Federal jury rules that Federal Housing Finance Agency improperly amended stock purchase agreements in 2012 to sweep all profits from Fannie Mae and Freddie Mac directly to the U.S. Treasury.
Over a decade of class-action litigation led by Boies Schiller Flexner partner Hamish Hume culminated in a historic victory on August 14, 2023, when a federal jury in Washington D.C. found that the August 2012 decision by the Federal Housing Finance Agency (FHFA) to give the U.S. Treasury 100% of all current and future net worth of Fannie Mae and Freddie Mac arbitrarily and unreasonably violated the contractual rights of private shareholders of Fannie Mae and Freddie Mac, to whom the jury awarded damages of $612.4 million (subject to a potential increase from prejudgment interest, to be decided by the court). This unanimous verdict comes after an initial trial that resulted in a hung jury last November.
In the midst of the 2008 housing and financial market crisis, Fannie Mae and Freddie Mac were placed under the conservatorship of the newly formed FHFA. Acting as conservator to both enterprises, in September 2008 the FHFA entered into stock purchase agreements with the U.S. Treasury, which secured funding from the Treasury for Fannie and Freddie and in exchange provided the Treasury with senior preferred stock that was entitled to an annual dividend equal to 10% of the amount of the Treasury's initial investments, as well as warrants to acquire 79.9% of the common stock in Fannie and Freddie. The class action case did not challenge these original terms of the funding arrangement.
Instead, the class action challenged the August 2012 decision of FHFA to amend the stock purchase agreements with the Treasury so as to change the dividend on Treasury’s senior preferred stock from 10% of its investments to 100% of both enterprises’ profits and net worth, in perpetuity – which they called the “Net Worth Sweep.” This was done right as Fannie Mae and Freddie Mac were returning to sustained profitability, and had begun to earn profits greater than the 10% dividend amount owed to the Treasury, and thus were rebuilding their net worth. The FHFA argued that this amendment was done because Fannie and Freddie were unable to pay the 10% dividend without borrowing more money from the Treasury, creating a problem of “circular draws” that could materially erode the Treasury commitment, causing instability in the markets. However, the class plaintiffs were able to show that purported reason could not possibly explain or justify such a draconian measure, and that instead the Net Worth Sweep was motivated by a desire to prevent Fannie and Freddie from rebuilding their net worth – a motivation that directly contradicted FHFA’s publicly stated mission as conservator.
The private shareholders represented by Boies Schiller and its co-counsel had invested over $33 billion into the enterprises, of which approximately $20 billion was invested during 2007 and 2008, during the housing and financial crisis, and at the express behest of the regulators of Fannie and Freddie. The Net Worth Sweep guaranteed that these private shareholders would be prevented from ever participating in the future profits of Fannie and Freddie, no matter how profitable they might become, because 100% of all profits would go to the Treasury. In 2013 alone, the very first year that the Net Worth Sweep took effect, it caused Fannie and Freddie to pay over $130 billion in cash dividends to Treasury, which was over $111 billion in excess of what the original 10% dividend would have required.
The jury found that the Net Worth Sweep violated the implied covenant of good faith and fair dealing in the shareholder contracts because it arbitrarily or unreasonably destroyed the reasonable contractual expectations of shareholders. This monumental victory was a collaborative effort between co-counsel for the classes of private shareholders, led by a Boies Schiller trial team which included Hamish Hume, Kenya Davis, Samuel Kaplan, and Jessica Mugler. Davis delivered the opening statement at the outset of the three-week trial in the U.S. District Court for the District of Columbia and presented several key witnesses during the proceedings. Hume examined the main fact witness and one of the expert witnesses, and delivered closing arguments at the end of the case, before the jury began its deliberations.
“We have long argued that the FHFA’s 2012 ‘Net Worth Sweep’ was unreasonable and unjust, giving the government over $150 billion in excess value above its already very generous stake in the companies,” said Hume. “With this verdict, the jury recognized that the government arbitrarily and unreasonably violated the contractual rights and reasonable expectations of those shareholders.”
First filed in 2013, the lawsuit by Fannie and Freddie shareholders bounced between the trial and appellate courts over the next decade, with Hume arguing and winning a successful federal appeal in the D.C. Circuit in 2017. The case was finally heard by a federal jury in the fall of 2022, but that jury could not agree upon a unanimous verdict. The second time around, the jury issued a resounding and historic rebuke against the government’s overreach.
Boies Schiller represented the plaintiffs in tandem with co-counsel Kessler Topaz Meltzer & Check, Bernstein Litowitz Berger & Grossmann, and Grant & Eisenhofer. The case is In re: Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations, case number 1:13-mc-01288, in the U.S. District Court for the District of Columbia.
The case has attracted widespread attention from the media and the general public for many years. Please see links below.