No docket proceedings yet.
See Below For Updates As Of October 1, 2014
· Last night, in the U.S. District Court for the District of Columbia, Judge Lamberth granted the defendants’ motions to dismiss and denied individual plaintiffs’ cross-motion for summary judgment. There was speculation that Judge Lamberth would revisit this over the interim period given the progress in the Blackwater trial (entered into jury deliberation earlier this month) but we were surprised that the Court did not take oral arguments or fact discovery (or even defer to the Court of Federal Claims) and instead Judge Lamberth elected to rule from the bench (it is our understanding that Judge Lamberth has a history of ruling from the bench and this was highlighted in our last GSE lunch this past July).
· In the first line of Judge Lamberth’s concluding remarks, he notes that “it is understandable for the Third Amendment, which sweeps nearly all GSE profits to Treasury, to raise eyebrows, or even engender a feeling of discomfort. But any sense of unease over the defendants’ conduct is not enough to overcome the plain meaning of HERA’s text.”
· The Court took on a very plain reading of HERA and concluded that FHFA did not exceed its statutory authority as Conservator, plaintiffs did not allege a cognizable property interest (and as such, failed to state a claim against FHFA and Treasury for a violation of the Fifth Amendment) and that the Court should only consider FHFA’s actual conduct.
· Judge Lamberth commented that the real question for the court was whether or not the plaintiffs could sufficiently plead that FHFA acted beyond the scope of its statutory powers or functions as a conservator when executing the Third Amendment to the PSPAs with Treasury.
· Lamberth takes on a very plain interpretation of HERA in that it bars “all declaratory, injunctive, or other equitable relief stemming from claims of arbitrary and capricious decisionmaking” and that HERA’s anti-injunction provision “may be logically extended to that government counterparty.”
· We anticipate the appeals process would likely include Judge Wilkins, United States Circuit Judge of the United States Court of Appeals for the District of Columbia Circuit, an Obama appointee and the judge overseeing this case before Judge Lamberth took over as his replacement.
· We suspect the government will send a judicial notice to both the Court of Federal Claims and U.S. District Court Southern District of Iowa in order to make these courts aware of yesterday’s ruling. Once this is filed, we suspect plaintiff counsel will be presented with an opportunity to respond and scrutinize Judge Lamberth’s decision.
· The government will likely attempt to use this ruling to influence the other two remaining major cases but we believe that the arguments and timeline for these cases remain intact and will carry much more importance for investors over the next few months. For the Court of Federal Claims (i.e. the takings case), the current expectation is for jurisdictional discovery to go through March 2015 (ongoing document production today and depositions thereafter) and we do not believe the timeline will be impacted by yesterday’s ruling. In the Iowa case, it is our expectation that a decision on the motion to dismiss could be heard by the end of this fiscal year. Important to highlight that in the Iowa case, Judge Walters stated that the Court “must take Continental Western’s factual assertions bearing on its jurisdictional theory — that the net worth sweep was unnecessary and improperly motivated – as true.”
· We admit that we found the APA case to be a more compelling case and as such, the complex will reprice accordingly into today’s session. That being said, we find that a decline of more than 60% to 70% across the capital structure would be overly punitive post this development (weakness in the preferreds should not be equivalent to the common stock in our opinion). It is important to highlight that plaintiffs can appeal this ruling and that there is ongoing activity in both the Court of Federal Claims (ongoing jurisdictional discovery) and Iowa proceedings that still preserve a pathway for investors. We suggest swapping out of off the run preferreds into more liquid on the run preferreds into weakness (price differential gap should begin to collapse into weakness). We find that the FNMAT’s will see more pronounced weakness given the high dollar price on a relative basis. We continue to favor FMCC preferreds on a relative basis to FNMA based on our thoughts for better recovery prospects and legal arguments (on a probability adjusted basis).
Select Excerpts from the Ruling
Source: Court Docket
The Court noted the following conclusions and observations (selected text):
· After reviewing HERA, the Court’s jurisdictional analysis is narrowed to “what the Third Amendment entails, rather than why FHFA executed the Third Amendment.”
· FHFA has acted within its broad statutory authority as conservator
· No HERA provision that requires a conservator to abide by every public statement it has made
· Treasury’s execution of the Third Amendment did not constitute the purchase of new securities in contravention of HERA
· Evaluating FHFA’s decision making would disregard Congress’ intention to remove the Court of jurisdiction to restrain FHFA’s exercise of its powers of functions under HERA and therefore, the Court will only consider FHFA’s actual conduct
· There is nothing in the pleadings or the administrative record that suggests coercion actionable under HERA
· HERA bars the plaintiffs’ derivative claims against FHFA and Treasury
· No requirement for the Court to decide whether such claims are derivative or direct, however if a determination was necessary the Court notes that it would find that the Fairholme plaintiffs’’ fiduciary duty claim is derivative in nature
· Did not suffer an injury to their right to a liquidation preference and that plaintiffs’ liquidation preference claims are not fit for a judicial decision until liquidation occurs
· Did acknowledge that the plaintiff liquidation claim would likely be the date of entering into receivership
· Class plaintiffs do not allege a cognizable property interest and as such, failed to state a claim against FHFA and Treasury for a violation of the Fifth Amendment
· Court rejection of claims to dividends and liquidation payments makes it clear that the government has not seized private property and kept that property for itself
Potential Items for Plaintiff Counsel to Highlight or Discuss During the Appeals Process
· Plaintiffs did not cite any precedent stating that a net worth sweep or equivalent resembles a liquidation
· Plaintiffs did not ask the Court to weigh in on the statute’s constitutionality as it pertains to derivative suits
· Should HERA’s anti-injunction provision be extended to that government counterparty?
· Court notes that they do not need to see the “full administrative record” to determine whether or not the Third Amendment exceeded the bounds of HERA – could further completion of the administrative record (which could be achieve via the Iowa case) warrant further review of the administrative record?
Concluding Remarks from Judge Lamberth’s Ruling:
Source: Court Docket
It is understandable for the Third Amendment, which sweeps nearly all GSE profits to Treasury, to raise eyebrows, or even engender a feeling of discomfort. But any sense of unease over the defendants’ conduct is not enough to overcome the plain meaning of HERA’s text. Here, the plaintiffs’ true gripe is with the language of a statute that enabled FHFA and, consequently, Treasury, to take unprecedented steps to salvage the largest players in the mortgage finance industry before their looming collapse triggered a systemic panic. Indeed, the plaintiffs’ grievance is really with Congress itself. It was Congress, after all, that parted the legal• seas so that FHFA and Treasury could effectively do whatever they thought was needed to stabilize and, if necessary, liquidate, the GSEs. Recognizing its role in the constitutional system, this Court does not seek to evaluate the merits of whether the Third Amendment is sound financial–or even moral-policy. The Court does, however, find that HERA’s unambiguous statutory provisions, coupled with the unequivocal language of the plaintiffs’ original GSE stock certificates, compels the dismissal of all of the plaintiffs’ claims.
See below for updates as of May 14, 2014
§ Into the Senate Banking Committee’s mark-up hearing to consider S. 1217, Housing Finance Reform and Taxpayer Protection Act of 2013, a number of parties have weighed in on the contents of the bill over the past few days. Just last week, internal memos from FNMA, FMCC and FHFA were publically released while other constituents have been actively voicing concerns and recommendations.
§ It is our understanding that FNMA and FMCC sent memos to FHFA describing issues and recommendations for the draft legislation. The Senate Banking Committee then received a separate memo from FHFA identifying other concerns with the bill. Based on the letter by FMCC’s CEO, it appears that FMCC “provided significant technical comments on the current draft of the Johnson-Crapo bill” at the request of the U.S. Treasury (FMCC’s discussion draft was dated March 26, 2014). FNMA, FMCC and FHFA raised key concerns with the J/C bill and offered recommendations in their discussion drafts. Looking to all three documents, we find that the discussion focused on the following key topics: impact on mortgage rates, availability of private capital, considerations for the transition, legal status of GSEs during the transition and workforce retention concerns.
§ While the Senate Banking Committee should find these comments to be helpful, legislators have much to consider here (along with comments from other constituents as well). While the Senate Banking Committee indefinitely delayed consideration of the J/C bill this morning (recess after hearing opening statements), comments from various legislators today suggests that committee members asked for a brief delay so that additional issues could be worked through before a final vote. According to news outlets, the vote was delayed as the committee looks to gain support from roughly six democrats who have not expressed support for the proposed bill. We suspect more conversations are needed to garner enough support to demonstrate to Senate Majority Leader Harry Reid that there is enough momentum behind the bill so that it can be considered for a broader floor vote. Several news outlets have quoted sources as saying the committee is expected to begin considering amendments to the bill and that a vote would occur next week at the earliest.
§ Separately, a new advocacy group calling itself United for American Homeownership, has started to run ads and solicit votes for an online petition, to “encourage Congress to enact housing reform legislation that preserves and strengthens Fannie Mae, Freddie Mac, and their core mission of making homeownership more accessible and affordable for all Americans.” The group’s website says its board includes the following individuals: Bob Kerry, the former United States senator; Harry C. Alford, chief executive of the National Black Chamber of Commerce; and Joshua Angel, a bankruptcy and restructuring lawyer with Herrick Feinstein in New York. The groups believes that any housing reform must: “protect consumers, promote responsible lending, ensure access to affordable housing, support ongoing economic recovery, preserve and strengthen Fannie Mae and Freddie Mac and respect the rights of stakeholders who have supported the two companies.”
§ On April 28, 2014, the Milken Institute hosted panel discussion to discuss “Housing Finance and Private Capital” which including the following notable speakers: Donald Layton (CEO of Freddie Mac), James Lockhart (Vice Chairman at WL Ross & Co.), Josh Rosner (Managing Director at Graham Fisher & Co.), Gene Sperling (Former Director, National Economic Council, The White House), with Phillip Swagel (Senior Fellow, Milken Institute; Professor, University of Maryland School of Public Policy) moderating the discussion. The conversation touched on the history of the GSEs and evaluated the contents of the J/C bill (availability of private capital, capital requirements, role of FMIC, etc.).
§ Earlier this week, Jonathan Macey, the Sam Harris Professor of Corporate Law, Corporate Finance, and Securities Law at Yale Law School and Logan Beirne of Information Society Project Fellow at Yale Law School, published a paper entitled “Stealing Fannie and Freddie.” Their paper “analyzes the current House and Senate housing finance reform proposals and faults their modes of liquidation for departing from legal norms, thereby harming investors and creditors, taxpayers, and the broader economy.”
See below for updates as of April, 7 2014
Discovery shall commence on Monday, April 7, 2014, and shall be completed by Thursday, July 31, 2014.
During the discovery period, the court will conduct a telephonic status conference every two weeks, unless both parties concur and inform the court that a status conference is not necessary. Additionally, the court will make itself available if a dispute requiring its immediate attention arises at any other time during the discovery period. Status conferences shall take place on:
o Wednesday, April 23, 2014, at 1:00 p.m.
o Wednesday, May 7, 2014, at 11:00 a.m.
o Wednesday, May 21, 2014, at 11:00 a.m.
o Wednesday, June 4, 2014, at 11:00 a.m.
o Wednesday, June 18, 2014, at 11:00 a.m.
o Wednesday, July 2, 2014, at 11:00 a.m.
o Wednesday, July 16, 2014, at 11:00 a.m.
o Wednesday, July 30, 2014, at 11:00 a.m.
• Defendant shall serve on plaintiffs its RCFC 26(a)(1)(A)(i) and (ii) initial disclosures no later than Monday, April 7, 2014.
• Plaintiffs shall serve on the government their initial round of document requests, if any, no later than Monday, April 7, 2014.
• The parties shall serve interrogatories, if any, no later than Monday, April 7, 2014.
• The responding party shall serve any objections to interrogatories within 14 calendar daysof receiving such interrogatories.
• With respect to all discovery requests, the responding party shall serve responses within 30 calendar days of receiving such requests.
• The parties shall attempt to resolve objections, and discuss any issues regarding the format for production of responsive materials, over the 7-day period following the service of objections. If objections are not resolved by the end of that period, the objecting party shall bear the burden of moving for a protective order no later than 7 days after the close of that period.
• Depositions shall be completed no later than Thursday, July 31, 2014.
• Nothing in this order prevents the parties from entering into a claw-back agreement pursuant to Federal Rule of Civil Procedure 26(b)(5) and Federal Rule of Evidence 502.
• In addition, by no later than Thursday, August 14, 2014, the parties shall file a joint status report (“JSR”) suggesting future proceedings in this case. If the parties cannot agree on a specific course of action, they must set forth their respective positions in the JSR, and not in separate status reports. Separate status reports shall be stricken from the docket.
See below for docket updates as of August 26, 2013.
- New shareholder derivative complaint filed with the United States Court of Federal Claims yesterday – stating “unlawful taking without just compensation under the Fifth Amendment to U.S. Constitution” – see attached for the complaint
- The derivative action seeks just compensation for the taking of the private property of Fannie Mae for public use by the United States, including the Department of the Treasury (“Treasury”), the Federal Housing Finance Agency (“FHFA”), and their respective agents.
- Bryndon Fisher (“Fisher”) is a citizen of California. Fisher currently owns and, at all relevant times, has owned 3,250 shares of nominal defendant Fannie Mae’s common stock. Fisher has owned Fannie Mae common stock prior to, at the time of, and continuously since the Treasury Department’s Net Worth Sweep announcement on August 17, 2012.
- Bruce Reid (“Reid”) is a citizen of California. Reid currently owns and, at all relevant times, has owned 29,000 shares of nominal defendant Fannie Mae’s common stock. Reid has owned Fannie Mae common stock prior to, at the time of, and continuously since the Treasury Department’s Net Worth Sweep announcement on August 17, 2012.
- Council: SCHUBERT JONCKHEER & KOLBE LLP
- The United States of America
- Federal National Mortgage Association – Nominal Defendant
- It appears that Arnold & Porter LLP will represent Edward Demarco and FHFA in this case and FAIRHOLME FUNDS, INC. et al v. FEDERAL HOUSING FINANCE AGENCY, et al
- Website: http://www.arnoldporter.com/home.cfm
- Arnold & Porter LLP is more well known for antitrust work and its litigation groups – recognized for regulatory and government relations work
- See below for the profiles of all three partners listed
WASHINGTON FEDERAL et al v. USA
- Unopposed MOTION for Extension of Time until 08/30/2013 to File Response as to 12 MOTION to Stay All Proceedings , filed by MICHAEL MCCREDY BAKER, CITY OF AUSTIN POLICE RETIREMENT SYSTEM, WASHINGTON FEDERAL.Response due by 9/12/2013.(Berman, Steve) (Entered: 08/26/2013)
- ORDER granting 14 Motion for Extension of Time to File Response to 12 Motion to Stay All Proceedings Response due by 8/30/13. Signed by Judge Margaret M. Sweeney. (ps2) Copy to parties. (Entered: 08/26/2013)
- Unopposed MOTION for Extension of Time until 8/30/2013 to Respond to Government’s Stay Motion , filed by All Plaintiffs.Response due by 9/12/2013.(Cooper, Charles) (Entered: 08/26/2013)
FAIRHOLME FUNDS, INC. et al v. FEDERAL HOUSING FINANCE AGENCY, et al – 1:13-cv-01053-RLW
- NOTICE of Appearance by Asim Varma on behalf of EDWARD DEMARCO, FEDERAL HOUSING FINANCE AGENCY (Varma, Asim) (Entered: 08/26/2013)
- NOTICE of Appearance by Howard Neil Cayne on behalf of EDWARD DEMARCO, FEDERAL HOUSING FINANCE AGENCY (Cayne, Howard) (Entered: 08/26/2013)
- NOTICE of Appearance by David Block Bergman on behalf of EDWARD DEMARCO, FEDERAL HOUSING FINANCE AGENCY (Bergman, David) (Entered: 08/26/2013)
DENNIS v. FEDERAL HOUSING FINANCE AGENCY et al
- U.S. Department of Justice
- NOTICE of Appearance by Joel L. McElvain on behalf of UNITED STATES DEPARTMENT OF THE TREASURY (McElvain, Joel) (Entered: 08/26/2013)
- NOTICE of Appearance by Thomas David Zimpleman on behalf of UNITED STATES DEPARTMENT OF THE TREASURY (Zimpleman, Thomas) (Entered: 08/26/2013)
- RESPONSE re 5 MOTION to Consolidate Cases MOTION to Appoint Counsel filed by UNITED STATES DEPARTMENT OF THE TREASURY. (Zimpleman, Thomas) (Entered: 08/26/2013)
- RESPONSE re 5 MOTION to Consolidate Cases MOTION to Appoint Counsel filed by FEDERAL HOUSING FINANCE AGENCY, FEDERAL NATIONAL MORTGAGE ASSOCIATION. (Varma, Asim) (Entered: 08/26/2013)