Fannie Mae (FNMA)

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New Shareholder Lawsuit: The Government's Actions Are Illegal



May 29, 2015

There were two notable legal developments this week. On Thursday, three GSE shareholders in Iowa filed a lawsuit against the federal government in federal court in Iowa, claiming the Third Amendment Sweep amounts to a breach of contract and illegally taking of property. The previous day, lawyers for Fairholme Funds, Inc., filed formal arguments essentially rejecting the government's rationale for withholding relevant documents in a case being litigated in Federal Claims Court.

The suit in Iowa is the first time individual shareholders have challenged the legality of the Sweep; and the first since reports of leaked Treasury documents have raised new questions about whether relevant information was withheld in the Fairholme case and another suit related to the Sweep.

In the new suit, three shareholders – Thomas Saxton, Ida Saxton and Bradley Paynter – accused the Federal Housing Finance Agency five violations of the Housing and Economic Recovery Act by:

– Failing to act as a conservator;
– Failing to put Fannie Mae and Freddie Mac into "sound and solvent condition;"
– Failing to preserve Fannie's and Freddie's assets;
– Failing to rehabilitate them into condition for return to private control;
– And failing to act independently and free of direction and supervision of other government agencies.


What this boils down to is the plaintiffs allege that, by following the direction of the U.S. Treasury to enact the Third Amendment Sweep, FHFA acted unlawfully, which has resulted in the federal government illegally taking private property. In a press release announcing the lawsuit, Plaintiff Thomas Sax ton said:

"I've invested a fair amount of money in Freddie Mac. What the government is doing is wrong, and I'm filing this to protect my property."


Politico Pro, always one of the fastest on the scene, offered this in its article from the government's perspective:

"The government has argued that it has the authority to manage the firms as it sees fit to protect the taxpayers who continue to back them. The change in 2012 was meant to end a cycle of continued borrowing from Treasury to payback dividends owed on the government's stake."


The problem is that the "change" violated federal law, in the view of senior officials who were involved in writing it.

Meanwhile, with regard to the discovery process in the Fairholme case, lawyers for plaintiffs filed a reply in support of its motion to remove the "protected information" designation of government documents. The government claims those documents were never meant to be made public so it's working on creating "public versions." Fairholme's lawyers rejected this claim:

"[T]he government's definition of confidential would mean that all meaningful discovery in this action would take place under a shroud of secrecy."


"Shroud of secrecy" is a great way of defining the government's actions. New York Times columnist Gretchen Morgenson has been following these events for a while now and, during a speech last month in Minneapolis, called the government's secrecy "absurd." Here's what the Minneapolis Post wrote about her remarks:

"…but last night, Morgenson noted that since her column, the Justice Department has asked the judge presiding in the litigation to seal yet more documents. Lawyers for the shareholders 'say they've never seen anything like it,' she said. "'or the government's part, it has said these documents, which date as far back as 2008, must be kept under wraps because they may roil the markets,' she added. 'That is completely absurd.'"


If the government has nothing to hide, then it should produce the documents it has been ordered by the judge to produce. The discovery process in the Fairholme case has been revealing. We anticipate the same for the new lawsuit, which, by the way, was filed in the U.S. District Court for Northern Iowa so it's not bound by the decision of the Northern District Court in the Continental Western case. We'll be anxiously watching for the government's response to this filing.