The regulator of Fannie Mae and Freddie Mac improperly amended stock purchase agreements in 2012 when it allowed the U.S. Treasury to sweep up the companies’ net profits, a jury in Washington, D.C. found Monday.
The jury awarded shareholders of the government sponsored enterprises a total of $612.4 million in damages.
Fannie Mae will pay junior preferred shareholders $299.4 million and Freddie will pay $281.8 million. The jury also issued $31.4 million to owners of Freddie’s common shares.
The surprising verdict in Berkley v. FHFA comes after the case was dismissed in October due to a hung jury.
Related cases, like Collins v. Yellen, which typically argued that the FHFA had no right to allow Treasury to sweep up the GSEs’ profits, have also been dismissed, mostly on technicalities or that shareholders had no standing.
The plaintiff’s argument in Berkley v. FHFA is that the FHFA violated the contractual rights of shareholders when it gave away all their dividends in perpetuity.
The case stems from the restructuring of the agencies in 2008. A group of GSE investors alleged that the government knew the GSEs would turn a huge profit after a $100 billion bailout from the Treasury in 2008.
An agreement between FHFA and the Treasury Department promised the investors compensation in the form of stock, dividends tied to the amount of money invested in the companies and priority over other shareholders in recouping their investment.
But that agreement was modified in 2012, to require Fannie Mae and Freddie Mac to pay dividends to the Treasury pegged to the companies’ net worth. The arrangement essentially washed out private investors’ ownership interests in the GSEs. Investors cried foul.
“By August 2012, FHFA and Treasury knew that the Companies were on the verge of generating huge profits,” the plaintiffs argued in the suit.
In 2018, the Fifth Circuit Court of Appeals ruled that the FHFA was within its statutory authority when it enacted the “net worth sweep” of the GSEs’ dividends, but found that the FHFA was not constitutionally structured. In 2019, the Fifth Circuit Court of Appeals reversed its ruling on the “net worth sweep” and remanded the case back to the district court. The Supreme Court last year dealt a blow to shareholders in Collins v. Yellen when it ruled the FHFA did not exceed its authority under federal law.
The victory in Berkley v. FHFA is sweet for shareholders, notably in that it’s their first one since the beginning of conservatorship, said David Stevens, a former Federal Housing Administration commissioner and Mortgage Bankers Association president.
“Whether this sets the tone for a new direction for the conservatorship is yet to be seen,” Stevens said. “But without question, a political leadership that oversees these two companies in Washington will be likely focusing on options ahead. While the jury awarded less than what was asked for by the plaintiffs, it is without question victory for the shareholder interest. What happens next will be interesting.”
Most observers expect the FHFA to appeal the decision.