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Fannie, Freddie Profit Sweep Jury Is Deeply Divided

"Deep divisions" still remained as the eight-woman jury wrapped up its third full day of deliberations, according to a copy of a jury note uploaded to the court's website. The jury foreperson underlined those two words in the note, saying jurors were divided in their interpretations of the evidence.

This is the second time the jury has notified the court of a split. The jurors sent a similar note to the court Wednesday that stated they were split 50/50 with very strong feelings on both sides.

By Katie Buehler

Law360 (November 4, 2022, 7:16 PM EDT) -- A D.C. federal jury was still deadlocked Friday after roughly 18 hours of deliberation over Fannie Mae and Freddie Mac shareholders' claims that the Federal Housing Finance Agency improperly amended stock purchase agreements to allow the U.S. Department of the Treasury to sweep up the companies' net profits.


A D.C. federal jury will continue deliberations Monday over Fannie Mae and Freddie Mac shareholders' claims that the Federal Housing Finance Agency improperly amended stock purchase agreements. (Photo Illustration by Pavlo Gonchar/SOPA Images/LightRocket via Getty Images)

"Deep divisions" still remained as the eight-woman jury wrapped up its third full day of deliberations, according to a copy of a jury note uploaded to the court's website. The jury foreperson underlined those two words in the note, saying jurors were divided in their interpretations of the evidence.

This is the second time the jury has notified the court of a split. The jurors sent a similar note to the court Wednesday that stated they were split 50/50 with very strong feelings on both sides.

Hamish Hume of Boies Schiller Flexner LLP, an attorney for the shareholders, told U.S. District Judge Royce C. Lamberth that if the jury remains split, he will issue a second request for a mistrial.

Hume previously moved for a mistrial on Wednesday following the note that stated the jurors were split evenly. He argued requiring the jury to continue to deliberate could result in a tainted verdict, but Judge Lamberth disagreed and rejected the motion.

"Our concern is this case could be decided under a war of attrition rather than a productive process," Hume told Judge Lamberth following Friday's note.

Jonathan Stern of Arnold & Porter, representing the FHFA, said the agency would oppose Hume's second mistrial motion. The jurors were clearly attentive during trial and their notes during deliberations have been focused on issues germane to the case, he said.

Along with notifying the court of their divide, the jurors have also requested a specific citation to a table that showed the goals and purposes of Fannie Mae and Freddie Mac before and during the FHFA's conservatorship of the entities, which the court provided.

They have also requested plain language definitions of "arbitrarily" and "unreasonably" and transcripts or videos of certain depositions played in the case. Judge Lamberth pointed out the definitions as described in the jury instructions for the case and denied the request for transcripts after both sides argued it would be prejudicial to provide transcripts of depositions but not trial testimony.

The jury will continue deliberating Monday.

The 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 former Chief Financial Officer 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 Emily Kokoll.