Pershing Square Sues U.S. Over Fannie Mae and Freddie Mac




William Ackman's Pershing Square Capital Management LP, which has taken sizable stakes in the common shares of Fannie Mae FNMA +3.64%  and Freddie Mac, FMCC +3.93%  filed a lawsuit Thursday against the U.S. government challenging its bailout terms for the mortgage-finance giants.


Pershing Square's suit, filed Thursday in the U.S. Court of Federal Claims in Washington D.C., is the latest investor action challenging the government's 2012 decision to force Fannie and Freddie to send nearly all of their profits to the U.S. Treasury as dividends. The New York hedge fund is joined in the suit by three individuals who are longtime investors of Fannie Mae common shares.


While the U.S. faces nearly 20 lawsuits from investors, including hedge-fund firm Perry Capital LLC and mutual-fund company Fairholme Capital Management LLC, most investors have sued to challenge the treatment of shareholders in the firms' "preferred" stock, a form of equity that is senior to common stock and that made regular dividends before the government took the companies over.


Pershing Square's suit focuses on the treatment of common shareholders.


While Pershing Square owns some preferred shares, the vast majority of its holdings are in common stock. In filings last November, Pershing Square disclosed it had spent a total of about $400 million on a nearly 10% stake in each firm. Mr. Ackman believes the common stock has more upside than the preferred shares, The Wall Street Journal previously reported, though they are seen by some as riskier investments.


The suit seeks "just compensation" for the plaintiffs but doesn't specify an amount.


The lawsuit alleges that the government's "brazen conduct…is illegal."


A Treasury spokesman declined to comment. Spokesmen for Fannie Mae and Freddie Mac also declined to comment.


Pershing Square's lawsuit against the U.S. adds a new, high-profile front to the multiple battles the nearly $15 billion hedge-fund firm is already fighting. Allergan Inc. AGN +0.45%  has filed a federal lawsuit challenging the legality of Pershing Square's joint takeover bid with Valeant Pharmaceuticals International Inc. VRX.T +1.47%  and accusing them of profiting from insider information—claims Pershing Square and Valeant have said are baseless.


The Journal reported on Thursday that the Securities and Exchange Commission was looking into whether the bid violates securities laws. A Pershing Square representative said the firm "welcome[d] the SEC's review of the facts."


Mr. Ackman also continues to campaign against Herbalife Ltd. HLF +0.77%  , which he believes is a pyramid scheme. Herbalife has denied the allegation.


Fannie Mae and Freddie Mac don't make loans. Instead, they buy them from lenders and package them into securities, providing guarantees to investors to make them whole if the loans default.


In 2008, the government put Fannie and Freddie into conservatorship and ended up giving the companies nearly $188 billion in aid. In return, the government received "senior preferred" shares of the companies, which initially paid a 10% dividend, along with warrants to acquire 80% of the companies' common stock.


Since the existing Fannie and Freddie stock wasn't completely wiped out, investors continued to trade shares. Hedge funds such as Perry and Paulson & Co. bought preferred shares at large discounts.


However, the Treasury Department changed the terms of their new class of shares in August 2012, eliminating the 10% dividend and instead sweeping nearly all of Fannie's and Freddie's profits. Beginning last year, the companies don't owe a dividend in periods where they run a loss, but they must pay nearly all of their profits out as a dividend.


The lawsuit alleges the government's action violates the Fifth Amendment protection against the taking of private property for public use without just compensation.


The investor lawsuits are getting increased focus as legislative efforts to overhaul the housing-finance system, and possibly eliminate Fannie and Freddie, have stalled.


The common shares of Fannie and Freddie are up more than 1400% since the end of 2012, while classes of the preferred shares are up nearly 700%.


Pershing Square's paper profits on its common shares are more than $300 million since it disclosed its stake and have contributed to the firm's 25% return for the year through June.


Write to Juliet Chung at, Joe Light at and Nick Timiraos at

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