A federal jury has ruled in favor of Fannie Mae and Freddie Mac shareholders
On Monday, a jury found that the Federal Housing Finance Agency improperly amended a stock repurchase agreement for shares of Fannie and Freddie in 2012 as part of the government's conservatorship of the enterprises. The arrangement enabled the Treasury Department to
The jury awarded the shareholders more than $600 million of damages.
Plaintiffs in the case claimed that the amendment violated the original terms of the conservatorship set in 2008, in which Treasury was supposed to receive a 10% dividend and 80% of the common stock in exchange for backstopping the enterprises during the global financial crisis. Shareholders say the government
The jury awarded $299.4 million to shareholders of Fannie Mae junior preferred stock, $281.8 million to holders of Freddie Mac junior preferred stock and $31.2 million to holders of Freddie Mac common stock.
The damages represent just a fraction of the private sector investment in the enterprises, according to prior statements by lawyers representing shareholders. Investors at one point held $33 billion of Fannie and Freddie stock, including $20 billion invested during the crisis years of 2007 and 2008.
In a statement released Tuesday, Bernstein Litowitz Berger & Grossmann, one of the law firms representing shareholders in the suit, called the decision a "unique class-action verdict against the federal government," noting that it took nine years for the case to finally have its day in court last year.
"We are thankful for the jury's tremendous public service and grateful for their verdict," trial lawyer Robert Kravetz and partner Adam Wierzbowski said in the statement. "This case demonstrated the skill and tenacity of our team to take this complex case through two trials and to achieve a positive outcome for our committed clients, whose trust and support we greatly appreciate."
The verdict comes less than a year after the mistrial was declared in the case. Eight jurors in U.S. District Court in Washington, D.C., could not reach a consensus on the issue last fall, resulting in a hung jury.
In a statement issued Monday evening, the FHFA said it was weighing its next steps in the matter.
"FHFA, Fannie Mae and Freddie Mac are disappointed in the verdict," an agency spokesman wrote in an email to American Banker. "FHFA will review the verdict and determine post-trial options."
But a move to challenge the verdict would not be a risk-free proposition for the FHFA, Tim Pagliara, chief investment officer of the financial advisory firm CapWealth, said.
"If the government appeals the verdict, it could backfire and the $612 million verdict could balloon to over $30 billion because the government could be forced to pay 100% of the preferred stock that they breached the contract on," Pagliara, whose clients are GSE shareholders, said. "There is controversy surrounding the damage model that the jury was allowed to consider in the trial that was just completed."
The litigation has gone through various iterations over the years. In 2017, a federal appeals court ruled that certain investors — largely hedge funds — that purchased shares of the government-sponsored enterprises after the 2012 amendment in hopes of recouping some of their fallen values
Conservatorship of Fannie and Freddie remains a contentious issue for some in the housing finance space, with opponents saying it has
During the Trump administration, then FHFA Director Mark Calabria made it a priority to bring the government's stewardship of the enterprises to an end and encouraged them to retain more capital.
Current FHFA head Sandra Thompson has said the agency is
