Investor Voluntarily Drops One of Two Lawsuits Over GSE Profits

Pershing Square Capital Management CEO William A. Ackman filed a voluntary notice of dismissal in the U.S. District Court for one of his company’s lawsuits against the federal government over the sweeping of GSE profits into the U.S. Department of Treasury.
Ackman filed two lawsuits against the government on consecutive days in mid-August over the handling of Fannie Mae and Freddie Mac profits. Pershing Square is the largest non-government shareholder in GSE stock with about 170 million shares and close to $700 million in both GSEs combined. Pershing’s stake in the two GSEs is about 10 percent.
Pershing Square’s first lawsuit, filed in the Federal Court of Claims, alleged that the diverting of GSE profits into Treasury, a practice started in 2012, equates to taking private property for public use without “just compensation,” a practice forbidden by the Fifth Amendment of the U.S. Constitution. The lawsuit alleged that the diversion of GSE profits created a “windfall” for the government while shortchanging GSE shareholders. This suit is still active.
The second lawsuit, filed in the U.S. District Court, claimed that Pershing Square was denied fundamental shareholder rights and that the Federal Housing Finance Agency (FHFA), conservator for both GSEs since 2008, refused to allow Pershing Squire to inspect books and records despite written demands made by Pershing to the FHFA board of directors to do so. The second complaint also called for the GSE profits being diverted to Treasury, which amount to billions of dollars, should be divided among the GSE’s common shareholders. This is the suit that Ackman voluntarily dismissed.
Two similar lawsuits filed in 2013 by investors Fairholme Funds and Perry Capital were dismissed by a judge in late September, with the judge ruling that the sweeping of GSE profits into Treasury was legal under the Housing and Economic Recovery Act. Both Fairholme and Perry have appealed the judge’s decision. Analysts suggest that Ackman anticipated a similar ruling on his lawsuits and that he dropped the suit in order to avoid a lengthy appeals process.
In mid-October, both Pershing Square and Fairholme announced they had shored up their stock in Fannie Mae and Freddie Mac.
The federal government seized control of Fannie Mae and Freddie Mac in September 2008 at the height of the nation’s financial crisis, after which Treasury provided $188 billion to bail out the companies. Fannie Mae and Freddie Mac have since become profitable and have returned $218.7 billion in dividends to taxpayers. The Obama administration wants to phase out the two GSEs, which have been in conservatorship since the government takeover six years ago.

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