Fannie and Freddie Shares Still Look Unappealing Fairholme’s latest legal efforts unlikely to shift case against mortgage giants Fairholme Funds has a large investment in the preferred shares of Fannie Mae and Freddie Mac. ENLARGE Fairholme Funds has a large investment in the preferred shares of Fannie Mae and Freddie Mac. PHOTO: MANUEL BALCE CENETA/ASSOCIATED PRESS By JOHN CARNEY Aug. 21, 2015 4:31 p.m. ET 0 COMMENTS Fairholme Funds has stepped up efforts to paint the U.S. government’s treatment of Fannie Mae and Freddie Mac as illegal. But scoring even a small victory looks unlikely.

Fairholme has a large investment in the preferred shares of the two mortgage companies. These, along with the common stock, fell sharply last year when a federal district court judge dismissed Fairholme’s lawsuit claiming the government acted unlawfully in 2012 when it changed the terms of its support for Fannie and Freddie so that they now turn over nearly all of their profits to the U.S. Treasury.

In a recent note to shareholders, Fairholme touted its efforts to get a federal appeals court in Washington, D.C., to allow it to submit materials uncovered in a lawsuit before a different federal court, the U.S. Court of Claims, where investors have been arguing that the profit sweep requires compensation under the U.S. constitution.

ENLARGE Fairholme claims the documents reveal the government improperly concealed information from the judge who issued the dismissal. It also says they undermine the notion that the 2012 changes were necessary because the companies were in danger of depleting their government support because they could not afford the fixed 10% dividend.

But those arguments may not matter legally. The district court’s dismissal assumed that Fairholme’s allegations about the government’s motivation were true. Yet it ruled that even so, Fairholme’s lawsuit had to be dismissed because the law authorizing Fannie’s and Freddie’s rescue barred courts from second-guessing the decisions of the conservator, the Federal Housing Finance Agency. The government’s reasons were irrelevant, the court said.

So John, if the government's reasons were irrelevant, why were they lying?

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So it seems very likely that the appeals court will refuse to consider the new materials, insisting instead that the appeal focus on purely legal questions, not factual or historical ones. If so, the shares might take another tumble.