Shareholder Sues to Inspect Fannie, Freddie Bailout Records

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By Che Odom

March 15 — Fannie Mae and Freddie Mac have been sued by CapWealth Advisors chief executive Tim J. Pagliara, who is demanding access to the government-sponsored enterprises' books and records to probe possible misconduct by directors.

Pagliara said the lawsuits, filed March 14 in Delaware and Virginia state courts, are to help him investigate what he suspects are breaches of fiduciary duty by board members in adopting amendments to an agreement with the federal government that turned over nearly all the GSEs' profits to the Treasury Department.

“I think it is important to leave no stone unturned,” Pagliara said during a March 15 conference call with reporters. “This is my right as a stockholder.”

Pagliara is the first-ever shareholder to demand inspection of the GSEs' books and records, according to Bloomberg BNA's review of court dockets.

`Net Worth Sweep.'

The Federal National Mortgage Association—or “Fannie Mae”—and the Federal Home Loan Mortgage Corp.—“Freddie Mac”—buy mortgages from lenders and package them into securities, on which they guarantee to investors principal and interest payments. The two GSEs were placed under conservatorship at the height of the financial crisis in late 2008.

When the companies returned to profitability in 2012, the terms of their agreements with the Treasury Department were amended so that their profits would be passed to the Treasury each quarter.

This so-called “Net Worth Sweep” has prompted nearly 20 shareholder lawsuits, claiming investors were unfairly barred from participating in post-bailout profits earned by the two companies and that the provisions amounted to a “taking” in violation of the U.S. Constitution.

“I owe it to the people who have entrusted me with their investments to pursue all avenues to demonstrate that the Net Worth Sweep violates both federal law and, I strongly believe, state law,” said Pagliara, who also serves as executive director of Investors Unite, a coalition of Fannie and Freddie investors.

Even if Fannie and Freddie directors say their companies are controlled by conservatorships, they still were required to fulfill their fiduciary duties to stockholders when approving the provisions to turn over profits to the Treasury, Pagliara said.

Attempts to reach the two companies for comment were unsuccessful March 15.

Bailout Proceeds

In 2008, the Treasury Department injected $187.5 billion into Fannie and Freddie to help them survive. As part of the agreement, the GSEs were placed into the control of a conservatorship, and the money was to be repaid to the Treasury with interest.

Fannie paid a total of $10.3 billion in dividends to the Treasury in 2015. The company expects to pay the Treasury $2.9 billion in dividends in March 2016. With the expected March 2016 dividend payment, Fannie Mae will have paid a total of $147.6 billion in dividends to the Treasury.

Freddie has paid a total of $96.5 billion in dividends to the Treasury and expects to pay the department an additional $1.7 billion for the first quarter of 2016.

Pagliara's complaints argue that board members of the two organizations violated their fiduciary duties to stockholders by either approving or failing to prevent the third amendment, which only benefited the controlling shareholder—the Treasury.

To contact the reporter on this story: Che Odom in Washington at codom@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com