Investors hit another road block in suit over Fannie, Freddie profits

by 17 Oct 2014
When Bruce Berkowitz’s Fairholme Funds brought in former Fannie Mae CFO Tim Howard to help them with discovery, the government reacted pretty quickly.

On Wednesday, Federal Judge Margaret Sweeney ruled that Howard wouldn’t be allowed to view any of the documents “because disclosure of the protected information could place this nation’s financial markets in jeopardy, a risk that the court is not willing to take.” The pending lawsuit involves a group of GSE investors, who want the mortgage giants to pay the shareholder profits it owes, but the GSEs are not doing that as part of the bailout agreement with the federal government.
Attorneys for the federal government argued that Howard should not get to serve as a consultant with access under the limited discovery a federal judge granted. They argued that Howard was forced out of Fannie in 2004 amid allegations that he and two other executives had cooked the books to increase the bonuses by more than $100 million in an accounting scandal.

However, the investor lawsuits against Howard were found to be without merit and his case was settled with the Securities and Exchange Commission. He wrote The Mortgage Wars shortly after, and in it, he claims that his removal was politically motivated and that the U.S. Treasury took advantage of the financial crisis to take over Fannie Mae when the GSE could have survived on its own.
Although the court agreed with the plaintiffs that Howard has the right to his opinion and recognized the plaintiffs’ litigation needs, "his desire for vindication in the public arena and his stock ownership give the court pause with respect to his admission to the protective order,” Sweeney wrote in her ruling. The judge was also skeptical that Howard was uniquely suited to review the privileged information considering he had been dismissed four years before the financial crisis struck.
Earlier this year, Fairholme Funds was granted a victory by Sweeney when she ruled in favor of broad access in discovery to FHFA records going back years, rather than the narrow period in 2012 that the FHFA wanted to limit discovery to.
Last month, in another lawsuit led by Fairholme Funds, District Judge Royce Lamberth threw out a lawsuit that sought to prevent the government from forcing Fannie Mae and Freddie Mac to turn over their profits to the Treasury.