GSE Reform: Tim Pagliara Files Suit in Delaware

GSE Reform: Tim Pagliara Files Suit in Delaware
GSE Reform: Tim Pagliara Files Suit in Delaware

GSE Reform: Tim Pagliara Files Suit in Delaware

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Plaintiffs are grabbing onto the “GSE’s are private entities” ruling from several courts now and are opening up a new front in the GSE litigation. This gets real tricky real quick for the government. Why? Well, for one they are not a party to the litigation. Second, their actions are not being questioned so they cannot intercede here claiming “executive privilege” and “administrative process” as they have in other litigations.  No, this litigation goes right to the Board’s of the GSE’s.

Remember, as the 9th Circuit ruled last week:

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The district court properly held that a claim presented to Fannie Mae or Freddie Mac is not presented to an “officer, employee or agent” of the United States. And that’s because Fannie Mae and Freddie Mac are private companies, albeit companies sponsored or chartered by the federal government.12 U.S.C. § 1716b (Fannie Mae is a “Government-sponsored private corporation”); 12 U.S.C. § 1452 (Freddie Mac is “a body corporate under the direction of a Board of Directors” elected annually by the voting common stockholders). Seealso Lebron v. Nat’l R.R. Passenger Corp., 513 U.S. 374, 392 (1995) (charter disclaimer of government entity status dispositive for matters within Congress’s control); U.S. ex rel. Totten v. Bombardier Corp., 380 F.3d 488, 492 (D.C. Cir. 2004) (False Claims Act coverage is a matter within Congress’s control), cert. denied, 544 U.S. 1032 (2005). The

United States filed a helpful and well-reasoned amicus brief agreeing with this conclusion.

Our prior decision in Rust v. Johnson, 597 F.2d 174 (1979), where we held that Fannie Mae was a federal instrumentality for state/city tax purposes, does not change the result, because Rust does not address Fannie Mae or Freddie Mac’s status under the False Claims Act. As we have previously held, just because an entity is considered a federal instrumentality for one purpose does not mean that the same entity is a federal instrumentality for another purpose. Kuntz v. Lamar Corp., 385 F.3d 1177, 1185 (9th Cir. 2004). Fannie Mae’s federal instrumentality status for state tax purposes doesn’t answer whether Fannie Mae and Freddie Mac are also government entities for False Claims Act purposes. See Lewis v. United States, 680 F.2d 1239, 1242–43 (9th Cir.1982).

Nor does the Federal Housing Finance Agency’s conservatorship transform Fannie Mae and Freddie Mac into federal instrumentalities. We agree that the FHFA has “all the rights, titles, powers and privileges of” Fannie Mae and Freddie Mac. Cty of Sonoma v. Fed. Hous. Fin. Agency, 710 F.3d 987, 993 (9th Cir. 2013) (quoting 12 U.S.C. § 4617(b)(2)(A)(i)). However, this places FHFA in the shoes of Fannie Mae and Freddie Mac, and gives the FHFA their rights and duties, not the other way around.

So, this suit is challenging the actions of the Board’s of the GSE’s. What was their decision making process regarding the 3rd amendment? Was there one or where they simply following orders from FHFA and Treasury? Why does it matter? Being Deleware Corps and still running the company, the BOD has a duty to minority shareholders. If they violated that duty, they are liable and so are the GSE’s.

This is where it gets even more interesting. Tim Pagliara has requested an expedited hearing (45-60 days) which we can be sure the GSE’s will fight. Tim Pagliara has a right to the hearing so there is a good choice it is granted (or an agreement is reached). We know as a fact the government is holding back thousands of documents from plaintiffs in its litigation claiming privilege (~11,000 of them).  There is a very good chance that internal discussions had by the BOD of the GSE’s will make reference to Treasury/FHFA directives that have not yet been disclosed.  The government can claim privilege for their documents and discussion but are going to have a hard time convincing a judge the BOD of the private GSE’s enjoy a similar privilege.

Why does this matter? Tim Pagliara (or his attorney’s), who is also involved in FHFA/Treasury litigation will be able to match what is uncovered in this litigation to what has been disclosed in the other litigation and find the omissions (and we KNOW there will be some). That will give plaintiffs in those cases amo in front of a judge for more disclosure there (probably the reason for the expedited hearing request).

If the courts here rules the BOD was derelict in its duty, one can assume plaintiffs will go after them personally. Wanna bet on how fast they turn on those above them to get out of it??? Further, if the dereliction involves the 3rd amendment, we can also assume plaintiffs will request the judge take action against that also.

It is so important to note nothing in this litigation calls into question the actions of the government and they are not a party to the lawsuit. Because of that,  all of the defenses you’ve heard to date in this litigation are irrelevant. The BOD here are not part of the government, they do not have the protections the government has and thus are “hanging in the wind” a bit.


Tim Pagliara Summary:

Plaintiff Timothy J. Pagliara (the “Stockholder”), by and through his undersigned counsel, brings this Verified Complaint against the Federal National Mortgage Association (“Fannie Mae”) for books and records, pursuant to Section 220 of the Delaware General Corporation Law (“DGCL”). In support of his claims, the Stockholder alleges as follows:


1. By this action, the Stockholder requests that the Court permit the Stockholder to inspect the books and records of Fannie Mae that are sought by the Stockholder’s demand dated January 19, 2016 (the “Demand”) (Exhibit A hereto). Fannie Mae had no legitimate basis to refuse the Demand.

2. Since its privatization decades ago, Fannie Mae has been a private corporation, governed by Delaware law, with private stockholders and a board of EFiled: Mar 14 2016 09:46AM EDT Transaction ID 58701769 Case No. 12105- 2 directors (the “Board”). Although it is now under temporary conservatorship (the “Conservatorship”), Fannie Mae has not changed: First, the statute that authorized the Conservatorship, the Housing and Economic Recovery Act of 2008 (“HERA”), expressly preserved Fannie Mae’s status as a private corporation and the interests of Fannie Mae’s private stockholders. Second, HERA did not change Fannie Mae’s governing Delaware law. It rather gave the conservator, the Federal Housing Finance Agency (“FHFA”), authority to use powers governed by Delaware law: some of the pre-existing powers of Fannie Mae and its stockholders, Board and management. Finally, after initially succeeding under HERA to some of the Board’s powers, FHFA promptly re-delegated the powers back to the Board.

3. The Demand fully satisfied Delaware law’s requirements for a stockholder’s inspection of corporate books and records. First, it satisfied Section 220’s formal requirements: It stated the Stockholder’s status as a stockholder, was accompanied by evidence of beneficial ownership, and stated that such evidence was a true and correct copy of what it purported to be. Second, it stated proper purposes: to investigate misconduct by the Board and others, communicate with other stockholders about the misconduct and value the Stockholder’s investment in Fannie Mae. Finally, as required to substantiate the investigatory purpose, it set forth credible bases to believe that the misconduct to be investigated had occurred. The Court therefore should summarily order Fannie Mae to comply with the Demand.

Tim Pagliara Lawsuit


Expedited hearing request

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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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