A federal appeals court on Tuesday issued a ruling that will prevent investors in government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac from fully recouping on their investments.
Investors from Perry Capital and others allege that they were illegally duped out of the gains on their shares in the companies when the Treasury department in 2012 implemented the so-called “third amendment sweep,” which allowed the U.S. government to “sweep” all of the GSEs’ profits to the Treasury.
In a 2-1 ruling, however, the D.C. Court of Appeals ruled that shareholders cannot pursue their claims related to the sweep, basically because of the broad powers granted to the Federal Housing Finance Agency (FHFA), conservator for Fannie Mae and Freddie Mac, under the Housing and Economic Recovery Act (HERA). However, some of the investors’ claims are to be remanded back down to lower courts for future rulings.
As per the court’s ruling, certain “contract-based claims regarding liquidation preferences and dividend rights are remanded to the district court for further proceedings.”
The investors were hoping that, should the GSEs be taken out of conservatorship, which could happen soon under the Trump administration, they would be re-capitalized and re-privatized, which would then pave the way for investors to recoup.
Several other hedge funds have similar suits claiming the government was illegally seizing profits from Fannie and Freddie and destroying shareholder value.
In a statement, Tim Pagliara, founder of Investors Unite, a coalition of more than 1,100 Fannie Mae and Freddie Mac investors who are seeking to recoup on their stocks, says he is pleased that some parts of the suit will be allowed to move forward.
“We are pleased that the D.C. Circuit acknowledged that shareholders have direct contract rights, which must be respected, and we look forward to a resolution of those rights,” Pagliara says.
“We respectfully disagree with the opinion that FHFA has the power to do whatever it wants with Fannie Mae and Freddie Mac,” Pagliara adds. “Neither HERA nor any other statute gives it such power. Meanwhile, the net worth sweep continues to place the U.S. taxpayer at risk by depriving these companies of adequate capital. We hope that the Trump administration will put an end to this wrong by ending the sweep now and restoring the rights of shareholders.”
According to a statement on the Investors Unite website, investors can still appeal the D.C. Appeals Court’s decision to the U.S Supreme Court.
“Despite today’s ruling by the Appeals Court for the U.S. Circuit Court for the District of Columbia, it is still hard to imagine that Congress gave the [FHFA] carte blanche to do whatever it wanted with Fannie Mae and Freddie Mac,” Investors Unite says in a statement. “It seems unlikely that HERA – or any other statute – grants the government such broad power to trample on property rights. Remember, even [U.S. District Court Judge Royce Lamberth], in his October 2014 dismissal of plaintiffs’ claims, conceded that the [third amendment] sweep could ‘raise eyebrows.’ Nonetheless, he saw the law as granting FHFA very wide latitude.”