Federal Judges Listened Carefully as Investors Pressed Their Case
- April 27, 2016
The three federal judges who recently heard oral arguments in the Perry Capital suit stemming from the Net Worth Sweep of the profits and Fannie Mae and Freddie Mac offered no hint that they were about to rubber stamp U.S. District Judge Royce Lamberth’s 2014 dismissal of the case.
The fact that they gave attorneys three full hours, rather than the one hour allotted, to present arguments and respond to a number of probing questions demonstrates that they recognize the significance of the case and want to take a careful look at all the issues involved, in the view of Hamish Hume, a partner at Boies Schiller & Flexner, who argued before the three-judge panel on behalf of investors on April 15.
“I view that as a very positive sign for the shareholders,” he said during a call with media and shareholders hosted Investors Unite Executive Director Tim Pagliara today. “The more time they spend looking at this case, the better for us. The more they look at it, the more I hope they will see that something really unjust happened.”
While there are many legal arguments against the legality of the Sweep, Hume focused on three claims: That it was a breach of contractual rights of shareholders, a breach of fiduciary duties owed by Treasury and the Federal Housing Finance Agency to both the companies and their shareholders, and a taking of private property, which gives rise to a claim for just compensation under the Constitution.
Under the contractual terms of the conservatorship established for Fannie and Freddie in 2008, the U.S. Treasury Department had a right to a 10% dividend payment on its senior preferred stock. To secure payments above that dividend, Treasury could have exercised the warrants it held for 79.9% of the companies’ common stock. Instead, Treasury implemented the Sweep. By doing so, it violated the contractual terms and maneuvered out of obligations to shareholders’ rights, which the Housing and Economic Recovery Act specifically aimed to protect.
“Under a breach of contract claim, especially when you have a breached covenant claim, a court needs to look at the economic substance of what happened,” Hume said. “Substance should matter over form. That is a really central concept here.”
Pagliara raised questions about “what the government knew and when it knew it” with regard to the timing of Sweep, and asserted that revelations in newly unsealed documents in Perry Capital’s suit point to a “premeditated attempt to destroy the companies.”
Hume acknowledged the unsealed documents were helpful to both claims. They show Treasury officials, in the months leading up to the Sweep, expected the companies to bring in profits exceeding dividend payments.
Hume noted that two of the three judges voiced a number of comments and questions about the importance of this information. Therefore, it will be critical going forward, even if it does not have a direct bearing on the violation of contractual and fiduciary responsibilities he raised before the judges
“There is a lot of ammunition there,” he said.
At this stage in this long process, what matters is that with each step in the litigation and as more facts come to light, federal judges are willing to reconsider whether the government did the right thing by investors under the law.