Pursuit of Shareholder Rights Alive and Well as Sixth Circuit Considers Appeal
- July 17, 2017
Nearly two years ago, a retired bank manager and shareholder named Arnetia Joyce Robinson filed a complaint in U.S. District Court in Kentucky laying out the government’s violation of the law in its implementation of the Net Worth Sweep of Fannie Mae and Freddie Mac’s revenues. That court dismissed the case and Ms. Robinson filed an appeal with the U.S. Court of Appeals for Sixth Circuit in Cincinnati last November. This week, the Court will hear oral arguments in the case.
The tenacity of shareholders in their quest for justice rests on a strong legal foundation. Likewise, the public has a right to get to the bottom of how unelected bureaucrats at the Federal Housing Finance Agency and the U.S. Treasury Department took it upon themselves to misapply the Housing and Economic Recovery Act of 2008 and convert private companies into a piggy bank for unauthorized spending.
Since Ms. Robinson filed her complaint, U.S. Court of Federal Claims Judge Margaret Sweeney has continued to slap down the government’s attempt to use the doctrine of executive privilege to hide officials’ misdeed with regard to the Sweep. After investors with the mutual fund Fairholme Funds sued the government in 2013 alleging the Sweep amounted to illegal taking of property without compensation, the government absurdly produced a privilege log with over 12,000 items. Slowly but surely, the wall of secrecy is cracking.
Late last year, plaintiffs selected 56 documents for Judge Sweeney to review to determine if various forms of executive privilege were valid. She concluded none passed the test. The government then appealed and in January a three-judge panel for the Court of Appeals for the Federal Circuit upheld Judge Sweeney on all but four documents. This sweeping rebuke has led to an ongoing discovery process involving some 3,500 other documents. The government’s obsession with secrecy in this case has to raise questions about the legality of its actions.
Developments in Sweeney’s courtroom coincided with the U.S. Court of Appeals for District of Columbia Circuit ruling 2-1 against investors in Perry Capital in February. Plaintiffs in that case also contend the Net Worth Sweep was illegal under provisions of the Administrative Practices Act and other statutes. However, the steady stream of documents made public by Judge Sweeney prompted a stinging dissent by Judge Janice Rogers Brown about the wisdom and propriety of the Sweep.
Among other assertions, she argued officials at the Federal Housing Finance Agency “pole vaulted over” their statutory authority. In doing so, the government looted the companies, which is in direct opposition of a conservator’s obligation. Accordingly, she warned this would send a bad signal to financial markets, commenting, “What might serve in a banana republic will not do in a constitutional one.”
The Sixth District Court is not bound by the DC appellate court’s holding in the Perry case. Indeed, it is possible Judge Brown’s dissent in the Perry case will be persuasive. If that happens, there would be contradictory rulings in two federal appellate courts, raising the possibility of consideration by the U.S. Supreme Court.
In the meantime, groups of shareholders in Michigan and Minnesota are challenging the legality of the Sweep based on broader constitutional principles concerning separation of power and the authority of each branch of government. They argue the FHFA is unconstitutional in its structure: Immune from Congressional oversight because it requires no appropriation from Congress; immune from presidential oversight because it is run by a single director rather than a board and the director is removable by the president only for cause; and immune from judicial review, per the pleading of government lawyers in other shareholder suits.
These new challenges of FHFA’s action with regard to the Sweep also rest on the fact that the so-called Appointments Clause in Article I of the Constitution has been held to require principal officers to be nominated by the president and confirmed by the Senate. With regard to FHFA, Ed DeMarco, whose hostility to Fannie and Freddie and their shareholders is now well known, was serving merely as acting director of FHFA when the Net Worth Sweep went into effect in 2012. On top of that, these suits invoke the Constitutional non-delegation doctrine that says that agencies need to have an “intelligible principle.” Since the Appeals Court in the Perry case held that intelligible principle of preserving and conserving assets and operating the institutions in a sound and solvent manner was not binding at all, this begs the question of whether the FHFA has any restraint at all. This represents an astounding case of a government agency doing whatever it pleases and makes statutory language inconsequential.
Interestingly, the only other government agency with authority over such a segment of the economy with a composition similar to the FHFA is the Consumer Financial Protection Bureau (CFPB). Litigation over the constitutionality of the CFPB’s structure continues to work its way through the federal court system.
The “temporary” conservatorship forced on Fannie and Freddie is now in its ninth year. The Net Worth Sweep has sent close to $270 billion of the companies’ earning to Treasury, over $80 billion more than the $187.5 billion in emergency funds extended to the companies. Until officials in the Trump Administration decide to end the fiasco and embrace a plan to make shareholders whole and protect taxpayers and qualified buyers over the long term, the legal battles to overturn the unprecedented actions by government officials to invalidate the rights of shareholders will continue.