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Jury Hears Final Arguments Over Fannie, Freddie Profit Sweep

By Katie Buehler

Law360 (October 31, 2022, 8:08 PM EDT) -- A D.C. federal jury was told Monday
the Federal Housing Finance Agency's decision to amend Fannie Mae and
Freddie Mac stock purchase agreements and let the U.S. Treasury sweep
up the companies' net worths made their stocks essentially worthless,
dashing shareholders' hopes of receiving dividends.

"Our clients were harmed — that should be the easiest thing to see,"

said shareholders' attorneys, Hamish Hume of Boies Schiller Flexner LLP.

He told the jury that it only needs to find one of three facts true to award damages to the shareholders: The FHFA underwent a "grossly inadequate process" before agreeing to the sweep, conducting no studies or analysis; the FHFA's reasoning for the sweep makes no sense and is contradicted by the evidence; or the agency's motive behind the sweep is different from its stated reason.

Hume argued the shareholders, who hadn't received dividends since the housing market crash, were hopeful they would once again receive returns on their investments once the companies recovered.

"We had contractual hope until the net worth sweep," he said.

Jury Hears Final Arguments Over Fannie, Freddie Profit Sweep

By Katie Buehler

Law360 (October 31, 2022, 8:08 PM EDT) -- A D.C. federal jury was told Monday the Federal Housing Finance Agency's decision to amend Fannie Mae and Freddie Mac stock purchase agreements and let the U.S. Treasury sweep up the companies' net worths made their stocks essentially worthless, dashing shareholders' hopes of receiving dividends.

Counsel for the three classes of shareholders presented part of closing arguments to the jury Monday afternoon, encouraging it to award $1.6 billion in damages on claims the FHFA improperly amended Fannie Mae and Freddie Mac's senior preferred stock purchase agreements with the U.S. Department of the Treasury, which controlled the government's bailout of the companies following the 2008 housing market crash.

The jury will begin deliberations in the case after the FHFA wraps up its closing arguments Tuesday morning.

The amendments, known as the "net worth sweep," increased the Treasury Department's dividend from 10% of its total investment to 100% of the companies' current and future net worths. The changes eliminated shareholders' prospect of ever receiving dividends and resulted in the Treasury receiving at least $130 billion more in dividends than it would have under the original deal.

"Our clients were harmed — that should be the easiest thing to see," said one of the shareholders' attorneys, Hamish Hume of Boies Schiller Flexner LLP.

He told the jury that it only needs to find one of three facts true to award damages to the shareholders: The FHFA underwent a "grossly inadequate process" before agreeing to the sweep, conducting no studies or analysis; the FHFA's reasoning for the sweep makes no sense and is contradicted by the evidence; or the agency's motive behind the sweep is different from its stated reason.

Hume argued the shareholders, who hadn't received dividends since the housing market crash, were hopeful they would once again receive returns on their investments once the companies recovered.

"We had contractual hope until the net worth sweep," he said.

Attorneys for the FHFA attempted to put the jury in the shoes of former agency officials during the first part of closing arguments Monday, explaining how the decision was based on "literally years" of negative net worths, U.S. Securities and Exchange Commission filings in which Fannie Mae and Freddie Mac said they wouldn't be profitable enough to pay the 10% dividend, and concerns from non-shareholder investors.

"Things weren't getting better; they were getting worse" leading up to the net worth sweep, said Jonathan Stern of Arnold & Porter, representing the FHFA.

When the arguments are wrapped up Tuesday, jurors will be asked to determine whether the FHFA breached an implied covenant of good faith and fair dealing in agreeing to the net worth sweep and, if so, whether the shareholders should receive damages.

The dispute stems from the housing market crash of 2008 and Congress' passage of the Housing and Economic Recovery Act that year, which created the FHFA and empowered it to act as a conservator for Fannie Mae and Freddie Mac when necessary. The FHFA placed the companies under a purportedly temporary conservatorship in September 2008.

By mid-2012, Fannie Mae and Freddie Mac had recovered significantly and returned to profitability, with the potential of exiting the conservatorship by 2020, according to the lawsuit.

FHFA has defended the amendments as a way to avoid a circular draw pattern in which Fannie Mae and Freddie Mac would continuously borrow more money from Treasury's capped fund to pay the 10% dividend, eroding the value of the department's investment. The pattern could cause investors to lose faith in the companies and potentially lead to another market crash, the agency claims.

The stock purchase agreements have since been amended several times to allow Fannie Mae and Freddie Mac to keep some profits while the department's in-kind investment increases.

The Treasury Department has invested $191.4 billion in the two companies since 2008 and has received $385.3 billion in return, according to investment data presented at trial.

The shareholders are represented by Hamish P.M. Hume, Samuel C. Kaplan and Kenya K. Davis of Boies Schiller Flexner LLP, Eric L. Zagar and Lee Rudy of Kessler Topaz Meltzer & Check LLP, Michael J. Barry of Grant & Eisenhofer PA, and Adam Wierzbowski and Robert Kravetz of Bernstein Litowitz Berger & Grossmann LLP.

The FHFA is represented by Asim Varma, Howard N. Cayne, David B. Bergman, Ian S. Hoffman, Jonathan L. Stern and Robert Stanton Jones of Arnold & Porter.

The Federal National Mortgage Association, or Fannie Mae, is represented by Meaghan VerGow of O'Melveny & Myers LLP.

The Federal Home Loan Mortgage Corp., or Freddie Mac, is represented by Michael J. Ciatti of King & Spalding LLP.

The case is In re: Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigation, case number 1:13-mc-01288, in the U.S. District Court for the District of Columbia.

--Editing by Adam LoBelia.