On June 10, 2013, Spector Roseman Kodroff & Willis, PC ("SRKW") filed a class action on behalf of the common and preferred shareholders of Fannie Mae and Freddie Mac in the United States Court of Federal Claims against the United States Government (Washington Federal, et al. v. United States). The action alleges that the Government's conduct in placing Fannie Mae and Freddie Mac into conservatorship in 2008, as well as subsequent actions the Government took in its role as conservator, caused substantial harm to the companies' shareholders by destroying their rights and obliterating the economic value of their shares. The class action seeks, among other relief, a monetary judgment against the United States for its role in effectively nationalizing these private, shareholder-owned corporations and failing to provide proper compensation to shareholders as required under the United States Constitution.
Fannie Mae and Freddie Mac are publicly traded companies owned by shareholders, not the Government, although they were chartered by Congress and are subject to some regulation and oversight by the Government. As mandated by Congress, Fannie Mae and Freddie Mac have guaranteed the vast majority of all new home mortgages in the United States for decades. The companies performed well and were widely considered to be stable investments; the Government even promoted Fannie Mae's and Freddie Mac's preferred shares to large financial institutions providing incentives to encourage further investments in these shares. During the recent financial crisis, however, Fannie Mae and Freddie Mac suffered losses, like virtually every other financial institution at that time. These losses stemmed, in significant part, from risky mortgage investments they made under pressure from the Government to increase access to affordable housing, even though this meant guaranteeing loans to borrowers with limited or unproved credit.
In July 2008, as the U.S. economy continued to decline, Congress enacted the Housing and Economic Recovery Act ("HERA"), which established the Federal Housing Finance Agency ("FHFA") as the chief regulator over Fannie Mae and Freddie Mac and conferred upon FHFA greater regulatory authority over the companies than had ever been authorized previously. Although the companies' previous regulator had the authority to place the companies into conservatorship, this authority under HERA was significantly expanded. Importantly, in pushing for the enactment of HERA, Government officials, including then Treasury Secretary Henry Paulson, emphasized that this expanded authority was largely a symbolic gesture to reinforce the public's perception that Fannie Mae and Freddie Mac were stable and subject to proper oversight.
Two months later, however, on September 7, 2008, Secretary Paulson and the head of the FHFA publicly announced that, at the "request" of the Government, the board of directors of each company "consented" that Fannie Mae and Freddie Mac be placed into conservatorship, with FHFA acting as conservator. This news shocked the market, causing the value of the companies' common and preferred shares to plummet. Fannie Mae's and Freddie Mac's common shares subsequently traded at less than $1.00 per share – down from over $7.04 per share and $5.10 per share, respectively, immediately prior to the imposition of the conservatorship. The companies' preferred shares traded at roughly 10-15% of redemption value immediately following the imposition of the conservatorship.
The terms of the conservatorship were clearly one-sided. In exchange for the Treasury's commitment to provide capital as needed, each company issued to the Treasury $1 billion in senior preferred stock with a cumulative 10-12% dividend, as well as common stock warrants representing a 79.9% ownership stake in each company. Further, the companies were ordered to stop paying dividends to shareholders, delist their stock, and cease all shareholder communications. These senior preferred stock agreements were amended several times and, in August 2012, the terms were amended such that, in lieu of the percentage based dividend, the companies were forced to relinquish to the Government, on a quarterly basis, all of their positive net worth (above a periodically diminishing capital reserve amount for the first five years). As the companies have recently returned to profitability, this change in terms has resulted in a windfall to the Government at the expense of the companies and their shareholders.
The class action complaint alleges that the Government's conduct violated the constitutional rights of Fannie Mae's and Freddie Mac's shareholders by taking private property (their shares in each company) for a public use without providing just compensation and/or depriving shareholders of their property without due process. Specifically, the complaint alleges that: (1) the conservatorships were improperly imposed because the statutory requirements for placing Fannie Mae and Freddie Mac into conservatorship were not fully satisfied and, even if they were, the boards of directors of both companies were coerced into consenting to the conservatorships; (2) the original terms of the conservatorships, particularly regarding the senior preferred stock agreements, violated the constitutional rights of the companies' shareholders; (3) the Government improperly used Fannie Mae and Freddie Mac to warehouse the toxic debts of other major financial institutions and shore up the foundering economy at the expense of the companies' shareholders; and (4) the August 2012 amendment to the senior preferred stock agreements constituted a taking of private property to provide a public economic benefit, for which just compensation was not provided. The complaint alleges that each of these actions caused substantial economic harm to the companies' preferred and common shareholders, resulting in tens of billions in monetary losses, and seeks monetary relief on behalf of these shareholders.
The complaint can be viewed here.