Fannie Mae: Ugoletti & DeMarco Testimony “Raise Serious Concerns About Justification for Net Worth Sweep”

This is a follow up to yesterday’s post on Thursday’s Fairholme filing:

From the filing:

These specific passages, like the Deposition as a whole, contain no “Protected Information.”And as discussed in greater detail in the next section of this brief, these passages are not only of unquestionable relevance to the resolution of the issues raised by the Government’s publicly-filed motion to dismiss in this case, they also raise serious concerns regarding justifications for the Net Worth Sweep made by the Government in its public filings in the Fairholme litigation now pending in the D.C. Circuit.

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III. IN THE ALTERNATIVE, THE COURT SHOULD PERMIT PLAINTIFFS TO FILE THE DEPOSITIONS UNDER SEAL IN FAIRHOLME FUNDS, INC. V. THE FEDERAL HOUSING AGENCY.

Finally, should the Court conclude—in error, Plaintiffs respectfully submit—that both the Depositions and the Redacted Depositions prepared by Plaintiffs contain Protected Information, Plaintiffs respectfully request that the Court permit the filing of the Depositions under seal in the Fairholme litigation in the D.C. Circuit. The Protective Order permits the Court to authorize a party “to file Protected Information in litigation other than the subject action identified in Paragraph 3.” P.O. ¶ 18. This information would be filed under seal. Id. (“Unless the parties otherwise agree or this court otherwise orders, any such Protected Information that is filed in other litigation must be filed under seal.”). The opening briefs in the D.C. Circuit are due on June 30, 2015. See supra note 1.

The DeMarco and Ugoletti Depositions contain information that is relevant to Plaintiffs’ pending appeal in the D.C. Circuit. For example, what the Government knew about Fannie’s and Freddie’s future profitability at the time of the Net Worth Sweep is at issue in both this case and in the D.C. Circuit, for the Government’s “death spiral” rationale for the Net Worth Sweep is undermined if the Government knew that Fannie and Freddie would soon generate earnings exceeding Treasury’s 10% dividend by tens of billions of dollars.

A significant portion of these tens of billions of dollars in earnings were generated by the reversals of the Companies’ deferred tax assets valuation allowances in 2013. FHFA submitted a declaration signed by Mr. Ugoletti in the district court asserting that [N]either the Conservator nor Treasury envisioned at the time of the Third Amendment that Fannie Mae’s valuation allowance on its deferred tax assets would be reversed in early 2013, resulting in a sudden and substantial increase in Fannie Mae’s net worth, which was paid to Treasury in mid-2013 by virtue of the net worth dividend.

Declaration of Mario Ugoletti ¶ 20, Perry Capital LLC v. Lew, No. 13-1025 (D.D.C. Dec. 17, 2013), ECF No. 24-2. This assertion followed and supported Mr. Ugoletti’s claim that “the intention of the Third Amendment was not to increase compensation to Treasury,” id. ¶ 19—a point FHFA emphasized in its briefing. See, e.g., FHFA Motion to Dismiss All Claims at 18, Perry Capital LLC v. Lew, No. 13-1025 (D.D.C. Jan. 17, 2014), ECF No. 28; FHFA Reply in Support of Motion to Dismiss at 53, Perry Capital LLC v. Lew, No. 13-1025 (D.D.C. May 2, 2014), ECF No. 45.

Then there is this:

Screen Shot 2015-06-26 at 12.08.01 PM

Anyone else dying to know what is behind those lines? What did either DeMarco or Ugoletti say? We know one thing, it isn’t good for the government.

This is also huge because what is declassified as protected can also be shared with Perry lawyers in their appeal of the District Court ruling. They can demonstrate to the Appeals Court that Lambreth erred in dismissing the case (not granting discovery that would have uncovered this information) and the Court can remand it back to him for trial.

Things start getting really interesting for the government then.

The post Ugoletti & DeMarco Testimony “Raise Serious Concerns About Justification for Net Worth Sweep” appeared first on ValuePlays.

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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 RealMoney.com 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”.