NEW YORK (TheStreet) -- Pershing Square Capital Management and three other common shareholders in Fannie Mae (FNMA) and Freddie Mac (FMCC) went public with their lawsuit against the U.S. government and the two government sponsored enterprises, or GSEs, late Thursday, arguing the government unlawfully wiped out the value of their shares in Fannie and Freddie.
The lawsuit, first reported by TheStreet before Thursday's market close, focuses in part on a controversial 2012 third amendment to the government conservatorship of Fannie and Freddie which started in 2008. Under the 2012 amendment, frequently referred to as a "net worth sweep," the Treasury changed the terms of its $189.4 billion preferred stake in the GSEs so that instead of owing a 10% annual dividend to the U.S. Treasury, the GSEs owed all of their profits, minus capital cushions of $3 billion for each GSE. That left nothing for private shareholders such as the plaintiffs, who claim the sweep was a violation of their fifth amendment rights against the seizure of private property for public use without just compensation.
"The government's brazen conduct in establishing the self-dealing Net Worth Sweep Agreements and requiring the ongoing quarterly sweeps . . . is illegal," the lawsuit states.
A high-profile New York-based hedge fund led by Bill Ackman, Pershing Square is by far the largest non-government owner of common shares of GSEs Fannie Mae and Freddie Mac.
Pershing Square owns about 63.58 million common shares of Freddie Mac worth $256 million, about three times as many as the next-largest shareholder, Bruce Berkowitz’s Fairholme Capital Management, according to the latest filings compiled by Bloomberg as of Friday morning. Pershing owns some 115.57 million shares of Fannie Mae worth about $466 million, nearly six times Fairholme’s stake, which again is the next largest. Like many other large investors in Fannie and Freddie, including Perry Capital and The Blackstone Group (BX), Fairholme has a large preferred stake in Fannie and Freddie, though one that is junior to the Treasury's preferred stake. (Pershing Square's holdings are as of the end of the first quarter, while Fairholme's are as of the end of the second quarter.)
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In addition to its $189.4 billion senior preferred stake, the U.S. Treasury has warrants to own 79.9% of both Fannie and Freddie common shares. It has not yet exercised the warrants, however.
Treasury spokesman Adam Hodge referred questions to the U.S. Department of Justice, where spokeswoman Nicole Navas declined to comment. Email messages to Steve Murray, a spokesman for Pershing Square at Rubenstein Communications and Andrew Wilson, a Fannie Mae spokesman, were not immediately returned. Freddie Mac spokesman Tom Fitzgerald declined to comment.
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Representing the plaintiffs is the law firm Jones Day. An email message to Jim Gauch, a Washington, D.C.-based partner at Jones Day, was not immediately returned.
Some 20 lawsuits have been filed against the Treasury and other U.S. government entities on behalf of Fannie and Freddie shareholders. Among the most prominent plaintiffs is Perry Capital, which is represented by Ted Olson, a former U.S. solicitor general under President George W. Bush and a partner at Gibson Dunn and Crutcher. Olson, who has had regular success litigating against the U.S. government, may be the most prominent Republican plaintiffs' attorney in the U.S. Also representing GSE shareholders against the government in another related suit is David Boies, Chairman of Boies, Schiller & Flexner. Boies may be equal in stature to Olson, though he is a Democrat.
Despite the presence of Ackman and Pershing Square, which acquired their shares after the 2012 sweep, this latest lawsuit attempts to turn the spotlight on individual investors such as Louise Rafter, a 90-year-old widow with 36,000 shares of Fannie Mae, "some of which she and her late husband purchased more than 25 years ago and which she and/or her late husband have held continuously since then," the claim states.
In addition to Rafter and Pershing Square, the other plaintiffs are Josephine and Stephen Rattien, a married couple who live in Washington D.C. and have held 1,000 Fannie Mae shares continuously for 15 years, according to the claim.
"Josephine Rattien is a retired psychiatric social worker and inner-city school counselor. Stephen Rattien is a retired senior science and technology policy manager," the claim states.
The highest profile spokesman for individual investors in Fannie and Freddie has been Ralph Nader, the storied consumer advocate and occasional presidential candidate, but Nader has been quiet of late. Nader is not suing the government. The Treasury Department has tried to characterize the battle as being led by greedy hedge funds.