From The Wall Street Journal:
A group of Wall Street investors on Tuesday suffered a blow in their attempts to sue the federal government over their treatment of the shareholders of mortgage finance giants Fannie Mae and Freddie Mac after the financial crisis.
A judge in the U.S. District Court for the District of Columbia dismissed claims brought against the federal government and U.S. officials for sending nearly all profits generated by Fannie Mae and Freddie Mac to the U.S. Treasury, a sweep which began last year.
The dismissal included lawsuits brought in the summer of 2013 by investors Perry Capital LLC and Fairholme Funds Inc., managed by mutual-fund manager Bruce Berkowitz.
In his opinion, filed on Tuesday, U.S. District Judge Royce Lamberth said Congress had in effect given the Federal Housing Finance Agency, Fannie Mae and Freddie Mac's regulator, and the Treasury Department the power to take the companies' profits as a provision of the Housing and Economic Recovery Act.
"It is understandable [for the profit sweep] to raise eyebrows, or even engender a feeling of discomfort," wrote Judge Lamberth, who added that the act and the language of the companies' stock certificates compel "the dismissal of all of the plaintiffs' claims."
It is unclear whether the plaintiffs will appeal Judge Lamberth's decision, and other similar cases are ongoing before different judges.
A Fairholme spokesman declined to comment. A Perry spokesman couldn't be reached for comment.
The dismissal didn't cover a lawsuit filed against the U.S. government by Pershing Square Capital Management LP, which made a similar argument but for a different group of shareholders. A spokesman for Pershing Square declined to comment.
In a research note to clients late Tuesday, Isaac Boltansky, an analyst for Compass Point Research & Trading LLC, wrote that the ruling "represents a material setback for [Fannie and Freddie] shareholder claims both in court and on Capitol Hill," and said that attention would now turn to the cases in the U.S. Court of Federal Claims.
Those cases, which also include Fairholme, involve similar claims against the federal government and are continuing.
The U.S. faces nearly 20 lawsuits from investors, with most challenging the treatment of shareholders in the firms' preferred stock. The Perry and Fairholme cases were among the most prominent and closely watched cases.
Fannie and Freddie were taken over by the U.S. government in 2008 in a so-called conservatorship.
The government didn't wipe out shareholders but received warrants to acquire up to 80% of the firms' common stock and avoided bringing their assets and liabilities onto the federal ledger.
The government also received a new class of "senior preferred" shares in the companies that initially paid a 10% dividend. But in August 2012, the FHFA and Treasury changed the terms of the bailout, eliminating the dividend but requiring that the companies send nearly all of their profits to the U.S. Treasury.
The companies don't need to pay a dividend when they see losses.
Fannie Mae and Freddie Mac have been a popular investment for many hedge-fund managers who believe that the U.S. government didn't have the right to change the terms of the government's bailout.
The court cases have taken on increased importance after a U.S. Senate plan to replace Fannie and Freddie as part of broader housing-finance overhaul stalled in May.
The companies received nearly $188 billion in government aid during the crisis but as of September had paid $218.7 billion to the U.S. Treasury in dividends.
In the past six months, the stocks of both companies have fallen about 25%. On Tuesday, shares of Fannie Mae fell 6.6% to $2.69, while shares of Freddie Mac fell 7.4% to $2.64.
In a statement, Tim Pagliara, executive director of shareholder group Investors Unite, wrote that the group disagreed with the judge's decision and "doubts Congress ever intended for the conservatorship to lead to nationalization of [Fannie and Freddie] with no compensation for shareholders."
Spokesmen for the Treasury Department and Justice Department declined to comment.
An FHFA spokeswoman couldn't be reached for comment.
— Juliet Chung
contributed to this article.
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