http://timhoward717.com/2014/10/18/keys-to-victory-simplify-and-focus/#comments
With all due respect, Dan is correct.
Judge Sweeney must set aside the Gov’t’s 79.9% preferred and warrants for 79.9% of the common shares.
Excerpts from WASHINGTON FEDERAL v. USA 13-cv-00385, filed 6/10/2013:
E. Fannie Mae and Freddie Mac Are Improperly Placed in Conservatorship
1. Government Actions Leading to Imposition of the Conservatorship
a. The Government dramatically changed capital requirements to make the Companies appear unsound.
67. On June 10, 2008, OFHEO announced a final rule that changed the mortgage loan loss severity formulas used in the Companies’ regulatory risk-based capital stress test. OFHEO announced that this new risk-based capital stress test would be formally applied beginning with the third quarter 2008 capital classification. These new standards dramatically increased the risk-based capital requirement. Fannie Mae estimated that these changes would have boosted the statutory risk-based capital requirement from $23.1 billion in March 2008 to $30.4 billion – an increase of 31.6%.
b. The Government’s conservatorship plan was hatched in secrecy and gave the Companies no choice but to accept Government control.
68. Despite their prior assurances to the public that both Fannie Mae and Freddie Mac were financially sound, on September 7, 2008, less than two months after the enactment of HERA, FHFA Director Lockhart and Treasury Secretary Paulson blindsided the Companies and their shareholders by placing the Companies into conservatorship and taking control away from the shareholders, generally citing both companies’ purported financial troubles. In a prepared statement, Paulson stated that “[b]ased on what we have learned about these institutions over the last four weeks – including what we learned about their capital requirements – and given the condition of financial markets today, I concluded that it would not have been in the best interest of the taxpayers for Treasury to simply make an equity investment in these enterprises in their current form.”
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69. Despite admitting to having “analyzed in great detail the current financial condition of the GSEs” for a four-week period prior to the imposition of the conservatorships, the Government intended to keep this plan secret until the last possible minute. As explained in Secretary Paulson’s memoir, On the Brink, the Secretary met with President George W. Bush only three days before the conservatorships were publicly announced and told him that “[w]e’re going to move quickly and take them by surprise. The first sound they’ll hear is their heads hitting the floor.”
70. In his September 7, 2008 statement announcing this unprecedented Government action, Lockhart misleadingly stated that “[t]he Boards of both companies consented yesterday to the conservatorship.” However, the Board’s “consent” was by no means voluntary. On the contrary, it was obtained through intimidation and coercion by the Government. Just two days prior to the September 7th announcement, Paulson and other top governmental officials had summoned the senior executives at Fannie Mae and Freddie Mac to secret meetings, where they were told that they would either accept Government control within 24 hours or the Government would impose it by force. Paulson misleadingly told them that “[w]e have the grounds to do this on an involuntary basis, and we will go that course if needed.”
71. In a 2009 speech, Mudd explained that “we were given 24 hours to accede to a government takeover – or else the government would effectively go to war against the company.” The FCIC concluded that “[e]ssentially the GSEs faced a Hobson’s choice: take the horse offered or none at all.” Secretary Paulson himself told the Commission that the Government team made “a very strong case so the board of directors did not have a choice” and that he told the Companies that, while the Government had authority to inject capital into them, it would not do so unless they were in conservatorship. This was a dramatically different scenario than what recently had been described by Senator Isakson, in explaining the intention of HERA, as granting “access to the Treasury window” much like the access to capital that is given to banks. In fact, the access to capital from the Treasury was being provided to Fannie Mae and Freddie Mac on far more onerous and extremely costly terms, which were severely detrimental to the private property interests of their shareholders, and the boards of directors at the Companies were not given any real choice in the matter. As Paulson later explained to the FCIC, “I believed the very best way to get them to agree on a friendly basis was to say ‘there’s a hard way and an easy way, and we hope and expect them to take [the] easy way. Which they did.[’]”
72. The Companies were thus presented with the “facts” that purportedly supported the imposition of the conservatorships. Those facts had been developed in secrecy, while officials at every level of the Government were making assurances about the Companies’ solvency. No one at the Government communicated these “findings” to the Companies, their shareholders, or the public prior to imposing the conservatorships. In fact, the FHFA was confident enough in the Companies’ solvency that, on August 22, just two weeks before the Government imposed the conservatorships, the FHFA stated in a letter to both Mudd and Syron that the Companies had adequate levels of capital. Before the Government imposed the conservatorships, the Treasury demanded that the letter be withdrawn, because it was inconsistent with the Government’s soon-to-be-announced position that the conservatorships were required. On October 9, 2008, the FHFA announced that it would no longer provide capital classifications for the Companies.
73. The Companies’ boards of directors never “consented” to the conservatorships. The conservatorships were presented to them as a take-it-or-leave-it proposition at a time when the financial markets were in turmoil and the economy needed additional support from the Companies. Knowing that it lacked a statutory basis for doing so, the Government threatened to take control of the Companies regardless of whether their boards of directors consented to the conservatorships, thereby leaving them no real choice. And even though the Government extended other financial institutions less costly and far less extreme forms of financial assistance, the Government gave no such options to Fannie Mae and Freddie Mac and their shareholders.
c. The Government’s motive for imposing the conservatorships was to maintain liquidity in the U.S. mortgage market, in part, by bailing out other financial institutions holding high-risk mortgages and mortgage-backed instruments.
74. The decision to appoint the FHFA as conservator for the Companies was not based on the grounds set forth in 12 U.S.C. § 4617, but rather on the broader public policy objective of restoring confidence and liquidity in the financial markets by, among other things, providing a mechanism for other financial companies to unload their bad mortgage debts. At the time, nearly every major financial institution was carrying debilitating amounts of such debt, and the Government saw in the Companies a place to transfer, or guarantee, that toxic debt and facilitate its removal from the balance sheets of those other institutions. Recognizing this opportunity, as well as the Government’s desire, for public policy reasons, to make absolutely sure the Companies continued to provide large amounts of liquidity to the mortgage market and support the nation’s economy, it took control of Fannie Mae and Freddie Mac away from their shareholders and forced the Companies to assume large amounts of additional high-risk debt, and guarantee even more risky assets, with complete disregard for whether this was in the best interests of the Companies and their shareholders. Faced with a mounting financial crisis, the Government saw Fannie Mae and Freddie Mac as “the only game in town.” As Secretary Paulson explained to the FCIC, “[the GSEs], more than anyone, were the engine we needed to get through the problem.” As a result of the Government’s actions, the Companies became “the mortgage industry’s wastebasket for toxic mortgage debt.”
2. The Government Bullied and Coerced the Companies’ Boards of Directors Into Consenting to the Conservatorships, Thus Rendering Their Consent Invalid.
81. Title 12, section 4617(a)(3)(I) provides that the FHFA may be appointed conservator of a GSE when “[t]he regulated entity, by resolution of its board of directors or its shareholders or members, consents to the appointment.” Neither of the Companies fell within the purview of this subsection at the time they were placed in conservatorship.
82. The shareholders of Fannie Mae did not consent, by resolution or other means, to the appointment of a conservator. Likewise, the shareholders of Freddie Mac did not consent, by resolution or other means, to the appointment of a conservator. Instead, as explained above (¶¶ 68-73), the Companies were threatened and given a mere 24 hours to either accept the conservatorships or have them forced upon them. The de minimis period afforded to the Companies’ board members to consider the appointment of the FHFA as conservator was inadequate for meaningful deliberation, rendering any purported consent given by any of the Companies’ board members unsubstantiated and invalid.
83. In his September 7, 2008 public announcement of the appointment of a Conservator, Director Lockhart stated that “[t]he Boards of both companies [Fannie Mae and Freddie Mac] consented yesterday to the conservatorship.” However, Director Lockhart has since explained to the FCIC that the Government wanted to claim it had the Companies’ consent because, in his words “they were adequately capitalized” and, absent the so-called “consent,” there was no statutory basis for the conservatorship.
84. By September 4, 2008, if not earlier, Government officials had decided to impose conservatorships upon Fannie Mae and Freddie Mac, come hell or high water. As Secretary Paulson told President Bush on that date, “[w]e’re going to move quickly and take them by surprise. The first sound they’ll hear is their heads hitting the floor.”
85. The following day, September 5, 2008, Director Lockhart and Secretary Paulson summoned Fannie Mae’s and Freddie Mac’s CEOs, Daniel Mudd and Richard Syron, respectively, to a meeting at which Mudd and Syron were told, in no uncertain terms, that the Companies would be placed in conservatorship. Secretary Paulson and Director Lockhart emphasized that the Companies had no other option, and that they expected the Companies’ boards of directors to comply. Paulson misleadingly told them: “We have the grounds to do this on an involuntary basis, and we will go that course if needed.”
86. Secretary Paulson regarded his role in the meetings with Mudd and Syron as follows: “My role in these meetings was always to say, ‘This is going to happen. This is about the United States of America, our capital markets, our economy. Be part of the solution. It won’t be good for anyone if you don’t consent. I need to know this evening. Your lawyers can spend a lot of time – then we won’t get there, and then it will be involuntary.’”
87. Further, HERA immunized the Companies’ directors against liability for consenting to the appointment of the FHFA as conservator. See 12 U.S.C. § 4617(a)(6). The Government played on this immunity to persuade the Companies’ management and directors to accede to the Government’s demands, despite the absence of any legal authority to impose the conservatorships, at the expense of the Companies’ preferred and common shareholders.
88. Notably, when asked how he allegedly persuaded the boards of Fannie Mae and Freddie Mac to consent to the conservatorships, Secretary Paulson stated that the boards were made by him, Director Lockhart, and Chairman Bernanke to understand that the decision was not just about the Companies’ needs, rather it “goes beyond their individual situations” because “this is about our capital markets, this is about the economy.”
89. In short, the Government – through threats, misrepresentations, and undue pressure – coerced the Companies’ directors to breach their fiduciary duties to their shareholders so that the Government could take control of the Companies and further its public policy goals. Any purported consent given by any of the Companies’ directors to the imposition of the conservatorships was thus improperly given and invalid.
90. Thus, none of twelve grounds for appointing the FHFA as conservator set forth in section 4617(a)(3)(I) was satisfied with respect to either Fannie Mae or Freddie Mac.
3. None of the Criteria Under HERA for Appointing a Conservator Was Properly Satisfied
91. In total, HERA provided for 12 circumstances in which the FHFA could place the Companies into receivership or conservatorship:
A. if a Company’s assets were insufficient to meet its obligations;
B. if a Company’s assets or earnings were substantially dissipated due to unlawful conduct or unsafe or unsound practices;
C. if a Company was in an unsafe or unsound condition to transact business;
D. if a Company willfully violated a cease and desist order;
E. if a Company concealed books and records from the FHFA Director;
F. if a Company became unlikely to be able to pay its obligations or meet the demands of its creditors in the normal course of business;
G. if a Company incurred, or became likely to incur, losses that would deplete substantially all of its capital with no reasonable prospect of becoming adequately capitalized;
H. if a Company violated the law;
I. if a Company’s board of directors or shareholders passed a resolution consenting to a conservatorship or receivership;
J. if a Company became undercapitalized or significantly undercapitalized, as defined by the governing statute, and could not or would not take corrective measures;
K. if a Company became critically undercapitalized, as defined by the governing statute; or
L. if a Company engaged in money laundering.
See 12 U.S.C. § 4617(a)(3)(A)-(L).
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F. The Stock Agreements Improperly Appropriated the Private Property of the Companies’ Preferred and Common Shareholders
1. The Original Stock Agreements
154. At the same time that the Companies were placed in conservatorship, the Director of the FHFA, acting as conservator, and the Secretary of the Treasury entered into the Stock Agreements dated September 7, 2008. The Stock Agreements provided that, in exchange for making available to each company a $100 billion line of credit – which neither company needed or asked for – the Treasury would receive (a) $1 billion in senior preferred stock “for free,” (b) additional senior preferred stock equal to the amount of any credit the Treasury extended to the Companies, (c) preferential rights for the Treasury’s senior preferred stock that placed it ahead of all other stockholders, and (d) warrants to acquire 79.9% of each company’s common stock for one-thousandth of one cent per share, which translated to a total exercise price of approximately $8,000 for each company. The Stock Agreements were amended in May 2009 to increase the line of credit to $200 billion for each company, and in December 2009 to make the maximum line of credit based on a formula designed to cover quarterly deficits in net worth from 2010 to 2012, and then for future years subject to a cap.
155. The Treasury claimed that its authority to enter into the Stock Agreements derived from Section 304(g) of Fannie Mae’s charter and Section 306(l) of Freddie Mac’s charter, substantially identical provisions added when Congress enacted HERA. However, HERA did not provide the Treasury with unilateral authority to enter into the Stock Agreements. The amended charters allowed the Treasury to purchase any obligations and other securities issued by the Companies “on such terms and conditions as the Secretary may determine and in such amounts as the Secretary may determine” if the Treasury determined doing so was necessary (i) to provide stability to the financial markets; (ii) to prevent disruptions in the availability of mortgage finance; and (iii) to protect the taxpayers. And, in order to do so, the Treasury had to obtain the consent of the Companies. As set in paragraphs 81-90 and 137-40, supra, the Treasury never obtained the Companies’ consent; instead, the conservatorships and the Stock Agreements were improperly forced upon them.
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159. The terms of the Stock Agreements clearly suggest that the intent of these agreements was to eventually put the Companies out of business. When the conservatorships were first imposed, the FHFA stated that they were not intended to be permanent. Acting Director DeMarco said that “[t]he statutory purpose of conservatorship is to preserve and conserve each Company’s assets and put them in a sound and solvent condition. The goals of conservatorship are to help restore confidence in the companies, enhance their capacity to fulfill their mission, and mitigate the systemic risk that contributed directly to instability in financial markets.” Despite these assurances, the Stock Agreements not only failed to consider how the Companies could return to private corporations, they ensured that the Companies could never again do so. Instead, the Government used the Stock Agreements to ensure that the Companies’ sole continuing purpose would be to pay the Treasury for the “right” to remove toxic assets from the books of other financial institutions by transferring them to the Companies’ books using capital provided by the Treasury. As Secretary Paulson explained on November 18, 2011, “we really need to use Fannie Mae and Freddie Mac to do anything that’s reasonable to provide financial support to the mortgage market.”
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B. The Government’s Conduct During the Conservatorship Dissipated the Assets of the Companies and Constituted a Taking
182. As described in Section V(E)(1)(c), supra, the Government pursued broad public policy goals that caused it to substantially harm the value of the Companies under its control, rather than operating the conservatorships in a manner designed to preserve and protect the value of the Companies as is the intended statutory purpose of the conservator.
183. Specifically, rather than preserving and protecting the value of the Companies, the Government used them as a vehicle to restore investor confidence in the mortgage market by providing a mechanism for other financial institutions to unload their bad mortgage debts. That Fannie Mae and Freddie Mac were seized purely to accomplish public policy goals could not be clearer. According to statements in its Annual Reports since the imposition of its conservatorship, Fannie Mae alone “provided approximately $2.3 trillion in liquidity to the mortgage market in 2009 through 2011 through [its] purchases and guarantees of loans, which enabled homeowners to refinance 6.6 million mortgages, 1.9 million households to purchase a home, and financing for over 1.1 million units of multifamily housing.”
184. These purchases of toxic debt were financed through the expensive draws from the Treasury as defined in the Stock Agreements. Through this strategy, the Government was able to get the toxic debt off the banks’ balance sheets (thus supporting the economy by restoring investor confidence in the banks) and provide additional liquidity to the mortgage market at a time when other institutions were fleeing this industry, while forcing the Companies to finance the Government’s objectives. Not surprisingly, the Government-orchestrated acquisition of these toxic mortgages and mortgage-related securities by the Companies, through a usurious financing arrangement it forced upon them, caused a significant loss of economic value to their shareholders.
185. The damage to Fannie Mae and Freddie Mac and, in turn, to their shareholders’ interests was further exacerbated by the otherwise unwarranted accounting changes forced upon the Companies by the Government. Specifically, by forcing the Companies to dramatically increase their loan loss reserves, in large part to account for the assumption of additional toxic assets instructed by the Government, and write down the value of their deferred tax assets, the Government squandered the value of the Companies and, accordingly, the equity interests held by their shareholders, creating the false perception at the time that they were less adequately capitalized than was actually the case and thereby necessitating further draws from the Treasury.
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186. In short, the Government effectively nationalized the Companies to use them to facilitate its own public policy objectives, which benefited the general public by supporting the economy during a very difficult time, but destroyed shareholder value. As noted in Fannie Mae’s Form 10-K for the year ending December 31, 2011, issued under FHFA control, “[b]ecause we are in conservatorship, our common shareholders currently do not have the ability to elect directors or to vote on other matters. The conservator eliminated common and preferred stock dividends (other than dividends on the senior preferred stock issued to Treasury) during the conservatorship, and we are no longer managed with a strategy to maximize shareholder returns.” (Emphasis added.0 Similarly, Freddie Mac disclosed in its 2011 Form 10-K that “[b]ecause we are in conservatorship, we are no longer managed with a strategy to maximize stockholder returns.”
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VIII. CLAIMS FOR RELIEF
COUNT ONE
(ILLEGAL TAKING AND/OR EXACTION
IN VIOLATION OF THE UNITED STATES CONSTITUTION)
200. Plaintiffs incorporate by reference and reallege each and every allegation of the preceding paragraphs, as though fully set forth herein.
201. In imposing the unprecedented conservatorships over the Companies and in taking and/or illegally exacting more than 1 billion shares of the common stock and approximately 597 million shares of the preferred stock of Fannie Mae (with a redemption value of approximately $21 billion) and approximately 650 million shares of the common stock and approximately 464.1 million shares of the preferred stock of Freddie Mac (with a redemption value of approximately $14 billion) without just compensation, the Government destroyed the rights and value of the property interests tied to the common and preferred stock of the Companies held by Plaintiffs and the Classes, nullified their reasonable, investment-backed expectations, and violated the fundamental principles of the Due Process and Takings Clauses of the Constitution.
202. In taking private property, the Government is required to adhere to due process of law and to respect the legal rights of affected parties.
203. The Government violated the statutory, contractual, and Constitutional rights of Plaintiffs and the Classes in taking and/or illegally exacting virtually all the value of the above referenced common and preferred shares of both Fannie Mae and Freddie Mac that they owned, without providing just compensation.
204. HERA did not authorize the Government to assert a conservatorship over Fannie Mae or Freddie Mac at the time the conservatorships were imposed.
205. To the extent HERA authorized the conservatorships in the first instance, the Government exceeded its authority as conservator under HERA by forcing the Companies to assume large amounts of additional subprime assets and guarantee additional toxic assets, while capping the amount of guarantee fees they could charge and forcing them to execute the Stock Agreements and the amendments thereto which created a predatory lending arrangement with the Treasury and siphoned off billions of dollars from the Companies and ultimately transferred virtually all of the value of the Companies’ equity from the common and preferred shareholders to the Government, as their shares were delisted and shareholder meetings were abolished.
206. As described herein, the Government destroyed the value of the stock held by Plaintiffs and members of the Classes, nullified their reasonable, investment-backed expectations, and violated the fundamental principles of the Due Process and Takings Clauses of the Constitution. The Government took and/or exacted the property and property rights of the Companies’ shareholders to improperly and impermissibly benefit private parties and interests in at least the following manners:
a. By causing the Companies to assume a significantly increased level of risky mortgages and mortgage-related assets prior to the conservatorship, thus leading to greatly diminished net worth and capital of the Companies;
b. By improperly imposing the Stock Agreements and conservatorships over the Companies;
c. By forcing the Companies to assume the toxic assets of other financial institutions following the conservatorships, thus engaging in a backdoor bailout of those other financial institutions and lowering the equity value of the Companies; and
d. By improperly taking all of the net worth of the Companies.
207. Even when the Government takes or illegally exacts private property to serve public purposes, the Constitution requires the payment of “just compensation.”
208. The Government did not pay just compensation to Fannie Mae common and preferred stock shareholders or Freddie Mac common and preferred stock shareholders for the taking and/or illegal exaction of the value of their equity interests in the Companies. The Government’s actions required it to pay just compensation to the Plaintiffs and members of the Classes under the Takings Clause of the Constitution.
209. The Due Process and Takings Clauses of the Constitution protect shareholders from having their property and property rights taken and/or illegally exacted without just compensation. As a direct result of the Government’s violations of the Constitution, Plaintiffs and the Classes were injured, including monetary damage, as a direct and proximate cause of the Government’s taking and/or illegal exaction of billions of dollars of property interests associated with their holdings of Fannie Mae common and preferred stock and Freddie Mac common and preferred stock. The Government is liable to Plaintiffs and the Classes for the injury it caused.
PRAYER FOR RELIEF
WHEREFORE Plaintiffs Washington Federal, Michael McCredy Baker, and City of Austin Police Retirement System demand judgment in their favor and in favor of the Classes against Defendant, the United States of America, as follows:
A. Determining that this action may be maintained as a class action;
B. Certifying Classes of, (A) for Fannie Mae (1) all persons or entities who held shares of Fannie Mae common stock on or before September 5, 2008, and (2) all persons or entities who held shares of Fannie Mae preferred stock on or before September 5, 2008; and, (B) for Freddie Mac (1) all persons or entities who held shares of Freddie Mac common stock on or before September 5, 2008, and (2) all persons or entities who held shares of Freddie Mac preferred stock on or before September 5, 2008.
C. Finding that Plaintiffs have met the requirements of a class representative and may maintain this action as representatives of the Classes;
D. Finding that the Defendant has taken and/or illegally exacted Plaintiffs’ and the Classes private property in violation of the Due Process and Takings Clauses of the Constitution;
E. Determining and awarding Plaintiffs and the Classes damages suffered by them by virtue of the Defendant’s taking and/or illegal exaction in the amount of $41 billion, or some other amount to be determined at trial;
F. Prejudgment and post-judgment interest, together with any and all further costs, disbursements and reasonable attorneys’ and experts’ fees;
G. Granting all other relief as this Court may deem just and appropriate.
DATED: June 7, 2013
By
Steve W. Berman
Attorney of Record
HAGENS BERMAN SOBOL SHAPIRO LLP
1918 Eighth Avenue, Suite 3300
Seattle, WA 98101
Telephone: (206) 623-7292
Facsimile: (206) 623-0594
E-mail: steve@hbsslaw.com