More Erroneous Reporting on Fannie Mae, Freddie Mac Litigation

More Erroneous Reporting on Fannie Mae, Freddie Mac Litigation
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More Erroneous Reporting on Fannie Mae, Freddie Mac Litigation by Todd Sullivan, ValuePlays

I reached out to Housing Wire this morning (both housing wire itself and author) to discuss this but as of publishing, have not heard back (3hrs). I like the site and visit it regularly, they just really, really missed the boat on this one.

Fannie Mae shareholders can not sue Department of Treasury

Housing wire:

Monday Morning Cup of Coffee takes a look at news crossing HousingWire’s weekend desk, with more coverage to come on bigger issues.

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In what could be a major blow to the investor case against Treasury regarding Fannie Mae and Freddie Mac shareholder rights, U.S. District Judge Amy Jackson on Friday ruled that Fannie Mae shareholders cannot sue the Department of Treasury in a derivative action because the Federal Housing Finance Agency has shareholder’s rights.

“The Court finds that this case does not present a conflict of interest sufficient to justify an exception to HERA’s command that only Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA)’s Conservator may bring suit on Fannie Mae’s behalf. Therefore, the Court will grant the Conservator’s motion to substitute for plaintiff in this case,” she said in her ruling, which can be read here.

Fairholme Funds is one of several hedge funds with Fannie Mae and Freddie Mac holdings.

Sounds ominous, no? But, as usual when one actually takes the time to read the decision, one immediately recognized that these case are not related at all. To use an analogy, it is a bit like being invited over for a chicken dinner only to be served steak. Yes, it is dinner (yes, this is an investor lawsuit v the Treasury) but after that, the comparison ends.

Fannie Mae vs Fairholme

First……this case was brought by a Ms Sweeney, not the same Judge Sweeney who currently presides over the Fairholme case…

Ms. Sweeney is suing Treasury et al:

….plaintiff contends that in this case, the Conservator suffers from a “manifest, disabling and irreconcilable” conflict of interest that prevents it from pursuing Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA)’s interests, and that plaintiff should therefore be permitted to bring this action.


In 2009, Fannie Mae owned low-income housing tax credits (“LIHTCs”)4 worth approximately $5.2 billion. Am. Compl. ¶ 57; FHFA Mot. at 7. But because Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) was not profitable at the time, it had no profits against which to offset the LIHTCs, and could not realize their value. Am. Compl. ¶ 57; FHFA Mot. at 7. Fannie Mae therefore sought to sell the LIHTCs, and it identified third-party investors interested in acquiring approximately $2.6 billion worth of the credits. Am. Compl. ¶ 61; FHFA Mot. at 8.

Pursuant to the Treasury Agreements, though, Fannie Mae and the Conservator could not dispose of the LIHTCs without Treasury’s written permission. See FHFA Mot. at 5. According to the complaint, Treasury declined to approve the sale twice – in November 2009 and February 2010 – finding that the sale would not ultimately protect or benefit the taxpayers. Am. Compl. ¶¶ 66, 73.5 Plaintiff alleges that Treasury’s failure to consent to the sale constitutes a breach of its fiduciary duties as the purported “controlling shareholder” of Fannie Mae. Am. Compl. ¶ 76. Through this derivative action, plaintiff seeks to step into the shoes of the Conservator and sueTreasury on behalf of Fannie Mae.

THAT is what this case is about. It has nothing to do with the 3rd amendment which, by the way is the basis for the Fairholme, Perry, and Ackman (among others) actions.

Let’s continue:

Fannie Mae litigation: Judge reference two cases

The Judge reference two cases, Dollar General (First Hartford) and Delta in which shareholder were allowed to breach the conservators expressed ability to solely act on behalf of shareholders.

In Dollar (First Hartford) plaintiffs sued the conservator FDIC under FIRRA (which also said shareholders cannot sue) claiming for breach of contract. In this case the Fed Circuit ruled:

The court found that the particular facts of this case warranted an exception to the “general proposition” that “the FDIC’s statutory receivership authority includes the right to control the prosecution of legal claims on behalf of” Dollar

In Delta:

In Delta Savings Bank, a failing bank was under investigation by the Office of Thrift Supervision (“OTS”) and it came under increased scrutiny because of an alleged racially-motivated conspiracy among two OTS employees and a Delta employee

A shareholder brought suit for the failure of Delta and the OTC for their failure in preventing the discrimination. The court ruled:

The court concluded that “[g]iven the nature and extent of the relationship between the FDIC and the OTS, . . . the FDIC cannot be expected to objectively pursue lawsuits against the OTS, even when it is in the best interest of the failing bank to do so.” Id. Therefore, it found that the “common-sense[ ] conflict of interest exception to the commands of FIRREA” established in First Hartford applied in this case, giving the shareholder plaintiff standing to sue.

Fannie Mae: Why did the judge rule against Ms. Sweeney

So, then, why did the judge rule against Ms. Sweeney here?

….plaintiff’s arguments fail because they do not establish a conflict of interest similar to the ones at issue in First Hartford and Delta 12 Savings Bank. First, the holding of First Hartford is “limited to the situation . . . in which a government contractor with a putative claim of breach by a federal agency is being operated by that very same federal agency.” 194 F.3d at 1295. Given that plaintiff here states that its “action is directed at Treasury . . . not the FHFA,” Pl.’s Opp. at 24, there can be no question that the alleged breach was not committed by the conservator agency. Therefore, the obvious conflict at issue in First Hartford is not present here, and that case’s reasoning does not support plaintiff’s claims.


Second, Delta Savings Bank, too, is inapposite. In that case, the Ninth Circuit applied the conflict-of-interest exception that was articulated in First Hartford, even though the conservator of the bank was not the agency that had allegedly harmed it, as was the case in First Hartford.

The court reasoned that the circumstances of Delta Savings Bank could “not [be] distinguish[ed] from First Hartford” because the OTS and the FDIC were so intertwined. 265 F.3d at 1022. In other words, the Ninth Circuit found that the two ostensibly separate agencies were so closely related that it was as if Delta Savings Bank were being operated by a single agency, the agency that harmed it, as in First Hartford.


In sum, this case does not present the type of “manifest conflict of interest” at issue in either First Hartford or Delta Savings Bank. Rather, it appears that plaintiff’s true objection is to the terms of the Treasury Agreements, which plaintiff does not challenge in its complaint, and which were authorized by Congress in HERA. Therefore, the Court will grant the Conservator’s motion to substitute.

Ms. Sweeney/FHFA ruling link

Plaintiffs in the Sweeney case sued Treasury, not FHFA and did not dispute the terms of the agreement or the agreement itself, they are suing because of a particular action (or lack thereof, the selling of the LIHTC’s) under the agreement.

Fannie Mae: Fairholme suing Treasury and FHFA

Fairholme is suing both Treasury and FHFA, they are contesting the legality of enacting the 3rd amendment as well as its terms. All three of these are absent from the case above. The judge ruled that since plaintiffs in Sweeney did not object to the SPSA or formally its terms, the validity of their claims rests upon the terms of that agreement, so, rightfully, they lost.

Since Fairholme and others are contesting all of the above, there can be no rational linkage between this decision and their cases. To be sure I fully expect Treasury/FHFA to use this and go to Judge Sweeney with a motion to halt discovery and simply rule in their favor. But I also fully expect them to lose that. They will do what they have done from day one in this case, cherry pick a line or two from the ruling and omit its context to attempt to sway Sweeney. Plaintiff’s lawyers will point this out and Sweeney will rule in favor of them again as she has done throughout this process to date.

Now, there is something more notable here. The judge admitted that there “are exceptions” to a conservator’s blanket ability to be the sole entity allowed to act “on behalf of shareholders”. She agreed with the referenced court cases that this ability is not absolute and can be pierced if their actions are not appropriate.

THAT is the real takeaway here……

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Todd Sullivan is a Massachusetts-based value investor and a General Partner in Rand Strategic Partners. He looks for investments he believes are selling for a discount to their intrinsic value given their current situation and future prospects. He holds them until that value is realized or the fundamentals change in a way that no longer support his thesis. His blog features his various ideas and commentary and he updates readers on their progress in a timely fashion. His commentary has been seen in the online versions of the Wall St. Journal, New York Times, CNN Money, Business Week, Crain’s NY, Kiplingers and other publications. He has also appeared on Fox Business News & Fox News and is a contributor. His commentary on Starbucks during 2008 was recently quoted by its Founder Howard Schultz in his recent book “Onward”. In 2011 he was asked to present an investment idea at Bill Ackman’s “Harbor Investment Conference”.

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