On September 6, 2008, the Government imposed conservatorships on Fannie Mae and Freddie Mac (collectively “the Companies,” and sometimes individually, “Company”). However, the “conservatorships” defied the very nature of conservatorship itself. Unlike when the Government acts as conservator of a bank in order to preserve the bank’s assets and protect its creditors, the Government used the conservatorships to stabilize the economy by warehousing on the Companies’ books bad mortgage debt from financial institutions the Government deemed “too big to fail.” In addition, via Stock Agreements forced on the Companies, the Government funneled billions of dollars to Treasury as “dividend payments” in exchange for capital infusions that the Companies never requested or needed. Eventually, the Government used the so-called conservatorships to deny the Companies their own profits, instead siphoning them directly to the federal treasury. While the Government called the Federal Housing Finance Agency (“FHFA”) “conservator,” it was such in name only. In reality, it has been a shill for using the Companies to accomplish whatever the Government wanted.
The Government’s unprecedented seizure of the Companies to further its own ends resulted in near total destruction of shareholder value. Almost immediately after the conservatorships were imposed, the value of the Companies’ shares plummeted, causing preferred and common shareholders of the two Companies to lose more than $41 billion. FHFA agreed, purportedly as conservator of the Companies, to accept from Treasury $100 billion in capital infusions for each Company, but in exchange granted from each Company $1 billion in preferred stock with preferential rights that placed the Government ahead of all other stockholders. FHFA further gave the Government warrants for 79.9% of the Companies’ common shares at a bargain-basement price of one-thousandth of one cent per share. The Government’s actions virtually handed majority control in the Companies to the Government for a miniscule fraction of their value. Once the conservatorships were imposed, shareholders also lost the right to vote their shares. And though shareholders have the right to receive a portion of the Companies’ assets in the event of dissolution, the Government’s newly-acquired preferred stock ensured that, if the Companies are dissolved, the Government will receive $189.5 billion from liquidation preferences while shareholders will get nothing. Even though conservatorships are by definition temporary, the Government’s seizure of the Companies has lasted over five years and there is no plan in sight for them to be returned to the shareholders who own them, and thus no avenue by which shareholders will be able to recover the loss of the value in their shares.
Under the Fifth Amendment to the United States Constitution, the Government cannot take private property without just compensation. Despite the extraordinary facts alleged in the Complaint, there is no doubt that the Government’s actions in imposing the conservatorships constituted a taking. In the alternative, they constituted an illegal exaction in violation of the Due Process Clause of the Constitution. Under either theory, whether done in the guise of “conservatorships” or otherwise, the Government cannot seize control of privately-held corporations, force them to serve the whim of the Government’s objectives and, in the process, wipe out the interests of millions of shareholders. And if the Government does so, it must compensate the shareholders for what it has taken.
Thus, while the Government’s Motion asks this Court to immunize the Government from its own conduct, nearly every one of the Government’s legal arguments ignores the facts of the Complaint and misrepresents the actions that led to and have constituted the alleged “conservatorships.” First, even though the Companies were subjected to conservatorship to serve the Government’s objectives, the Government argues that FHFA was not, in fact, the Government. Not only is this argument premised on the fiction that FHFA acted as a “conservator” but, even assuming the existence of true conservatorships, it improperly asks this Court to find, as a matter of law, that FHFA ceased acting as a regulator once it became the Companies’ conservator. It likewise ignores the Complaint’s allegations, which the Court must accept as true, that FHFA conspired with Treasury in imposing the conservatorships. Indeed, during the conservatorships there has been no meaningful distinction between the roles of Treasury and FHFA, as the conservatorships were designed not to preserve the Companies’ assets, but rather to further Treasury’s directives and goals.
The Government also claims that Plaintiffs are precluded from pursuing this action by virtue of a purportedly exclusive remedy in the Housing and Economic Recovery Act of 2008 (“HERA”). However, the provision cited by the Government (12 U.S.C. § 4617(a)(5)) only addresses claims for declaratory and injunctive relief, not the claims for damages Plaintiffs make here. When Congress intends to preclude judicial review of constitutional claims its intent to do so must be clear, and the Government has pointed to no such legislative declaration in HERA.
The Government next claims Plaintiffs lack “standing” to bring this action because, under HERA, it suggests, FHFA assumed all rights of the Companies’ shareholders, including the ability to bring suit. But this argument ignores a well-recognized exception applicable when a conservator has a conflict of interest because of its entanglement with “closely related” government entities. As described above, the Complaint alleges the existence of such an entanglement here. The Government further claims that Plaintiffs lack standing to recover the Companies’ lost profits. But Plaintiffs are not seeking to recover profits that belong to the Companies themselves: they are seeking to recover for the destruction of the value of their shares. Moreover, Plaintiffs can directly recover based on the Companies’ overpayment to the Government for access to Treasury funds, which caused Plaintiffs to lose the economic value and voting power of their shares.
Plaintiffs have sufficiently alleged that the conservatorships constituted an unconstitutional taking. As an initial matter, Plaintiffs’ claims are ripe for review. Indeed, the Government would force Plaintiffs to wait until their claims were barred by the statute of limitations before this Court could find them sufficiently “ripe.” More substantively, this Court has recently reiterated in Starr International Co. v. United States that Plaintiffs have a cognizable property interest in their shares. The Government’s actions clearly affected the value of those shares and Plaintiffs’ other ownership interests. Plaintiffs had reasonable-investment backed expectations that the Government would not take over the Companies for its own purposes, thereby destroying the value of their shares and their rights as shareholders. As much as the Government would like the Court to believe otherwise, the Companies were not engaged in banking and thus were not part of the “highly regulated” banking industry, where regulatory takeovers are more common. Thus, there is no basis for suggesting that Plaintiffs should have reasonably anticipated the Government’s actions here, particularly where, just months before the conservatorships were imposed, the Government repeatedly represented that there was no need to impose them because the Companies were financially sound. The Government was not “rescuing” the Companies as would be done in a traditional conservatorship. At best, it was cleaning up its own mess after directing the Companies to make high-risk investments.
Finally, Plaintiffs have stated an exaction claim. The Government’s actions were not lawful under HERA. If the Government’s argument is true, the Government could have imposed the conservatorships to do whatever it wished with the Companies. Instead, HERA established FHFA’s duty to preserve the Companies’ assets, and that duty creates a money mandating obligation. FHFA has done precisely the opposite by giving away the Companies’ assets virtually for free to Treasury. Finally, Plaintiffs’ claims are not “indirect,” because there is no intervening party more injured by the Government’s actions.
The Government’s Motion ignores defining facts of the takeover and instead simply characterizes its actions as ordinary. But the Government’s attempt to reinvent history shows the very reason this Court should not grant its Motion. Accepting Plaintiffs’ account as true, as the Court must, and considering the novel application of constitutional principles implicated by this case, dismissal is inappropriate at this stage. The Motion should be denied and Plaintiffs’ claims decided on their merits after discovery.