Judge dismisses Fannie, Freddie securities class action

A federal judge recently dismissed a securities class action brought forth to represent the shareholders of Fannie Mae and Freddie Mac, the latest such decision to be handed down for a lawsuit of this type. 

Shareholders have filed many such claims against the federal government over the last several years, launching these suits in the aftermath of the financial crisis and the subsequent government takeover of Fannie Mae and Freddie Mac. 

Securities class action dismissal
On Tuesday, Feb. 3, the U.S. District Court in Iowa provided the latest dismissal, which was filed against the U.S. Department of the Treasury and the Federal Housing Finance Agency over the treatment of Fannie Mae and Freddie Mac's profits, according to The Wall Street Journal. 

This lawsuit, which was brought forth by plaintiff Continental Western Insurance, had challenged the federal government's 2012 decision to have the Treasury sweep almost all of the two companies' profits, the media outlet reported. 

"Shareholders have filed many such claims against the federal government."

Similar claims
U.S. District Judge Robert Pratt stated that the lawsuit made "the same seven claims and seeks essentially the same relief" as a separate case filed previously by W.R. Berkley Corp., Continental Western Insurance's parent company, Perry Capital LLC and others, according to Law360. 

"The court concludes that Continental Western cannot establish that either of the arguments are unique, because they are merely different bases for arguing the same claims that were already made in Perry Capital – that FHFA and Treasury exceeded their authority under [the Housing and Economic Recovery Act of 2008]," Pratt wrote in his ruling, the media outlet reported. 

October ruling
The lawsuit filed by Perry Capital, W.R. Berkley Corp. and others was dismissed by the U.S. District Court for the District of Columbia in October 2014. This particular legal action had consolidated claims brought forth by investors Fairholme Funds Inc. and Perry Capital LLC, which are both managed by mutual-fund manager Bruce Berkowitz. 

When explaining his ruling, U.S. District Judge Royce Lamberth wrote that Congress had given the Treasury Department and the FHFA the authority to confiscate the profits of Fannie Mae and Freddie Mac as part of the Housing and Economic Recovery Act, the media outlet reported. 

The court system dismissed the latest shareholder suit involving Fannie Mae and Freddie Mac.The court system dismissed the latest shareholder suit involving Fannie Mae and Freddie Mac.

In exchange for this financial backing, the federal government received a new class of senior preferred shares, which at first paid a 10 percent dividend, the media outlet reported. In addition, the government received warrants that granted it the right to purchase up to 80 percent of the firms' common stock.Background for lawsuits
The federal government took control of the companies in 2008 through so-called conservatorship. Since then, the firms have received significant government aid so that they can maintain solvency. 

However, in August 2012, the Treasury and the FHFA revised the terms of the bailout agreement, obligating the two companies to send almost all of their profits to the Treasury but getting rid of the dividend payments, according to the news source. 

Over the last several years, many hedge fund managers have invested in Fannie Mae and Freddie Mac, maintaining that the federal government lacked the authority to alter the terms of its bailout, according to the news source. When Lamberth provided his ruling in October, Berkowitz's Fairholme Capital Management LLC stated that it was "disappointed" with the outcome and pledged to "vigorously pursue the enforcement of existing contractual claims." 

"The federal government took control of the companies in 2008."

This February, when the Iowa court dismissed the latest securities class action, Berkowitz told investors on a conference call that Fannie Mae and Freddie Mac would eventually receive their just payment, The Wall Street Journal reported. 

After this ruling, both a spokeswoman for the FHFA and a spokesman for the Treasury Department neglected to comment, and a spokeswoman for W.R. Berkley Corp. did not have anything to say at the time, according to the news source. 

Further legal challenges
In the aftermath of this latest ruling, the federal government's legal woes are far from over, as shareholders – including sizeable hedge funds such as Pershing Square Capital Management – have filed more than 20 securities class action lawsuits, The Street reported.

These challenges could become more severe after Judge Margaret Sweeney of the U.S. Court of Federal Claims announced late last month that she was rejecting the government's request for a stay, according to the new source.

By seeking this postponement, the government was attempting to keep Fairholme from obtaining classified government documents and testimony that could potentially strengthen the investment manager's case, the media outlet reported.