NEW YORK ( TheStreet) -- Hedge fund Perry Capital has brought out the big legal guns in a challenge to the Obama administration's 2012 amendment to the Treasury's conservatorship of Fannie Mae ( FNMA) and Freddie Mac ( FMCC). Perry has hired Gibson Dunn and Crutcher's Ted Olson, U.S. Solicitor General from 2001 to 2004 and possibly the highest-profile conservative litigator in the country. A practiced expert at invalidating U.S. regulations, Olson has argued 59 cases in the Supreme Court, according to his bio on Gibson Dunn's Web site, including the two cases that decided the disputed presidential election of 2000 in favor of George W. Bush. Working alongside Perry and Gibson Dunn is Hamilton Place Strategies, a public relations firm led by former George W. Bush administration staff. In its lawsuit, filed July 7, Perry argues the 2012 amendment, which sweeps all the profits of Fannie and Freddie into the Treasury, violates the terms of the 2008 conservatorship of the Government Sponsored Enterprises (GSEs). Under the 2008 deal, the Treasury acquired preferred shares worth $1 billion in the GSEs, paying 10% annual dividends. The Treasury also got warrants to buy 80% of the outstanding common stock and agreed to lend up to $100 billion to the GSEs, a total that was later raised to $200 billion. Hedge funds began buying preferred shares of Fannie and Freddie prior to the 2012 amendment on the theory that the GSEs would become profitable enough to repay their debt to the Treasury with money left over to restore the dividends. In its lawsuit, Perry Capital disclosed it began buying GSE preferred shares in 2010. Other big name investors who have bought Fannie and Freddie preferred shares include Fairholme Funds and, reportedly, Paulson & Co. and The Carlyle Group's ( CG) Claren Road Asset Management. But the 2012 amendment effectively changed the rules in the middle of the game, Perry's lawsuit argues. By placing Fannie and Freddie under conservatorship in 2008, their regulator, the Federal Housing Finance Authority, caused private investors to "reasonably
expect that the principles of conservatorship -- not receivership -- would guide the government's actions," states a press release from Gibson Dunn which summarizes the complaint. "As conservator, the statute requires FHFA to preserve the assets of Fannie Mae and Freddie Mac, not liquidate them. When changing the rules governing Treasury's investment, Treasury and the FHFA announced that they were beginning the process of winding down the companies -- the exact opposite of what the statute explicitly requires, and depriving private investors of their rights."
A Treasury spokesman declined to comment. Common shares of Fannie and Freddie were up about 2% in late morning trading Monday, while the most liquid preferred shares, which have been favored by institutional investors, were logging more substantial gains. Fannie Mae Series S ( FNMAS) preferred shares were up 5.22% to $5.24 and Freddie Mac Series Z ( FMCKJ) shares were up 7% to $5.35. The lawsuit is at least the second brought by shareholders of the government sponsored enterprises against the government in recent weeks. -- Written by Dan Freed in New York. Follow @dan_freed