The U.S. Court for the Eastern District of Virginia on Tuesday dismissed a lawsuit filed by a Freddie Mac shareholder earlier this year who was seeking to inspect the GSE’s records.
CapWealth Advisors CEO Tim Pagliara, a GSE shareholder and founder of GSE shareholder advocacy group InvestorsUnite, filed the lawsuit in the Virginia court in March 2016 seeking to inspect Freddie Mac’s corporate records related to the sweeping of all GSE profits into Treasury, aka the Net Worth Sweep.
Pagliara filed his lawsuits in the state courts after written requests to inspect corporate records, which are available to shareholders under state law in both Delaware and Virginia, were denied. Pagliara’s complaints pointed out that the Treasury’s publicly stated goal of the Net Worth Sweep is to ensure that “every dollar of earnings each firm generates is used to benefit taxpayers,” which Pagliara claims ignores shareholder rights and is underpinning the conservatorship that requires Fannie Mae’s and Freddie Mac’s assets to be “conserved.”
According to the Wall Street Journal, the Eastern Court in Virginia ruled that GSE shareholders lost the right to inspect Fannie Mae and Freddie Mac records due to a provision in the Housing and Economic Recovery Act of 2008 which created the Federal Housing Finance Agency and authorized the Agency to act as the GSEs’ conservator. The provision states that when FHFA became conservator of the GSEs, the FHFA succeeded the rights, titles, powers, and privileges of all stockholders.
“Because Pagliara no longer possesses the right to inspect, the Court must dismiss this Complaint,” the court said, according to the Journal.
A Freddie Mac spokesperson said they do not comment on ongoing litigation.
Pagliara said in an email to MReport, "We respectfully disagree with the judge's ruling. HERA makes clear that conservatorship does not mean nationalization, and shareholders have rights. Transparency and public scrutiny are important to ensuring accountability in an eight year conservatorship."
At the same time Pagliara filed the suit in Virginia, he also filed a suit in a Delaware state court seeking to inspect Fannie Mae’s records. The outcome of that suit has yet to be decided.
Fannie Mae and Freddie Mac received a combined $187.5 billion bailout from taxpayers in 2008 to remain afloat. In September 2008, they were taken into conservatorship by the Federal Housing Finance Agency (FHFA). In 2012, the GSEs returned to profitability but the terms of the bailout agreement were amended to require all of their profits to be swept into Treasury every quarter instead of the original agreement of 10 percent annually.
The Net Worth Sweep has resulted in several lawsuits from GSE investors, notably by Fairholme Funds and Pershing Square Capital Management. Pagliara’s lawsuits, however, were the first to assert a shareholder’s right to inspect corporate documents under state corporate laws in which Fannie Mae and Freddie Mac each operate. The court's ruling in the Pagliara case is viewed as a setback for GSE shareholders who have filed lawsuits over the Net Worth Sweep.