Junior Shareholders Sue Fannie & Freddie

     WASHINGTON (CN) – Junior preferred stockholders sued Fannie Mae and Freddie Mac, claiming they’ve been stiffed in the government-sponsored corporations’ recent billion-dollar recoveries.
     Lead plaintiff Joseph Cacciapelle sued the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and their conservator, the Federal Housing Finance Administration (FHFA), in Federal Court.
     The class claims the massive mortgage-backing monsters unilaterally amended their terms with the U.S. Treasury in 2012 so that stockholders would be left out of the mix when the corporations paid back the government after the 2008 financial meltdown.
     “Between the start of the conservatorship in September 2008 through the beginning of 2012, the Government advanced Fannie Mae and Freddie Mac more than $188 billion – most of which was advanced to cover accounting losses reflecting excessive write-downs of assets that have turned out to be worth farm more than their written down amounts,” the complaint states. “These advances increased the face value of the Senior Preferred Stock held by the Government to approximately $189 billion, entitling the Government to an annual dividend of approximately $18 billion, which translates to a quarterly dividend of just under $5 billion.”
     How much in dividends do junior stockholders get?
     Zilch, they claim.
     “Specifically, on August 17, 2012, Fannie Mae and Freddie Mac, through their Conservator FHFA, amended the terms of their agreements with the Treasury to provide that beginning on January 1, 2013, Fannie Mae and Freddie Mac would pay the Government dividends equal to their entire net worth (the ‘Net Worth Sweep’), leaving Fannie Mae and Freddie Mac with no funds to redeem the Government’s Senior Preferred Stock or to distribute to the holders of Junior Preferred Stock, whether by dividend, redemption, or in a liquidation,” the lawsuit states.
     The August 2012 action, according to junior stockholders, wiped out any chance of general stockholders being paid back – including the money owed to the government for its 79.9 percent junior ownership in Fannie and Freddie – despite the institutions’ recovery in 2012.
     “Plaintiffs and other members of the Class paid valuable consideration to acquire these rights, and in doing so helped provide financial support for Fannie and Freddie, both before and after the conservatorship, by contributing to a viable market for Fannie’s and Freddie’s issued securities,” the class claims. “Indeed, the contractual rights owned by the holders of Junior Preferred Stock were worth billions of dollars prior to being eliminated in August 2012.”
     The class claims that if Fannie and Freddie were liquidated, Uncle Sam would “receive the full amount of the institutions’ net worth in that liquidation.” They seek fair dividends and fair payment if they choose to sell their stock.
     They also seek damages for breach of contract and breach of faith and fair dealing.
     They are represented by Hamish Hume with Boies Schiller & Flexner.

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