A federal appeals court upheld a ruling that barred hedge funds from suing to overturn the U.S. government’s 2012 decision to capture billions of dollars in the profits generated by the mortgage guarantors Fannie Mae and Freddie Mac after their bailout, sending shares plunging.
Some Fannie Mae and Freddie Mac investors still have a shot at money damages, based on when they acquired their shares and whether they did so before or after the Federal Housing Finance Agency was created and then imposed its control over Fannie Mae and Freddie Mac. They can pursue breach of contract claims, the appeals panel said in a split 2-1 decision Tuesday.
“It’s a little too early for me to announce what our response will be other than to say what these breach of contract claims were always the central claims in this case,” said Hamish Hume, a Washington-based attorney with Boies Schiller Flexner LLP, who represented some of the prevailing shareholders.
Fannie Mae shares fell 24 percent to $3.18 at 11:42 a.m. in New York trading. Freddie Mac shares were down 23 percent to $3.10. Some classes of Fannie’s preferred shares were down more than 30 percent.
Major owners of Fannie’s and Freddie’s preferred shares include hedge fund manager Perry Capital and mutual fund firm Fairholme Funds Inc. Bill Ackman’s Pershing Square Capital Management is a major owner of the companies’ common shares.
Reduced Stake
In place since January 2013, the net worth sweep allowed the U.S. to recapture all of the $187 billion in taxpayer money it spent to stave off the companies’ collapse during the global fiscal crisis and -- by the end of 2015 -- at least $56 billion more. All of that without reducing Treasury’s liquidation stake in either firm.
The court, which included two judges selected by Republican presidents and one picked by a Democrat, heard arguments on April 15. It later allowed additional friend-of-the-court briefs to be filed by allies on each side, solicited still more submissions concerning a jurisdictional question and permitted the investors’ filing of evidence produced in sweep-related cases pending before other courts.
Their ruling may yet be subject to U.S. Supreme Court review.
The U.S. Treasury Department press office did not immediately reply to an e-mailed request for comment. David Thompson, an attorney for the suing Fairholme Funds Inc. did not immediately respond to a voice-mail message seeking comment.