GSE investors that have sued the government over the sweeping of Fannie Mae and Freddie Mac profits into Treasury (aka the “Net Worth Sweep”), which began when the bailout agreement was amended in August 2012, suffered a couple of setbacks in the courts in August and September with the dismissal of two lawsuits.
A federal judge has given them more hope this week, however. A ruling from Judge Margaret Sweeney in the U.S. Court of Federal Claims was unsealed this week that ordered Treasury to release 56 documents related to the sweep that provide more insight as to why the federal government enacted the sweep in the first place.
“It's the result of a very thoughtful and conservative process by a judge that I've come to respect a lot. I think Judge Sweeney has approached this in a very deliberate way that's fair to everybody,” said GSE investor Tim Pagliara, one of the main plaintiffs, in a conversation with MReport. “It's a major step forward to getting to the truth of what happened before the conversvatorship, during the conservatorship, the rationale for the Third Amendment Sweep, and everything that's followed.”
The Net Worth Sweep has promoted nearly two dozen lawsuits from GSE investors who claim the sweep is illegal. Fairholme Funds CEO Bruce Berkowitz, who in 2013 filed one of the suits that is still pending, said in a statement about this week’s ruling that “Judge Sweeney astutely recognized that the government’s attempt to hide thousands of documents is unjustifiable, for the work of our government must withstand public scrutiny.”
Sweeney’s ruling released this week said that Fairholme Funds had an “overwhelming” need for the documents and that the document contained information about the Net Worth Sweep that could not be obtained from any other available source.
In April 2016, Sweeney ordered the unsealing of seven documents related to the Net Worth Sweep that seem to suggest that key government officials (namely the CFO at Fannie Mae at the time, Susan McFarland) knew that the GSEs were on the brink of major profitability in the summer of 2012 right before the bailout agreement was amended to include the Net Worth Sweep.
According to the New York Times, the government had invoked various privileges while previously refusing to release some 12,000 documents related to the sweep. Sweeney examined 56 of the documents that the parties selected as a representation of all of the documents, and gave the government the benefit of the doubt when examining all the documents, according to Pagliara.
The New York Times filed a motion with the U.S. Court of Federal Claims in June 2015 seeking the release of certain documents that contained key testimony from government officials about the Net Worth Sweep, including former FHFA Director Ed DeMarco and former Treasury Senior Official Mario Ugoletti.
According to Fortune, presidential privilege was cited in the government’s decision to withhold four of the 56 documents ordered to be released which were either authored or sent to then-National Economic Council Director Gene Sperling, who in May 2016 was named Hillary Clinton’s top economic advisor. Sperling, who is a former Counselor to Treasury Secretary Timothy Geithner, has been mentioned a possible Treasury Secretary should Clinton win the upcoming presidential election.
The Department of Justice declined to comment when reached by email.
Saikrishna Bangalore Prakash, James Monroe Distinguished Professor of Law and Horace W. Goldsmith Research Professor at the University of Virginia School of Law, earlier this year published a white paper on the government’s withholding of documents related to the Net Worth Sweep.
“Under federal law, the plaintiffs have a right to documents and testimony that help prove their taking case,” Prakash said. “The Court of Claims ought to vindicate that right. More broadly, the public has a right to understand why its government chose to sweep up the profits of Fannie and Freddie and whether the executive branch has been honest with the American people about its motivations.”