Fannie Mae-No Politics (FNMA)

[navycmdr]

Jury Continues Deliberations On Fannie, Freddie Profit Sweep

So far, the eight-woman jury has deliberated for roughly eight hours and will continue deliberations Thursday.

By Katie Buehler



Law360 (November 2, 2022, 6:14 PM EDT) -- A D.C. federal jury continued deliberating Wednesday in spite of a COVID-19 scare and request for a mistrial in Fannie Mae and Freddie Mac shareholders' lawsuit accusing the Federal Housing Finance Agency of improperly amending stock purchase agreements to allow the U.S. Department of the Treasury to sweep up the companies' net profits.

The day began with jurors, court staff and both trial teams testing themselves for COVID after a member of the court's staff tested positive. Jurors tested themselves in a courtroom they are using for deliberations while lawyers tested themselves in the hallways of the federal courthouse in Washington, D.C. No one reported a positive rapid test.

Jurors then deliberated for about three hours before sending the court a note stating they were split 50/50 with very strong feelings on both sides. U.S. District Judge Royce C. Lamberth called the jurors into the courtroom and empathized that this is a tough case, but requested they continue deliberating.

Attorneys for both sides agreed with that decision at first, but then, about an hour later, attorneys for the shareholders requested a mistrial, noting there is D.C. Circuit case law that a deadlocked jury asked to continue deliberating despite a split could produce a tainted verdict. Attorneys for the FHFA didn't take a position on the motion.

"It is with some regret that I move for the court to declare a hung jury and mistrial," said Hamish Hume of Boies Schiller Flexner LLP, an attorney for the shareholders.

Judge Lamberth denied the motion, finding the split would cause no undue cohesion in the jury because there was no minority of jurors that could feel pressured to switch their votes.

So far, the eight-woman jury has deliberated for roughly eight hours and will continue deliberations Thursday.

Jury deliberations follow a two-week trial in which the shareholders accused the FHFA of breaching the implied covenant of good faith and fair dealing by amending the stock purchase agreements in 2012. FHFA defended the move, claiming it was the only way to save the companies from a "death spiral" and ensure their future viability.

The 2012 amendments, known as the "net worth sweep," increased the Treasury's dividend from 10% of its total investment to 100% of the companies' current and future net worths.

The shareholders sought $1.6 billion in damages, claiming the net worth sweep eliminated their prospect of ever receiving dividends and resulted in the Treasury Department receiving at least $130 billion more in dividends than it would have under the original deal. The requested damages amount was equal to the total decline in value of Fannie Mae and Freddie Mac stocks on the day the net worth sweep was announced.

During two days of closing arguments, the FHFA tried to put the jury in officials' shoes at the time of the amendments, noting that they only had years of negative net worths, uncertain U.S. Securities and Exchange Commission filings, and growing concerns from nonshareholder investors over the future viability of the companies to base their decision on.

The shareholders, meanwhile, argued the fact there were "zippo, zero, zilch" internal communications, analyses or reports completed prior to the net worth sweep meant it was an arbitrary and unreasonable decision for the FHFA to make.

Former FHFA Director Edward DeMarco himself admitted during trial that the agency didn't consult accountants, its own financial modeling division or its chief economist before agreeing in 2012 to the net worth sweep.

Former Fannie Mae Chief Financial Officer Susan McFarland testified she viewed the 2012 amendments as an effort by the FHFA and Treasury to prevent the companies from recapitalizing and returning to normal. McFarland said she presented the companies' positive projections to Treasury Department officials about a week or two before the net worth sweep was announced.

Freddie Mac's former CFO Ross Kari, on the other hand, said the amendments "simplified things operationally."

Financial experts hired by the shareholders called the net worth sweep unprecedented and improper.

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.

The stock purchase agreements have since been amended several times to allow Fannie Mae and Freddie Mac to keep some profits while the Treasury'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 Orlando Lorenzo.