Fannie Mae (FNMA)

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Judge Declares Mistrial In Fannie, Freddie Profit Sweep Suit

By Katie Buehler



Law360 (November 7, 2022, 11:53 AM EST) -- A D.C. federal judge declared a mistrial Monday after eight jurors couldn't reach a verdict in a lawsuit brought by shareholders of Fannie Mae and Freddie Mac accusing the Federal Housing Finance Agency of improperly amending stock purchase agreements to allow the U.S. Treasury Department to sweep up the companies' net worths.


The suit was brought by shareholders of Fannie Mae and Freddie Mac against the FHFA. The jury on Monday failed to reach a verdict. (Andrew Harrer/Bloomberg via Getty Images)
After the all-women jury revealed for a third time they were deadlocked, U.S. District Judge Royce C. Lamberth issued to them an anti-deadlock instruction to encourage them to come to an agreement to avoid a hung jury. The jury deliberated for an additional hour before telling the court they had reached an "impasse" and that deliberations had "come to a halt."

Judge Lamberth thanked the jurors for their service in what turned out to be a three-week trial before dismissing them. He also spoke to the jurors privately after declaring a mistrial.

Hamish Hume of Boies Schiller Flexner LLP, an attorney for the shareholders, told Law360 he was thankful for the jury's attention to a difficult case and was hopeful for a win in the future.

"The fight for justice will continue, and we are confident that we will prevail in the next trial," he said.

Counsel for the FHFA declined to comment Monday.

Judge Lamberth and the trial teams had known about the jury's split since Wednesday, when the group revealed in a note they were split 50/50 with strong feelings on both sides.

In the early afternoon on Friday, the jury again told the court that "deep divisions" remained, explaining jurors were divided in their interpretations of the evidence. In a third note Friday, the jury said it was still "deeply divided" after "involved discussions, heated debates" and "digging through the evidence provided."

Attorneys for the shareholders moved for a mistrial following the Wednesday note, arguing a split jury forced to continue deliberations could return a tainted verdict. But Judge Lamberth disagreed and denied the motion.

The shareholders renewed their motion for a mistrial Monday, saying they still had serious concerns that the jury may be under the impression they have to reach a verdict and that one will be reached through a "war of attrition." Judge Lamberth again denied the motion, explaining the jury's notes have never stated the jury is hung, even though both sides agree that is the essence of the notes.

The jury deliberated for a total of 19 hours.

The mistrial ends a 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. The 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 receiving at least $130 billion more in dividends than it would have under the original deal. The requested damages were 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 that the fact that there were "zippo, zero, zilch" internal communications, analyses or reports completed before the net worth sweep meant it was an arbitrary and unreasonable decision for the FHFA to make.

Former FHFA Acting Director Edward DeMarco himself acknowledged during trial that the FHFA didn't consult accountants, its own financial modeling division or its chief economist before agreeing 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 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 nominally 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 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 Brian Baresch.