The needless exercise in pulling teeth continues as shareholders in Fannie Mae and Freddie Mac were forced yet again this week to seek a court order to get access to documents that have no business remaining walled off.
The three-year battle to open up the most voluminous privileged log tin he country’s history focused this week on a new motion to compel (Appendix) the disclosure of documents. In this motion, attorneys for Fairholme Fund’s shareholders in Fannie and Freddie ask the U.S. Court of Federal Claims to order the use of the “quick peek” procedure for about 1,500 documents of government deliberations dating back more than five years. The government continues to reserve the right to assert various forms of privileged treatment as it undertakes a painstaking review of these documents. Thus, getting to the facts surrounding the Net Worth Sweep has devolved into a plea for a mere glance at documents that most likely should never have considered secret in the first place.
To put the latest development in context, in the drawn out discovery process involving some 12,000 documents, the government initially coughed up roughly 3,500 documents. Earlier this year, a Federal Circuit resisted the government’s attempt to end the discovery process altogether and kept open the option for shareholder attorneys to get a look at specific documents on a case-by-case basis as the government examines the still vast trove of emails, memos, analyses, etc., it still possesses. The government completed its re-examination of the documents listed on the privileged log in late May but the teeth-pulling continued.
In a rare interview with Harvard Business School that was published online earlier this month, (it has since been taken down) value investor Seth Klarman spoke at length about his investment process, philosophy and the changes value investors have had to overcome during the past decade. Klarman’s hedge fund, the Boston-based Baupost has one of Read More
Not surprisingly, Fairholme shareholders’ attorneys identified a number of items as highly relevant in delving into the legality of the Net Worth Sweep, the 2012 amendment to the terms of the conservatorship that started the process of diverting Fannie and Freddie’s earning to the U.S. Treasury. Fairholme’s attorneys then asked the government to review once more 38 of the documents it was still withholding under claims of privilege. The government agreed to unseal an additional 22 documents but dug in on the others, saying essentially these documents were of no concern to shareholders. After a series of communications between Fairholme attorneys and the Justice Department this summer, on August 1, the government conveyed its refusal to agree to use the “quick peek” procedure on many documents but agreed to produce 17 more documents.
In the latest motion to compel, Fairholme’s attorneys acknowledge the government has not failed to make a “good faith” effort to comply with the court’s orders but its apparent foot-dragging on such a large and complex case continues to be a matter of concern. Less diplomatically stated, it is hard to escape the conclusion that the government is covering something up and impeding the administration of justice for shareholders.
Consider documents unsealed late last week. One of them is a straightforward report of the financials of Fannie and Freddie. It is not a confidential, personal exchange about the political considerations of policy options but merely numbers. Why did it take the government three rounds of reviews to decide a routine financial summary from five years ago could, at last, be made public?
Two other documents unsealed last week could make some former government officials squirm. Nonetheless, it should have been obvious a long time ago that these pieces of information did not meet the two relevant legal tests to justify the government withholding them: the deliberative process and bank examination privileges. One concerned a discussion about “re-recording certain deferred tax assets that had been written-off.” It was not only relevant to deliberations concerning the Net Worth Sweep but also – and more troubling – it directly contradicts a statement by Mario Ugoletti, a senior Federal Housing Finance Agency official closely involved with decision making related to the conservatorship of Fannie and Freddie. The other was an email summarizing a June 2012 meeting between FHFA officials and Fannie’s CFO Susan McFarland that affirmed yet again what has already been established: Officials knew the GSEs were about to become quite profitable even though the Sweep was later justified, in part, as a way to protect taxpayers from possible vulnerability at Fannie and Freddie. Again, McFarland’s previously unsealed statements have affirmed these facts, so why was it necessary for another round of reviews for the government to produce this email exchange from five years ago?
In light of the persistent obstacles to reviewing documents that have been shown to have no justification for being hidden away, Fairholme attorneys want the Court to order the use of the “quick peek” procedure to enable them to review documents – only a subset of documents from May 2012 onward – without waiving the government’s claims of privilege. They estimate there are only about 1,500 such documents. Given that many are likely short email exchanges, there is no reason why the re-examination process could not be completed within a month.
In other words, shareholder attorneys want to make it easier for the government to arrive at the inevitable conclusion that more documents need to be produced. This would help put to rest suspicions that the government is concealing facts to hide wrongdoing or trying to spare officials from embarrassment. If the government is confident that officials discharged their duties consistent with the law, then government attorneys should welcome the chance to fully document its position.