Back in February, the D.C. Circuit panel gave the U.S. Department of the Treasury and Federal Housing Finance Agency a win over the allocation of profits from Freddie Mac and Fannie Mae to the Treasury. This affirmed a lower court’s ruling that actions taken under the FHFA’s conservatorship of the GSEs cannot be challenged in court, however Fannie and Freddie shareholders sued the two for agreeing to the deal. They believe the profit sweep violates the reasonable expectations that they had when they originally purchased stock in the GSEs. Though a federal judge threw out most of the investors’ claims, another group of plaintiffs requested the full D.C. Circuit rehear the decision. Friday, the FHFA and Treasury urged the D.C. Circuit to not modify its ruling.
The FHFA said the investors’ argument suggests that stock is a fixed contract pegged to the moment of its issuance, which conflicts with what the FHFA considered “well-established” principles of law viewing stock as an evolving contract that renews itself every time it’s traded.
“When an investor buys stock in the secondary market, it acquires the contractual rights and obligations as they exist at the time of purchase,” Law360 reported the FHFA said in a response filed on behalf of itself and Fannie and Freddie, which it oversees as conservator.
Using an example of a 2017 investor who purchased stock that was issued in 2000, the FHFA said the investors’ shareholder rights “are of course determined” by the law, corporate bylaws and charter that are in effect in 2017, not what may have been in place in 2000. According to Law360, having it this way is necessary to prevent investors from being able to “buy” lawsuits by purchasing stock and suing the issuer retroactively for alleged harms they were already aware of.
The treasury agreed that the investors’ expectations at the time of purchase were what mattered. If there was a possibility at the time of purchase that the government might take actions that would impair their investments, they should not be able to recover damages for “regulatory takings.”
“It is common sense that one who buys with knowledge of a restraint assumes the risk of economic loss,” Law360 reported the Treasury said, citing Federal Circuit precedent. “In such a case, the owner presumably paid a discounted price for the property. Compensating him for a ‘taking’ would confer a windfall.”
According to Law360, the panel’s order could cut out of the proposed class those investors who bought their shares after Congress passed the Housing and Economic Recovery Act of 2008, which the investors have argued it should not have done. That law allowed the federal government to bail Fannie and Freddie out; the value of the investors’ public stock dropped to near zero in the aftermath, and shares were swept up by hedge funds and other investors who took the bet that their value would be restored.