On May 28, 2015, three Fannie Mae and Freddie Mac (the “Companies”) shareholders filed a complaint in the United States District Court for the Northern District of Iowa against the Federal Housing Finance Agency (“FHFA”), its director, and the U.S. Treasury Department in connection with FHFA’s agreement to pay all of the Companies’ profits to the Treasury on a quarterly basis (the “Net Worth Sweep”).  According to plaintiffs, the Net Worth Sweep would be all encompassing depriving the private shareholders of their profits forever.

The action arises out of a September 2008 preferred stock purchase agreement between the Treasury Department and FHFA when the Treasury had temporary  authority under the Housing and Economic Recovery Act of 2008 (“HERA”) to purchase the Companies’ shares.  In the agreement, the Treasury agreed to provide up to $100 billion to each Company to draw upon in quarters where their liabilities exceeded their assets.  In return, the Treasury received, from each Company, one million shares of government stock, warrants to purchase 79.9% of common stock, and $1 billion in initial liquidation preferences, among other things.  The agreements also provided that the Treasury’s shares would be treated as redeemed once the Companies pay down the liquidation preferences.  By December 2009 – when the Treasury’s authority under  HERA expired – the agencies amended the agreements to allow the Treasury to commit at least $200 billion to each Company.

Plaintiffs alleged that between 2008 and 2012, the Companies drew a total of $187 billion from the Treasury to cover large non-cash losses, and increased the liquidation preferences held by the Treasury to $117 billion for Fannie Mae and $72 billion for Freddie Mac.  But by August 2012, the economy recovered and the Companies became profitable again, thus allowing them to redeem the Treasury’s shares and exit conservatorship.  However, days after the Companies announced their profitability, FHFA and the Treasury amended the 2008 agreement to enter into the Net Worth Sweep, through which FHFA would submit all of the Companies’ profits to the Treasury and would pay the Treasury a quarterly dividend equal to the Companies’ net worth.  These dividends would not, however, pay down the Companies’ liquidation preferences or otherwise redeem the Treasury’s government shares.  The plaintiffs contend that the Net Worth Sweep – coupled with statements made by FHFA and the Treasury – reflect the agencies’ intent to nationalize the Companies, divest their private shareholders of the value of their stock, and hinder the Companies’ exit out of conservatorship.

According to plaintiffs, FHFA violated HERA by failing to take actions that place the Companies in a “sound and solvent condition.”  They further contend that FHFA breached its contract and implied covenant of good faith and fair dealing with the Companies’ private shareholders by divesting the shareholders of their dividends and wrongfully prioritizing the Treasury’s government shares over those of private, preferred shareholders.  The plaintiffs allege that the Treasury violated HERA and the Administrative Procedure Act and breached its fiduciary duties as the Companies’ dominant shareholder.  The plaintiffs seek damages, the vacation of the Net Worth Sweep, and a declaration that the Net Worth Sweep violates HERA, among other things.