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On Second Thought…Federal Court Concedes a Little on Shareholder Damage Claims

It looks as though the U.S. Circuit Court for the District of Columbia has acknowledged it was a bit too sweeping in February when it rejected GSE shareholders’ claims in Perry Capital’s suit against the government over the Net Worth Sweep.

In its 2-1 decision at that time the court minced few word in trying to shut down shareholder suits: “We hold that the stockholders’ statutory claims are barred by the Recovery Act’s [the 2009 American Recovery and Reinvestment Act] strict limitation on judicial review,” Senior Circuit Judge Douglas H. Ginsburg and Circuit Judge Patricia Millett wrote in the majority opinion. “We also reject most of the stockholders’ common-law claims.” While the court kept the door slightly ajar on the possibility shareholders could pursue monetary damages under breach of contract claims, even there the decision was averse to shareholder rights.

However, on July 17, in light of claims made in various cases, the court felt compelled to amend its decision slightly, allowing two groups of investors, Arrowood Indemnity Co. and Fairholme Funds Inc., another chance to pursue damage claims for breach of contract in proceedings in district court. At the same, the court affirmed its view that institutional shareholders forfeited claims against the Federal Housing Finance Agency based on a breach fiduciary duty.

The court also amended its earlier opinion with regard to shareholder claims flowing from the timing of purchases of shares of Fannie and Freddie stock. In February, the court instructed a lower court judge to consider what the reasonable expectations of the plaintiffs were “at the various times [they] purchased their shares.”  The court now says damages for breach of contract claims are no longer based on when shareholders bought their shares but when the shares were issued. 

This was a concession to a basic tenet of contract law; a contract is formed and the damages measured based on expectations from “when the shares are issued.” In this case, this was before the conservatorship of Fannie and Freddie was established in 2008 in contrast to “the subsequent expectations of shareholders who purchased shares on the secondary market.”  In other words, the Circuit Court is dropping the qualifier that was based on timing of when shares were purchased. This gives the district court judge more latitude when considering when the “relevant expectations” were formed, thus influencing subsequent breach of contract claims and possible damages that could be awarded.

The revised opinion leaves in place a decision that sanctioned a stunning example of overreach by unelected bureaucrats, but any step that better enables shareholders to pursue economic justice is a step in the right direction.