Fannie, Freddie Investors Win Class Cert. For Stock Profit Suit
Law360 (December 8, 2021, 8:52 PM EST) — A District of Columbia federal judge has given his blessing to three classes of Fannie Mae and Freddie Mac stockholders accusing the government of wrongfully tweaking stock purchasing agreements, divvying the classes up based upon type of stock at issue.
U.S. District Judge Royce C. Lamberth on Tuesday certified three classes of current holders of junior preferred and common stock in Fannie Mae and Freddie, or their successors in interest, as of the date of certification and before any final judgment or settlement. The classes have the potential to include thousands of investors, according to a pair of orders granting the certification.
“The court finds that Rule 23(a)’s requirements — numerosity, commonality, typicality and adequacy of representation — are satisfied here,” the judge said. “So too is Rule 23(a)’s implicit requirement that the proposed classes be definite and ascertainable.”
The shareholders allege that they could not have foreseen that the government-sponsored entities, or GSEs, would have amended the terms of their federal bailout to give the U.S. Treasury the right from 2012 onward to “sweep up” excess profits and leave other investors with nothing.
The shareholders asked for class certification in August, and that motion has since been narrowed. The request was uncontested by the defendants, Judge Lamberth said in Tuesday’s order.
Judge Lamberth noted that there are millions of shares of junior preferred stock and common stock outstanding, held by thousands of putative class members across the globe. On top of that, the alleged injuries, which include lost dividends and liquidation preference, are also common to the class members on a per-share basis, he said. And the members’ claims invoke a common legal theory, per the order.
“While each series of junior preferred stock has its own contractual dividend rate and liquidation preference value, the certificates for all series of junior preferred stock entitle their holders to dividends and liquidation rights in the same manner using identical or substantially similar language,” Judge Lamberth said.
The judge also appointed plaintiffs Joseph Cacciapalle, Barry P. Borodkin, Michelle M. Miller and Timothy J. Cassell as class representatives. Boies Schiller Flexner LLP, Kessler Topaz Meltzer & Check LLP, Grant & Eisenhofer PA and Bernstein Litowitz Berger & Grossmann LLP will serve as class counsel, according to the order.
Judge Lamberth ordered the parties to meet and discuss how class members should be notified and gave them 45 days to submit a plan to the court.
The shareholder dispute has dragged on for years. Judge Lamberth initially threw out the shareholder claims, but in 2017, the D.C. Circuit held that the judge had applied the wrong standard to the breach-of-covenant claims brought by a class of Fannie and Freddie investors, along with institutional investors including Fairholme Funds Inc. and Arrowood Indemnity Co. that filed their own lawsuits.
In 2018, Judge Lamberth allowed the shareholders’ claims for breach of the covenant of good faith and fair dealing to advance. He rejected arguments from the Federal Housing Finance Agency, which took Fannie and Freddie into conservatorship in 2008, that an emergency bill passed by Congress earlier that year called the Housing and Economic Recovery Act gave it sweeping powers to fund and manage the entities without fear of lawsuits.
“Defendants cannot simply say that since HERA permits the conservator to act in its own best interests, the FHFA can do whatever it wants and plaintiffs could not expect otherwise,” the judge wrote at the time. “The question is whether defendants exercised their discretion arbitrarily or unreasonably in a way that frustrated plaintiffs’ expectations under the contract. Plaintiffs plausibly allege that they have.”
Counsel for the parties didn’t immediately return requests for comment late Wednesday.
The classes are represented by Boies Schiller Flexner LLP, Kessler Topaz Meltzer & Check LLP, Grant & Eisenhofer PA and Bernstein Litowitz Berger & Grossmann LLP.
The Federal Housing Finance Agency is represented by Asim Varma, Howard N. Cayne and David B. Bergman of Arnold & Porter.
The Federal Home Loan Mortgage Corp. is represented by Michael J. Ciatti of King & Spalding LLP.
The Federal National Mortgage Association is represented by Meaghan VerGow of O’Melveny & Myers LLP.
The case is In re: Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations, case number 1:13-mc-01288, in the U.S. District Court for the District of Columbia.