Today, common shareholders of the Federal National Mortgage Association
(“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie
Mac”) filed suit in the U.S. Court of Federal Claims seeking to remedy
the federal government’s unlawful taking of shareholders’ rights and
property in Fannie and Freddie and other violations of law. The
shareholder plaintiffs are three individuals and Pershing Square Capital
Management, L.P. (“Pershing Square”). The defendant is the United States
government, including the U.S. Department of the Treasury and the
Federal Housing Finance Agency (“FHFA”).
The complaint challenges the government’s ongoing confiscation of all
profits of Fannie Mae and Freddie Mac (the “Companies”). According to
the filing, the government is expropriating the Companies’ profits
through a 2012 arrangement (the “Net Worth Sweep Agreements”) by which
FHFA, purportedly acting as the conservator of the Companies, and
Treasury agreed to strip all earnings from both Companies and sweep them
to Treasury in cash, every quarter, in perpetuity. These Net Worth
Sweeps implement what internal Treasury documents had earlier described
as the Administration’s “commitment” to “ensure existing common equity
holders will not have access to any positive earnings from the
[Companies] in the future.”
The three individual common shareholders who have brought this suit are
a retired nurse who holds common shares of Fannie Mae first purchased
over 25 years ago and a retired scientist and retired psychiatric social
worker who have held Fannie Mae common shares for approximately 15
years. They are joined by Pershing Square, which is the Companies’
largest common shareholder, with an approximate 10% stake in the
outstanding common stock of each Company. Today’s complaint follows
other lawsuits, brought primarily by institutional shareholders of the
Companies’ preferred stock, which also challenge the Net Worth Sweep
Agreements. The common shareholders bringing today’s suit seek to
challenge the government’s illegal actions and vindicate and protect
their rights as common shareholders of the privately owned, for-profit
Companies as chartered by Congress.
Applicable law requires FHFA as conservator to “preserve and conserve”
the Companies’ “assets and property” and to “put [them] in a sound and
solvent condition.” Instead, through the Net Worth Sweeps the government
has taken the Companies’ profits for itself without any compensation to
the Companies’ shareholders. The Net Worth Sweeps treat the
Plaintiffs—and all of the other common shareholders—as “shareholders” in
name only, rather than as the owners of the Company with relevant
property rights as conferred by law. Today’s complaint charges that the
government’s action violates the Takings Clause of the Fifth Amendment
to the United States Constitution as well as FHFA’s implied contractual
duties.
The government’s confiscation of the entire earnings of the Companies
also violates federal statutes and the government’s fiduciary duties to
the Companies’ shareholders, and the plaintiffs in this case intend to
pursue their legal rights on those claims separately in an appropriate
forum.
The case is entitled Louise Rafter, Josephine Rattien, Stephen Rattien
and Pershing Square Capital Management L.P., plaintiffs, v. The United
States of America, defendant, Federal National Mortgage Association and
Federal Home Loan Mortgage Corporation, nominal defendants. To view the
complaint, click
here.
ABOUT PERSHING SQUARE
Pershing Square, based in New York City, is an SEC-registered investment
advisor to private investment funds. Funds managed by Pershing Square
own securities of Fannie Mae and Freddie Mac. Pershing Square may
increase, decrease, dispose of, or change the form of its investment in
Fannie Mae and Freddie Mac for any or no reason, at any time. Pershing
Square disclaims any obligation to notify the market of any such changes.
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