fannie Mae, and its counterpart, Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC)’ and that he sees his book as part of that initiative.” Id. According to defendant, there is “significant reason” to be concerned about Mr. Howard potentially violating the protective order if he is granted access to protected information. Id. Specifically, defendant argues, because Mr. Howard believes that he “lost his career and reputation” due to the “[g]overnment’s regulation of the [e]nterprises,” such “deeply-held beliefs may color” his view of confidential documents in the case and also his willingness to adhere to the protective order, both during and after this litigation. Id. at 3. Further, because Mr. Howard owns common and preferred stock in Fannie Mae, defendant contends that he has a personal financial stake in the outcome of this case. Defendant asserts that as a shareholder, Mr. Howard “would have an incentive to release confidential information in order to increase the price of his shares.” Id. Defendant concludes that Mr. Howard’s access to protected information should be barred because of the risk of its inadvertent or intentional disclosure. Id. at 4.

See full Fannie Mae: Doc. 101 (order on Howard application) here.

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