Two law firms have joined to file a class action lawsuit against the U.S. government, alleging the government violated the Fifth Amendment when it took Fannie Mae and Freddie Mac into conservatorship in 2008.
Two law firms have joined to file a class action lawsuit against the U.S. government, alleging the government violated the Fifth Amendment when it took Fannie Mae and Freddie Mac into conservatorship in 2008. Whether the lawsuit will stick is another matter.
Spector Roseman Kodroff & Willis, P.C., based in Philadelphia, and Hagens Berman Sobol Shapiro, based in Seattle, filed the class action suit on behalf of shareholders this week, seeking $41 billion in damages.
“The U.S. government paid no heed to the rights and interests of shareholders when it effectively nationalized these two corporations,” said attorney Robert M. Roseman, managing partner of SRKW. “While other major financial institutions were attempting to minimize their losses during a difficult economy, the government essentially forced Fannie Mae and Freddie Mac to do the exact opposite, expanding their exposure to some of the riskiest assets.”
There is question as to whether a court would side with the plaintiffs as the GSE regulator has broad discretion as conservator to do what it sees best, said Jaret Seiberg, a policy analyst with Guggenheim Securities, in a research note, MarketWatch reported.
“The Constitution bars the government from taking private property without “just compensation,” but doesn’t address GSEs, Seiberg noted.
The firms are not disputing that the government’s actions may have been in the best interests of the national economy, according to statements by Steve W. Berman, managing partner and co-founder of Hagens Berman Sobol Shapiro. But the lawsuit claims the government was obligated to provide just compensation under the Fifth Amendment for shareholders who suffered significant financial losses.
According to the lawsuit, the government forced Fannie and Freddie to purchase subprime mortgages and other risky assets, which caused significant losses to the companies and their shareholders. Additionally, the government was able to acquire 80% ownership of the formerly private companies at an exercise price of $0.00001 per share, leaving shares in both companies “nearly worthless,” according to the law firms.
The case is a proposed class action, meaning individuals or institutions that purchased shares in the companies on or before Sept. 5, 2008, may be entitled to recover losses.
