Government’s Case on Sweep is on Shaky Ground and Beyond a Crumbling Wall of Secrecy by Investors Unite
This has not been a good week for government lawyers charged with defending the 2012 Net Worth Sweep of the revenues of Fannie Mae and Freddie Mac – which means it has been a good week for shareholders.
Today, attorneys presented oral arguments in the appeal of U.S. District Judge Royce Lamberth’s September 2014 dismissal of investors’ claims that the Sweep violated the Housing and Economic Recovery Act. Lamberth threw out the suit on the grounds that HERA gave the government wide discretion in its role as conservator of Fannie and Freddie. What has become increasingly evident is the absurdity of thinking that the statute’s authority was so broad as to allow the government to do the opposite of what the law was enacted to accomplish – which is what the government seems to be arguing.
For the first quarter of 2022, the Voss Value Fund returned -5.5% net of fees and expenses compared to a -7.5% total return for the Russell 2000 and a -4.6% total return for the S&P 500. According to a copy of the firm’s first-quarter letter to investors, a copy of which ValueWalk has been able Read More
“We are confident that the government’s attempt to nationalize and loot the profits of Fannie Mae and Freddie Mac will not withstand judicial scrutiny,” said David H. Thompson, managing partner at Cooper & Kirk, who is among the attorneys who presented oral arguments today before a three-judge panel.
Earlier this week, documents unsealed in another shareholder suit over the Sweep exposed the fact that a central rationale put forward by the Government – that the Sweep was imperative to protect taxpayers from additional losses – is pure fiction. In fact, those documents show that government officials were well aware of the fact that Fannie and Freddie were about to return to robust profitability on the eve of the Sweep.
“The documents unsealed this week in the Court of Federal Claims contradict government testimony that the Third Amendment Sweep of 100% of the profits of the GSEs was a necessary response to the companies imminent ‘death spiral,’” said Investors Unite Executive Director Tim Pagliara.“The Government’s breath taking level of greed is a clear violation of law and an unconstitutional taking of private property.”
The appeal rests on four key arguments:
1.) The Federal Housing Finance Agency violated its mandate from HERA to return the companies to a “sound and solvent” condition: with the Sweep, they are being operated with zero capital. This is the opposite of “sound and solvent” on its face. Capital is the touchstone of modern financial regulation. There is no institution that could operate with zero capital.
2.) FHFA failed to “preserve and conserve” assets: Standing by as Treasury orchestrated a raid on Fannie and Freddie is the reverse of preserve and conserve. It is more like aid and abet.
3.) FHFA was required to rehabilitate the companies: If the companies were beyond rehabilitation, then they would have been put into receivership, as the statute stipulated.
4.) Duties of conservator: There is a well understood meaning of what a conservator is. There have been hundreds, if not thousands, of conservators in the past. None of them involve the sort of wanton debilitation of the company under conservatorship as was perpetrated by the government in this case. The Sweep undermined and did not restore the health of the companies.
Another issue important in the appeal is that under HERA, FHFA cannot act under the direction of another agency. But documents unsealed this week and reports over the last year demonstrate that Treasury has had a significant role on many aspects of the conservatorship and the Sweep in particular.
In court filings over the last 18 months, the government has pushed back on issues such as jurisdiction, technical considerations under the Administrative Procedures Act, and the latitude of the statute. But those arguments crumble if one looks at the record underlying the legislative debate. This is well-documented in a white paper from last year written by key officials involved in crafting the legislation.
More broadly, what is clearer now than ever is that the Sweep was a premediated and unjustified move by a select group of government officials to get around a law they found inconvenient to their policy objectives of shutting down Fannie and Freddie and trampling on the rights of investors.
“It’s one of the most egregious appropriations of private economic rights in history,”summed up Hamish Hume, a partner in New York-based Boies Schiller Flexner LLP, who also presented arguments today.
No doubt, the documents made public this week are a new matter of inconvenience for government officials mentioned in the depositions and government lawyers. But Judge Sweeney’s ruling makes a strong statement in favor of transparency in government actions and deliberations and sets a high bar for justifying shielding information from public view under claims of “protected information.” Sweeney wrote:
While the court recognizes that protection of the Nation’s financial markets and fledgling financial institutions were legitimate goals when the court first entered its order, with the passage of time, the potential for harm to the Nation’s markets and then-fledgling financial institutions no longer exists. Instead of harm to the Nation resulting from disclosure, the only “harm” presented is the potential for criticism of an agency, institution, and the decision-makers of those entities. The court will not condone the misuse of a protective order as a shield to insulate public officials from criticism in the way they execute their public duties.
Another driving consideration in the decision to unseal the documents was the fact that the information contained therein consisted of discussions that took place more than three years ago. Accordingly, “With the passage of time, the court’s initial concern regarding a negative impact on the Nation’s financial markets or financial institutions has dissipated,” Sweeney wrote.
In its efforts to either spare officials discomfort or simply to conceal wrongdoing in the conservatorship of Fannie and Freddie, the Government has asserted broad claims of “executive privilege” or “protected information” status on over 12,000 documents. Given that executive privilege is available to protect national security and other urgent matters, Sweeney’s ruling should cast doubt on any justification the Government could make on any of the thousands of items currently listed in privileged logs in this case.
A decision on the appeal is expected any time over the next several weeks. While it is impossible to predict what that decision will be, with each legal challenge, the ground beneath the Government’s case is eroding and the wall of secrecy it has built to conceal the illegality of the Sweep is cracking. This week helped advance the case for transparency, the rule of law and the restoration of shareholder rights.