FNMA and FMCC preferreds. In search of the elusive 10 bagger.

[colinwalt]

Have not read this yet:

 

http://www.glenbradford.com/2015/06/fnma-fanniegate-copy-of-the-maniere-decision-cited-by-our-government/

13-465-0161-A_-_Maniere_v._U.S._31_Fed.Cl._410_1994.pdf

[colinwalt]

One thing that strikes me as fundamentally different with the current case is that we are talking about current shareholders of profitable companies, so if the sweep is deemed illegal, or a taking, then holders who bought after the sweep was put in place should be entitled to profits earned / divdends payable since the day they bought.

 

I suppose the government can still argue that those who bought after the sweep was put in place, bought knowing it had happened and so can't sue, but if those people team up with owners at the time and win then what? Dividends are paid out proactively / pro-rated for the amount of time the shares were owned?

 

Or dividends are only paid out to owners until the time the sweep went into force? But what about profits after the sweep? If the sweep is now deemed illegal - who has rights to those?

 

Again, not a lawyer... but just thought I'd throw this out there...

[Eye4Valu]

It's straight forward in my mind. When I buy a stock, I succeed to a residual ownership interest in the company's liquidation value. It's no different for FNMA/FMCC. The Treasury has the right to 79.9% of the residual interest. A current stockholder is entitled to the rest in accordance with their respective ownership interest. When I buy FNMAS Preferred Stock, I expect the "Liquidation Preference" [Fannie Mae's term from Offering Circular:http://www.fanniemae.com/resources/file/ir/pdf/stock-info/series_s_12062007.pdf] to be "$25 per share plus accrued dividends from the most recent payment date, whether or not the dividend was declared." That is what I'm entitled to via the contractual obligation that is created when I purchase Preferred Stock. Whenever that is. Fannie Mae has breached the terms of its contract with me by not following the Liquidation Preference terms. This breach has occurred due to the actions of the former and present conservator. The conservators' actions contravene the terms of HERA. Give away all future profits while placing the entities in a sound and solvent condition? It's not a conservatorship. Even if you place them in receivership, what happened to my liquidation preference rights, irrespective of when I purchased? I like the breach of contract cause of action a lot here. Awful lot of talk about a taking however. I also believe it is a regulatory taking, but like the breach of contract action best with respect to the Preferred. By the way, this type of cause is properly heard in the U.S. Court of Claims. Don't be surprised when Sweeney decides that jurisdiction is proper. You heard it here first.

 

From the Offering Circular:

"In the event of any dissolution, liquidation or winding up of Fannie Mae, holders of the Preferred Stock will be entitled to receive, out of any assets available for distribution to preferred stockholders, $25 per share plus accrued dividends from the most recent Payment Date (whether or not declared but without accumulation of any undeclared dividends for prior periods)." 

[muscleman]

I am not a lawyer but here is how I view it:

If this Maniere case is so powerful to dismiss the entire suit, then government should have thrown it out last June when it requested Fairholme's stock purchase records. The fact that government didn't file this motion of dismiss until discovery and deposition has gone this far implies this is more likely to be a desperate struggle rather than an effective defense.

[merkhet]

So, I'm at a bit of an impasse here.

 

I am/was a lawyer (since everyone else is putting up this disclosure), and the Maniere case reads to be pretty on point with the situation in the Fairholme case. The only remaining distinguishing point seems to be that in Maniere, the company was made insolvent in an instant, and in Fairholme, the insolvency is "ongoing." I'm unclear as to whether this is enough of a distinguishing point to make a difference. Moreover, if the Takings is ongoing, it also brings up the procedural issue of "ripeness."

 

The flip side of this, of course, is what muscleman pointed out. The interrogatory is dated May 7, 2014, and there was just the one question. If Maniere is the silver bullet, then what was the point of allowing the Fairholme case to get all the way to depositions? Is it incompetence? Am I missing something?

 

I have yet to reconcile these two.

[Jurgis]

I am not a lawyer.

 

Merkhet, the explanation might be as follows. Maniere is not silver bullet for government since it does not resolve the issue. It only changes one set of plaintiffs for another set. Government would rather get this thrown out totally. So that might be the reason why they did not go Maniere up till now.

 

Or incompetence. ;)

 

(BTW, in class action cases against companies the beneficiaries are stockholders through a certain period when damage to stock price occurred. So stockholders who held stock at that particular period benefit and not the ones holding stock later/currently. Since I am not a lawyer, this may be irrelevant here. ;) )

[colinwalt]

Is anyone familiar with Slattery v the US at all? There's some interesting elements that are tangent to this case. Namingly, it tackles the who should be compensated current shareholders or former shareholders.

 

In Summary: The government made a deal with Meritor Bank to hold certain types of goodwill as capital, and then later on seized the bank saying it was inadequately capitalized and went back on its agreement.  They eventually won and held the government to its original word even though it took many years. Later on shareholders at the time of the seizure that had sued saying they should be the ones compensated and the court found that it was "current shareholders" that were proper recipients of receivership surplus.

 

http://law.justia.com/cases/federal/appellate-courts/cafc/12-5041/12-5041-2013-03-21.html

 

Disclaimer: I have no special legal knowledge or anything and may be messing some details up.

 

Another Q... why would Maniere be more relevant than the Meritor case?

[merkhet]

I am not a lawyer.

 

Merkhet, the explanation might be as follows. Maniere is not silver bullet for government since it does not resolve the issue. It only changes one set of plaintiffs for another set. Government would rather get this thrown out totally. So that might be the reason why they did not go Maniere up till now.

 

Or incompetence. ;)

 

(BTW, in class action cases against companies the beneficiaries are stockholders through a certain period when damage to stock price occurred. So stockholders who held stock at that particular period benefit and not the ones holding stock later/currently. Since I am not a lawyer, this may be irrelevant here. ;) )

 

That's a fair point, since it doesn't mean the Government doesn't have to pay out -- it only changes who can bring a case and to whom the Government pays out. However, it still would have solved the issue of preventing Fairholme from continuing discovery and/or conducting depositions. Perhaps the issue here is that this is a delay tactic to push the resolution further into the future -- try to get this particular case thrown out and face the next case when it comes.

 

Another Q... why would Maniere be more relevant than the Meritor case?

 

While the fact pattern in the Meritor case is similar, it is not a Takings case. In the Meritor case, there was statutory language requiring the receivership surplus to be paid out to "shareholders." The argument there was whether shareholders means "previous" or "current" shareholders. The Takings issues, on the other hand, indicate that the people who have standing to bring a Takings claim are the individuals that were owners at the time of the Taking, because they are the ones harmed.

 

Thus, the characterization of the Taking (length, etc.) is now paramount.

[doughishere]

From timhoward717.com

 

 

Peter Chapman was kind enough to locate and email me the Maniere decision which was one of the cases cited in the governments latest motion to dismiss.Peter also had this to say:

 

“The Maniere decision doesn’t quite say what our government wants it to say. Fairholme is not claiming third-party beneficiary status in its lawsuit or anything close to what Mr. Maniere was after. Fairholme complains that our government expropriated its securities and it wants our government to write it — and every other similarly situated preferred and common shareholder — a check for just compensation under the Fifth Amendment for the taking of private property for public use.”

[merkhet]

Chapman is wrong. He is completely ignoring the fact that the Maniere case alleges TWO claims of action -- one based on third-party beneficiary status and one based on Takings.

 

Page 4 of the Maniere case posted above:

 

As already indicated, the plaintiff asserts two claims for relief, a contract claim and a taking claim. For the contract claim, the defendant seeks dismissal pursuant to RCFC 12(b)(1) for lack of jurisdiction, and for the taking claim, the defendant seeks dismissal under RCFC 12(b)(4) for lack of standing. This Court considers these two issues seriatim.

 

Last page of the Maniere case posted above:

 

As the plaintiff presents neither factual nor legal grounds for his alleged third-party beneficiary status as it pertains to his contract claim, this Court finds that the plaintiff has failed to demonstrate a basis of subject matter jurisdiction pursuant to Rule 12(b)(1) of the United States Court of Federal Claims. Therefore, the plaintiff's contract claim is dismissed for lack of jurisdiction. Furthermore, as the plaintiff presents neither factual nor legal support for the allegation of standing with regard to his takings claim, this Court similarly finds that the plaintiff has failed to state a claim on which relief may be granted pursuant to Rule 12(b)(4) of the United States Court of Federal Claims. Therefore, the plaintiff's takings claim must also be dismissed. Accordingly,this Court grants the defendant's motion to dismiss, and the plaintiff's complaint will be dismissed.

[merkhet]

So here's a thought that has been brewing in my head for a while now.

 

Let's say that the judge agrees with this motion -- that means that there's now precedence stating that, if there was a Taking, the Taking happened August 17, 2012. So WR Berkeley files suit, and if they win, that means that the Government would have to pay out some amount to them (and all the prior holders of the companies' equity securities).

 

However, that seems to be a waste because, if you believe that there are no workable substitutes for Fannie & Freddie, then how do you recapitalize the companies? If the government finds a way to recapitalize them, then that's a problem because now you've paid twice. Alternatively, you'd be locking yourself into the idea that private capital will either recapitalize the companies or step in to fill the gap with their own offerings -- both of which, thus far, have been a losing bet.

[Eye4Valu]

The Plaintiff's claims were dismissed for lack of jurisdiction because the Plaintiff lacked privity of contract. Plaintiff held common stock only. One of the holdings from the case follows: "Privity of contract, or some exception to privity requirement such as third-party beneficiary status,  is  required  as  jurisdictional  prerequisite to  contract  suit  in  Court  of  Federal  Claims."

 

I believe the Preferred Stock is a contractual obligation that places its holder in privity with FNMA/FMCC, thus jurisdiction is proper due to the breach of contract.

 

A little knowledge is a dangerous thing. It's important to reiterate the Fairholme motto: "Ignore the crowd."  That applies across the board on this controversial position.

 

 

[Mephistopheles]

I haven't read the Maniere case yet, so perhaps this was addressed in it.

 

If Judge Sweeney agrees with the motion to dismiss, and the taking only applies to shareholders prior to 8/17/12, then what becomes of all the profits since? Are the shareholders on the day of the third amendment entitled to all of the profits since then? That doesn't make sense either. The sweep is either going to be ruled legal or illegal. If it's illegal, then how can it be that only shareholders as of that day are entitled to profits? Profits will continue to roll in, so who do they belong to?

[merkhet]

The Plaintiff's claims were dismissed for lack of jurisdiction because the Plaintiff lacked privity of contract. Plaintiff held common stock only. One of the holdings from the case follows: "Privity of contract, or some exception to privity requirement such as third-party beneficiary status,  is  required  as  jurisdictional  prerequisite to  contract  suit  in  Court  of  Federal  Claims."

 

I believe the Preferred Stock is a contractual obligation that places its holder in privity with FNMA/FMCC, thus jurisdiction is proper due to the breach of contract.

 

A little knowledge is a dangerous thing. It's important to reiterate the Fairholme motto: "Ignore the crowd."  That applies across the board on this controversial position.

 

Eye4Valu, did you read the entire Maniere opinion?

 

Alternatively, in the event that this Court rejects the contract theory as a jurisdictional basis, the plaintiff also claims entitlement to compensation based on a taking theory under the Fifth Amendment of the Constitution. The plaintiff claims that the change of regulation, which prohibited the amortization of goodwill and resulted in the insolvency of First Federal, constituted a taking of the value of the plaintiff's investment.

 

There are two claims -- one for breach of contract, which requires a privity of contract, and one for the Takings Clause violation. Your comment that "a little knowledge is a dangerous thing" is very condescending so maybe, instead, you can help explain to me why the ruling on the Takings claim does not apply here.

 

Alternatively, perhaps this is where the confusion lies. The Sweeney case does not have a breach of contract claim -- if you read the 2013 complaint in the Fairholme case, you'll see that they only ask for relief for a Taking -- the breach of contract claim that you're talking about was dismissed for lack of ripeness in the Lamberth Opinion in September of 2014. (It's currently on appeal.)

[merkhet]

I haven't read the Maniere case yet, so perhaps this was addressed in it.

 

If Judge Sweeney agrees with the motion to dismiss, and the taking only applies to shareholders prior to 8/17/12, then what becomes of all the profits since? Are the shareholders on the day of the third amendment entitled to all of the profits since then? That doesn't make sense either. The sweep is either going to be ruled legal or illegal. If it's illegal, then how can it be that only shareholders as of that day are entitled to profits? Profits will continue to roll in, so who do they belong to?

 

It's not addressed -- they merely say that the plaintiff doesn't have standing. I agree that the logistics would be messy.

[constructive]

It's not addressed -- they merely say that the plaintiff doesn't have standing. I agree that the logistics would be messy.

 

I assume that Sweeney is smart enough to realize that this is a capital structure problem which needs a capital structure solution. Mailing checks out to people wouldn't resolve the underlying problem.

 

If a judge ends up deciding for the plaintiffs, I would expect the most likely decision would be to roll back the net worth sweep, count all dividends in excess of 10% annual as paying down the government preferred, and recalculate the amount of government preferred outstanding.

[merkhet]

It's not addressed -- they merely say that the plaintiff doesn't have standing. I agree that the logistics would be messy.

 

I assume that Sweeney is smart enough to realize that this is a capital structure problem which needs a capital structure solution. Mailing checks out to people wouldn't resolve the underlying problem.

 

If a judge ends up deciding for the plaintiffs, I would expect the most likely decision would be to roll back the net worth sweep, count all dividends in excess of 10% annual as paying down the government preferred, and recalculate the amount of government preferred outstanding.

 

Sweeney does not have the power to do that. Her court is only authorized to hear claims that result in monetary damages.

[Mephistopheles]

I haven't read the Maniere case yet, so perhaps this was addressed in it.

 

If Judge Sweeney agrees with the motion to dismiss, and the taking only applies to shareholders prior to 8/17/12, then what becomes of all the profits since? Are the shareholders on the day of the third amendment entitled to all of the profits since then? That doesn't make sense either. The sweep is either going to be ruled legal or illegal. If it's illegal, then how can it be that only shareholders as of that day are entitled to profits? Profits will continue to roll in, so who do they belong to?

 

It's not addressed -- they merely say that the plaintiff doesn't have standing. I agree that the logistics would be messy.

 

The Starr case involves shareholders as of the time the deal was made, correct? So in that case they are demanding a monetary award that reflects the fair value of AIG as of that time period. I can imagine this applying to this case. The big difference here is that the taking is continuing every day. If the judge rules that it's illegal for the government to have done that to the pre-3rd amendment shareholders (who would have to file their own case obviously); why would it not be illegal inherently? If it's a taking, it's a taking, no matter who's holding the shares.

[merkhet]

That's the one wrinkle to the case. In Maniere the receivership was one and done. Here, the sweep is continual. Does that matter from a common sense perspective? Sure. Does it matter from a legal perspective? Unclear.

 

Another random thought: if the Takings is declared to have happened (and be final) as of August 17, 2012 -- then it would seem that Lamberth's argument that the contract claim isn't ripe should go away.

 

It would be rather strange to say that for the purposes of a Taking, the shareholders lost everything on August 17, 2012 but that the liquidation preference (breach of contract) claim has not yet ripened.

[constructive]

It's not addressed -- they merely say that the plaintiff doesn't have standing. I agree that the logistics would be messy.

 

I assume that Sweeney is smart enough to realize that this is a capital structure problem which needs a capital structure solution. Mailing checks out to people wouldn't resolve the underlying problem.

 

If a judge ends up deciding for the plaintiffs, I would expect the most likely decision would be to roll back the net worth sweep, count all dividends in excess of 10% annual as paying down the government preferred, and recalculate the amount of government preferred outstanding.

 

Sweeney does not have the power to do that. Her court is only authorized to hear claims that result in monetary damages.

 

From what I have read, the USCFC only hears claims for monetary damages against the government, but they are also capable of delivering nonmonetary judgments on those claims.

[merkhet]

http://origin.www.gpo.gov/fdsys/pkg/USCODE-2009-title28/pdf/USCODE-2009-title28-partIV-chap91-sec1491.pdf

 

It can issue equitable remedies only in very specific & limited situations -- see 1491 (a)(2) & (b)(2). It's unclear to me whether (a)(2) gives the court enough power to fashion a judgement the way that you've envisioned.

[doughishere]

Isnt Maniere with regards to "federal regulators which allowed institution to amortize goodwill of purchased institution as capital asset"?

 

 

Were not talking about Coca-colas secret formula or McD's secret sauce...were talking about cold hard cash that was transferred from the companies to the Treasury.

[ZenaidaMacroura]

Isnt Maniere with regards to "federal regulators which allowed institution to amortize goodwill of purchased institution as capital asset"?

 

 

Were not talking about Coca-colas secret formula or McD's secret sauce...were talking about cold hard cash that was transferred from the companies to the Treasury.

I think the issue of standing doesn't really care what was taken -just that you didn't own the security at the time the "taking" occurred.

[doughishere]

Isnt Maniere with regards to "federal regulators which allowed institution to amortize goodwill of purchased institution as capital asset"?

 

 

Were not talking about Coca-colas secret formula or McD's secret sauce...were talking about cold hard cash that was transferred from the companies to the Treasury.

I think the issue of standing doesn't really care what was taken -just that you didn't own the security at the time the "taking" occurred.

 

Basically this then

 

the

defendant contends that the plaintiff fails one of the basic

proof elements for making out a takings case, that being a

showing of ownership of the subject property at the time of

the taking

 

I get what Merk is saying.....

[Mephistopheles]

That's the one wrinkle to the case. In Maniere the receivership was one and done. Here, the sweep is continual. Does that matter from a common sense perspective? Sure. Does it matter from a legal perspective? Unclear.

 

 

I think even from a legal perspective, it's hard to argue for the below if you're the government. "At the time of the taking" to me sounds pretty cut and dry. The taking is still occurring as Fairholme holds the shares. August 17, 2012 was merely the start of the taking. Thus, "time of the taking" is not a single point in time in this case, but an ongoing matter.

 

Disclosure: Not a lawyer :D

 

 

the

defendant contends that the plaintiff fails one of the basic

proof elements for making out a takings case, that being a

showing of ownership of the subject property at the time of

the taking