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Q4 2013 ER is projected to be released 2/26/2014.
I don't think that will happen, but I feel good about the div continuing at a nickel or better, and quite possibly the pps moving up closer to $3.5 or more this year.
Did everyone get their SPECIAL div?
US seeks $2.1bn from BofA over mortgage fraud
By Camilla Hall in New York
The US government has asked for $2.1bn in penalties from Bank of America in a high-profile case where the bank was found liable for civil fraud over bad mortgages sold to Fannie Mae and Freddie Mac.
The request comes as a blow to the bank as the government has more than doubled its earlier demand of about $860m.
The case dubbed the “hustle” – after the bank’s internal “high-speed swim lane” for rushing through loans – is one of several large legal cases that BofA still faces.
The bank is expected to reach multibillion-dollar settlements with other government agencies over alleged faulty mortgages and is awaiting approval on a separate $8.5bn mortgage-backed securities settlement with private investors.
The initial $860m fine the government sought was based on gross losses incurred by Fannie and Freddie resulting from bad mortgages by Countrywide, which Bank of America acquired in 2008.
The higher figure is based on gross revenues generated by the bank, rather than losses incurred by Fannie and Freddie.
Jed Rakoff, the US district judge, will rule on the size of the penalty to be imposed after BofA presents its own calculations by February 26.
The “hustle,” was the first government case arising from the financial crisis over defective mortgages to go to trial. It is developing as other US attorneys’ offices and the DoJ examine the sale of mortgage-backed securities by as many as eight other banks.
In October, a jury found BofA and mid-level employee Rebecca Mairone liable for fraud over bad mortgages sold by Countrywide. The fine for Ms Mairone has been maintained at $1.1m and is based on her ability to pay, the DoJ said.
“To punish defendants for their culpability and bad faith, and to deter financial institutions and their executives who would engage in similar fraudulent mortgage schemes, the court should impose the maximum penalty on the bank,” Preet Bharara, US attorney for the Southern District of New York, wrote in a court document filed late Wednesday.
Lawrence Grayson, a BofA spokesman, said: “This claim is no relation to a limited Countrywide programme that lasted several months and ended before Bank of America’s acquisition of the company. We will present the relevant facts in a detailed response soon.”
US banks from BofA to JPMorgan Chase are keen to put their legal woes behind them as mortgage-related settlements continue to drag on earnings and create large unknowns for investors.
NEW YORK—Judge James Peck approved Lehman Brothers Holdings Inc.'s settlement with Fannie Mae FNMA 0.00% over $18.9 billion in mortgage claims, one last major decision as Lehman's bankruptcy judge before his retirement at the end of the week.
"I want to thank all of you, including those not in the room, for making this the experience of a lifetime," a teary-eyed Judge Peck said before concluding the hearing.
A lawyer for Weil Gotshal & Manges LLP, Lehman's bankruptcy counsel since Lehman's 2008 collapse, began the hearing thanking Judge Peck for his "hard work, scholarship and practicality.
"We'll miss you, and we wish you luck in your future endeavors," said the lawyer, Jacqueline Marcus. "Thank you very much," Judge Peck said.
The judge said in December that he would retire at the end of this month. Aside from his work on Lehman and other cases, he has served as a mediator in several large cases, including the creditors' settlement with Ally Financial Inc. in Residential Capital LLC's Chapter 11 case.
Lawyer after lawyer thanked and congratulated the judge for his service, and the morning had moments of levity. Quintin F. Lindsmith, who represents Nationwide Life Insurance Co., on another matter, touted Judge Peck's "astounding legacy" even though his motions in the case have been denied.
"You're still going to lose today, you know that," Judge Peck said, to courtroom laughter. After the laughter died down, Mr. Lindsmith said, "I've never been laughed at before."
Judge Shelley C. Chapman, who will take over the Lehman case, sat in the back of the courtroom Wednesday with one of her clerks, laughing at a few of Judge Peck's quips.
His last major approval, over mortgage loans and mortgage-backed securities Lehman sold Fannie in the years before the financial crisis, was apropos considering the housing industry's contribution to Lehman's demise. No one objected to the settlement.
Fannie Mae, which originally said it was owed $18.9 billion, will receive a general unsecured claim of $2.15 billion against Lehman. Under Lehman's Chapter 11 payment plan, that works out to a recovery of about 25 cents on the dollar, or about $537.5 million.
In return, Lehman resolves its long-running dispute with the housing giant, which had argued Lehman was on the hook for the risky loans and frees up $5 billion for creditors. Judge Peck had ordered Lehman to set that amount aside pending the outcome of the Fannie dispute when he approved the bank's Chapter 11 plan two years ago.
"This will conclude our relationship with Fannie Mae," said Weil's Alfredo Perez, another Lehman lawyer.
Lehman collapsed into the largest bankruptcy ever in September 2008, a breaking point that accelerated the financial crisis. Under Judge Peck's purview, those in charge of the holding company and its brokerage have sorted out tens of thousands of claims, hundreds of disagreements and the concerns of dozens of classes of creditors. Since Judge Peck approved Lehman's liquidation plan in December 2011, those creditors have received more than $60 billion in distributions, with more to come.
The case won't disappear from bankruptcy court quickly, though. Lehman has a new board of directors and billions of dollars in assets to manage and sell, much of it real estate.
Judge Chapman will be the one to deal with Lehman's remaining issues, including any asset sales, claims disputes and litigation.
Docket 42153- LBHI settles 18.9B for 2.15B in class 7. Free's up more reserves (5B was orig reserved for this claim).
11. Under the terms proposed in the Settlement Agreement, the Fannie Mae Claim will be reduced from its asserted amount of approximately $18.9 billion and allowed in
the amount of $2.15 billion in LBHI Class 7
After reading through all the legalese...this is what I see the GOV is trying to avoid.
Conservatorship FAQs
What is a conservatorship?
The Federal Reserve Bank of St. Louis (and subsequently, the Federal Housing Finance Agency) defines a conservatorship as “[t]he legal process (for entities that are not eligible for Bankruptcy court reorganization) in which a person or entity is appointed to establish control and oversight of a company to put it in a sound and solvent condition. In a conservatorship, the powers of the company’s directors, officers, and shareholders are transferred to the designated conservator.” http://timeline.stlouisfed.org/pdf/CrisisGlossary.pdf
How does it compare to a receivership?
A receiver is a neutral party appointed by the court to take possession of property and preserve its value for the benefit of the person or entity subsequently determined to be entitled to the property. CJS Receivership § 1. Under the Federal Deposit Insurance Act the receiver is charged by law with the duty of winding up the affairs of a bank or savings association or branch of a foreign bank. 12 U.S.C. § 1813(j)
Is a conservatorship temporary or permanent?
There is no inherent duration in a conservatorship. The organic statute or order creating the conservatorship defines its goals, operations, and conditions for existence, differing from the FDIC receivership context, which does not anticipate a return to business. In this case, the Federal Housing Finance Agency has stated that the conservatorship will terminated upon successful completion of its plan to restore the companies to safe and solvent condition (“Fact Sheet – Questions and Answers on Conservatorship”. http://www.fhfa.gov/webfiles/35/FHFACONSERVQA.pdf)
How were the Federal Housing Finance Agency conservatorships established?
Pursuant to authority granted under Housing and Economic Recovery Act and the Safety and Soundness Act, on September 6, 2008, the Boards of Fannie Mae and Freddie Mac both assented to the order of Federal Housing Finance Agency Director Lockhart appointing the Federal Housing Finance Agency as conservator of Fannie Mae and Freddie Mac.
Under what conditions could a conservatorship be instituted?
The Housing and Economic Recovery Act prescribes that the director may appoint a conservator (or receiver) in cases of insolvency, undercapitalization, operating in an unsafe or unsound condition, concealment of books and records to regulators, inability to pay obligations or meet the demands of creditors, violations of law, consent of the Board of Directors, and others.
Under the Housing and Economic Recovery Act, the Director must place the entity under receivership if the entity is insolvent for the preceding 60 days, or has not paid its obligations for the preceding 60 days.
What are the powers of the Conservator?
Per Section 1367 of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (12 U.S.C. § 4501, et seq., as amended) and regulations published by the Federal Housing Finance Agency (12 CFR Part 1237), the conservator has three general sets of powers:
First, the Conservator (or Receiver) is the immediate successor to all rights, titles, powers, and privileges of the entity, and any stockholder, officer, or director.
Second, Conservator may operate the entity – including conducting all business of the entity, taking over the assets, and operating with all the powers of the shareholders, directors, and the officers. The conservator may also collect obligations due to the entity, and contract out any function or duty of the entity.
Finally, and perhaps most importantly, the Conservator may take such action as necessary to: (1) put the entity in a sound and solvent condition, and (2) carry on the business of the regulated entity and preserve and conserve the assets and property of the regulated entity.
How do the Conservatorships operate?
Treasury ‘firmly committed’ to reform of Fannie and Freddie
By Michael Mackenzie and Tracy Alloway in Las Vegas
Link: http://www.ft.com/intl/cms/s/0/7a056cc0-839a-11e3-86c9-00144feab7de.html#axzz2rBwzy9AQ
The US Treasury is fully committed to reforming the housing market, with an official taking a firm stand against allowing the two big housing agencies to remain intact as they generate record profits.
Michael Stegman, counsellor to the secretary of the Treasury for housing finance policy, said while it was good news that Fannie Mae and Freddie Mac were generating large profits, it should not derail efforts to reform the “Government Sponsored Entities” that were taken into conservatorship in September 2008.
“The administration is still firmly committed to comprehensive housing reform,” he told delegates at the Structured Finance Industry Group’s first annual conference in Las Vegas.
Mr Stegman said the Treasury was actively engaged with the Senate banking committee and was hopeful that comprehensive bipartisan housing reform was achievable this year.
“Continued uncertainty about their political future will impede access to credit, particularly for families with less pristine credit. So comprehensive housing reform remains a top priority for the administration,” he said.
The GSEs have nearly paid back their $180bn bailout from the Treasury, thanks to the recovery in home prices since the financial crisis of 2008. That has fuelled talk that reform was not required at this time, particularly with midterm elections later this year dominating the agenda in Washington.
“Some stakeholders mistakenly argue that housing finance reform is no longer needed, that the GSE’s are so flush with cash?.?.?.?We could not disagree more.”
Mr Stegman said that recent results from Fannie and Freddie may “overstate the true financial conditions of the enterprises”. The two mortgage financiers have surged to profitability, allowing them to return billions of dollars to the US government which bailed them out and stalling efforts in Washington to wind them down.
However, Mr Stegman said that about $75bn of their combined income came from one-time tax reversals, while more than $20bn of income came from the release of provisions for bad loans and legal settlements related to mortgages.
More than half of the combined income from GSEs was generated through their vast investment portfolios, which the government wants them to cut from their current $1tn levels, he said.
“At the time they went into conservatorship, the GSEs used their portfolios like hedge funds,” he added.
“Continuing the GSEs in a conservatorship is not the best framework for broadening the mortgage market over time,” he added.
Mr Stegman also said Treasury wanted to see new entrants in the housing market during the transition process of winding down the GSEs in order to prevent any disruption in the flow of housing credit.
The proposed Corker-Warner Senate bill that sets out to wind down the GSEs over five years is seen by many in the housing market as a viable blueprint for reform efforts.
Mr Stegman’s remarks came after the opening day of the conference that saw many in the housing industry downplay the chances of meaningful reform later this year.
Adam LaVier, managing director at Millstein & Co, said during a SFIG panel discussion on GSE reform that housing finance reform was not high on the list of priorities.
“It’s a complex issue, the market is complex and so is the government’s role. It also requires courage and most congressmen see more downside. It’s hard to campaign on ‘I reformed Fannie and Freddie’ as it can come back to haunt you if reform is screwed up.”
Mr Stegman also pushed back against recent calls to expand the US government’s mortgage modification programme, known as Harp. Currently underwater borrowers who took out a home loan before May 31, 2009 are eligible to take advantage of the programme.
“Advancing the date would do more harm than good by prolonging market and investor uncertainties,” Mr Stegman said.
the ex-div date for the special .20 cent div was 01/06/2014...for the normal Q4 2013 div of .09 cents was 12/31/2013. if you are looking for a consisten payout for a while...take a look at Armour Residential REIT...ticker is ARR...they announced they will be paying a MONTHLY div of .05 cents each month for all of 2014. pps is around 4.03 right now so that equates to .60 for the year and a projected div rate of around 15%.
this is where I have a major issue....
"Fannie and Freddie have taken $187.5 billion in aid since 2008. They have returned $185.2 billion — counted as a return on the 80% stakes the government holds — not as repayment"
I fail to see any LEGAL precedent for a "stock holder" of a publicly traded company having the right or ability to determine which class of shareholder is eligible for a dividend. If I remember correctly, they have no voting rights.
I vote we get a dividend for all classes shareholders.
I believe Alexander is having a few legal issues with his swordfish company. I believe Janice posted something about that a while back.
The div pays out just like any other div...this one pays quarterly and will be .09 cents with a SPECIAL div of .20 cents payable at the end of this month. you can go to yahoo finance...put in the ticker symbol...select historical prices...select dividends only...put in a date range of several years...you will be able to estimate when the next div should be paid. Personally I like CIM...have been holding and reinvesting the divs for a number of years.
What exactly does this "new breed" of trader do differently than some of us "old breed" traders? I've only been investing/trading for around 45 years now, and I'm always interested to take a look at new investing/trading ideas that can improve my knowledge levels in the different market areas.
thx for any info you can provide...GLTY
Not gonna be a pretty day
credit Suisse bumped their holdings up by around 10 million shares in the past 3 months alone...so along with several of the other big holders...the 5 top holders own around 300 million shares total....with total inst. investors holding close to 60 % of the company. I don't see anything wrong with that kind of support.
they own 55,069,189 shares....not a bad lil chunk of change
and if I remember correctly...there is no early out with time off for good behavior..... or doing the right thing...or what ever else a criminal may do to get their sentence reduced. Rufie gets to server the entire length of his sentence...no short cuts allowd.
Re: United States v. Defendant(s) RUFUS PAUL HARRIS , BENJAMIN STANLEY
Case Number 2006R01278
Dear xxxxx:
The enclosed information is provided by the United States Department of Justice Victim Notification System (VNS). As a victim witness professional with the United States Attorney's Office, my role is to assist you with information and services during the prosecution of this case. I am contacting you because you were identified by law enforcement as a victim during the investigation of the above criminal case.
The appeal in the case of defendant(s), RUFUS PAUL HARRIS , BENJAMIN STANLEY , was decided on January 6, 2014. The appeal was affirmed. This means the conviction was affirmed and the sentence given originally remains in effect.
U.S. judge asks: Why haven't the financial executives been prosecuted?
LINK
http://www.latimes.com/business/hiltzik/la-fi-mh-us-judge-20131230,0,4386369.story#ixzz2qCds2xSZ
By Michael Hiltzik
December 30, 2013, 11:17 a.m.
As the five-year statute of limitations approaches for the wrongdoing that bequeathed us the Great Recession, the question of why no high-level executives have been prosecuted becomes more urgent.
You won't find a better, more incisive discussion of the question than the one by U.S. District Judge Jed Rakoff of New York in the current issue of the New York Review of Books.
Rakoff, 70, is the right person to raise the issue. He's a former federal prosecutor in Manhattan, where he handled business and securities fraud. A Clinton appointee, he's been on the bench for more than 17 years.
It's unsurprising to find Rakoff emerging as a critic of the government's hands-off treatment of Wall Street and banking big shots in the aftermath of the financial crisis: He's never shown much patience for the settlements in which the Department of Justice and the Securities and Exchange Commission allow corporations and executives to wriggle out of cases by paying nominal penalties and promising not to be bad in the future. These are known as "consent decrees."
In 2009, he tossed a $33-million SEC settlement of a white-collar case with Bank of America, calling it "a contrivance designed to provide the S.E.C. with the facade of enforcement and the management of the Bank with a quick resolution of an embarrassing inquiry." The parties later agreed to a higher fine and stricter terms. And in 2011 he rejected a $285-million consent decree Citigroup entered with the SEC. That rejection is still being pondered by a federal appeals court.
In his new essay, Rakoff takes particular aim at the government's habit of prosecuting corporations, but not their executives -- a trend we railed against earlier this year.
"Companies do not commit crimes," Rakoff observes; "only their agents do...So why not prosecute the agent who actually committed the crime?" He's witheringly skeptical of prosecutions of corporations, which usually yield some nominal fines and an agreement that the company set up an internal "compliance" department. "The future deterrent value of successfully prosecuting individuals far outweighs the prophylactic benefits of imposing internal compliance measures that are often little more than window-dressing."
Rakoff's at his best when analyzing why the government has stopped pursuing individuals and taken the easy route of settling with corporations. He notes that this is a recent trend: In the 1980s, the government convicted more than 800 individuals, including top executives, in the savings-and-loan scandal, and a decade later successfully prosecuted the top executives of Enron and WorldCom.
He dismisses the Department of Justice rationale that proving "intent" to defraud in the financial crisis cases is difficult: There's plenty of evidence in the public record that banking executives knew the mortgage securities they were hawking as AAA were junk.
He doesn't buy the excuse that criminal prosecutions involving major financial firms might have damaged the economy -- no one has ever contended that a big firm would collapse just because its high-level executives were prosecuted. And he notes that the government doesn't dispute that some of these executives may be guilty -- it just comes up with excuses for not prosecuting.
Why? Rakoff posits that there are several reasons for the lack of prosecutions. One is that the FBI and SEC are both understaffed because of budget cuts, and in the FBI's case with the diversion of much of its workforce to anti-terrorism efforts after 9/11. And he speculates that the government may feel abashed at its own complicity in the crisis, arising from the easing of financial and mortgage regulations over the years.
Rakoff's piece has elicited some predictable push-back from the Department of Justice, where a spokesman scoffed that he "does not identify a single case where a financial executive should have been charged, but wasn't."
This is a cynical defense at best, since the DOJ knows well that for Rakoff to have prejudged a case by naming names would have been a flagrant breach of judicial ethics. Indeed, Rakoff takes pains to disavow any opinion about whether criminal fraud was committed "in any given instance." But he does point out that evidence of fraudulent behavior is not hard to find -- the final report of the Financial Crisis Inquiry Commission headed by former California Treasurer Phil Angelides brims with documented examples.
What's been lacking, Rakoff finds, is the political will and government resources to bring individuals before the bar of justice. Although millions of Americans are still suffering the financial consequences of the crisis, Rakoff suggests that the failure of the justice system may do even more lasting damage to the fabric of American society. His warning should be heeded, before it's too late.
Reach me at @hiltzikm on Twitter, Facebook, Google+ or by email.
Sen. Warren: Getting at the truth of those big, bogus bank penalties
LINK:
http://www.latimes.com/business/hiltzik/la-fi-mh-bank-settlements-20140110,0,4236968.story#ixzz2qCbanCPH
The dirty little secret of those eye-popping fines and penalties the government has been extracting from banks and Wall Street firms for financial wrongdoing is that they cost the firms only a fraction of the top-line numbers.
Now Sens. Elizabeth Warren (D-Mass.) and Tom Coburn (R-Okla.) are demanding that the top and bottom lines be disclosed -- not only what the government and the banks claim the settlements are worth, but what they're really worth. As my colleague Jim Puzzanghera reported, they've introduced the Truth in Settlements Act to do that job.
For any federal agency settlement larger than $1 million -- and you have to be engaged in some pretty trivial wrongdoing to fall below that threshold -- the act would require public disclosure of how much of the settlement is tax-deductible, and how much involves "credits" for routine conduct.
Warren's office points out, for example, that the $25-billion National Mortgage Settlement reached by five big banks in February 2012 actually included $17 billion in credits for routine conduct, such as hewing to mortgage disclosure rules. She might also have mentioned, as we reported then, that the settlement provided cover for another stealth bailout in which the banks settled a $400-million claim from the U.S. Comptroller of the Currency for zero merely by promising to comply with the terms of the mortgage settlement.
Warren and Coburn would insist that when settlement details are kept confidential, the federal agencies explain why. And the agencies would have to make an annual report toting up all their confidential deals.
The measure reflects a rise in public discontent with settlements that look like major penalties but shrivel into wrist-slaps when reality is accounted for. Until now, the battle has been uphill, waged by lonely figures such as U.S. Judge Jed Rakoff, who has tossed a couple of deals out of his courtroom for being too secret and too paltry.
In 2009, Rakoff bounced the Securities and Exchange Commission's $33-million settlement with Bank of America, which involved no admission or denial of wrongdoing. He complained that the deal looked like "a contrivance designed to provide the SEC with the facade of enforcement and the management of the Bank with a quick resolution of an embarrassing inquiry," and found that the deal "cannot remotely be called fair." The parties had to come back with a more detailed disclosure and a higher number.
The worst recent example of a settlement that looks tough on the outside but comfy on the inside may be the $13-billion settlement JPMorgan reached with regulators in November over its chicanery in the mortgage securities market. As we observed at the time, the regulators crowed that it was "the largest settlement with a single entity in American history," to quote the Department of Justice.
But it wasn't what it seemed. First, of the $13-billion total, $7 billion was tax deductible by JPMorgan, which could save the company nearly $2.5 billion. Another $4 billion represented a settlement the bank reached earlier with the Federal Housing Finance Agency, the regulator overseeing Fannie Mae and Freddie Mac.
Another $4 billion wasn't a cash outlay, but included $2 billion in forgiveness of principle for homeowners with underwater mortgages -- borrower relief sure to save Morgan money in the long run, for there's nothing more costly for a mortgage lender than having borrowers go into foreclosure. Another $2 billion involved "credits" the bank will receive to bump up lending in low-income communities.
So what looked like $13 billion really penciled out at around $6.5 billion. Under the Warren/Coburn act, presumably, this would be stated up front without requiring members of the public to do the math themselves.
It's a good start, though it doesn't solve the biggest problem with these settlements. That problem is that they almost never involve indictments of actual human wrongdoers, up to and including the CEOs who oversaw the shenanigans. That's the necessary next step, without which the white collar wrongdoing will just continue. Time for an "Effectiveness in Deterrence Act"?
Reach me at @hiltzikm on Twitter, Facebook, Google+ or by email.
I'm hoping this is the push to 60...I thought about getting out at 55 as well, but I'm greedy...hopefully they will bump up the div this year and we can get a decent return to drive the pps towards triple digits
I agree with you 100% that the "taxpayers" will not receive a dime in their returns. The political powers will feed that money off to whatever little pet project or piece of debt obligation that needs to be taken care of so they can say they have done well by the taxpayers.
As far as paying back the bailout...technically....based on the terms of the agreement there was no loan, so nothing to pay back.
Per the agreement, Treasury PURCHASED Senior Preferred shares and the government has received warrants to buy up to 79.9% of GSE common stock for $0.00001 per share.
Sooooo.....based on the original terms....Fannie owed a 10% dividend on the amount of money the FED spent to purchase the Senior Preferred shares...I think totaled $116.1 billion.
Now with the "amended" terms, Fannie pays all profits to the FED minus ~$3 billion for operating costs....don't know what that % figures out to, but it is a hellll of a lot higher than 10%.
Fannie, Freddie Rise After Senators Offer Hope to Private Investors
LINK:
http://www.thestreet.com/story/12218852/1/fannie-freddie-rise-after-senators-offer-hope-to-private-investors.html?puc=yahoo&cm_ven=YAHOO
BY Philip van Doorn | 01/08/14 - 01:39 PM EST
NEW YORK (TheStreet) -- Shares of Fannie Mae (FNMA_) and Freddie Mac (FMCC_) rose considerably on Wednesday, after comments at a Financial Services Round Table meeting indicated a willingness in Congress to consider the interests of private investors when winding down the two government sponsored enterprises (GSEs).
Common shares of Fannie Mae were up 5% in afternoon trading to $3.22, while Freddie's common shares were up 5.4% to $3.10.
The GSEs' junior preferred shares popped, with Fannie Mae's preferred Series F shares (FNMAS) rising 13.3% to $9.88, while Freddie's preferred Series Z (FMCKJ) shares were up over 9.1% to $9.88. Both preferred issues have par values of $25.00.
The GSEs were taken under government conservatorship at the height of the credit crisis in September 2008. The U.S. Treasury holds $117.1 billion in senior preferred Fannie Mae shares and $72.3 billion in senior preferred Freddie Mac shares. Under their modified bailout agreements, the GSEs must pay all earnings to the government in excess of minimal capital cushions of $3 billion apiece. Including their December dividend payments, the government has received $185.3 billion in dividends from Fannie and Freddie, for a five-year investment of $189.4 billion.
But there's no mechanism in place for either GSE to repurchase any government-held preferred shares. Several institutional investors holding junior preferred and/or common shares of Fannie and Freddie have sued the government over what they say has been an illegal seizure of their property.
Consumer advocate Ralph Nader is firmly on the side of the GSEs non-government shareholders.
Bruce Berkowitz's Fairholme Capital in July sued the federal government "to protect its rights as an owner of preferred stock in Fannie Mae and Freddie Mac, including the right to receive dividends from the profitable companies." Then in November, Berkowitz sent a letter to acting Federal Housing Finance Agency (FHFA) director Edward DeMarco, proposing to establish two privately funded companies "to purchase, recapitalize and operate the mortgage-backed securities insurance business of Fannie and Freddie."
Former North Carolina Rep. Mel Watt was sworn in as the new FHFA director on Monday.
Under Berkowitz's November proposal, Fairholme's suit against the government would be dropped, and the new companies would be capitalized with $34.6 billion from the conversion of junior preferred stock in the entities to common shares. At least another $17.3 billion of new capital would be raised from the junior preferred stockholders in a rights offering. The GSEs' book of investments and insurance would be wound down and the proceeds would be used to fully repay the Treasury and provide a profit to taxpayers. Any proceeds remaining would go to common shareholders.
Berkowitz proposal was quickly rejected by the White House, and it was clear the proposal would meet initial resistance in Congress, which wouldn't want to lose its GSE cash cow. Washington also perceived a lack of sympathy for the non-government shareholders of Fannie and Freddie, some of whom scooped up the shares at tremendous discounts in the hope of making a killing as the GSEs returned to consistent profitability.
Do I blame them for hanging on? Not at all. I do blame them for the REASONS they are hanging on though. I don't believe for a second they are doing this for the "taxpayers" as they say. The taxpayers are footing the bill for the lost "value" in the financial and housing markets no matter what the FED says. They are continuing to hold FnF in conservatorship and sweeping the entire quarterly profits of both companies...minus a nominal $3 billion each for operating costs while they try to determine how best to recover and reshape the financial world?
They have already figured out how to resolve the issues...they have already figured out who is/was at fault...they have already decided the taxpayers will foot the bill for all the wrong doings of those at the top whom will most likely never be found personally liable for any of this. Very, very few heads will roll from this fiasco...most of them that will face any kind of repercussions have already lost their jobs...been fined...retired...moved on to other companies, or took a slap on the hand, got their nose wiped...booboo kissed, and allowed to carry on with a warning.
WE, as shareholders, are also tax payers. Yet they look at us through a different set of eyes as though the shareholders were/are part of the evil doers that brought the financial world to it's knees. They will continue to blame FnF as a whole for a lot of this while quietly bending us over and ramrodding us until they have no choice but to release FnF from conservatorship.
They act as though the general public hasn't a clue as to what caused this mess, or who was truly behind it. Most of us know this actually started back with uncle Billy, way back when he was NOT having sex with that woman...and carried on with some...but not enough resistance from GW who got side tracked by all those WMD's. I will say, though GW did make somewhat of an effort to stop/slow the Billy ball rolling downhill, he didn't push hard enough, nor did he make enough of an effort to B^^^ slap Barney and allowed him/her to make some of the most absurd changes to the financial backing of the housing markets that have ever been allowed.
Was FnF guilty in any of this? Of course...they had their hands in it as well...albeit somewhat of a forced hand...they did little to nothing to right the wrongs or blow the whistle. While the money flows...it's all good....they saw the world through rose colored glasses with the attitude of...I'll get mine while I can...let the next in line deal with the fallout that's coming...hopefully long after I'm gone.
Bottom line is...WE as taxpayers will ALWAYS foot the bill for public or political misdeeds/mistakes/screw-ups...what ever one wishes to call them...when they are discovered. The taxpayer is the wall at the bottom of shit hill...and we all know which way it rolls.
My rant is over for the day...been in FNMA for over 5 years and would like to see some fairness and equality spread our way for once.
A little action today...did someone fart?
Price Size Mkt Time
$0.0002 40,000 OTO 14:41:30
$0.0001 148,501 OTO 10:58:53
$0.0001 1,875 OTO 10:48:19
$0.0001 54,001 OTO 10:44:17
$0.0001 999,998 OTO 10:35:34
$0.0001 500,000 OTO 10:35:34
$0.0001 10,000 OTO 10:34:44
$0.0001 10,000 OTO 10:33:38
$0.0001 10,000 OTO 10:32:49
$0.0001 10,000 OTO 10:32:22
$0.0001 10,000 OTO 10:31:28
$0.0001 200,000 OTO 10:31:06
$0.0001 47,500 OTO 10:30:51
earnings report will be out before the bell on Jan 16th....hope it is decent enough to drive the pps up around $60
It may not...we both have a 50 - 50 chance of being right. I see the FED doing everything they can to hold on to the div sweeps as long as possible. We know all too well how long the legal system takes to reach a final decision with appeals and what ever else can be brought up to prolong the div sweep.
I think both FnF could be remodeled with new directives and oversight within this year, set free, and resume their roles in the housing market to the benefit of the country....I don't think it will be that quick because of the political posturing.
with what?
Agreed...I would suspect the court is implying that as long as they play within the rules, the court wouldn't intervene...even if playing within the rules is detrimental to someone or some organization in some way...but venture outside that legal boundary, and the court may well take the position that they do need to step in and clarify the legal aspects.
As time goes on, I see more and more a cumulative effect of the various lawsuits and allegations of those boundaries being violated, and adding up to point where the judicial system has no choice but to force the conservator to make a decision to release both FnF from conservatorship.
Though that will probably not happen until well into the NEXT Presidency. I think as we see the corrections and reforming of regulations involving the housing and financial worlds, we see a much better scenario where FnF are positioned to return to public hands....albeit highly regulated and scrutinized....and of course a nice growth in pps as those times grow closer
It appears this letter is a complaint involving the failure of the FNMA conservator to abide by the laws of the housing and Recovery act of 2008 (HERA)
Interesting letter...a bit old, but I do like the comment by the 11th circuit court
The FHFA cannot evade judicial scrutiny by merely labeling its actions with a conservator stamp. Congress did not intend that the nature of the FHFA's actions would be determined based upon the FHFA's self-declarations because the distinction between regulator and conservator would be one without a meaning or effect. Moreover, "if the FHFA were to act beyond statutory or constitutional bounds in a manner that adversely impacts the rights of others, would not bar judicial oversight or review of its actions"[/I]
LINK:
http://nlihc.org/sites/default/files/NLIHC_RTTC_Demand_Ltr_4-15-13.pdf
Thank you sir!
you might find this link interesting
http://www.finatec.us/home/articles/US_Takeover_of_GSEs.html
not sure when this came out...still trying to find it on a different one of the FED sites to verify the date.
Worth posting again
LINK: http://www.treasury.gov/press-center/press-releases/Documents/fhfa_consrv_faq_090708hp1128.pdf
FEDERAL HOUSING FINANCE AGENCY
FACT SHEET
Contact:
Corinne Russell
(202) 414-6921
Stefanie Mullin
(202) 414-6376
****EMBARGOED UNTIL 11AM****
QUESTIONS AND ANSWERS ON CONSERVATORSHIP
Q: What is a conservatorship?
A: A conservatorship is the legal process in which a person or entity is appointed to establish control and oversight of a Company to put it in a sound and solvent condition. In a conservatorship, the powers of the Company’s directors, officers, and shareholders are transferred to the designated Conservator.
Q: What is a Conservator?
A: A Conservator is the person or entity appointed to oversee the affairs of a Company for the purpose of bringing the Company back to financial health.
In this instance, the Federal Housing Finance Agency (“FHFA”) has been appointed by its Director to be the Conservator of the Company in accordance with the Federal Housing Finance Regulatory Reform Act of 2008 (Public Law 110-289) and the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (12 U.S.C. 4501, et seq., as amended) to keep the Company in a safe and solvent financial condition.
Q: How is a Conservator appointed?
A: By statute, the FHFA is appointed Conservator by its Director after the Director determines, in his discretion, that the Company is in need of reorganization or rehabilitation of its affairs.
Q: What are the goals of this conservatorship?
A: The purpose of appointing the Conservator is to preserve and conserve the Company’s assets and property and to put the Company in a sound and solvent condition. The goals of the conservatorship are to help restore confidence in the Company, enhance its capacity to fulfill its mission, and mitigate the systemic risk that has contributed directly to the instability in the current market.
There is no reason for concern regarding the ongoing operations of the Company. The Company’s operation will not be impaired and business will continue without interruption.
Q: When will the conservatorship period end?
A: Upon the Director’s determination that the Conservator’s plan to restore the Company to a safe and solvent condition has been completed successfully, the Director will issue an order terminating the conservatorship. At present, there is no exact time frame that can be given as to when this conservatorship may end.
Q: What are the powers of the Conservator?
A: The FHFA, as Conservator, may take all actions necessary and appropriate to (1) put the Company in a sound and solvent condition and (2) carry on the Company’s business and preserve and conserve the assets and property of the Company.
Q: What happens upon appointment of a Conservator?
A: Once an “Order Appointing a Conservator” is signed by the Director of FHFA, the Conservator immediately succeeds to the (1) rights, titles, powers, and privileges of the Company, and any stockholder, officer, or director of such the Company with respect to the Company and its assets, and (2) title to all books, records and assets of the Company held by any other custodian or third-party. The Conservator is then charged with the duty to operate the Company.
Q: What does the Conservator do during a conservatorship?
A: The Conservator controls and directs the operations of the Company. The Conservator may (1) take over the assets of and operate the Company with all the powers of the shareholders, the directors, and the officers of the Company and conduct all business of the Company; (2) collect all obligations and money due to the Company; (3) perform all functions of the Company which are consistent with the Conservator’s appointment; (4) preserve and conserve the assets and property of the Company; and (5) contract for assistance in fulfilling any function, activity, action or duty of the Conservator.
Q: How will the Company run during the conservatorship?
A: The Company will continue to run as usual during the conservatorship. The Conservator will delegate authorities to the Company’s management to move forward with the business operations. The Conservator encourages all Company employees to continue to perform their job functions without interruption.
Q: Will the Company continue to pays its obligations during the conservatorship?
A: Yes, the Company’s obligations will be paid in the normal course of business during the Conservatorship. The Treasury Department, through a secured lending credit facility and a Senior Preferred Stock Purchase Agreement, has significantly enhanced the ability of the Company to meet its obligations. The Conservator does not anticipate that there will be any disruption in the Company’s pattern of payments or ongoing business operations.
Q: What happens to the Company’s stock during the conservatorship?
A: During the conservatorship, the Company’s stock will continue to trade. However, by statute, the powers of the stockholders are suspended until the conservatorship is terminated. Stockholders will continue to retain all rights in the stock’s financial worth; as such worth is determined by the market.
Q: Is the Company able to buy and sell investments and complete financial transactions during the conservatorship?
A: Yes, the Company’s operations continue subject to the oversight of the Conservator.
Q: What happens if the Company is liquidated?
A: Under a conservatorship, the Company is not liquidated.
Q: Can the Conservator determine to liquidate the Company?
A: The Conservator cannot make a determination to liquidate the Company, although, short of that, the Conservator has the authority to run the company in whatever way will best achieve the Conservator’s goals (discussed above). However, assuming a statutory ground exists and the Director of FHFA determines that the financial condition of the company requires it, the Director does have the discretion to place any regulated entity, including the Company, into receivership. Receivership is a statutory process for the liquidation of a regulated entity. There are no plans to liquidate the Company.
Q: Can the Company be dissolved?
A: Although the company can be liquidated as explained above, by statute the charter of the Company must be transferred to a new entity and can only be dissolved by an Act of Congress.
Don't know if this had been posted earlier
LINK:
https://docs.google.com/viewer?a=v&pid=forums&srcid=MDUxNDQwNjExMTIwMzQzNjc3NDIBMTA2MjY0NjIzMzA1MjMyOTg2MDEBZ21GUVY5WW5VYzhKATQBAXYy
Case 1:13-cv-00385-MMS Document 37 Filed 12/16/13 Page 1 of 67
No. 13-385C
(Judge Sweeney)
UNITED STATES COURT OF FEDERAL CLAIMS
WASHINGTON FEDERAL, MICHAEL McCREDY BAKER,
and CITY OF AUSTIN POLICE RETIREMENT SYSTEM,
Plaintiffs,
v.
THE UNITED STATES,
Defendant.
PLAINTIFFS’ BRIEF IN OPPOSITION TO DEFENDANT’S MOTION TO DISMISS
Case 1:13-cv-00385-MMS Document 37 Filed 12/16/13 Page 2 of 67
TABLE OF CONTENTS
Page
I. INTRODUCTION ............................................................................................................. 1
II. STATEMENT OF FACTS ................................................................................................ 5
A. The Creation of Fannie Mae and Freddie Mac ...................................................... 5
B. The Government’s Actions Weakened the Companies’
Financial Strength by Requiring Them to Increase Their
Holdings in Riskier Mortgages and Mortgage-Backed
Investments ............................................................................................................ 6
C. The Housing and Economic Recovery Act of 2008 and the Government’s Continued Expressions of Confidence in the Companies and Their Financial Strength ............................................................... 7
1. Fannie Mae and Freddie Mac were suddenly and improperly placed into conservatorship ..................................................... 8
a. The Government’s motive for imposing the
conservatorships was to maintain liquidity in the U.S. mortgage market, in part, by bailing out
other financial institutions holding high-risk mortgages and mortgage-backed instruments ................................ 9
b. The conservatorships obliterated shareholder value ............................................................................................. 10
2. None of the criteria under HERA for appointing a conservator was satisfied ......................................................................... 10
D. The Stock Agreements Improperly Appropriated the Private Property of the Companies’ Preferred and Common
Shareholders ......................................................................................................... 11
1. The Original Stock Agreements ............................................................... 11
2. The Third Amendment ............................................................................. 12
III. STANDARD OF REVIEW ............................................................................................. 13
IV. ARGUMENT ................................................................................................................... 14
A. The Court Has Jurisdiction to Entertain Each of Plaintiffs’
Claims .................................................................................................................. 14
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1. The Court has Tucker Act jurisdiction over FHFA
because the Complaint challenges FHFA’s conduct as a
regulator, not as a conservator, and alleges that FHFA
colluded with Treasury ............................................................................ 14
2. HERA creates no limitation whatsoever on Plaintiffs’
ability to seek damages based upon the imposition of
the conservatorships ................................................................................. 19
a. HERA’s 30-day challenge window applies only
to requests for equitable relief...................................................... 19
b. HERA’s 30-day window cannot be construed to
preclude claims for damages based on Fifth
Amendment violations. ................................................................ 21
B. Plaintiffs Have Standing to Bring These Claims ................................................. 22
1. HERA does not preclude Plaintiffs from suing the
Government directly because FHFA is so inextricably
intertwined with the Government that it cannot stand in
the shoes of the Companies’ shareholders. .............................................. 22
2. Plaintiffs have standing to bring a direct action against
the Government ........................................................................................ 25
a. Plaintiffs have standing because there is no risk
of double recovery and any recovery by the
Companies would improperly go to the
Government.................................................................................. 25
b. The loss of the value of Plaintiffs’ shares is
directly attributable to the Government’s
dilution of Plaintiffs’ shares ......................................................... 27
C. Plaintiffs Have Adequately Alleged Violations of the Takings
Clause ................................................................................................................... 30
1. Plaintiffs’ claims are ripe for judicial review .......................................... 30
a. Plaintiffs’ injuries are concrete .................................................... 31
b. The indeterminate nature of the conservatorship
further underscores the need for judicial review .......................... 33
2. Plaintiffs have a cognizable property interest in their
shares........................................................................................................ 35
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Case 1:13-cv-00385-MMS Document 37 Filed 12/16/13 Page 4 of 67
a. The existence of a regulatory framework
applicable to the Companies does not vitiate
Plaintiffs’ property interests ......................................................... 36
3. Plaintiffs have adequately pleaded a Penn Central
regulatory taking ...................................................................................... 39
a. The Government’s actions have resulted in
severe economic impact ............................................................... 41
b. The Plaintiffs reasonably expected that the
Government would not interfere with their
rights as shareholders in the Companies ...................................... 41
c. The Government was not rescuing the
Companies; at most it was cleaning up its own
mess.............................................................................................. 44
D. Plaintiffs State an Exaction Claim ....................................................................... 46
1. The Government’s actions were not presumptively
authorized ................................................................................................. 47
2. Plaintiffs have alleged claims under money mandating
statutes...................................................................................................... 48
a. For Plaintiffs’ claims concerning the
conservatorship, Plaintiffs have sufficiently
alleged that HERA is money mandating ...................................... 48
b. For Plaintiffs’ claims related to the Stock
Agreements, Plaintiffs have alleged that the
Companies’ statutory charters were money
mandating ..................................................................................... 52
3. The Government exacted something from Plaintiffs by
breaching its duty to conserve the Companies’ assets
during the conservatorship ....................................................................... 52
4. The harm to Plaintiffs was not indirect; if Plaintiffs are
not able to recover their losses, the Government’s
conduct will go without a remedy ............................................................ 53
E. If the Court Finds Plaintiffs’ Allegations to be Insufficient,
Plaintiffs Should Be Permitted Leave to Amend ................................................. 54
V. CONCLUSION ................................................................................................................ 55
VI. REQUEST FOR ORAL ARGUMENT ........................................................................... 55
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TABLE OF AUTHORITIES
Page(s)
CASES
Abbott Labs. v. Gardner,
387 U.S. 136 (1967) .................................................................................................................30
Acceptance Ins. Co., Inc. v. United States,
583 F.3d 849 (Fed. Cir. 2009)......................................................................................20, 38, 39
Aerolineas Argentinas v. United States,
77 F.3d 1564 (Fed. Cir. 1996)..................................................................................................53
AG Route Seven P’ship v. United States,
57 Fed. Cl. 521 (2003) .............................................................................................................17
Am. Continental Corp. v. United States,
22 Cl. Ct. 692 (1991) .........................................................................................................42, 43
Am. Pelagic Fishing Co., L.P. v. United States,
379 F.3d 1363 (Fed. Cir. 2004)................................................................................................35
Ambase Corp. v. United States,
61 Fed. Cl. 794 (2004) .......................................................................................................17, 21
Ameristar Fin. Servicing Co., LLC v. United States,
75 Fed. Cl. 807 (2007) .............................................................................................................16
Appolo Fuels, Inc. v. United States,
381 F.3d 1338 (Fed. Cir. 2004)................................................................................................41
Ashcroft v. Iqbal,
556 U.S. 662 (2009) ...........................................................................................................14, 20
Bayou Des Familles Dev. Corp. v. United States,
130 F.3d 1034 (Fed. Cir. 1997)................................................................................................31
Bell Atl. Corp. v. Twombly,
550 U.S. 544 (2007) ...........................................................................................................14, 20
Branch v. United States,
69 F.3d 1571 (Fed. Cir. 1995)......................................................................................37, 38, 40
Brodowy v. United States,
482 F.3d 1370 (Fed. Cir. 2007)................................................................................................48
Brookfield Relocation, Inc. v. United States,
113 Fed. Cl. 74 (2013) .......................................................................................................30, 31
- iv -
010347-11 661111 V1
Case 1:13-cv-00385-MMS Document 37 Filed 12/16/13 Page 6 of 67
Brown v. United States,
105 F.3d 621 (Fed. Cir. 1997)..................................................................................................21
Cal. Hous. Sec., Inc. v. United States,
959 F.2d 955 (Fed. Cir. 1992)............................................................................................38, 44
Casa de Cambio Comdiv, S.A. de C.V. v. United States,
291 F.3d 1356 (Fed Cir. 2002)...........................................................................................53, 54
Cienega Gardens v. United States,
331 F.3d 1319 (Fed. Cir. 2003)..........................................................................................37, 44
Colonial Chevrolet Co. v. United States,
103 Fed. Cl. 570 (2012) .....................................................................................................13, 40
Commonwealth Edison Co. v. United States,
56 Fed. Cl. 652 (2003) .............................................................................................................32
Connolly v. Pension Benefit Guar. Corp.,
475 U.S. 211 (1986) .................................................................................................................44
County of Sonoma v. FHFA,
710 F.3d 987 (9th Cir. 2013) .............................................................................................47, 51
Del-Rio Drilling Programs, Inc. v. United States,
146 F.3d 1358 (Fed. Cir. 1998)................................................................................................45
Delta Sav. Bank v. United States,
265 F.3d 1017 (9th Cir. 2001) ...........................................................................................23, 24
Dura Pharms., Inc. v. Broudo,
544 U.S. 336 (2005) .................................................................................................................53
Eastport Steamship Corp. v. United States,
372 F.2d 1002 (Ct. Cl. 1967) ...................................................................................................52
Esther Sadowsky Testamentary Trust v. Syron,
639 F. Supp. 2d 347 (S.D.N.Y. 2009) ......................................................................................23
Feldman v. Cutaia,
956 A.2d 644 (Del. Ch. 2007)..................................................................................................27
First Hartford Corp. Pension Plan & Trust v. United States,
194 F.3d 1279 (Fed. Cir. 1999)................................................................................................24
Franklin Sav. Corp. v. United States,
56 Fed. Cl. 720 (2003) .......................................................................................................50, 51
Frazer v. United States,
288 F.3d 1347 (Fed. Cir. 2002)..........................................................................................17, 18
- v -
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Gatz v. Ponsoldt,
925 A.2d 1265 (Del. 2007) .................................................................................................27,29
Gentile v. Rossette,
906 A.2d 91 (Del. 2006) ..........................................................................................................27
Gibraltar Fin. Corp. v. Fed. Home Loan Bank Bd.,
1990 WL 394298 (C.D. Cal. June 15, 1990) ...........................................................................51
Gibson v. Resolution Trust Corp.,
51 F.3d 1016 (11th Cir. 1995) .................................................................................................20
Golden Pac. Bancorp v. United States,
15 F.3d 1066 (Fed. Cir. 1994)..................................................................................................38
Hage v. United States,
35 Fed. Cl. 147 (1996) .......................................................................................................31, 34
Hawkeye Commodity Promotions, Inc. v. Vilsack,
486 F.3d 430 (8th Cir. 2007) ...................................................................................................40
Herron v. Fannie Mae,
857 F. Supp. 2d 87 (D.D.C. 2012) ...........................................................................................17
Hindes v. FDIC,
137 F.3d 148 (3d Cir. 1998)...............................................................................................20, 21
Holland v. United States,
59 Fed. Cl. 735 (2004), partial reconsideration granted on other grounds, 63 Fed. Cl.
147 (2004) ................................................................................................................................26
Hometown Fin., Inc. v. United States,
56 Fed. Cl. 477 (2003) .............................................................................................................26
In re Federal Home Loan Mortg. Corp. Derivative Litig. (“Freddie Derivative Litig.”),
643 F. Supp. 2d 790 (E.D. Va. 2009) ......................................................................................23
In re Ionosphere Clubs, Inc.,
17 F.3d 600 (2d Cir. 1994).......................................................................................................26
In re Methyl Tertiary Butyl Ether (“MTBE”) Prods. Liab. Litig.,
725 F.3d 65 (2d Cir. 2013).......................................................................................................34
In re Tri-Star Pictures, Inc. Litig.,
634 A.2d 319 (Del. 1993) ........................................................................................................27
Joint Venture of Comint Sys. Corp. & EyeIT.com, Inc. v. United States,
100 Fed. Cl. 170 (Fed. Cl. 2011) .............................................................................................55
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Jones & Assocs., Inc. v. D.C.,
797 F. Supp. 2d 129 (D.D.C. 2011) .........................................................................................29
Keene Corp. v. United States,
508 U.S. 200 (1993) .................................................................................................................45
Kellmer v. Raines,
674 F.3d 848 (D.C. Cir. 2012) .................................................................................................23
Laudes Corp. v. United States,
86 Fed. Cl. 152 (2009) .............................................................................................................13
Leon County Fla. v. FHFA,
700 F.3d 1273 (11th Cir. 2012) .........................................................................................16, 47
Lorilland v. Pons,
434 U.S. 575 (1978) .................................................................................................................25
Lucas v. S.C. Coastal Council,
505 U.S. 1003 (1992) ...............................................................................................................39
Maritrans Inc. v. United States,
342 F.3d 1344 (Fed. Cir. 2003)....................................................................................32, 33, 40
Mastrolia v. United States,
91 Fed. Cl. 369 (2010) .............................................................................................................13
Norman v. United States,
429 F.3d 1081 (Fed. Cir. 2005)................................................................................................53
Ontario Power Generation, Inc. v. United States,
369 F.3d 1298 (Fed. Cir. 2004)................................................................................................54
Parkridge Investors Ltd. P’ship v. Farmers Home Admin.,
13 F.3d 1192 (8th Cir. 1994) ...................................................................................................40
Penn Cent. Transp. Co. v. City of New York,
438 U.S. 104 (1978) .................................................................................................................39
Rhodes v. Silkroad Equity, LLC,
2007 WL 2058736 (Del. Ch. July 11, 2007)............................................................................29
Riggin v. Office of Senate Fair Emp’t Practices,
61 F.3d 1563 (Fed. Cir. 1995)..................................................................................................21
Rith Energy v. United States,
247 F.3d 1355 (Fed. Cir. 2001)................................................................................................45
Robo Wash, Inc. v. United States,
223 Ct. Cl. 693 (1980) .............................................................................................................26
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Rose Acre Farms, Inc. v. United States,
373 F.3d 1177 (Fed. Cir. 2004)................................................................................................42
Rose Acre Farms, Inc. v. United States,
559 F.3d 1260 (Fed. Cir. 2009)..........................................................................................40, 44
Scheuer v. Rhodes,
416 U.S. 232 (1974) .................................................................................................................14
Starr Int'l Co., Inc. v. United States,
106 Fed. Cl. 50 (2012) ..................................................................................................... passim
Statesman Sav. Holding Corp. v. United States,
41 Fed. Cl. 1 (1998) .................................................................................................................26
Tahoe-Sierra Preservation Council, Inc. v. Tahoe Reg’l Planning Agency,
535 U.S. 302 (2002) ...........................................................................................................39, 40
Town of Babylon v. FHFA,
699 F.3d 221 (2d Cir. 2012).....................................................................................................47
U.S. Inspect, Inc. v. McGreevy,
2000 WL 33232337 (Va. Cir. Ct. Nov. 27, 2000) ...................................................................29
Underland v. Alter,
2012 WL 2912330 (E.D. Pa. July 16, 2012), reconsideration denied, 2012 WL
4108998 (E.D. Pa. Sept. 18, 2012) ..........................................................................................33
United States v. Mitchell,
445 U.S. 535 (1980) (Mitchell I) .............................................................................................50
United States v. Mitchell,
463 U.S. 206 (1983) (Mitchell II) ............................................................................................50
United States v. Testan,
424 U.S. 392 (1976) .................................................................................................................52
United States v. White Mountain Apache Tribe,
537 U.S. 465 (2003) .................................................................................................................49
United States v. Winstar Corp.,
518 U.S. 839 (1996) .................................................................................................................16
Webster v. Doe,
486 U.S. 592 (1988) .................................................................................................................21
White & Case LLP v. United States,
67 Fed. Cl. 164 (2005) .......................................................................................................33, 34
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Case 1:13-cv-00385-MMS Document 37 Filed 12/16/13 Page 10 of 67
STATUTES
12 U.S.C. § 1455(f) ........................................................................................................................52
12 U.S.C. § 1464(d)(2)(B) .............................................................................................................20
12 U.S.C. § 1719(g) .......................................................................................................................52
12 U.S.C. § 1787(b)(2) ..................................................................................................................23
12 U.S.C. § 1821(c)(7) ...................................................................................................................20
12 U.S.C. § 1821(d)(2) ..................................................................................................................23
12 U.S.C. § 1821(j) ..................................................................................................................20, 21
12 U.S.C. § 4502(20) .....................................................................................................................38
12 U.S.C. § 4513(a)(1)(B)(ii) ........................................................................................................15
12 U.S.C. § 4513(a)(1)(B)(iv)........................................................................................................15
12 U.S.C. § 4513(a)(2)(B) .............................................................................................................15
12 U.S.C. §§ 4513a(a) and (c) .......................................................................................................25
12 U.S.C. § 4617(a) .......................................................................................................................38
12 U.S.C. § 4617(a)(2) ...................................................................................................................49
12 U.S.C. § 4617(a)(3)(A)-(L) .......................................................................................................10
12 U.S.C. § 4617(a)(5) ........................................................................................................... passim
12 U.S.C. § 4617(a)(7) ...................................................................................................................25
12 U.S.C. § 4617(b)(2)(A)(i) .........................................................................................................23
12 U.S.C. § 4617(b)(2)(B)(iv) .......................................................................................................49
12 U.S.C. § 4617(b)(2)(D) .................................................................................................18, 46, 49
12 U.S.C. § 4617(b)(2)(D)(ii) ........................................................................................................47
12 U.S.C. § 4617(f) ............................................................................................................20, 47, 21
28 U.S.C. § 1491(a) .......................................................................................................................14
28 U.S.C. § 2501 ............................................................................................................................31
28 U.S.C. § 4617(b)(2)(D) ...........................................................................................15, 18, 46, 49
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OTHER AUTHORITIES
FLETCHER CYCLOPEDIA OF THE LAW OF CORPORATIONS § 5924 ...................................................27
Case 1:13-cv-00385-MMS Document 37 Filed 12/16/13 Page 12 of 67
I. INTRODUCTION
On September 6, 2008, the Government imposed conservatorships on Fannie Mae and
Freddie Mac (collectively “the Companies,” and sometimes individually, “Company”).
However, the “conservatorships” defied the very nature of conservatorship itself. Unlike when
the Government acts as conservator of a bank in order to preserve the bank’s assets and protect
its creditors, the Government used the conservatorships to stabilize the economy by warehousing
on the Companies’ books bad mortgage debt from financial institutions the Government deemed
“too big to fail.” In addition, via Stock Agreements forced on the Companies, the Government
funneled billions of dollars to Treasury as “dividend payments” in exchange for capital infusions
that the Companies never requested or needed. Eventually, the Government used the so-called
conservatorships to deny the Companies their own profits, instead siphoning them directly to the
federal treasury. While the Government called the Federal Housing Finance Agency (“FHFA”)
“conservator,” it was such in name only. In reality, it has been a shill for using the Companies to
accomplish whatever the Government wanted.
The Government’s unprecedented seizure of the Companies to further its own ends
resulted in near total destruction of shareholder value. Almost immediately after the
conservatorships were imposed, the value of the Companies’ shares plummeted, causing
preferred and common shareholders of the two Companies to lose more than $41 billion. FHFA
agreed, purportedly as conservator of the Companies, to accept from Treasury $100 billion in
capital infusions for each Company, but in exchange granted from each Company $1 billion in
preferred stock with preferential rights that placed the Government ahead of all other
stockholders. FHFA further gave the Government warrants for 79.9% of the Companies’
common shares at a bargain-basement price of one-thousandth of one cent per share. The
Government’s actions virtually handed majority control in the Companies to the Government for
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Case 1:13-cv-00385-MMS Document 37 Filed 12/16/13 Page 13 of 67
a miniscule fraction of their value. Once the conservatorships were imposed, shareholders also
lost the right to vote their shares. And though shareholders have the right to receive a portion of
the Companies’ assets in the event of dissolution, the Government’s newly-acquired preferred
stock ensured that, if the Companies are dissolved, the Government will receive $189.5 billion
from liquidation preferences while shareholders will get nothing. Even though conservatorships
are by definition temporary, the Government’s seizure of the Companies has lasted over five
years and there is no plan in sight for them to be returned to the shareholders who own them, and
thus no avenue by which shareholders will be able to recover the loss of the value in their shares.
Under the Fifth Amendment to the United States Constitution, the Government cannot
take private property without just compensation. Despite the extraordinary facts alleged in the
Complaint, there is no doubt that the Government’s actions in imposing the conservatorships
constituted a taking. In the alternative, they constituted an illegal exaction in violation of the
Due Process Clause of the Constitution. Under either theory, whether done in the guise of
“conservatorships” or otherwise, the Government cannot seize control of privately-held
corporations, force them to serve the whim of the Government’s objectives and, in the process,
wipe out the interests of millions of shareholders. And if the Government does so, it must
compensate the shareholders for what it has taken.
Thus, while the Government’s Motion1
from its own conduct, nearly every one of the Government’s legal arguments ignores the facts of
the Complaint and misrepresents the actions that led to and have constituted the alleged
“conservatorships.” First, even though the Companies were subjected to conservatorship to
serve the Government’s objectives, the Government argues that FHFA was not, in fact, the
Government. Not only is this argument premised on the fiction that FHFA acted as a
1
All references to the Government’s Motion to Dismiss, [Dkt. No. 31] will appear as “Mot. at __.”
asks this Court to immunize the Government
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“conservator” but, even assuming the existence of true conservatorships, it improperly asks this
Court to find, as a matter of law, that FHFA ceased acting as a regulator once it became the
Companies’ conservator. It likewise ignores the Complaint’s allegations, which the Court must
accept as true, that FHFA conspired with Treasury in imposing the conservatorships. Indeed,
during the conservatorships there has been no meaningful distinction between the roles of
Treasury and FHFA, as the conservatorships were designed not to preserve the Companies’
assets, but rather to further Treasury’s directives and goals.
The Government also claims that Plaintiffs are precluded from pursuing this action by
virtue of a purportedly exclusive remedy in the Housing and Economic Recovery Act of 2008
(“HERA”). However, the provision cited by the Government (12 U.S.C. § 4617(a)(5)) only
addresses claims for declaratory and injunctive relief, not the claims for damages Plaintiffs make
here. When Congress intends to preclude judicial review of constitutional claims its intent to do
so must be clear, and the Government has pointed to no such legislative declaration in HERA.
The Government next claims Plaintiffs lack “standing” to bring this action because, under
HERA, it suggests, FHFA assumed all rights of the Companies’ shareholders, including the
ability to bring suit. But this argument ignores a well-recognized exception applicable when a
conservator has a conflict of interest because of its entanglement with “closely related”
government entities. As described above, the Complaint alleges the existence of such an
entanglement here. The Government further claims that Plaintiffs lack standing to recover the
Companies’ lost profits. But Plaintiffs are not seeking to recover profits that belong to the
Companies themselves: they are seeking to recover for the destruction of the value of their
shares. Moreover, Plaintiffs can directly recover based on the Companies’ overpayment to the
Government for access to Treasury funds, which caused Plaintiffs to lose the economic value and
voting power of their shares.
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Plaintiffs have sufficiently alleged that the conservatorships constituted an
unconstitutional taking. As an initial matter, Plaintiffs’ claims are ripe for review. Indeed, the
Government would force Plaintiffs to wait until their claims were barred by the statute of
limitations before this Court could find them sufficiently “ripe.” More substantively, this Court
has recently reiterated in Starr International Co. v. United States that Plaintiffs have a cognizable
property interest in their shares. The Government’s actions clearly affected the value of those
shares and Plaintiffs’ other ownership interests. Plaintiffs had reasonable-investment backed
expectations that the Government would not take over the Companies for its own purposes,
thereby destroying the value of their shares and their rights as shareholders. As much as the
Government would like the Court to believe otherwise, the Companies were not engaged in
banking and thus were not part of the “highly regulated” banking industry, where regulatory
takeovers are more common. Thus, there is no basis for suggesting that Plaintiffs should have
reasonably anticipated the Government’s actions here, particularly where, just months before the
conservatorships were imposed, the Government repeatedly represented that there was no need
to impose them because the Companies were financially sound. The Government was not
“rescuing” the Companies as would be done in a traditional conservatorship. At best, it was
cleaning up its own mess after directing the Companies to make high-risk investments.
Finally, Plaintiffs have stated an exaction claim. The Government’s actions were not
lawful under HERA. If the Government’s argument is true, the Government could have imposed
the conservatorships to do whatever it wished with the Companies. Instead, HERA established
FHFA’s duty to preserve the Companies’ assets, and that duty creates a money mandating
obligation. FHFA has done precisely the opposite by giving away the Companies’ assets
virtually for free to Treasury. Finally, Plaintiffs’ claims are not “indirect,” because there is no
intervening party more injured by the Government’s actions.
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The Government’s Motion ignores defining facts of the takeover and instead simply
characterizes its actions as ordinary. But the Government’s attempt to reinvent history shows the
very reason this Court should not grant its Motion. Accepting Plaintiffs’ account as true, as the
Court must, and considering the novel application of constitutional principles implicated by this
case, dismissal is inappropriate at this stage. The Motion should be denied and Plaintiffs’ claims
decided on their merits after discovery.
II. STATEMENT OF FACTS2
A. The Creation of Fannie Mae and Freddie Mac
Congress established Fannie Mae in 1938 to provide increased liquidity to the nation’s
home mortgage market. Compl. ¶ 29.3
Government, in 1968 Congress reorganized it as a government-sponsored enterprise (“GSE”), a
federally-chartered private corporation charged with serving the self-supporting mortgage
market. Id. In so doing, Congress transferred the ownership of Fannie Mae to its new
shareholders and enabled the Company to raise capital from the private capital markets. Id.
Beginning in 1968 and continuing until June 2010, Fannie Mae was publicly traded on the New
York Stock Exchange. Id. ¶ 30.
Congress established Freddie Mac in 1970 to create a secondary market for conventional
mortgages. Compl. ¶ 31. In 1989, the Company was reorganized as a for-profit corporation
owned by private shareholders. Id. Beginning in 1984 and continuing until June 2010, Freddie
Mac was publicly traded on the New York Stock Exchange. Id. ¶ 32.
While the Company was originally operated by the
2
In its Statement of Facts, the Government omits large swaths of facts, the inclusion of which would
plainly defeat the Government’s Motion. In addition, throughout its Statement, the Government makes
statements of “fact” unsupported by citations that should not be considered in deciding its Motion.
Plaintiffs attempt to point out the Government’s sleights of hand throughout. 3
All references to “Compl. ¶ __” are to Plaintiffs’ June 10, 2003 Complaint, [Dkt. No. 1].
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Although the Companies were charged with a public mission, for decades they raised
capital from investors through the private capital markets, generating profits and increasing
shareholder value, and generally operated much like any other publicly traded, shareholder-
owned company. Compl. ¶ 33. As with any publicly traded company, the bylaws and offering
documents for the Companies’ common stock enumerated specific rights held by each
Company’s common shareholders, including the right to transfer their shares and vote for
candidates for those Companies’ boards of directors and shareholder proposals. Id. ¶¶ 34-335.
The owners of the Companies’ common stock also had the right to receive a portion of the
Companies’ assets in the event of dissolution or liquidation. Id. ¶ 35. The offering documents
for the Companies’ preferred stock also enumerated specific rights held by their preferred
shareholders typical of those rights often held by preferred stockholders in a shareholder-owned
company, such as the right to transfer their shares, to receive a portion of the Company’s assets
in the event of dissolution or liquidation, and to vote on amendments to their series’ certificate of
designation. Id. ¶¶ 36-37. Indeed, private investors long considered Fannie Mae and Freddie
Mac securities to be popular, sound, conservative investments. Id. ¶¶ 38-41. In fact, the
Government created strong incentives for banks and other institutions to buy Fannie’s and
Freddie’s preferred stock, including beneficial capital treatment and tax treatment. Id. ¶ 19.
B. The Government’s Actions Weakened the Companies’ Financial Strength by
Requiring Them to Increase Their Holdings in Riskier Mortgages and Mortgage-
Backed Investments
Throughout their existence as public companies, the Companies were charged, to varying
degrees, with attempting to increase home ownership in the United States. Compl. ¶ 49.
However, by 2006, HUD’s quotas resulted in low- and moderate-income mortgages accounting
for nearly 57% of each Company’s mortgage portfolio. Id. And in the years leading up to the
financial crisis, both Congress and the Office of Federal Housing Enterprise Oversight
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(“OFHEO”), which had oversight responsibility for the Companies, repeatedly exerted pressure
on Fannie and Freddie to delve deeper into the subprime and Alt-A mortgage market. Id. ¶¶ 50-
54. Despite the Government’s ill-advised policies, the Companies had less exposure to toxic
mortgages than many other financial institutions, and they did not have significant amounts of
risky mortgage debt on their books until 2006. Id. ¶ 55.
C. The Housing and Economic Recovery Act of 2008 and the Government’s Continued
Expressions of Confidence in the Companies and Their Financial Strength
As the financial crisis deepened, Congress enacted HERA on July 24, 2008. Compl.
¶ 56. HERA replaced OFHEO with FHFA. Id. Congress gave FHFA new authority to place the
Companies into receivership and expanded authority to place them into conservatorship. Id.
¶ 57. In giving FHFA that power, then-Treasury Secretary Paulson told the Senate that
regulators needed “a bazooka” at their disposal, but said “[y]ou are not likely to take it out.” He
added, “I just say that by having something that is unspecified, it will increase confidence. And
by increasing confidence it will greatly reduce the likelihood it will ever be used.” Id.
In addition, in supporting and enacting HERA, members of Congress repeatedly
emphasized the health and viability of both Fannie and Freddie and expressly rejected the notion
that a conservatorship would ever be imposed on either Company. Id. ¶¶ 58-61. For example, in
support of the bill, Senator Isakson (R-GA) explained that:
The bill we are doing tomorrow is not a bailout to Freddie Mac and
Fannie Mae or the institutions that made bad loans. It is an
infusion of confidence the financial markets need. Fannie and
Freddie suffer by perception from the difficulties of our mortgage
market. If anybody would take the time to go look at the default
rates, for example, they would look at the loans Fannie Mae
holds, and they are at 1.2 percent, well under what is considered
a normal, good, healthy balance. The subprime market’s defaults
are in the 4 to 6 to 8-point range. That is causing that problem.
That wasn’t Fannie Mae paper, and it wasn’t securitized by Fannie
Mae. They have $50 billion in capital, when the requirement is
to have $15 billion, so they are sound.
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Compl. ¶ 61 (emphasis added) (citing 154 Cong. Rec. S7436-01 (2008)).
Around the same time, other government officials and executives at both Companies
went out of their way to reinforce the public’s positive views of Fannie and Freddie. Id. ¶¶ 62-
64. In the months before the Companies were placed into conservatorship, OFHEO and
Secretary Paulson represented that both Companies were “adequately capitalized.” Id. ¶¶ 65-66.
Notwithstanding the positive views of the Companies, in June 2008, the Government
began to take steps that would lead to the imposition of the conservatorships on the Companies
to serve the Government’s public policy objectives. For example, on June 10, 2008, OFHEO
announced a final rule that changed the loan loss severity formulas used in the Companies’
regulatory risk-based capital stress test and began to formally apply that rule with the third
quarter 2008 capital classification. Compl. ¶ 67. These new standards dramatically increased
the risk-based capital requirement. Id.
1. Fannie Mae and Freddie Mac were suddenly and improperly placed into
conservatorship.4
On September 7, 2008, less than two months after the enactment of HERA, when their
regulators and Government officials said the Companies were adequately capitalized, FHFA and
Treasury blindsided the Companies and their shareholders by placing them into conservatorship
and taking control away from the shareholders. Compl. ¶ 68. The Government intended to keep
the plan to place the Companies into conservatorship secret until the last possible minute. Id. ¶
69. As explained in Secretary Paulson’s memoir, On the Brink, the Secretary met with President
George W. Bush only three days before the conservatorships were publicly announced and told
4
The Government’s Motion claims that the Government was “called upon to rescue the Enterprises
when their investment strategies left them exposed to the disintegrating housing market and declining
access to capital markets.” Mot. at 6. The Government does not identify who or what made this “call” to
the Government and, in fact, provides no citation for this assertion at all. This “fact” likewise does not
appear in the Complaint, and therefore cannot be considered in deciding the Government’s Motion.
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him that “[w]e’re going to move quickly and take them by surprise. The first sound they’ll hear
is their heads hitting the floor.” Id.
In his September 7, 2008 statement announcing the conservatorships, FHFA Director
Lockhart misleadingly stated that “[t]he Boards of both companies consented yesterday to the
conservatorship.” Id. ¶ 70. However, the Boards’ “consent” was by no means voluntary. Id.
Two days prior to the September 7th announcement, the senior executives at Fannie and Freddie
were summoned to secret meetings where they were told that they could either accept
Government control within 24 hours or the Government would impose it by force. Further,
HERA immunized the Companies’ directors against liability for consenting to the appointment
of FHFA as conservator, Compl. ¶ 87 (citing 12 U.S.C. § 4617(a)(6)), and the Government
played on this immunity to persuade the Companies’ management and directors to accede to the
Government’s demands. Id. The Financial Crisis Inquiry Commission concluded that:
“[e]ssentially the GSEs faced a Hobson’s choice: take the horse offered or none at all.” Id.
¶¶ 70-73; see also id. ¶¶ 81-90.
a. The Government’s motive for imposing the conservatorships was to
maintain liquidity in the U.S. mortgage market, in part, by bailing out
other financial institutions holding high-risk mortgages and
mortgage-backed instruments.
The decision to impose the conservatorships was not based on the statutory grounds set
forth in HERA, but rather on the broader public policy objective of restoring confidence and
liquidity in the financial markets by, among other things, providing a mechanism for other
financial companies to unload their bad mortgage debts. Compl. ¶ 74. As a result of the
Government’s actions, the Companies became “the mortgage industry’s wastebasket for toxic
mortgage debt.” Id. Whatever the validity of these goals from a public policy perspective, they
did not constitute a valid legal basis for imposing conservatorships over the Companies and
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taking control away from their shareholders, and they had very little to do with the Companies’
health. Id. ¶ 75.
b. The conservatorships obliterated shareholder value.
Under the terms of the conservatorships, FHFA assumed the powers of the Companies’
boards of directors and management, and the Companies’ CEOs were dismissed. Compl. ¶ 79.
It terminated all shareholder meetings and all shareholder voting rights. Id. These Government
actions caused the Companies’ preferred and common stock values to plummet, destroying both
shareholder value and the rights and property interests of the Companies’ preferred and common
shareholders. Id. ¶¶ 79-80. The Companies were ordered to cease paying dividends on their
preferred and common stock. Id. On June 16, 2010, FHFA ordered the Companies to delist their
common and preferred shares from the New York Stock Exchange. Id.
In total, preferred and common shareholders of the two Companies suffered a loss in
value of more than $41 billion. See Compl. ¶¶ 189-91.
2. None of the criteria under HERA for appointing a conservator was satisfied.
HERA provides for 12 circumstances under which FHFA could place the Companies into
conservatorship. 12 U.S.C. § 4617(a)(3)(A)-(L); Compl. ¶ 91. None of these statutory grounds
existed with respect to either Company because: (1) the Companies’ assets were greater than
their obligations to their creditors and others, see id. ¶¶ 93-98; (2) neither of the Companies had
experienced a substantial dissipation of assets or earnings due to i) any violation of any provision
of federal or state law or ii) any unsafe or unsound practice, see id. ¶¶ 99-105; (3) neither
Company was operating in an unsafe or unsound condition to transact business, see id. ¶¶ 106-
12;5
(4) neither Company was in violation of a cease or desist order, see id. ¶¶ 113-15;
5
The Government says that FHFA had determined that “the Enterprises had severe capital
deficiencies and were operating in an unsafe and unsound manner.” Mot. at 7. It cites Paragraph 68 of
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(5) neither Company concealed or refused to submit any books and records, see id. ¶¶ 116-18;
(6) the Companies were able to pay their obligations and meet the demands of their creditors, see
id. ¶¶ 119-24; (7) neither Company had incurred or was likely to incur losses that would deplete
all or substantially all of their capital, see id. ¶¶ 125-33; (8) neither Company violated any law or
regulation, or engaged in any unsafe or unsound practice or condition that would likely cause
insolvency, a substantial dissipation of assets or earnings, or a weakening of its condition, see id.
¶¶ 134-36;6
137-40;7
(10) neither Company was undercapitalized, see id. ¶¶ 141-48; (11) or critically
undercapitalized, see id. ¶¶ 149-51;8
laundering, see id. ¶¶ 152-53. Thus, there was no legal basis for the Government to place the
Companies into receivership or conservatorship. Compl. ¶ 92.
D. The Stock Agreements Improperly Appropriated the Private Property of the
Companies’ Preferred and Common Shareholders
1. The Original Stock Agreements
At the time the Companies were placed into conservatorship, the Director of FHFA,
acting as conservator, and the Secretary of the Treasury entered into the Stock Agreements.
the Complaint for this proposition, but that Paragraph simply quotes Treasury Secretary Paulson’s
statement that the conservatorships were being imposed “based on . . . what we have learned about their capital requirements.” There is no support – in the Complaint or otherwise – for the proposition that, at the time of the conservatorships, the Government determined the Companies were operating in an unsafe or unsound manner. 6
The Government’s Statement of Facts says that the Companies “were facing serious financial
difficulty, and insolvency loomed.” Mot. at 7. The citations to the Complaint purportedly offered in
support of this observation do not support the Government’s statement. 7
The Government claims the Companies did consent, Mot. at 7-8, but at this stage the Court must
accept Plaintiffs’ allegations that the consent was coerced as true. See Starr Int'l Co., Inc. v. United
States, 106 Fed. Cl. 50, 79 (2012) (“The Court acknowledges that the Government vigorously disputes
Starr’s characterization of the voluntariness of the loan agreement, . . . and the cause of those
circumstances. . . . On a motion to dismiss, however, the Court must assume the truth of the plaintiffs’
allegations and leave the determination as to their merit for a later stage.”) (internal citations omitted).
8
The Government’s Motion claims that, at some unspecified time between 2007 and 2008, “the
Enterprises faced a critical decline in their ability to raise capital.” Mot. at 5. However, this “fact” is not
alleged in the Complaint and the Government provides no citation for it.
(9) the Companies did not consent to the appointment of a conservator, see id. ¶¶
and (12) neither Company was found guilty of money
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Compl. ¶ 154.9
Company a $100 billion line of credit, which the Companies never sought or requested,10 the
Treasury would receive (a) $1 billion in preferred stock with a cumulative 10% dividend;
(b) additional senior preferred stock equal to the amount of any credit the Treasury extended to
the Companies; (c) preferential rights for the Treasury’s senior preferred stock that placed it
ahead of all other stockholders; and (d) warrants to acquire 79.9% of each company’s common
stock for one-thousandth of one cent per share, which translated to a total exercise price of
approximately $8,000 for each Company. Id. The Stock Agreements were amended in May
2009 to increase the line of credit to $200 billion for each Company, and in December 2009 to
make that maximum line of credit based on a formula designed to cover quarterly deficits in net
worth from 2010 to 2012, and then for future years subject to a cap. Id.
2. The Third Amendment
The Treasury’s purpose in entering into the Stock Agreements became even clearer in
August 2012, when, after Fannie Mae and Freddie Mac had once again achieved positive net
worth despite having been forced to pay tens of billions of dollars to the Treasury in dividends in
exchange for capital infusions the Companies did not need, the Treasury amended the terms of
the Stock Agreements. Compl. ¶ 161.11 Under the Third Amendment to each of the Stock
Those Agreements provided that, in exchange for making available to each
9
The Government claims that “[t]he conservatorship decisions focused on maintaining the
Enterprises as functioning market participants and avoiding the statutory trigger for receivership and
liquidation.” Mot. at 8. Again, the Government cites no support for it. 10 The Government’s Motion claims this funding was necessary “to avoid insolvency” and
characterizes it as “capital lifelines.” Mot. at 8. However, the Complaint does not allege this and, in fact,
the Government made no such findings when it forced the Stock Agreements on the Companies. Instead,
Treasury stated that the amount of the lines of credit was “unrelated to the Treasury’s analysis of the
current financial conditions of the GSEs.” See Fact Sheet: Treasury Senior Preferred Stock Purchase
Agreement (Sept. 7, 2008), Exhibit A to Declaration of Steve W. Berman (“Berman Decl.”). 11 The Government’s Motion claims that “[t]he amendment was necessary because of a concern that
the Enterprises, although solvent with Treasury’s assistance, would fail to generate enough revenue to
fund the 10 percent dividend obligation.” Mot. at 8; see also id. at 9 (“There was concern that, under the
weight of the fixed dividend, the Enterprises would run through the remaining Treasury investment
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Agreements, beginning in January 2013, the entire positive net worth of Fannie Mae and Freddie
Mac, to the extent that the Companies generate profits going forward, will be transferred to the
Treasury on a quarterly basis, less a diminishing capital reserve requirement for the first five
years following this change. Id. As the Wall Street Journal reported, “Fannie and Freddie are
simply making interest payments on a loan that can’t ever be paid off.” Id. ¶ 162.12 This is a
windfall for the Government, at the direct expense of the Companies’ shareholders.
The Companies are currently in strong financial health. See id. ¶ 163. Two primary
things have contributed to their renewed profitability. Id. ¶ 164. First, after years of being
denied the opportunity to do so, the Companies have been permitted to increase their guarantee
fees. Id. Second, the Government recently revised the treatment of the Companies’ deferred tax
assets – the very same assets it previously forced the Companies to write down. Id. ¶¶ 165-66.
While the Government is now reaping a fortune from its takeover of the Companies, the
Companies’ shareholders have been left with nothing. See id. ¶¶ 167-69.
III. STANDARD OF REVIEW
The burden of moving forward on a motion to dismiss is “minimal.” Colonial Chevrolet
Co. v. United States, 103 Fed. Cl. 570, 574 (2012). In deciding a motion to dismiss for lack of
subject matter jurisdiction, the Court must accept as true the allegations in the complaint and
draw all reasonable inferences in favor of the plaintiff. Laudes Corp. v. United States, 86 Fed.
Cl. 152, 159 (2009). The plaintiff “need only make a prima facie showing of jurisdictional facts
in order to survive a motion to dismiss.” Mastrolia v. United States, 91 Fed. Cl. 369, 376 (2010).
capacity, leading to insolvency.”). The Government provides no citation for these statements and they do
not appear anywhere in the Complaint. 12 The Government claims that “[t]he amendment was designed to strengthen the Enterprises,
decreasing their funding costs and avoiding draws on the limited backstop provided by Treasury in the
Stock Agreements. Thus, the modification maintained market stability by preserving Treasury’s ability to
support the continued solvency of the Enterprises.” Mot. at 9. Again, the Government provides no
citation for these statements and they do not appear in the Complaint.
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To defeat a motion to dismiss, a plaintiff need only state a claim to relief that is
“plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). As with a motion
to dismiss for lack of subject matter jurisdiction, in deciding a motion to dismiss for failure to
state a claim, the Court must also accept all well-pleaded allegations in the complaint as true and
draw all reasonable inferences in favor of the plaintiff. Ashcroft v. Iqbal, 556 U.S. 662, 678
(2009). A complaint can survive dismissal even if it appears on the face of the pleadings that
“recovery is very remote and unlikely.” Scheuer v. Rhodes, 416 U.S. 232, 236 (1974).
IV. ARGUMENT
A. The Court Has Jurisdiction to Entertain Each of Plaintiffs’ Claims
The facts set forth in the Complaint reflect the breadth and complexity of the
Government’s scheme to take over the Companies, use them to stabilize the economy, and then
drain them of their assets for the Government’s own benefit, all at Plaintiffs’ expense. Despite
these facts, and despite conceding that FHFA’s placement of the Companies into conservatorship
was conduct by “a Government actor,” Mot. at 12, the Government argues that this Court lacks
jurisdiction over Plaintiffs’ claims because the Complaint purportedly does not challenge actions
committed by the Government. The Government’s arguments mischaracterize the facts in the
Complaint and improperly assume that its characterizations of the relevant conduct control.
1. The Court has Tucker Act jurisdiction over FHFA because the Complaint
challenges FHFA’s conduct as a regulator, not as a conservator, and alleges
that FHFA colluded with Treasury.
Whether FHFA’s conduct with respect to the Companies is characterized as the conduct
of a regulatory agency or a conservator, the United States is responsible for its conduct, and this
Court therefore has jurisdiction over FHFA under the Tucker Act. See 28 U.S.C. § 1491(a). The
Complaint alleges that, rather than acting as a conservator authorized to “take such action as may
be . . . necessary to put the regulated entity in a sound and solvent condition . . . and . . .
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appropriate to carry on the business of the regulated entity and preserve and conserve the assets
and property of the regulated entity,” 28 U.S.C. § 4617(b)(2)(D) (emphasis added), FHFA used
the conservatorships to further Government policies, including the shoring up of the housing
finance market through the warehousing of other institutions’ toxic debt, and enrich the
Government by implementing the Stock Agreements, including the “net worth sweep” effected
by the Third Amendment. Thus, FHFA’s conduct was consistent with its role as a regulator, not
a conservator13 and is therefore subject to jurisdiction under the Tucker Act.14
In recasting Plaintiffs’ allegations, Defendant argues that FHFA’s conduct was consistent
with a traditional “preserve and conserve” conservatorship, such as the type the Federal Deposit
Insurance Corporation (“FDIC”) has imposed upon troubled banks. The Government argues
that, once it became conservator, FHFA’s conduct became immunized against this Court’s
review because “courts have ruled that a Government regulatory agency – acting as conservator
– is not the United States.” Mot. at 12. Neither the facts concerning FHFA’s conduct nor the
cases cited support this position.15 “FHFA cannot evade judicial scrutiny by merely labeling its
13 FHFA’s stated mission is to “[e]nsure that the housing GSEs operate in a safe and sound manner so
that they serve as a reliable source of liquidity and funding for housing finance and community
investment,” Federal Housing Finance Agency – Mission, http://www.fhfa.gov/Default.aspx?Page=38
(emphasis added), and the Agency’s authorizing statute empowers the FHFA director “to exercise such
incidental powers as may be necessary or appropriate to fulfill the duties and responsibilities of the
Director in the supervision and regulation of such regulated entity,” 12 U.S.C. § 4513(a)(2)(B), to ensure
that, inter alia, “the operations and activities of each regulated entity foster liquid, efficient, competitive,
and resilient national housing finance markets . . . ,” § 4513(a)(1)(B)(ii), and that “each regulated entity
carries out its statutory mission only through activities that are authorized under and consistent with this
chapter and the authorizing statutes . . . .” § 4513(a)(1)(B)(iv). 14 The Company’s SEC filings even acknowledged that FHFA’s mandates were out of tune with a
conservator’s obligation to preserve and conserve a company’s assets: “Certain changes to our business
objectives and strategies [under the conservatorship] are designed to provide support for the mortgage
market in a manner that serves our public mission and other non-financial objectives. . . . In addition, the
objectives set forth for us under our charter and by our Conservator, as well as the restrictions on our
business under the [Stock] Purchase Agreement, have adversely impacted and may continue to adversely
impact our financial results . . . .” Compl. ¶ 77 (citing Freddie Mac’s 2011 Form 10-K). 15 See also id. (“Although it may appear at first blush that many of the functions of the FHFA as
regulator and as conservator overlap, we consider both the concept and function of a conservatorship and
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actions with a conservator stamp.” Leon County Fla. v. FHFA, 700 F.3d 1273, 1278 (11th Cir.
2012).
The Government inaptly cites a litany of Winstar16 cases in support of its position. In
each of these cases, the courts looked at the relevant conduct by the FDIC and concluded that it
acted solely as conservator or receiver for a banking institution. Therefore, those courts held that
the Tucker Act could not provide a basis for this Court’s jurisdiction over the FDIC. For
instance, in Ameristar Fin. Servicing Co., LLC v. United States, 75 Fed. Cl. 807 (2007) – the
primary case on which the Government relies – Ameristar sued the FDIC, which was acting as
receiver for a failed savings bank and conservator for its newly-established successor bank.
Ameristar had contracted with the successor bank to collect an outstanding loan owned by the
original bank. See id. at 808. Before Ameristar could collect that debt, the FDIC, acting as
receiver for the original bank, settled the loan with the debtors. See id. Ameristar then sued the
FDIC for breach of contract and a taking. See id. at 808-09. This Court dismissed Ameristar’s
claims, reasoning that because the FDIC’s actions were taken solely in its role as
conservator/receiver, it had “‘step[ped] into the shoes’” of the bank, and was therefore not acting
as the United States for purposes of the Tucker Act. Id. at 811 (quoting O’Melveny & Meyers v.
FDIC, 512 U.S. 79, 86 (1994)). Central to the Ameristar court’s reasoning was the
Government’s argument that, as conservator/receiver, the FDIC was “[a]cting in the interests of
the depositors and investors and is, therefore, more akin to a private party than the Government.”
Id. at 810 (internal quotation marks omitted). Thus, “[Ameristar’s] claim is . . . actually one
between two non-governmental parties . . . .” Id. at 812.
the overall statutory scheme to determine whether the actions of the FHFA . . . should be deemed an act
taken by the FHFA as conservator, insulated from judicial review, or an act of rulemaking within its
function as a regulator.”). 16 United States v. Winstar Corp., 518 U.S. 839 (1996).
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The remaining Winstar cases cited by the Government had similar facts.17 The facts of
this case are likewise distinguishable from Herron v. Fannie Mae, 857 F. Supp. 2d 87 (D.D.C.
2012), in which the district court held that an aggrieved former Fannie Mae consultant, whose
position began after the Company was placed into conservatorship, could not raise constitutional
claims against the Company simply because it was under FHFA’s conservatorship. See id. at 95-
97. The district court concluded that FHFA’s control over Fannie Mae did not turn the private
institution into a federal actor. See id. at 96 (citing O’Melveny, 512 U.S. at 86-87). Rather,
Herron’s dispute was with Fannie Mae, and “when FHFA took over as conservator of Fannie
Mae, it stepped into Fannie Mae’s private role.” Id.
The Government’s reliance on Herron and the Winstar cases is inapt because Plaintiffs
here were injured by FHFA’s conduct in its role as the Companies’ regulator. The Government’s
argument rests on the untenable presumption that once an agency takes on the role of
conservator, its role as a regulator ceases. Because this oversimplified view is inconsistent with
both the law and the well-pleaded facts in the Complaint, the Tucker Act provides a clear basis
for exercising jurisdiction over FHFA.
Even if FHFA’s conduct is viewed as implicating its role as the Companies’ conservator,
it is still subject to jurisdiction under the Tucker Act because of its extensive collusion with
Treasury. See Frazer v. United States, 288 F.3d at 1354. In Frazer, the Federal Circuit
considered whether equitable tolling would be available to plaintiffs seeking to pursue Winstar-
related derivative claims, when FDIC, acting as receiver for the failed bank in which the
plaintiffs held shares, had negotiated a tolling agreement with the Department of Justice. The
17 See Frazer v. United States, 288 F.3d 1347, 1350, 1353-54 (Fed. Cir. 2002) (discussed below);
Ambase Corp. v. United States, 61 Fed. Cl. 794, 797 (2004) (claim of mismanagement by FDIC as
receiver for failed bank not a claim against the government; “[t]he FDIC is not generally considered to be
the government for jurisdictional purposes in Winstar litigation”); AG Route Seven P’ship v. United
States, 57 Fed. Cl. 521, 534 (2003) (same).
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court held that the plaintiffs were not parties to the tolling agreement; moreover, there was no
government action that would have misled the plaintiffs regarding the expiration of the
limitations period, a requirement for equitable tolling. The court therefore held the FDIC was
not the government for Winstar purposes, and the Department of Justice had made no
representations to the plaintiffs. See id. at 1353-54. Importantly, the court also held that any
collusion between the FDIC and the Department of Justice that misled the plaintiffs “would
make the United States responsible for the conduct of the FDIC,” thus providing a basis to
exercise jurisdiction. Id. at 1354.
Applying the collusion exception in Frazer to the facts of this case, the Complaint alleges
numerous acts by FHFA clearly indicating that it was in collusion with Treasury, thus requiring
the United States to answer for FHFA’s conduct in its purported role as conservator. As detailed
throughout the Complaint, FHFA’s actions during the ongoing, apparently indefinite
conservatorships were inextricably intertwined with Treasury’s directives and goals. Both FHFA
and OFHEO, its predecessor, directed that the Companies purchase and provide guarantees for
subprime and other high risk securities and caused the Companies to suffer significant losses on
certain portfolio holdings. Compl. ¶¶ 2, 4, 49-55. Then, after encouraging the Companies to
purchase and guarantee bad mortgage debt after other financial institutions had left the market,
the Government, including FHFA, ordered the Companies to warehouse additional bad debt from
the books of other larger financial institutions. Id. ¶¶ 5, 14-16. At the same time, while
purportedly being charged with the power to “take such action as may be . . . necessary to put the
regulated entit[ies] in a sound and solvent condition[] and . . . appropriate to carry on the
business of the regulated entit[ies] and conserve the assets and property of the regulated
entit[ies],” 12 U.S.C. § 4617(b)(2)(D), the Government set strict limits on the fees the
Companies could charge to guarantee more transactions. Compl. ¶¶ 16-17. It then forced the
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Companies to substantially increase their loan loss reserves, thus unnecessarily reducing the
value of their deferred tax assets. Id. ¶ 18.
Then, just a month after making repeated representations about the financial soundness of
the Companies, FHFA, in consultation with Treasury, met in secret to decide to place the
Companies into conservatorship and subsequently forced the Companies’ Boards to “consent” to
them. Id. ¶¶ 68-73; 81-90. And FHFA’s actions as conservator have borne no relationship to
the typical purpose of conservatorship: FHFA’s first action as conservator was to enter into the
Stock Agreements with Treasury, under which the Companies were forced to accept capital
infusions they neither needed nor requested in exchange for giving the Government billions of
dollars in preferred stock and warrants for 79.9% of the Companies’ common stock. Id. ¶¶ 157-
60. The Third Amendment thereafter required the Companies to “sweep” their entire positive
net worth to the Treasury. Id. ¶¶ 161-62.
Given FHFA’s conduct unrelated to its role as conservator and extensive collusion with
Treasury, the Government cannot plausibly argue that the United States is not answerable for
FHFA’s actions. This Court should conclude that it has Tucker Act jurisdiction over FHFA.
2. HERA creates no limitation whatsoever on Plaintiffs’ ability to seek damages
based upon the imposition of the conservatorships.
a. HERA’s 30-day challenge window applies only to requests for
equitable relief.
Because Plaintiffs seek only damages for the Government’s conduct, HERA does not
preclude this Action. See Prayer for Relief, Compl. at 64. The Government mistakenly insists
that Plaintiffs were required to pursue the remedy available under 12 U.S.C. § 4617(a)(5), which
provides a 30-day window in which to seek to have a conservatorship set aside. This is
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nonsense.18 Although no court appears to have opined on the scope of § 4617(a)(5), courts
evaluating similar provisions have uniformly concluded that they are directed exclusively at
limiting claims for declaratory and injunctive relief, not claims for damages.
The only two cases on which the Government relies illustrate this point. In Gibson v.
Resolution Trust Corp., 51 F.3d 1016 (11th Cir. 1995), the plaintiff-appellants sought only
declaratory and injunctive relief relating to the appointment of the Resolution Trust Corporation
as conservator and receiver of a failed bank. See id. at 1020, 1026. The Eleventh Circuit
rejected their claims, concluding that 12 U.S.C. § 1464(d)(2)(B), a provision analogous to
§ 4617(a)(5), precluded such a challenge to the conservatorship. Id. at 1026. Although Gibson
did not expressly address whether such provisions also preclude claims for damages, the
Government’s second case, Hindes v. FDIC, 137 F.3d 148 (3d Cir. 1998), answered that
question. In that case, shareholders of a bank placed into receivership sought both a declaration
that the order closing the bank and placing it into receivership was unconstitutional and the
rescission of the order. See id. at 165. Although the Third Circuit held that the requested relief
was precluded by 12 U.S.C. § 1821(j),19 id. at 166, it also expressly held (when evaluating a
18 Similarly, the Government asserts that “plaintiffs identify nothing in Federal statute or precedent
that would allow the Enterprises’ shareholders to ignore the statutorily limited challenge window, wait
years for the Enterprises to begin recovery, and then sue FHFA for a taking or illegal exaction.” Mot. at
15-16. This argument is also incorrect. Simply put, neither R.C.F.C. 8 nor the Supreme Court’s
decisions in Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007), or Ashcroft v. Iqbal, 556 U.S. 662 (2009),
require a complaint to plead defenses to arguments that have not yet been raised. Rather, the Government
bears the burden of demonstrating that the complaint does not “plausibly suggest[] a showing of
entitlement to relief.” Acceptance Ins. Co., Inc. v. United States, 583 F.3d 849, 853 (Fed. Cir. 2009)
(internal citations and quotation marks omitted). 19 Section 1821(j), entitled “Limitation on court action,” is plainly broader than the 30-day window
provision at § 1821(c)(7) (which is analogous to 12 U.S.C. §§ 1464(d)(2)(B) and 4617(a)(5)), and reads:
“Except as provided in this section, no court may take any action, except at the request of the Board of
Directors by regulation or order, to restrain or affect the exercise of powers or functions of the
Corporation as a conservator or receiver.” Section 4617(f), also titled “Limitation on court action,”
contains virtually identical language: “Except as provided in this section or at the request of the Director,
no court may take any action to restrain or affect the exercise of powers or functions of the Agency as a
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related argument) that “[o]ur interpretation of section 1821(j) only denies appellants the
declaratory and injunctive relief they now seek, but does not deny them judicial review for their
constitutional claims. Courts have uniformly held that the preclusion of section 1821(j) does
not affect a damages claim.” Id. at 161 (canvassing circuit law) (emphasis added). This Court
reached the same conclusion in Ambase Corp. v. United States, 61 Fed. Cl. 794 (2004),
reasoning that Ҥ 1821(j) is not directed to the pursuit of money damages ex post as the result of
FDIC actions. Instead, this section is intended to prevent injunctive relief against the FDIC’s
actions as receiver.” Id. at 799 (footnote omitted). Because Plaintiffs do not seek declaratory or
injunctive relief related to the imposition of the conservatorships, § 4617(a)(5) does not preclude
their damages claims.20
b. HERA’s 30-day window cannot be construed to preclude claims for
damages based on Fifth Amendment violations.
“[W]here Congress intends to preclude judicial review of constitutional claims its intent
to do so must be clear.” Webster v. Doe, 486 U.S. 592, 603 (1988). “We require this heightened
showing in part to avoid the ‘serious constitutional question’ that would arise if a federal statute
were construed to deny any judicial forum for a colorable constitutional claim.” Id.; see also
Riggin v. Office of Senate Fair Emp’t Practices, 61 F.3d 1563, 1570 (Fed. Cir. 1995) (“there is a
strong presumption that constitutional claims are judicially reviewable in some forum”) (citing
Webster, 486 U.S. at 603). Section 4617(a)(5) contains no language evincing such a “clear
intent,” and the Government cannot plausibly argue otherwise. Rather, like the equally
conservator or a receiver.” Although the Government does not argue that § 4617(f) governs Plaintiffs’
claims for damages, for the reasons discussed in this paragraph, § 4617(f) is also inapplicable here. 20 This assertion is in no way undermined by the Plaintiffs’ Prayer for Relief, which requests “all
other relief as this Court may deem just and appropriate.” Compl. at 64. Plaintiffs are aware that the
Tucker Act does not provide this Court with jurisdiction to entertain claims for declaratory or injunctive
relief. See Brown v. United States, 105 F.3d 621, 624 (Fed. Cir. 1997). Rather, Plaintiffs’ Prayer merely
reflects their understanding that the Court has discretion to fashion appropriate remedies.
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restrictive provision at issue in Hindes, § 4617(a)(5) merely limits a plaintiff’s ability to seek
injunctive or declaratory relief related to the imposition of a conservatorship; it has no bearing on
Plaintiffs’ constitutional claims for damages.
B. Plaintiffs Have Standing to Bring These Claims
At all relevant times, Plaintiffs were preferred and common shareholders of the
Companies. Compl. ¶¶ 21-23. When the conservatorships were imposed, shareholders
collectively lost more than $41 billion (id. ¶ 191) and lost all their rights as shareholders (the
right to vote, id. ¶¶ 35-37, 80, 186; subordination of the preferred shares to the Government’s
senior preferred stock, id. ¶ 154; the right to receive a portion of the Companies’ assets in the
event of dissolution or liquidation, id.; and the suspension of dividends, id. ¶ 80). As a result of
the Government’s actions, shareholders who have since sold their shares lost nearly all the value
of those shares. For shareholders who have not sold, the Government’s actions in imposing and
conducting the conservatorships took away every indicia of ownership of Plaintiffs’ shares.
Whatever ultimately happens to the Companies, the interests of current shareholders have been
permanently subordinated to the Government’s whims.
Despite these facts, the Government suggests Plaintiffs do not have standing to bring
claims to recover their losses because they are derivative in nature, indirect, or would be better
pursued by the very Government agency that gave away the value of the Companies’ shares to
the Treasury in the first instance. Because the Government’s standing arguments defy common
sense and established authority, the Court should reject them.
1. HERA does not preclude Plaintiffs from suing the Government directly
because FHFA is so inextricably intertwined with the Government that it
cannot stand in the shoes of the Companies’ shareholders.
The Government claims that Plaintiffs lack standing to bring a direct action for damages
against the Government because under HERA, upon the imposition of a conservatorship, FHFA
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assumed the sole right to pursue this action.21 In support of its argument, the Government relies
on a series of derivative cases interpreting similar language in the Financial Institutions, Reform,
Recovery and Enforcement Act of 1989 (“FIRREA”), 12 U.S.C. § 1821(d)(2); 12 U.S.C. §
1787(b)(2).22 However, even the Government’s cases acknowledge that FHFA cannot stand in
the shoes of shareholders when a conflict of interest prohibits it from doing so.23
For example, in Delta Sav. Bank v. United States, 265 F.3d 1017 (9th Cir. 2001), the
plaintiffs alleged that Delta fell under federal scrutiny and eventually receivership because of a
conspiracy between two employees at the Office of Thrift Supervision (“OTS”) and an employee
at Delta. The Delta court held that the plaintiffs had standing to pursue their claims as
representatives of Delta and that the Resolution Trust Corporation (“RTC”), the receiver, was not
the proper party to assert claims against OTS. The court stated the plaintiffs’ position as follows:
[P]laintiffs make a simple plea to logic: the FDIC should not have
the final say on whether it is in Delta’s best interests to sue the
OTS. The OTS and the FDIC are interrelated agencies with
overlapping personnel, structures, and responsibilities, and thus,
according to plaintiffs, the FDIC faces a conflict of interests [sic]
when it contemplates a suit against the OTS.
21 12 U.S.C. § 4617(b)(2)(A)(i) (granting FHFA “all rights, titles, powers, and privileges of the
regulated entity, and of any stockholder, officer, or director of such regulated entity with respect to the
regulated entity and the assets of the regulated entity”). 22 See Kellmer v. Raines, 674 F.3d 848 (D.C. Cir. 2012) (action brought by shareholders against
directors for accounting irregularities); In re Federal Home Loan Mortg. Corp. Derivative Litig.
(“Freddie Derivative Litig.”), 643 F. Supp. 2d 790 (E.D. Va. 2009) (shareholder action against former
board members for misrepresenting financial health of Freddie Mac); Esther Sadowsky Testamentary
Trust v. Syron, 639 F. Supp. 2d 347 (S.D.N.Y. 2009) (shareholder action against former Freddie Mac
officers and directors for misrepresentations). 23 Kellmer, 674 F.3d at 850 (“all of these courts have found that, absent a manifest conflict of interest
by the conservator not at issue here, the statutory language bars shareholder derivative claims”) (citing
cases); Freddie Derivative Litig., 643 F. Supp. 2d at 797 (“There is authority for the principle that under
FIRREA, if a federal receiver or conservator is subject to a manifest conflict of interest, shareholders can
maintain a derivative suit despite otherwise being barred from doing so,” but holding conflict of interest
not relevant because the government was not being sued.).
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Id. at 1021-22. The court agreed with plaintiffs’ position, noting that “[t]hese are not two
disengaged bodies on the opposite ends of an organizational chart; these are closely related
entities.” Id. at 1023. It observed that the director of the OTS was, by statute, a member of the
Board of the FDIC and that, until the RTC ceased to exist, the Director of OTS was also a
member of the Thrift Depositor Protection Oversight Board, which had oversight over the RTC.
Id. It noted that an employee of OTS could simultaneously serve as an assistant to a member of
the FDIC Board, and that the FDIC and OTS jointly issued regulations, reports, and conducted
cooperative investigations. Id. Finally, it found that the OTS and RTC “even share a common
genesis, both having been created in FIRREA” and that they played “complementary roles” in
the process of bailing out failing thrifts. Id.24
The very nature of the conduct alleged in the Complaint supports that FHFA likewise has
such a conflict of interest here. Namely, as described in Section IV(A)(1) above, FHFA imposed
and has used the conservatorships to accomplish the Government’s own objectives rather than
preserving the Companies’ assets with a view towards their eventual emergence from
conservatorship. No understanding of conservatorship would include actions that destroyed the
value of the Companies and siphoned their control and profits to the Government. Because
FHFA has the same conflict of interest found in the Delta Savings Bank line of cases,25 and
because in enacting HERA Congress imported language from FIRREA that courts had uniformly
24 While Delta Savings Bank was a derivative case, the Government itself says that “there is no basis
for distinguishing direct or indirect suits,” Mot. at 17, and “[t]he reasoning of [the Government’s
derivative cases] is directly applicable here, however, because HERA, in granting FHFA all shareholder
rights, makes no distinction between individual and derivative rights sought be to asserted by
shareholders.” Id. at 19. 25 See also First Hartford Corp. Pension Plan & Trust v. United States, 194 F.3d 1279, 1295 (Fed.
Cir. 1999) (holding FDIC had a conflict of interest to become plaintiff in derivative action because it “was
asked to decide on behalf of the depository institution in receivership whether it should sue the federal
government based upon a breach of contract, which, if proven, was caused by the FDIC itself”).
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interpreted as including the conflict of interest exception in that line of cases,26 HERA does not
prevent Plaintiffs from asserting direct claims.27 At the motion to dismiss stage, Plaintiffs have
sufficiently alleged that there is a conflict of interest.
2. Plaintiffs have standing to bring a direct action against the Government.
The Government next argues that Plaintiffs lack standing because “[c]ourts generally
view the loss of share value as an injury to a corporation that may only be asserted by
shareholders derivatively, rather than directly.” Mot. at 19. While the Government’s argument
articulates a general rule, that rule does not apply here where there is no risk of double recovery
and any recovery on behalf of the Companies would go to the Government. Moreover, the
Government’s rule has an exception where, as here, a shareholder seeks to recover the value of
the loss of control.
a. Plaintiffs have standing because there is no risk of double recovery
and any recovery by the Companies would improperly go to the
Government.
In all of the cases cited by the Government, shareholders were attempting to recover lost
profits that those courts held were owed to the corporation.28 The reasoning behind those cases,
26 See Lorilland v. Pons, 434 U.S. 575, 580 (1978) (“Congress is presumed to be aware of . . .
a[] judicial interpretation of a statute and to adopt that interpretation when it re-enacts a statute without
change[.]”). 27 The more superficial facts of Delta are likewise present here. The Director of FHFA receives
advice from the Federal Housing Finance Oversight Board, whose 4-member Board includes the
Secretary of the Treasury. 12 U.S.C. §§ 4513a(a) and (c). FHFA and Treasury regularly create initiatives
and author publications related to all aspects of housing finance. See, e.g., Treasury, HUD and FHFA
Extend Homeowner Assistance Programs Through 2015, available at: https://www.nscha.org/print/28264
(last visited Dec. 16, 2013); FHFA, Treasury Working on GSE Risk Sharing Model, National Mortgage
News (June 4, 2012); Treasury and FHFA, Reforming America’s Housing Finance Market, A Report to
Congress (Feb. 2011). Both before and during the conservatorships they have played complementary
roles in both housing finance generally and also in regulating Fannie and Freddie. And though HERA
provides that “[w]hen acting as conservator or receiver, the Agency shall not be subject to the direction or
supervision of any other agency of the United States or any State in the exercise of the rights, powers, and
privileges of the Agency,” 12 U.S.C. § 4617(a)(7), that language does not mean FHFA had such
independence in its actions leading to and in imposing the conservatorships or at any time thereafter.
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to prevent a duplicative recovery, does not apply here. Indeed, it would be unjust to hold that
Plaintiffs could only proceed derivatively, when any recovery from that action would go in
substantial part to the Government, which is responsible for the actions alleged here in the first
place. See Starr Int’l Co. v. United States, 106 Fed. Cl. at 65 (“If Starr were to prevail on its
derivative claim only, any recovery would go to AIG, with the Government receiving an amount
corresponding to its ownership percentage. Because the party that suffers the alleged harm
should be the beneficiary of any recovery, the Government’s continuing ownership interest in
AIG provides further support for the view that Plaintiffs have standing to bring a direct claim.”)
(discussed in subsection b, below). None of the Government’s cases had the same set of
concerns. Even in the receivership cases the Government cites,29 the receiver did not also
become an actual or de facto majority shareholder,30 and that certainly was not true in the
Government’s cases decided outside the receivership context.31
28 The Government’s claim that Plaintiffs have “admitted” that the Companies are the injured entities
because the Complaint alleges that the Government’s actions were “made with respect to the Companies”
cannot be taken seriously. See Mot. at 21 (citing Compl. ¶ 170). Plaintiffs have made no such admission. 29 See In re Ionosphere Clubs, Inc., 17 F.3d 600 (2d Cir. 1994) (affirming injunction against
corporation’s preferred shareholders from bringing fundamentally derivative claims against the
corporation after estate had been resolved in Chapter 11 proceeding); Hometown Fin., Inc. v. United
States, 56 Fed. Cl. 477, 486-87 (2003) (holding shareholders lacked standing to directly recover lost
equity damages out of concern for potential double recovery); Statesman Sav. Holding Corp. v. United
States, 41 Fed. Cl. 1, 15-16 (1998) (holding shareholders lacked standing to recover “expectancy
damages” in the form of lost profits or the bank’s value as a going concern); Robo Wash, Inc. v. United
States, 223 Ct. Cl. 693, 696-97 (1980) (holding employees and shareholders lacked standing to sue for
breach of duties owed to corporation). 30 In addition, in receivership cases, courts have been concerned that permitting direct recovery for
breach of contract claims would allow shareholders to circumvent priority of recovery in a receivership
statute. Hometown, 56 Fed. Cl. at 487; Statesman, 41 Fed. Cl. at 17-18; cf. Ionosphere Clubs, 17 F.3d at
606 (bankruptcy). In this case, there is no such concern because Plaintiffs’ claims here do not make them
creditors of the Companies. 31 See Holland v. United States, 59 Fed. Cl. 735, 739 (2004), partial reconsideration granted on other
grounds, 63 Fed. Cl. 147 (2004) (holding shareholders could not recover “expectancy damages” or lost
profits from thrift).
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Another reason courts prohibit shareholders from directly recovering for wrongs done to
the corporation is to avoid allowing certain shareholders recovery at the expense of other
shareholders. Here, of course, Plaintiffs have brought claims on behalf of proposed classes of
shareholders of preferred and common stock of both Companies. Therefore, no such concerns
exist. Indeed, the fact that this case is a proposed class action allows former shareholders who
have since sold their stock to recover for their losses just as current shareholders do.
b. The loss of the value of Plaintiffs’ shares is directly attributable to the
Government’s dilution of Plaintiffs’ shares.
Plaintiffs’ claims are direct because Plaintiffs seek to recover the value of their shares lost
when the Companies overpaid the Government. Following Delaware law,32 the Starr court
recognized a “species” of “corporate overpayment claims,” “premised on the notion that the
corporation, by issuing additional equity for insufficient consideration, made the complaining
stockholder’s stake less valuable,” and held that such a claim was “both derivative and direct in
character.” 106 Fed. Cl. at 62 (citations omitted). A corporate overpayment claim exists where:
(1) a stockholder having majority or effective control causes the
corporation to issue ‘excessive’ shares of its stock in exchange for
assets of the controlling stockholder that have a lesser value; and
(2) the exchange causes an increase in the percentage of the
outstanding shares owned by the controlling stockholder, and a
corresponding decrease in the share percentage owned by the
public (minority) shareholders.
32 See Gatz v. Ponsoldt, 925 A.2d 1265, 1278-79 (Del. 2007); Gentile v. Rossette, 906 A.2d 91, 100
(Del. 2006) (“[T]he public (or minority) stockholders also have a separate, and direct, claim arising out of
that same transaction. Because the shares representing the ‘overpayment’ embody both economic value
and voting power, the end result of this type of transaction is an improper transfer – or expropriation – of
economic value and voting power from the public shareholders to the majority or controlling
stockholder.”); In re Tri-Star Pictures, Inc. Litig., 634 A.2d 319, 330 (Del. 1993) (“Although it is true that
claims of waste are derivative, a claim of stock dilution and a corresponding reduction in a stockholder’s
voting power is an individual claim.”); Feldman v. Cutaia, 956 A.2d 644 (Del. Ch. 2007); see also
FLETCHER CYCLOPEDIA OF THE LAW OF CORPORATIONS § 5924 (“A claim of stock dilution and a
corresponding reduction in a stockholder’s voting power is an individual claim.”).
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Id. (citing Rossette, 906 A.2d at 100). The Starr court held that the two key aspects of such a
claim existed where the corporation was forced to overpay for an asset and, by means of that
overpayment, minority shareholders lost a portion of the economic value and voting power of
their stock interest. Id. at 63.
In Starr, the plaintiff shareholder alleged that the corporation overpaid for an $85 billion
loan in exchange for giving the Government a 79.9% stake in the corporation, which caused the
plaintiff shareholder to lose a portion of the economic value and voting power of its outstanding
shares. The Court held that, though there were factual disputes about when the alleged dilution
occurred, it was “persuaded that the facts alleged here are sufficiently analogous to those in Gatz
and Rossette to support Starr’s right to maintain a direct claim for the taking of its equity and
voting interests,” id. at 65, because “the Government had an obligation not to appropriate the
minority shareholders’ property interests – irrespective of whether the Government was a
stockholder when the purported dilution occurred.” Id. (footnote omitted).
Here, the Government, which had effective control of Fannie Mae and Freddie Mac
through FHFA, caused the Companies to issue $1 billion in senior preferred stock and additional
senior preferred stock equal to the amount of any credit the Treasury extended to the Companies,
as well as warrants to acquire 79.9% of each company’s common stock for $8,000 for each
Company, which resulted in an increase in the percentage of outstanding shares owned by
Treasury. See Compl. ¶ 154.33 And although the Government does not technically “own” the
shares of common stock for which it has warrants, at the time of the Starr decision the
Government likewise had not exercised those warrants. See Starr, 106 Fed. Cl. at 80. Moreover,
33 See also N. Eric Weiss, Congressional Research Service, Fannie Mae’s and Freddie Mac’s
Financial Status: Frequently Asked Questions, at 13. (“Because the appeal of the preferred stock is
centered on the security of its dividend payments, the long-run value of the GSEs’ preferred stock has
been reduced. The value of common stock has been reduced because of the termination of their dividends
and increased uncertainty over the future long-run viability of the enterprises.”).
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unlike with AIG, here there is no need for the Government to exercise the warrants because, by
virtue of the conservatorships, the Government already has control of the Companies. And
control is the relevant fact. As the Supreme Court of Delaware explained in Rossette:
A rule that focuses on the degree or the extent of the expropriation,
and requires that the expropriation attain a certain level before the
minority stockholders may seek a judicial remedy directly,
denigrates the gravity of the fiduciary breach and condones
overreaching by fiduciaries – at least in cases where the resulting
harm to the minority falls below the prescribed threshold for
“materiality.”
906 A.2d at 102.
Even though these facts are not identical to those in Rossette or Starr, the principles
articulated in those cases and their progeny apply equally here.34 For example, in Rhodes v.
Silkroad Equity, LLC, 2007 WL 2058736 (Del. Ch. July 11, 2007), a firm’s original shareholders
who held 20% of the company alleged that the firm that owned 80% of the company initiated a
scheme to depress the value of the firm so that they could later acquire it at a bargain. The
Delaware Court of Chancery noted that these facts did not “fit snuggly within [the] ‘transactional
paradigm’” articulated in Rossette. Id. at *5. However, the court held that it was not restricted to
“the abstract structuring of the transaction or course of conduct under scrutiny,” but instead
“must [be] focus[ed] on the ‘true substantive effect’ of the challenged transaction.” Id. (citations
omitted). Once focused on that “true substantive effect,” it found that the defendants’ actions
had clearly harmed the original shareholders in a “substantially different” way than the company
itself was harmed. Id.; see also Gatz, 925 A.2d at 1280-81 (finding it irrelevant that voting and
34 Starr was decided under Delaware law because AIG is incorporated there. Fannie and Freddie’s
principal places of business are, respectively, Washington, D.C. and Virginia. Neither one of those
jurisdictions has addressed whether a corporate overpayment claim is direct or derivative. However, both
jurisdictions look to Delaware law on matters of corporate law. See Jones & Assocs., Inc. v. D.C., 797 F.
Supp. 2d 129, 135 (D.D.C. 2011); U.S. Inspect, Inc. v. McGreevy, 2000 WL 33232337, *4 (Va. Cir. Ct.
Nov. 27, 2000) (looking to Delaware law for guidance in absence of guidance from Virginia Supreme
Court).
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economic power of shares was not maintained by controlling shareholder but instead was
transferred to a third party because “t is the very nature of equity to look beyond form to the
substance of an arrangement,” and “the fiduciary exercise[d] its stock control to expropriate, for
its benefit, economic value and voting power from the public shareholders”).
C. Plaintiffs Have Adequately Alleged Violations of the Takings Clause
Plaintiffs’ Complaint more than adequately pleads takings claims based on the
Government’s conduct. At the height of a financial crisis, and after years of promising that
shareholders’ investments were secure and, in some cases, inducing the share purchases in the
first instance, the Government capitalized on several opportunities to accomplish its public
policy goals by seizing the Companies and using them as it saw fit to support the nation’s
economy, all to the detriment of the Companies’ shareholders. Accordingly, Plaintiffs were –
and remain – injured by the Government’s conduct. The Government effected a taking of
Plaintiffs’ property to accomplish its own goals. The Fifth Amendment requires that the
Government compensate Plaintiffs accordingly.
1. Plaintiffs’ claims are ripe for judicial review.
“As with other justiciability doctrines, the Court of Federal Claims must address ripeness
as a ‘threshold consideration’ before addressing the merits.” Brookfield Relocation, Inc. v.
United States, 113 Fed. Cl. 74, 79 (2013) (internal quotation marks and citation omitted).
Whether a case is ripe for judicial review hinges on (1) “the fitness of the issues for judicial
decision,” and (2) “the hardship to the parties of withholding court consideration.” Abbott Labs.
v. Gardner, 387 U.S. 136, 149 (1967). Judicial review is appropriate when “an administrative
decision has been formalized and its effects felt in a concrete way by the challenging parties.”
Id. at 148-49. “Therefore, under the ripeness doctrine, this court is obligated to hear this case if
the court determines that these plaintiffs will suffer real consequences if the court declines to
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consider their claims.” Hage v. United States, 35 Fed. Cl. 147, 162 (1996). Plaintiffs’ claims are
ripe because they have plainly suffered concrete injuries from the Government’s conduct and
because, unless their claims are entertained now, Plaintiffs may never be able to obtain judicial
review of the Government’s conduct.
a. Plaintiffs’ injuries are concrete.
An injury is sufficiently concrete for ripeness purposes when (1) the Government’s action
is “final,” i.e., once a formal act has occurred, and (2) the action imposes legal consequences.
See Brookfield, 113 Fed. Cl. at 79. The finality of, and consequences flowing from, the
Government’s conduct are made plain in the Complaint and throughout this Brief, and need not
be repeated here. In short, damage has been done; nothing more is required for this Court to
entertain Plaintiffs’ claims.
Bizarrely, the Government chides Plaintiffs both for waiting to file suit, see Mot. at 15,
and for filing too soon. See id. at 31-35. “Courts must be sensitive to the constitutional and
prudential concerns reflected in the ripeness doctrine, while at the same time being aware that
purposeful bureaucratic delay and obfuscation is not a valid basis for denial of judicial relief.”
Bayou Des Familles Dev. Corp. v. United States, 130 F.3d 1034, 1038 (Fed. Cir. 1997). As
explained in Section IV(A)(2) above, there is nothing to the Government’s delay argument:
HERA does not affect Plaintiffs’ claims for damages, and Plaintiffs’ Complaint was filed well
within the six-year limitations period. See 28 U.S.C. § 2501. As to the second point, the
Government contends that Plaintiffs’ injuries are not yet ripe for judicial review because
anything could still be done with the Companies while they remain in conservatorship.35 But this
argument inappropriately conflates the magnitude of Plaintiffs’ injuries with the existence
35 Certainly, the Government could not reasonably contend that, with regard to any class members
who have since disposed of their shares, such class members’ injuries are speculative.
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thereof and, as explained further below, highlights the urgent need for judicial review. The cases
relied upon by the Government reflect this confusion and actually support the conclusion that
Plaintiffs’ claims are ripe.
For example, in Commonwealth Edison Co. v. United States, 56 Fed. Cl. 652 (2003), the
Government sought summary judgment on the question whether the Department of Energy
(“DOE”) was obligated under the terms of a “Standard Contract” between DOE and a utility to
accept certain nuclear waste for disposal. See id. at 655. The court denied the motion on
ripeness grounds, reasoning that the plaintiff had not raised a claim for damages related to
DOE’s failure to accept such waste, and indeed had never even asked DOE to do so. See id. at
658. Moreover, the court noted that the terms of the Standard Contract required DOE to
promulgate specific criteria used to classify potentially acceptable waste, but DOE had not yet
done so. See id. Accordingly, the underlying question whether DOE would even be obligated to
accept Commonwealth Edison’s waste could not be addressed because “the issue is contingent
upon future events that may not occur as anticipated.” Id. at 658-59. Commonwealth Edison is
thus distinguishable because Plaintiffs have alleged injuries and damages from the Government’s
conduct that are not contingent upon future events.
The holding in another one of the Government’s cases, Maritrans Inc. v. United States,
342 F.3d 1344 (Fed. Cir. 2003), further illustrates that Plaintiffs’ claims are ripe. In that case,
Maritrans argued that it had suffered a taking in light of a provision of the Oil Pollution Act of
1990, which required the retirement of oil transport vessels that did not conform to the statute’s
double-hull requirement. See id. at 1349. The Federal Circuit held that Maritrans’ claim with
respect to several vessels was ripe because the vessels were subject to the retirement provision
from the time of the statute’s enactment and the retirement dates could be discerned from a
schedule provided in the statute. See id. at 1359. Thus, “the permissible uses of the vessels after
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each retirement date are known to a reasonable degree of certainty,” id., and, accordingly, the
value of the vessels was impacted upon enactment of the statute. The harm suffered by Plaintiffs
is far less attenuated than that alleged in Maritrans, as Plaintiffs’ injuries stemmed from
contemporaneous government conduct, not the mere threat of government action.
Importantly, the Maritrans court was not concerned with the purely speculative conduct
of the sort the Government urges this Court to consider – namely, the notion that the
shareholders’ futures are uncertain while the Companies remain in Government hands. Indeed,
Congress could have amended or even rescinded the vessel retirement provisions at issue in
Maritrans, just as FHFA and Treasury might take some future action with respect to the
Companies that benefits or, more likely, harms their shareholders. But that does not eliminate
the fact of an injury in the first instance; it is merely a question of degree.
36
b. The indeterminate nature of the conservatorship further underscores
the need for judicial review.
The substantial delay that Plaintiffs have endured, and potentially infinite delay they may
continue to endure, is a sufficiently severe hardship to establish ripeness. See White & Case LLP
v. United States, 67 Fed. Cl. 164, 174 (2005). In White & Case, a law firm sought an informant
award for contributing information to the then-U.S. Customs Service regarding an illegal car part
importation scheme. See id. at 165-68. The Government argued that because the Customs
investigation was ongoing and because it had made assessments and obtained liquidated damages
with regard to only 11 of the 98 instances in which White & Case had provided relevant
36 Cf. Underland v. Alter, 2012 WL 2912330, at *2 (E.D. Pa. July 16, 2012), reconsideration denied,
2012 WL 4108998 (E.D. Pa. Sept. 18, 2012) (“The Advanta Defendants also argue that the controversy is
not ripe for judicial review, as Plaintiffs may recover all of their alleged losses through Advanta’s
bankruptcy process. . . . Here, the Court finds that the parties are in an adversarial posture, the case
involves the analysis of past Registration Statements, which will allow the Court to decide liability
conclusively, and Plaintiffs have alleged a genuine injury. While their recovery from Advanta through the
bankruptcy process might ultimately affect the Court’s calculation of damages, the pending bankruptcy
reorganization does not affect the ripeness of the controversy.”).
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information, White & Case had failed to wait for a final agency determination on its claim for an
informant award, and therefore its claim for damages was unripe. See id. at 167-68. In
evaluating the hardship to White & Case of withholding review, the court reasoned that the
length of time the plaintiff had waited for an administrative decision – five and one-half years –
and the indefinite nature of the administrative review process mandated the exercise of
jurisdiction. See id. at 174. Here, more than five years have passed since the conservatorships
were imposed, and the Government has given every indication that Plaintiffs may never be made
whole for their injuries. As the Government concedes, “whether and when Fannie Mae and/or
Freddie Mac will emerge from conservatorship is unknown . . . .” Mot. at 35.37
Moreover, this Court’s refusal to review Plaintiffs’ claims now would likely result in at
least some – if not all – of those claims becoming time-barred, a substantial hardship in and of
itself. See In re Methyl Tertiary Butyl Ether (“MTBE”) Prods. Liab. Litig., 725 F.3d 65, 111 (2d
Cir. 2013) (“dismissing the City’s claims as unripe would work a ‘palpable and considerable
hardship,’” because dismissal would result in a subsequent action being untimely).38 For
instance, Plaintiffs’ claims with respect to the imposition of the conservatorships accrued in
September 2008; those claims will no longer be actionable as of September 2014. Yet the
Government would require that “the conservatorships . . . end before [any of] the plaintiffs’
37 The indeterminacy of the conservatorships is further underscored by the drawn out but so far
fruitless debate in Washington over the Companies’ futures. See, e.g., Nick Timiraos & Alan Zibel,
House Republicans Plan to Wind Down Fannie, Freddie, The Wall Street Journal, July 12, 2013,
http://online.wsj.com/news/articles/SB10001424127887324425204578599732524463590 (“Republicans
promised to abolish Fannie and Freddie and drastically reduce the government’s role in the mortgage
market when they took control of the House in 2011, but so far they have little to show for those aims.
President Barack Obama also hasn’t made any serious effort to advance an overhaul. His administration
issued a ‘white paper’ two years ago that called for a ‘wind down’ of Fannie and Freddie, but it hasn’t
advanced any detailed transition steps.”), Ex. B to Berman Decl. 38 See also Hage, 35 Fed. Cl. at 163 (“The court has an affirmative obligation to hear these claims,”
notwithstanding parallel administrative proceedings, because the parallel “adjudication began fifteen
years ago and may take decades to complete. Such a delay would make a mockery of the Constitution’s
guarantee of both due process and just compensation.”).
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claims can ripen.” Mot. at 35. It would cause undue hardship to Plaintiffs if they were forced to
wait for what increasingly appears to be an unlikely event, particularly as long as the Companies
remain profitable and continue to contribute to the Government’s coffers, only to ultimately be
put out of court. Thus, the hardship analysis weighs in favor of entertaining Plaintiffs’ claims.
2. Plaintiffs have a cognizable property interest in their shares.
It is well settled that the existence of a cognizable property interest is determined by
“looking to existing rules or understandings and background principles derived from an
independent source such as state, federal, or common law.” Am. Pelagic Fishing Co., L.P. v.
United States, 379 F.3d 1363, 1376 (Fed. Cir. 2004) (internal quotation marks and citations
omitted). This Court has recognized that a company’s shareholders can have a cognizable
property interest in the equity and rights associated with their shares. See Starr, 106 Fed. Cl. at
71-75. Plaintiffs’ property interests are no different than those in Starr. The relevant question,
then, is whether, prior to the conservatorships, Plaintiffs’ equity and other rights associated with
their shares were protected, or whether they “simply were enjoying a use of their property that
the government chose not to disturb.” Am. Pelagic, 379 F.3d at 1377. The laissez faire
framework under which the Companies operated prior to the imposition of the conservatorships
plainly reflects the fact that the Companies’ shareholders retained protected interests in their
shares.
As alleged in the Complaint, Fannie and Freddie received little in the way of safety and
soundness oversight (insofar as such oversight would relate to shareholders’ interests) from the
time that their shares began trading publicly in 1968 and 1984, respectively, and, unlike in the
banking industry, where the FDIC directly insures the deposits on account at banks, the
Government never assumed liability for the Companies’ business decisions. Although Congress
first approved the Government’s conservatorship authority over the Companies in 1992,
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investors in Fannie and Freddie were given every indication that the authority conferred by the
Safety and Soundness Act was toothless: as reflected in later statements by members of
Congress, this statutory scheme was far weaker than that governing “the banking system in our
country.” Compl. ¶ 61. And despite serious mismanagement and accounting scandals at both
Fannie and Freddie that resulted in each of the Companies restating their financial reports for
several years, the Government never found a reason to exercise its conservatorship authority.
See id. ¶¶ 47-48.
Even the enactment of HERA, which ostensibly imposed a regulatory structure somewhat
more akin to the one governing the banking system as compared to the former regulatory
structure, did nothing to change the fact that Plaintiffs’ rights were protected. This is because
government officials repeatedly emphasized that the Companies were healthy and that the
authority conferred by HERA – which included new receivership authority and expanded
conservatorship authority – would not be used. This view was pressed by officials at the
Companies, id. ¶¶ 62-64, the members of Congress who worked to pass HERA, id. ¶¶ 58-61,
Federal Reserve Chairman Bernanke, id. ¶ 63, and perhaps most importantly, the Companies’
chief regulators – Secretary Paulson and the OFHEO director. Id. ¶¶ 57, 62-63, 65-66. And all
the while, the Government promoted Fannie Mae and Freddie Mac securities as some of the
safest, best protected investments on the market. Id. ¶ 19. Thus, by its words and actions, the
Government established that the terms of the regulatory framework applicable to Fannie and
Freddie did nothing to limit the rights of the Companies’ shareholders.
a. The existence of a regulatory framework applicable to the
Companies does not vitiate Plaintiffs’ property interests.
The Government leaps to the conclusion that the mere existence of a regulatory
framework is sufficient to vitiate any property interests that would otherwise inhere as a result of
Plaintiffs’ stock ownership. But this is easily rebutted: if the Government’s ability to exercise
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some control over a company was sufficient to eliminate a cognizable property interest, there
could never be a basis for a regulatory taking claim. Moreover, this oversimplification is clearly
not the law. As the Federal Circuit held in Cienega Gardens v. United States, 331 F.3d 1319,
1350 (Fed. Cir. 2003), distinguishing the holding in Branch v. United States, 69 F.3d 1571 (Fed.
Cir. 1995), the conclusion that an industry is “highly regulated” is not self-evident from the mere
existence of a regulatory framework:
Branch concerned the banking industry, and the power of the
government to allocate the burdens of bank failures in a way that
protects the public, regardless of the principle of limited corporate
liability. All this shows is that at the extremes, where history
shows consistent, intrusive and changing government regulation
of all facets of all transactions even arguably within a field, for
example, banking, the effect of being in so highly a regulated
field is clear. We have no evidence that the housing programs
involved here were part of such an extreme field and therefore
cannot . . . rely solely on the fact of regulation, but must probe
into its content and other considerations.
331 F.3d at 1350-51 (emphasis added and internal citations omitted).39
Looking solely to the conservatorship provisions in the Safety and Soundness Act and
HERA, the Government analogizes those provisions to similarly-worded statutes applicable to
the highly regulated banking industry, concluding that, as with investors in banks, Fannie Mae
and Freddie Mac shareholders lack protected property interests. The problem with this argument
is twofold. First, it is inapt to compare the regulatory framework applicable to the Companies to
39 See also id. at 1350 (“Nor is the fact that the industry is regulated dispositive. A business that
operates in a heavily-regulated industry should reasonably expect certain types of regulatory changes that
may affect the value of its investments. But that does not mean that all regulatory changes are reasonably
foreseeable or that regulated businesses can have no reasonable investment-backed expectations
whatsoever.” (emphasis in original)). Tellingly, the Cienega Gardens court also held that “the field of
private mortgage lending,” 331 F.3d at 1351 n.45, one involving what the Government might also broadly
characterize as “financial institutions,” “is one which cannot be considered highly regulated.” Id.
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that of the banking industry.40 “[It] is well known that ‘anking is one of the longest regulated
and most closely supervised of public callings.’” Cal. Hous. Sec., Inc. v. United States, 959 F.2d
955, 958 (Fed. Cir. 1992) (quoting Fahey v. Mallonee, 332 U.S. 245, 250 (1947)). In contrast to
the Government’s historically hands-off approach with Fannie and Freddie, the regulatory
framework applicable to banks historically limits the rights of banks’ investors.41
The second problem with the Government’s argument is that it fails to account for the
ways in which it interfered with Plaintiffs’ rights. The cases cited by the Government, including
Golden Pacific and Acceptance Ins. Cos., Inc. v. United States, 583 F.3d 849 (Fed. Cir. 2009),
merely stand for the proposition that a plaintiff’s rights are not infringed for purposes of the
Takings Clause when the Government, acting pursuant to a regulatory framework, engages in
conduct that is entirely consistent with that framework. For instance, in Golden Pacific, the
court reasoned that a defunct bank’s majority shareholder lacked a cognizable property interest
affected by the bank’s seizure because, given the regulatory framework and the actual insolvency
of the bank, the shareholder’s “expectations could only have been that the FDIC would exert
control over the Bank’s assets if the Comptroller became satisfied that the Bank was insolvent
and [consistent with the governing statute] chose to place it in receivership.” 15 F.3d at 1074.
40 HERA’s use of the term “regulated entities,” in contrast to the Safety and Soundness Act’s
references to “enterprises,” detracts nothing from Plaintiffs’ argument. That change merely reflects the
reorganization of provisions within the statute to encompass both the Companies and the Federal Home
Loan Banks. Compare 12 U.S.C. § 4617(a) (West 1992) applying to “enterprises”), with 12 U.S.C. §
4617(a) (West 2013) (applying to “regulated entities,” defined at 12 U.S.C. § 4502(20) as Fannie Mae,
Freddie Mac, and the Federal Home Loan Banks). 41 See, e.g., Branch, 69 F.3d at 1575 (“The seizure and closure of the bank, once the bank became
insolvent, did not constitute a taking. It is well established that it is not a taking for the government to
close an insolvent bank and appoint a receiver to take control of the bank’s assets. . . . Banking is a highly
regulated industry, and an individual engaged in that industry is deemed to understand that if his bank
becomes insolvent or is operated in violation of laws or regulations, the federal government may ‘take
possession of its premises and holdings,’ . . . and no compensation for that governmental action will be
due.” (internal citations omitted)); Golden Pac. Bancorp v. United States, 15 F.3d 1066, 1073-74 (Fed.
Cir. 1994) (“Given the highly regulated nature of the banking industry, . . . Golden Pacific could not have
had a historically rooted expectation of compensation for the Comptroller’s actions[.]”).
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Likewise, in Acceptance, the court held that the plaintiff lacked a cognizable interest in selling its
crop insurance policies to a third party because, under the applicable regulatory framework, any
sale of such policies was subject to approval by the RMA, a governmental body. See 583 F.3d at
857-58. This conclusion was not altered by the RMA’s previous approval of similar
transactions, as the RMA could permissibly conclude in that instance that the sale would be
“detrimental” to the relevant public interests. See id. at 858.
In contrast, the various Government actions challenged by Plaintiffs went far beyond
anything authorized in HERA. Instead, FHFA, acting as conservator and regulator, and
Treasury, acting as loan shark, took the unprecedented and unforeseeable move of placing the
Companies into conservatorship, saddling them with largely unnecessary debt, using them
parasitically to protect unrelated financial institutions, and then steering all of the Companies’
profits to the Government’s coffers indefinitely and without regard for the debts imposed upon
the Companies by the Government itself – all at the expense of the Companies’ shareholders.
Each of these acts, which were part of a broad governmental scheme, had nothing to do with the
statutorily-defined purpose of a conservatorship – to preserve and conserve the assets of an
allegedly troubled institution – but were rather orchestrated to serve a wholly unrelated purpose,
namely creating stability in the greater economy and providing Treasury with needed funds.
3. Plaintiffs have adequately pleaded a Penn Central regulatory taking.
To the extent that the Government’s conduct has effected a partial regulatory taking, in
light of the factors set forth in Penn Cent. Transp. Co. v. City of New York, 438 U.S. 104, 124
(1978), Plaintiffs have alleged facts that plausibly give rise to a takings claim.42 At the heart of
42 The Government’s blustering that Plaintiffs cannot establish a physical taking is plainly
inconsistent with the Complaint. Nor is there any merit to the Government’s argument that a regulatory
“total wipeout” taking claim, as articulated in Lucas v. S.C. Coastal Council, 505 U.S. 1003, 1014-19
(1992), is limited only to claims involving real property. Although Lucas and Tahoe-Sierra Preservation
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the Government’s challenge to Plaintiffs’ takings claims is the simplistic notion that Fannie and
Freddie are indistinguishable from run-of-the-mill banks and, in turn, the Companies’
shareholders are indistinguishable from banks’ shareholders. However, the Complaint’s
allegations describing in exhaustive detail the regulatory framework applicable to the
Companies, Compl. ¶¶ 19, 42, 47-48, 56-66, 175-79, render the banking comparison inapt.
Commenting on the Penn Central framework in Colonial Chevrolet Co., Inc. v. United
States, 103 Fed. Cl. 570 (2012), Judge Hodges emphasized that “[n]either the Supreme Court nor
the Court of Appeals for the Federal Circuit has limited takings cases to strict or formulaic
theories at the pleading stage.” Id. at 575. Instead, the existence of a taking “‘depends largely
upon the particular circumstances’” of the case and there is no “‘set formula for determining
when justice and fairness require that economic injuries caused by public action be compensated
by the government.’” Id. (quoting Penn Central, 438 U.S. at 123-24). Accordingly, “reference
to isolated facts in other takings cases provides limited guidance.” Rose Acre Farms, Inc. v.
United States, 559 F.3d 1260, 1282 (Fed. Cir. 2009). For the reasons discussed below, Plaintiffs
have adequately pleaded takings claims, and the novelty of the scenario described in Plaintiffs’
Council, Inc. v. Tahoe Reg’l Planning Agency, 535 U.S. 302 (2002), dealt only with land, neither case
expressly held that interests unrelated to real property could not be the subject of a categorical taking.
And the Federal Circuit has rejected the Government’s argument before. See, e.g., Maritrans, 342 F.3d at
1352-55 (rejecting Government’s argument that “the concept of a categorical taking cannot be extended
to regulations that restrict the use of personal property,” but concluding that no categorical taking
occurred). Finally, neither the Eighth Circuit’s holding in Hawkeye Commodity Promotions, Inc. v.
Vilsack, 486 F.3d 430 (8th Cir. 2007), nor Branch, 69 F.3d 1571, support the Government’s position.
Hawkeye’s holding that Lucas applies only to real property, 486 F.3d at 441, rests on dubious reasoning:
in reaching this conclusion, the Hawkeye court noted that Lucas and Tahoe-Sierra dealt only with land,
and then perfunctorily extended the holding of Parkridge Investors Ltd. P’ship v. Farmers Home Admin.,
13 F.3d 1192 (8th Cir. 1994). But the Parkridge Investors court rejected a categorical taking claim on the
basis that the government conduct at issue did not deprive the plaintiff of all economic use, not on the
basis that a contractual property right, as opposed to land, was involved. See id. at 1199. Further, Branch
involved a taking claim based on a monetary assessment, and is therefore distinguishable from Plaintiffs’
claims. 69 F.3d at 1576-77. Accordingly, insofar as any facts asserted in the Complaint support the
conclusion that the Government’s conduct effected a “total wipeout,” Plaintiffs may invoke Lucas as a
basis for recovery.
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Complaint begs judicial review. The Government’s attempt to construe its actions here as
analogous to those often exercised within the narrow context of the banking industry is
inappropriate, and its motion should be denied.
a. The Government’s actions have resulted in severe economic impact.
As discussed in Section IV(C)(2), Plaintiffs have pleaded concrete, substantial economic
harm resulting from the Government’s conduct amounting to at least $41 billion. See also
Compl. ¶ 191. The Government cannot seriously contend that this amount is insufficient to state
a Penn Central claim. See generally Starr, 106 Fed. Cl. 50 (no challenge to $23 billion
economic impact allegation).
Rather, the Government argues that because the extent of Plaintiffs’ damages is not, in its
view, precisely calculable, Plaintiffs cannot “identify any actual economic impact . . . until the
conservatorships end.” Mot. at 30. But as explained in Section IV(C)(1) above, the
Government’s appeal to the ripeness doctrine is misplaced, and any questions regarding the
magnitude of Plaintiffs’ injuries are not appropriately resolved on a motion to dismiss.
b. The Plaintiffs reasonably expected that the Government would not
interfere with their rights as shareholders in the Companies.
Whether a plaintiff has a reasonable investment-backed expectation depends on:
(1) whether the plaintiff operated in a “highly regulated industry;”
(2) whether the plaintiff was aware of the problem that spawned
the regulation at the time it purchased the allegedly taken property;
and (3) whether the plaintiff could have “reasonably anticipated”
the possibility of such regulation in light of the “regulatory
environment” at the time of purchase.
Appolo Fuels, Inc. v. United States, 381 F.3d 1338, 1349 (Fed. Cir. 2004) (quoting
Commonwealth Edison, 271 F.3d at 1348). As discussed in Section IV(C)(2) above, Fannie and
Freddie’s shareholders reasonably expected that the Government would not infringe upon their
interests because the Companies operated under a unique, permissive regulatory structure and
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because Government officials expressly represented that the Companies would not be interfered
with, especially in light of their stated belief that the Companies were financially secure.
Ignoring these facts, and relying solely on cases arising in the banking context, the
Government argues that Plaintiffs’ expectations were unreasonable based on the already
debunked notion that the Companies were generic “financial institutions” participating in a
“highly regulated industry.” But the consistency and intensity of regulatory oversight in the
banking context is starkly different than the regulatory framework applicable to the Companies,
and accordingly, not all regulated industries are “highly regulated industries.”43
As this Court’s predecessor explained in Am. Continental Corp. v. United States, 22 Cl.
Ct. 692, 695-96 (1991): “Federally insured banking is a highly regulated industry. In its effort
to promote the strong public interest in a sound banking system, the federal government
regulates many aspects of the business of federally insured savings and loan associations.”
Against this historical backdrop, the American Continental court held that taking claims were
unavailable even with respect to property acquired by the bank at issue before the law authorized
the bank to be placed in conservatorship or receivership, given that subsequent authority. See id.
at 698. The court reasoned that the American Continental plaintiffs lacked reasonable
investment-backed expectations because they “were on reasonable notice as to what the ‘rules of
the game’ were”: the statutory framework governing banks was specific, well-understood, and
clearly designed to protect the interests of the banks at issue, their depositors, and the taxpayers
who would be legally obligated to pay in the event of a bank’s failure. Id. Moreover, the
43 Moreover, even participation in a “highly regulated industry” does not per se preclude a conclusion
that the reasonable investment-backed expectations factor weighs in favor of a plaintiff. See, e.g., Rose
Acre Farms, Inc. v. United States, 373 F.3d 1177, 1191 (Fed. Cir. 2004) (approving trial court holding
that new regulations applicable to company in highly regulated poultry and egg industry was not merely
an extension of previous comparable regulations, but a wholesale change based on a new scientific
understanding of disease transmission).
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regulatory process through which the Government took control of the bank was transparent,
finite, and returned all remaining proceeds to the shareholders. See id.
The Government’s argument must fail here because, as discussed above in Section
IV(C)(2), the Government did not have any direct liability associated with the Companies, as it
does in the banking context, where the FDIC directly insures the deposits on account at federally
insured banks, and it had never exercised its authority to place the Companies into
conservatorship, unlike the banking industry, where this has happened hundreds, if not
thousands, of times. In fact, the Government had repeatedly assured investors that it would not
place the Companies into conservatorship. Certainly, investors could not have expected that the
Government would do so for reasons tied to the Government’s own public policy objectives,
rather than for the reasons contemplated by HERA.
It is no answer for the Government to contend, as it likely will, that the Companies’
boards of directors consented to the conservatorship, and that shareholders could not reasonably
expect that FHFA would nevertheless stand aside. Even assuming that the boards validly
consented to the conservatorship, and the imposition of the conservatorship was therefore
authorized by HERA, the Complaint makes clear that, whatever troubles the Companies may
have faced, they were not in such dire straits that the imposition of a conservatorship could be
expected. Compl. ¶¶ 4, 12, 93-112, 119-36, 141-51. This is especially the case where, as here,
the conservator, in collusion with Treasury, has used the conservatorship vehicle to shore up the
foundering economy, not to “conserve and protect” the Companies. Id. ¶¶ 5-6, 13, 17-18, 74-78,
182-83. Taking these facts as true, the Court must conclude that Plaintiffs reasonably expected
to be able to exclude the Government from interfering with their property interests; this was the
very promise made by the Government.
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Nor can the Government legitimately argue that the statutory language is the only factor
relevant to the reasonable investment-backed expectations question. Indeed, courts have held
that reasonable investment-backed expectations are limited not only by the existing regulatory
framework, but also by possible future regulatory regimes. See, e.g., Connolly v. Pension
Benefit Guar. Corp., 475 U.S. 211, 227 (1986) (“Those who do business in the regulated field
cannot object if the legislative scheme is buttressed by subsequent amendments to achieve the
legislative end.” (internal quotation marks and citation omitted)); Cal. Hous. Sec., Inc. v. United
States, 959 F.2d at 959 (“Given this long history of government regulation of savings and loan
associations, CHS and Saratoga were certainly on notice that Saratoga might be subjected to
different regulatory burdens over time.”).44 It would defy logic to conclude that investors must
reasonably take into account as ephemeral a concept as what might be, but that they cannot
reasonably rely on what is, as expressed by those government officials charged with creating and
implementing any such regulatory structure.
c. The Government was not rescuing the Companies; at most it was
cleaning up its own mess.
Penn Central’s “character of the governmental action” factor does not look to the
wisdom of the Government’s conduct, but rather to “‘the actual burden imposed on property
rights, or how that burden is allocated.’” Rose Acre Farms, 559 F.3d at 1278 (quoting Lingle v.
Chevron U.S.A. Inc., 544 U.S. 528, 543 (2005)). The Government’s conduct cannot be viewed
as a rescue for two reasons. First, the Complaint pleads in detail that the Companies were not, in
fact, in an “unsafe and unsound” financial condition. Compl. ¶¶ 4, 12, 93-112, 119-36, 141-51.
44 Notably, however, the Federal Circuit clarified in Cienega Gardens that possible subsequent
changes to a legislative scheme are relevant to the reasonableness of investment-backed expectations only
insofar as those changes “clarif[y] the originally-intended meaning of an existing statute . . . .” 331 F.3d
at 1351. “[L]egislative amendments that fundamentally changed the scheme legislated previously” do not
count. Id. (emphasis in original).
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Rather, although the Government ignores it, they were taken into conservatorship and
manipulated to accomplish the Government’s goal of stabilizing the economy; the Companies’
shareholders alone were forced to bear this burden.45 Id. ¶¶ 5-6, 13, 17-18, 74-78, 182-83.
Second, assuming arguendo that a rescue was required because of instability caused by
the Companies’ investments in the subprime and Alt-A mortgage markets, those investments
were entirely attributable to the Government. When the Government itself creates the troubles
within a private company and then must step in to remedy the situation, the Government – not
the company’s shareholders – must bear that burden. See Starr, 106 Fed. Cl. at 79-80. In Starr,
the plaintiff alleged that AIG’s board of directors was coerced by the Government into accepting
the terms of a usurious loan agreement. See id. at 78. The Government countered that even if
the board was coerced, the loan agreement was offered to AIG with the intention of bailing out
the company from the consequences of its own business risks; such a rescue, in the
Government’s view, precluded a compensable taking. See id. at 79. This Court rejected the
Government’s argument, reasoning that “the Government’s position . . . is not the position
45 The Government argues the Complaint must be dismissed because it contains allegations that the
Government “violated statutes or otherwise overstepped its authority.” Mot. at 25. The Government
improperly conflates actions that are unlawful with actions that are unauthorized. The Complaint clearly
alleges the former, and it is well-established that “a court’s conclusion that government agents acted
unlawfully does not defeat a Tucker Act takings claim if the elements of a taking are otherwise satisfied.”
Del-Rio Drilling Programs, Inc. v. United States, 146 F.3d 1358, 1363 (Fed. Cir. 1998). For this reason,
“the Court of Federal Claims has held specifically that a plaintiff may advance a takings claim and an
unlawful exaction claim concurrently.” Starr Int’l Co., Inc. v. United States, 106 Fed. Cl. at 70 (citing
Figueroa v. United States, 57 Fed. Cl. 488, 496 (2003)); see also Rith Energy v. United States, 247 F.3d
1355, 1365 (Fed. Cir. 2001) (“[A]n uncompensated taking and an unlawful government action constitute
‘two separate wrongs [that] give rise to two separate causes of action’ . . . . To proceed on the second
cause of action does not require that the plaintiff first litigate, and lose, on the first.”).
In the same vein, Defendant takes issue with Plaintiffs’ allegations that the Government engaged in
coercion, misrepresentation, an abuse of power, and accounting manipulation, arguing that such claims
are not actionable in this Court. Mot. at 16-17. However, Plaintiffs do not rely on these allegations as
freestanding torts; nor could they. See Keene Corp. v. United States, 508 U.S. 200, 214 (1993) (“tort
cases are outside the jurisdiction of the Court of Federal Claims”). Rather, these ancillary tort allegations
are pleaded in support of Plaintiffs’ claim that the Government’s conduct exceeded its authority, thus
amounting to an illegal exaction. The Government raised this same argument in Starr, and this Court
squarely rejected it. See 106 Fed. Cl. at 77 n.21.
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alleged in Starr’s Complaint. . . . Starr sets forth a very different account of the causes of its
financial situation, placing significant blame on specific government actions and inaction . . . .”
Id. Accordingly, the court denied the motion to dismiss the takings claim on the ground that the
Government’s conduct constituted a rescue. See id. at 79-80. As in Starr, Plaintiffs’ Complaint
demonstrates that the “poor performance” of Fannie Mae and Freddie Mac, Mot. at 31, was the
result of regulators’ insistence that the Companies take on substandard investments, many of
which would not have met the Companies’ own underwriting standards but for regulatory
adjustments.
D. Plaintiffs State an Exaction Claim
The Complaint alleges that the Government engaged in two different types of exactions.
First, the Government improperly imposed the conservatorships on the Companies without
satisfying the criteria set forth in HERA for doing so. Compl. ¶¶ 91-153. Second, even if one of
the statutory requirements for imposing a conservatorship was met, FHFA could only “take such
action as may be . . . necessary to put the regulated entit[ies] in a sound and solvent condition[]
and . . . appropriate to carry on the business of the regulated entit[ies] and conserve the assets
and property of the regulated entit[ies].” 12 U.S.C. § 4617(b)(2)(D). Despite the existence of
this obligation, FHFA, acting in concert with other governmental entities, including Treasury,
exceeded its authority by using Fannie and Freddie for the Government’s objectives. Compl.
¶¶ 7, 10, 13, 18, 154-70, 205-06.
The Government asserts that Plaintiffs’ exaction claim fails because: (1) the Court must
presume that FHFA’s action in imposing the conservatorships was authorized; (2) HERA is not a
46 Compl. ¶¶ 2-4, 49-54. Thus, the Government’s motion should be denied.
46 The Motion to Dismiss conveniently overlooks these allegations. Similarly, in arguing that the
Companies’ shareholders should bear the burden of the Government’s conduct because “taxpayers – not
shareholders – intervened and risked billions to rescue the Enterprises,” Mot. at 31, the Government
blatantly ignores Plaintiffs’ allegation that the Companies could have raised capital from the public equity
markets had they been afforded adequate opportunity to do so. Compl. ¶¶ 130-31.
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money mandating statute; (3) the Government purportedly did not exact anything from Plaintiffs;
and (4) the effect of the Government’s actions with regard to the Companies was indirect.
Because all of these arguments are premised on the assumption that the Government may act
unchecked in moments of financial crisis, they should be rejected.
1. The Government’s actions were not presumptively authorized.
The Government says that the imposition of the conservatorships should not be subject to
challenge because the conservatorships were “authorized” by HERA. Plainly, the law cannot be
that, having statutory authorization to impose the conservatorships, the Government could do
whatever it wanted during them. Yet this would be the logical result of the Government’s
argument that its conduct should be immunized because it was “authorized” in the sense the
Government claims. Indeed, in all of the cases cited by the Government, the action challenged
by the plaintiff related to “the exercise of powers of functions of the Agency as conservator or a
receiver,” 12 U.S.C. § 4617(f), and involved conduct by the FHFA to “preserve and conserve the
assets and property of the [Companies].” 12 U.S.C. § 4617(b)(2)(D)(ii).47 Here, the Complaint
has alleged the Government did precisely the opposite.
The Government’s argument also acts as if the language in HERA setting forth the
criteria under which the Government could impose conservatorships did not exist. The
Complaint alleges that the Government did not satisfy any of the 12 prongs necessary before a
conservatorship can be imposed under HERA and that the Government’s decision to place the
47 Both County of Sonoma v. FHFA, 710 F.3d 987 (9th Cir. 2013), and Town of Babylon v. FHFA,
699 F.3d 221 (2d Cir. 2012), were actions brought by municipalities to challenge an FHFA directive
prohibiting Fannie and Freddie from purchasing mortgages on properties encumbered by liens made
under the PACE (property-assessed clean energy) program. Both courts held that directive fell squarely
within the conservator’s powers. See County of Sonoma, 710 F.3d at 993 (“A decision not to buy assets
that the FHFA deems risky is within its conservator power to ‘carry on’ the Enterprises’ business and to
‘preserve and conserve the assets and property of the [Enterprises].’” (citation omitted)); Town of
Babylon, 699 F.3d at 227 (“Directing protective measures against perceived risks is squarely within
FHFA’s powers as a conservator.”); see also Leon County Fla. v. FHFA, 700 F.3d 1273 (11th Cir. 2012).
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Companies into conservatorship resulted from separate considerations neither covered by nor
relevant to HERA. See Compl. ¶¶ 11, 91-153. While the Government disputes whether some of
these criteria was satisfied, on a motion to dismiss the Court must accept Plaintiffs’ allegations as
true. Moreover, the Government has pointed to no evidence, even outside the Complaint,
showing that, at the time the conservatorships were imposed, the Government believed any of
the HERA criteria to be met. Indeed, in proclaiming that the Government’s actions were
“authorized,” the Government does not even discuss the twelve circumstances under HERA
where the Government could have properly imposed conservatorships.
2. Plaintiffs have alleged claims under money mandating statutes.
a. For Plaintiffs’ claims concerning the conservatorship, Plaintiffs have
sufficiently alleged that HERA is money mandating.
The Government also claims that HERA is not a money mandating statute. As an initial
matter, this Court does not need to decide this issue now. In Starr, the Government argued that
the Court should analogize cases decided outside the exaction context to hold that Section 13(3)
of the Federal Reserve Act, 12 U.S.C. §§ 341 and 343, was not money mandating. 106 Fed. Cl.
at 84. The court held that the argument was “novel” and, based on the limited briefing devoted
to the issue, concluded that it was “premature at this stage to rule decisively on the issue, let
alone treat it as dispositive for purposes of Starr’s illegal exaction claim.” Id. Likewise here, no
court has ever decided the issue of whether HERA is money mandating. This is a novel issue
that is premature to address at this stage of the litigation.
Even if this Court decides to address the issue, there is sufficient support for Plaintiffs’
claim that HERA is money mandating. This Court has subject matter jurisdiction over a case
“[w]here plaintiffs have invoked a money mandating statute and have made a non-frivolous
assertion that they are entitled to relief under the statute.” Brodowy v. United States, 482 F.3d
1370, 1375 (Fed. Cir. 2007) (citations omitted). A statute may be deemed money mandating if it
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can “fairly be interpreted as mandating compensation by the Federal Government for the damage
sustained” and is “reasonably amenable to the reading that it mandates a right of recovery in
damages.” United States v. White Mountain Apache Tribe, 537 U.S. 465, 472-73 (2003). In
White Mountain, for example, the Supreme Court held that a federal statute requiring the
Government to “maintain, protect, repair and preserve” property for the White Mountain Apache
Tribe created a fiduciary trust relationship that made the Government subject to duties as a
trustee and therefore potentially liable in damages for breach of that duty. It therefore remanded
the action to the Court of Federal Claims to determine whether plaintiff stated a claim for breach
of that duty. The Court held that “[t]his is so because elementary trust law, after all, confirms the
commonsense assumption that a fiduciary actually administering trust property may not allow it
to fall into ruin on his watch.” Id. at 475. It further explained that “[t]o the extent that the
Government would demand an explicit provision for money damages to support every claim that
might be brought under the Tucker Act, it would substitute a plain and explicit statement
standard for the less demanding requirement of fair inference that the law was meant to provide
a damage remedy for breach of a duty.” Id. at 477.
Likewise here, HERA established FHFA as a conservator for the Companies “for the
purpose of reorganizing, rehabilitating, or winding up the affairs of a regulated entity.” 12
U.S.C. § 4617(a)(2). Among other things, FHFA has the obligation to “preserve and conserve
the assets and property of the regulated entity.” § 4617(b)(2)(B)(iv). It may take such action as
may be “(i) necessary to put the regulated entity in sound and solvent condition; and (ii)
appropriate to carry on the business of the regulated entity and preserve and conserve the assets
and property of the regulated entity.” § 4617(b)(2)(D).
There are abundant allegations in the Complaint to support that the Government did
precisely the opposite. Rather than supporting the Companies on favorable terms similar to
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those offered to many other struggling financial institutions at that time, it took control of Fannie
and Freddie to warehouse bad mortgage debt for other financial institutions deemed “too big to
fail.” Compl. ¶¶ 5, 74-78, 157. It entered into Stock Agreements that gave away the
Companies’ preferred stock and rights to its common stock for pennies while obligating them to
pay onerous dividends – and eventually all of their profits – to the Treasury. Id. ¶¶ 154-69. Put
in the terms of the White Mountain Court, it is elementary that, having assumed the role of
conservator, the Government could not permissibly allow the Companies to fall into ruin – and
certainly could not cause their eventual demise by, among other things, operating them for its
own objectives and transferring all of the Companies’ profits to itself – under its watch.
The Government will likely rely on Franklin Sav. Corp. v. United States, 56 Fed. Cl. 720
(2003), to distinguish White Mountain from these facts. In Franklin, the plaintiffs, a defunct
savings and loan (“S&L”) and its holding company, argued that, by virtue of its comprehensive
regulation of the banking industry generally, as well as through FIRREA, the Government had
assumed a fiduciary duty to the S&Ls over which it imposed conservatorships and receiverships.
The plaintiff then alleged that the Government breached that duty by doing a number of things
specifically authorized in FIRREA as part of a conservator’s powers. See id. at 747. This Court
rejected that claim. First, it held that the banking statutes relied on by the plaintiff did not
provide a substantive source of law imposing fiduciary duties on the Government. Id. at 752.
Second, it noted that FIRREA granted the Government significant power and discretion in
regulating S&Ls and that it would be inconsistent with the statute’s purpose to curtail that power.
Id. at 752-53. It therefore concluded that “nderlying [plaintiffs’] breach of a Mitchell48 type
trust claim is the hypothesis that pervasive regulation of an industry or endeavor creates a
48 United States v. Mitchell, 445 U.S. 535 (1980) (Mitchell I); United States v. Mitchell, 463 U.S. 206
(1983) (Mitchell II).
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fiduciary relationship between the United States and a regulated entity. . . . [Plaintiff] is here
simply complaining of what Congress wrought: enactment and implementation of FIRREA.”
Id. at 754.
As an initial matter, Franklin preempts the Government’s likely argument that the
reasoning of the White Mountain Court is restricted to the Indian context in which it arose.
Moreover, Plaintiffs’ White Mountain arguments bear only superficial resemblance to the
arguments made by the Franklin plaintiff. First, Plaintiffs are not challenging the Government’s
actions in fulfilling duties specifically given to the Government by HERA. Instead, Plaintiffs
argue that HERA gave the Government the power to impose a conservatorship to preserve the
Companies’ assets and that the Government never came close to accomplishing that purpose. 49
Second, Plaintiffs are not arguing that the Government’s duties arose from comprehensive
regulation of the Companies, but instead from specific statutory language within HERA itself.
The Government also argues that Plaintiffs should not be entitled to any review of the
Government’s actions during the conservatorship because HERA allegedly only provides
“limited judicial review of the conservatorship decision.” Mot. at 40. But as discussed in
Section IV(A)(2), HERA merely limits a plaintiff’s ability to seek injunctive or declaratory relief
related to the imposition of a conservatorship; it has no bearing on Plaintiffs’ constitutional
claims for damages. Moreover, as the County of Sonoma court acknowledged, “the anti-judicial
review provision [in HERA] is inapplicable when FHFA acts beyond the scope of its conservator
power.” 710 F.3d at 992 (citing Sharpe v. FDIC, 126 F.3d 1147, 1155 (9th Cir. 1997)).
49 Cf., e.g., Gibraltar Fin. Corp. v. Fed. Home Loan Bank Bd., 1990 WL 394298, at *3 (C.D. Cal.
June 15, 1990) (“The case at hand is similar to the above-discussed cases. In imposing the
conservatorship upon the Associations, the Defendants exceeded their normal regulatory and supervisory
activities and assumed control of the operations of those institutions. Under these circumstances GFC, as
a shareholder of the Associations, may state a claim for breach of fiduciary duty.”).
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b. For Plaintiffs’ claims related to the Stock Agreements, Plaintiffs have
alleged that the Companies’ statutory charters were money
mandating.
Plaintiffs have further alleged that the Government effected an exaction by forcing the
Companies to enter into the Stock Agreements. In doing so, the Treasury invoked Section
304(g) of Fannie Mae’s Charter Act, 12 U.S.C. § 1719(g), and Section 306(f) of Freddie Mac’s
Charter Act, 12 U.S.C. § 1455(f). See Compl. ¶ 155. However, Treasury never fulfilled the
requirements in HERA that would have allowed it to purchase obligations and other securities
issued by the Companies. See Compl. ¶¶ 155-58. Much like in White Mountain, both HERA
and the Companies’ charters imposed duties on the Government, and these provisions mandate
that damages be paid to Plaintiffs, who were uniquely injured by the conservatorships as well as
the subsequent entry into the Stock Agreements, including the Third Amendment.
3. The Government exacted something from Plaintiffs by breaching its duty to
conserve the Companies’ assets during the conservatorship.
The Government also argues that Plaintiffs’ exaction claim fails because the Government
purportedly doesn’t have any of Plaintiffs’ money “in its pocket” and Plaintiffs have not alleged
that “the Government’s coffers were increased by this – or any – amount.” Mot. at 37, 38.
Although the Government’s Motion presumes only one, there are two types of exaction claims:
(1) those in which the plaintiff has paid money over to the government, directly or in effect, and
seeks return of that sum; and (2) those demands in which money has not been paid but the
plaintiff asserts that it is nevertheless entitled, under a money mandating statute, to a payment
from Treasury for damages sustained. United States v. Testan, 424 U.S. 392, 401-02 (1976);
Eastport Steamship Corp. v. United States, 372 F.2d 1002, 1007-08 (Ct. Cl. 1967). In the second
group, where no such payment has been made, the allegation must be that the particular
provision of law relied upon grants the claimant, expressly or by implication, a right to be paid a
certain sum. Id. As set forth above, Plaintiffs have identified such statutory authority.
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Further, contrary to the Government’s argument, even in the first category of exaction
claim, there is no requirement that the plaintiff pay money directly into the Government’s
“pocket.” See Casa de Cambio Comdiv, S.A. de C.V. v. United States, 291 F.3d 1356, 1364 (Fed
Cir. 2002) (The Federal Circuit has held “that an illegal exaction claim lies even where money is
not paid by the plaintiff directly to the government.”) (internal quotation marks and citation
omitted). Indeed, while the Government relies on Aerolineas Argentinas v. United States, 77
F.3d 1564 (Fed. Cir. 1996), in that case the Federal Circuit made clear that “if [the plaintiffs]
made payments that by law the [government agency] was obliged to make, the government has
‘in its pocket’ money corresponding to the payments that were the government’s statutory
obligation.” Id. at 1573; see also id. at 1579 (Nies, J., concurring) (“The government must order
assumption of a government obligation. Thus, cases where the government itself had no
financial obligation in the matter and receives no direct financial benefit are distinguishable.”)
(citations omitted).
4. The harm to Plaintiffs was not indirect; if Plaintiffs are not able to recover
their losses, the Government’s conduct will go without a remedy.
Finally, the Government argues that any harm to Plaintiffs is “indirect.” The
Government’s argument assumes that its actions must have been aimed at Plaintiffs, but the test
is whether the “causal connection” is sufficiently direct. Norman v. United States, 429 F.3d
1081, 1096 (Fed. Cir. 2005). Here, the Government does not – and cannot – seriously contend
that Plaintiffs’ harm was caused by anything other than the Government’s imposition of the
conservatorships and its conduct thereafter.50 And to the extent the Government makes such a
50 The Government half-heartedly claims that “[t]he loss of share value did not result as much from
Government action as it did from the perceptions of countless, potential buyers and sellers of the
Enterprises’ stock,” Mot. at 40, but neither the facts of the case nor the case the Government cites for it,
Dura Pharms., Inc. v. Broudo, 544 U.S. 336 (2005), supports such an assertion. Dura simply held that a
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claim, it is belied by the Government’s own admissions after the conservatorships were imposed
that the conservatorships “rendered the common [and preferred] shares of the Enterprises
virtually worthless,” thereby destroying the property rights of the Companies’ shareholders who
“effectively lost their investments,” and that “[e]xisting common and preferred shareholders
were effectively wiped out” by the conservatorships. Compl. ¶ 9.
In all of the cases on which the Government relies for its claim that Plaintiffs’ injuries are
insufficiently direct, there was an intervening third party that was more directly harmed by the
Government’s actions.51 Here, in contrast, there is no intervening third party more directly
injured. Indeed, if the Government’s argument on directness is accepted, it would deny any
recovery for the conduct alleged in the Complaint.
E. If the Court Finds Plaintiffs’ Allegations to be Insufficient, Plaintiffs Should Be
Permitted Leave to Amend
Based on the arguments set forth above, the Government has set forth no arguments
justifying dismissal of Plaintiffs’ claims at this early stage of ligation. However, if the Court
finds the Complaint deficient, Plaintiffs respectfully request leave to amend their Complaint.
Such amendment, if deemed necessary, is consistent with R.C.F.C. 15(a)(2), which provides that
plaintiff bringing a claim for a securities violation must have relied on the representations made. This is
not a misrepresentation case. 51 In Casa de Cambio Comdiv, the depositor of a stolen Treasury check alleged that the Government’s
actions in recouping check funds from the presenting bank violated federal regulations and constituted a
taking. The plaintiff argued that “the government committed a regulatory taking when it caused [a third
party] to take [plaintiff’s] property when the government debited [the presenting bank’s] account.” 291
F.3d at 1361. The court held that the relevant federal regulation was money mandating only with regard to
the presenting bank, not the depositor plaintiff. Id. at 1361. (This holding was in the section of the
court’s discussion devoted to the plaintiff’s takings claim, but the court later held that “[the illegal
exaction] test is identical to the Takings test.” Id. at 1364.) In Ontario Power Generation, Inc. v. United
States, 369 F.3d 1298 (Fed. Cir. 2004), the plaintiff alleged that the government had engaged in a taking
by assessing excise taxes on U.S. suppliers who sold coal to the plaintiff, a Canadian power company.
The court held that only the U.S. suppliers on whom the taxes were assessed had such a claim, and that
the plaintiff was “one step removed” from them. Id. at 1302.
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permission to amend should be freely given when justice so requires,52 and is particularly
appropriate in this case given the complexity of the facts and novel theories of law.
V. CONCLUSION
The Government effectively nationalized Fannie and Freddie to serve the Government’s
purposes. It cannot avoid paying Plaintiffs just compensation for its actions by cloaking its
actions in statutory authority that the Government ignored in imposing the conservatorships in
the first instance. Its Motion should be denied.
VI. REQUEST FOR ORAL ARGUMENT
Pursuant to R.C.F.C. 20(c), Plaintiffs respectfully request oral argument on the
Government’s Motion.
Dated: December 16, 2013 Respectfully submitted,
By /s / Steve W. Berman
Attorney of Record
HAGENS BERMAN SOBOL SHAPIRO LLP
1918 Eighth Avenue, Suite 3300
Seattle, WA 98101
Telephone: (206) 623-7292
Facsimile: (206) 623-0594
E-mail: steve@hbsslaw.com
OF COUNSEL:
Jennifer Fountain Connolly
HAGENS BERMAN SOBOL SHAPIRO LLP
1701 Pennsylvania Ave. NW, Suite 300
Washington, D.C. 20006
Telephone: (202) 248-5403
Facsimile: (202) 580-6559
Email: jenniferc@hbsslaw.com
Steve W. Berman
52 See Joint Venture of Comint Sys. Corp. & EyeIT.com, Inc. v. United States, 100 Fed. Cl. 170, 171
(Fed. Cl. 2011) (“If the underlying facts or circumstances relied upon by a plaintiff may be a proper
subject of relief, he ought to be afforded an opportunity to test his claim on the merits. In the absence of
any apparent or declared reason – such as undue delay, bad faith or dilatory motive on the part of the
movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the
opposing party by virtue of allowance of the amendment, futility of amendment, etc. – the leave sought
should, as the rules require, be ‘freely given.’”) (citing Foman v. Davis, 371 U.S. 178, 182 (1962)).
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Robert M. Roseman
Joshua B. Kaplan
SPECTOR ROSEMAN KODROFF &
WILLIS, P.C.
1818 Market Street, Suite 2500
Philadelphia, PA 19103
Telephone: (215) 496-0300
Facsimile: (215) 496-6611
E-mail: rroseman@srkw-law.com
E-mail: jkaplan@srkw-law.com
Mark S. Willis
James McGovern
SPECTOR ROSEMAN KODROFF &
WILLIS, P.C.
1101 Pennsylvania Avenue, N.W.
Suite 600
Washington, D.C. 20004
Telephone: (202) 756-3601
Facsimile: (202) 756-3602
E-mail: mwillis@srkw-law.com
E-mail: jmcgovern@srkw-law.com
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100% correct...I trade in 4 different accounts (different brokers) because each have their own little idiosyncracies about what/how you can/can't trade....even with a self directed account.
Many years ago...maybe nto that many...brokers used to require that you "register" as a day trader....don't know if they still do that or not.
Scotttrade is quite clear on their day trading requirements...follow the rules and there is no issue.
http://research.scottrade.com/public/knowledgecenter/help/article.asp?docId=0d1519113bb04b72a79240759174865d
DRIP's are nice if your plan is to build up your position in a particular stock and not care about the pps....that's a typically very long play. I quit using DRIP's because I like to paper play stocks while waiting for the div and pick through what I think is a nice entry point for the same stock or a different stock.
That's just me...DRIP's are an easy way to go at times.
They have been "trying" to get their act together on missed filings for a few years now, but to release the div payout for the next two quarters is very positive.
nice link for DRIP research
http://www.dripdatabase.com/DRIP_Directory_AtoZ.aspx