The Jig is Up: Shareholder Lawyers Close to Getting a Look at All Documents in Sweep Litigation

Once again, a federal judge has sent government lawyers a clear message: Stop trying to hide the truth about the Net Worth Sweep. This time, they appear to be out of options.

On October 4, U.S. Court of Federal Claims Judge Margaret Sweeney granted a motion to compel the disclosure of documents filed over the summer by attorneys for Fairholme Fund’s shareholders in Fannie and Freddie. In August, they asked Sweeney to order the use of the “quick peek” procedure for about 1,500 documents related to the Sweep, many of them emails and other communications between government officials going back five years ago or more.  Consistent with several previous rulings, Sweeney’s granting the motion rebuked government lawyers who have for years invoked various forms of privileged treatment to keep the public from knowing the full story about the Sweep – and to deny shareholders their rights.

With the latest ruling, lawyers for shareholders will finally be able to review nearly all of the documents the government has been so determined to hide about the deliberations, calculations and machinations of senior officials in the Obama Treasury Department, the Federal Housing Finance Agency (FHFA) and other governmental offices. While this is a clear victory for transparency in government, Sweeney’s ruling provides Fairholme’s attorneys only the opportunity to scan the trove of documents that have been part of the largest privileged log in U.S. history.  In essence, at this point a “quick peek” is getting close to the “full monty.”

When the Net Worth Sweep was announced in August 2012, Fannie Mae and Freddie Mac were already four years into what was supposed to be a temporary conservatorship and back on their feet financially. The GSEs were also about to enter a period of great profitability, just as government officials predicted when conceiving the idea of the Net Worth Sweep. The decision to suddenly divert the GSEs’ earnings away from replenishing capital reserves and into government coffers seemed amiss and prompted a series of lawsuits by investors and shareholders in Fannie and Freddie.

To demonstrate this action exceeded the legal authority provided to government agencies under the Housing and Economic Recovery Act (HERA), shareholders sought documents that should have been open to the public. But the government raised the dubious claim executive privilege, normally invoked for national security reasons, to keep the records sealed. In a discovery process involving about 12,000 documents the government at first made 3,500 documents available. But that was just the beginning of a battle over documents.

In early 2017, a Federal Circuit Court turned down the government’s attempt to end the discovery process altogether but allowed that documents could be made available to plaintiff attorneys on a case-by-case basis. On August 1, the government agreed to release 17 more documents but these items only fueled suspicion about what the government continued to hide. For example, an email discussion about “re-recording certain deferred tax assets that had been written-off” directly contradicted a statement by Mario Ugoletti, a senior Federal Housing Finance Agency (FHFA). Another document concerned an email summarizing a June 2012 meeting between FHFA officials and Fannie’s CFO Susan McFarland that affirmed yet again that officials knew the GSEs were about to become quite profitable even though the Sweep was later justified, in part, as a way to protect taxpayers from possible losses at Fannie and Freddie.

Instead of battling over one five-year-old email after another, in August Fairholme attorneys asked Sweeney to use the “quick peek” procedure for about 1,500 documents from May 2012 onward.  By saying yes this week, Sweeney not only helped expedite a protracted battle over evidence critical to the pursuit of justice for shareholders but also affirmed the principle of transparency in government.