Federal Judge Gives Government 4 Months To Complete Discovery In Fairholme Case

The Fairholme case was back in court today with both sides discussing the discovery process before U.S. Federal Claims Judge Margaret M. Sweeney. It was a quick hearing with the resolution that the government lawyers have four months to complete the discovery process. But don’t read that to mean the government has been a willing player in this process.

The Fairholme legal team told the Judge there has been a “serious breakdown in the discovery process” because the government hasn’t been producing the requested documents. Throughout most of last year, the U.S. Treasury produced 120,000 pages and the Federal Housing Finance Agency produced 30,000 pages, but the government lawyers have not turned over a single document since it filed for a motion to stay discovery (translated: make it stop!) in October. For anyone keeping count, that’s three months in which zero documents have been produced. Their excuse? According to government lawyers, they’ve been having technical problems with the review software. Pardon us whilst we guffaw for a moment.

While Judge Sweeney sympathized with their problems, she did tell them (nicely) to get things moving by a, refusing to grant their request for a stay; and b, giving them four months to wrap it up.

There was an interesting exchange in which the government’s lawyers complained that the Fairholme team expanded discovery by sending requests to Fannie Mae and Freddie Mac for documents. Judge Sweeney said that it was odd for the government to complain on behalf of the GSEs if the government wasn’t controlling them.

It’s not unusual in complex cases like this one for the discovery phase to take a while. So while it may seem extreme to non-legal types for this process to go on for more than a year (Judge Sweeney granted the original discovery motion in February 2014. Here’s what the Wall Street Journal’s MoneyBeat reported at the time:

“The U.S. had argued that the case should be dismissed and that shareholders’ claims weren’t ripe for review because Fannie and Freddie’s future profitability is unknown and because the firms are still in a government-run conservatorship. Those claims, the government had said, meant plaintiffs couldn’t assert that they had sustained losses resulting from the government’s actions.

“Fairholme had said that discovery would allow them to resolve the dispute over the potential to forecast future profitability at the companies, and Judge Sweeney sided with the plaintiffs. ‘Discovery will enable plaintiffs to confirm that such evidence exists with regard to profitability and additional answer the question as to when, and how, the conservatorship will end,’ Judge Sweeney wrote.

“The government has also argued that the case should be dismissed because the FHFA acted as the conservator for Fannie and Freddie and not as an arm of the U.S. government. The court granted Fairholme’s request to seek evidence that the FHFA acted ‘an agent and arm of the Treasury,’ which could determine whether the case is allowed to proceed.”

For a quick primer on the lawsuit, this Forbes piece is an fast and easy read. Here’s the nut of it:

“Fairholme – and Perry Capital – objects to an August 2012 amendment to the rescue that saw the government force Fannie and Freddie to deliver all profits to the Treasury Department, superseding a prior arrangement that saw the government collect dividends on preferred shares it held as part of the 2008 rescue.

“‘Fairholme’s objective is quite simple,’ according to [Fairholme Fund Founder Bruce] Berkowitz, ‘the Government set the terms of their 2008 investments and should be held to their original deal.’

“Instead, Fairholme and Perry are arguing, with Fannie and Freddie recovering Uncle Sam decided to cut out investors and keep the upside to itself.”

Judge Sweeney noted during today’s hearing that she’s familiar enough with the government’s lawyers to know that they’re working diligently to fulfill the discovery request so we’ll see where things stand in four months when her deadline for the government to wrap up discovery hits.