Shareholders File Lawsuit in Delaware

Another lawsuit has been filed against the federal government by two GSE shareholders alleging that the Net Worth Sweep is illegal under Delaware and Virginia corporate law. The write-up in Politico Pro (subscription paywall) noted that while the GSEs are “are chartered under federal law, investors are pointing out state bylaws apply to their corporate governance practices and procedures.” Fannie Mae is charted under Delaware law and Freddie Mac falls under Virginia’s jurisdiction.

According to the complaint:

“Under Delaware and Virginia corporate law, preferred stock of a corporation cannot be given a cumulative dividend right equal to all the net worth of the corporation in perpetuity. The Net Worth Sweep represents an unlawful confiscation of the entire economic value of the Companies and their other classes and series of stock. The Net Worth Sweep is an illegal term for any preferred stock instrument, whether or not held by the federal government.”

As a result of the “unprecedented agreement” between the U.S. Treasury and the Federal Housing Finance Agency to implement the sweep (in violation of federal law, we might add), the complaint notes that “Treasury will receive – in perpetuity – any and all profits that Fannie Mae and Freddie Mac earn.”

We never miss an opportunity to point out that the Sweep was enacted after the companies returned to profitability in 2012 when Fannie reported $84 billion in profits and Freddie $51.6 billion. In August of that year, the Sweep magically came into being and starting siphoning out every dollar, preventing them from maintaining a capital buffer or “distribute dividends or otherwise deliver any value to Plaintiffs or the other members of the Classes holding stock in the Companies,” the complaint reads.

We also would like to point out that while federal law may pre-empt state law, federal policy (ie, an agreement between agencies) does not. We look forward to developments in this case.