Certified Forensic Loan Auditors, LLC

 
  Upcoming Classes

Search CFLA's Article Archive:

U.S. Angered as Freddie Mac Auditor Settles Investor Suit

fortune.com | October 27, 2016

By Roger Parloff

Feds want deal undone.

It looks like some clever Freddie Mac shareholders may have actually got some of their money back, in compensation for the government’s effective nationalization of the mortgage finance giant in August 2012, which wiped out virtually all the value of their stock.

The money—or whatever the investors got in a confidential lawsuit settlement that was first announced to the judge on October 11 and then apparently completed by October 18, when the parties agreed to dismiss the case—didn’t come from the government itself, but rather from Freddie’s auditor from 2008 to 2013, PricewaterhouseCoopers, which was the sole defendant in the suit.

Nevertheless, Uncle Sam is mad about the deal. The government is trying to find out exactly what its terms were—and possibly to undo it. The Federal Housing Finance Agency, which has been Freddie Mac’s conservator since 2008, has asked a Miami federal judge to reopen the case in order to dismiss it again, but this time “without payment of any kind,” as it papers explain.

The odd dispute arose in one of the satellite lawsuits stemming from the government’s confiscation, in essence, of both Fannie Mae FNMA -1.74% and Freddie Mac FMCC -2.44% in 2012, when it dramatically changed the terms of a federal bailout of the two government-sponsored enterprises (GSEs), which began in 2008. (Fannie Mae is the popular name for the Federal National Mortgage Association and Freddie Mac refers to the Federal Home Loan Mortgage Corporation.)

U.S. District Judge Federico Moreno of Miami has scheduled a hearing Monday morning to decide what to do. The plaintiffs—23 individual investors plus investment managers Gator Capital, of Tampa, and Perini Capital, of Miami—are arguing that the judge no longer has jurisdiction, because the parties agreed to dismiss the case last Tuesday.

The shareholders sued PwC in March, claiming, in effect, that it helped federal regulators both to seize Freddie Mac in 2008 and to nationalize it is 2012—when it first became clear that the government had no intention of ever letting the GSEs pay back their debts and reemerge as independent companies—by portraying it as being in worse financial shape than it really was.

Specifically, the suit alleges that PwC “assisted government regulators and officers of Freddie Mac to destroy the value of Freddie Mac stock” by “manipulating the books . . . to overstate losses and understate its assets by hundreds of billions of dollars.” The suit alleges that these acts amounted to “negligent misrepresentations” and “aiding and abetting” of fiduciary breaches by Freddie’s own directors and by the federal officials who took over from them in 2008. A PwC spokeswoman said she couldn’t comment on any aspect of the suit due to a confidentiality agreement reached as part of the settlement. (The suit never reached the stage where PwC filed an answer in court responding to the accusations. FHFA and Treasury have denied any wrongdoing in numerous other suits.)

A few days before the suit against PwC was filed last March, a nearly identical suit was filed by Gator, Perini, and about 30 individuals—including some of the same ones—against Fannie Mae’s auditors, Deloitte & Touche. No settlement has been reached in that case.

To understand the whole mess, we need to take a couple steps back. In September 2008, as the nation’s economic system descended into crisis, with defaults on residential mortgages skyrocketing, FHFA’s director placed Fannie and Freddie into conservatorship, with FHFA acting as conservator. The stated goal was to ensure stability in the national housing market.

Over the next four years the GSEs received, under the terms of special bailout legislation, $189.5 billion in taxpayer money. In exchange, they issued special “senior preferred stock” to the Treasury under which they had an obligation to pay 10% interest on the bailout money they’d received. In early 2012, the GSEs began to make money again, together posting a healthy $8 billion in profits for the second quarter.

But in August 2012, a few days after posting that profit, Treasury and FHFA suddenly changed the terms of the GSEs’ special preferred stock. They replaced the 10% interest obligation with a requirement that the GSEs instead pay Treasury their entire profit each quarter in perpetuity (except for a small capital reserve that would gradually dwindle to nothing by 2018). The GSEs would, therefore, never emerge from conservatorship, and would, rather, be wound down and replaced with some other system of housing finance to be set up by Congress.

Government officials have claimed that they took this action because they feared the GSEs would start losing money again, and that taxpayers would end up on the hook again. In the months immediately following the momentous switch, however, the GSEs actually booked record profits. As of last November, by which time thousands of Fannie and Freddie investors—led by hedge fund Perry Capital and the Fairholme Group of mutual funds—had filed numerous suits in numerous courts, the GSEs had paid the government about $240 billion in exchange for the $189.5 billion bailout, or nearly $130 billion more than they would have paid under the original 10% coupon agreements.

Though the investor suits have been based on a wide range of legal theories, they fall into two main categories: those alleging that the momentous 2012 revision in bailout terms was beyond federal officials’ statutory powers and those alleging that it was an unconstitutional “taking” of shareholder property without just compensation—i.e., a violation of the Fifth Amendment.

Lawyers for the investor plaintiffs have speculated that the Treasury and FHFA officials responsible actually knew that the GSEs were healthy in 2012 (and possibly even in 2008) but confiscated their assets for opportunistic budgetary reasons, including, perhaps, the desire to postpone hitting the national debt ceiling at a time when Congress was threatening to shut down the government.

The two Miami suits against each GSE’s accounting firm were filed in state court, but were swiftly transferred to federal court by each defendant.

There, FHFA moved to oust the plaintiffs in each suit and to substitute itself, citing the federal law that created FHFA in July 2008. Under that statute, FHFA, when acting as a conservator, “succeeds to . . . all rights, titles, and privileges . . . of any stockholder” of a seized GSE. Thus, FHFA argues, only FHFA is empowered to bring shareholder litigation relating to Freddie Mac at this point, and it has not chosen to do so.

Before Judge Moreno could rule on that motion, the parties settled. Judge Moreno then dismissed FHFA’s substitution request as moot (i.e., no longer relevant). But last Monday FHFA asked once again to be permitted to oust the plaintiffs and undo the settlement. It would then dismiss the suit without seeking “payment of any kind.”

FHFA has also asked Judge Moreno to force the parties to show it the settlement deal by Friday.

The FHFA declined comment on the suit. Attorneys for the plaintiffs did not return an email seeking comment.

In the broader litigation, investors have had mixed results so far. In September 2015, U.S. District Judge Royce Lamberth of Washington, D.C., dismissed one group of consolidated investor suits, finding that FHFA and Treasury had acted within their statutory authority. His ruling was argued before a federal appeals court last April, and the appellate decision could come down any day.

In the Court of Federal Claims—where most of the constitutional “takings” cases are being heard—plaintiffs appear to be faring better, so far, with Judge Margaret Sweeney last month granting their request to force the Treasury Department, FHFA, and the White House to turn over documents which the latter had been seeking to withhold, citing various evidentiary privilege doctrines.

 

 

 

 

Order Cutting-Edge Services Now   Quiet Title Packages from Licensed Attorneys
     
CFLA Sponsored Attorney Links   CFLA Training Academy

 

 

Back to October 2016 Archive

 

CFLA was founded by the Nation's Leading Foreclosure Defense Attorneys back in 2007 to serve the Foreclosure Defense Industry and fight pervasive Bank Fraud. Since opening our virtual doors, CFLA has rapidly expanded to become the premier online legal destination for small businesses and consumers. But as the company continues to grow, we're careful to hold true to our original vision. For us, putting the law within reach of millions of people is more than just a novel idea—it's the founding principle, just ask Andrew P. Lehman, J.D.. With convenient locations in Houston and Los Angeles, you can contact Our National Account Specialist and General Manager / Member Damion W. Emholtz at 888-758-2352 for a free Mortgage Fraud Analysis or to obtain samples of work product, including cutting edge Bloomberg Securitization Audits, Litigation Support, Quiet Title Packages, and for more information about our Nationally Accredited and U.S. Department of Education Approved "Mortgage Securitization Analyst Training Certification" Classes (3 days) 24 hours for approved CLE & MCLE Credit (Now Available Online).

SEE BELOW- http://www.certifiedforensicloanauditors.com

Call us toll free at 888-758-2352

Bookmark and Share
spacer
Facebook Like us on Facebook
Twitter Follow us on Twitter
YouTube View our YouTube Videos
LinkedIn Connect to us on Linkedin
 
BBB Logo

 

spacer

Contact us or view our Sample Documents & Audits by completing the form below.

  • Reload
  • Should be Empty:

 

DVD Sets Only $99

 

FREE Mortgage Fraud Analysis

 

Order Cutting-Edge Services Now

 

Quiet Title Packages from Licensed Attorneys

 

Affiliate Services

 

CFLA Sponsored Attorney Links

 

Take-Home Education Package

 

ALB Law Firm

 

Advocate Legal

 

The True News Network

 

Sutton Law Firm, P.L.L.C.

 

Rubenstein Business Law

 

Atighechi Law Group

 

Scunziano & Associates

 

Get Certified to Perform Mortgage Securitization Audits

 

CFLA Training Academy

 

Expert Witness Services

 

Cutting Edge Expert Securitization Reports

 

CFLA Credit Cards

 

Breaking News

 

Letters to the Editor

 

CFLA Weekly Newsletters

 

Code of Ethics

 

Testimonials

 

Instructional Videos

 

Job Opportunities

 

License Opportunities

 

MARS Rule

 

Product Samples

 

Resource Links

 

Servicer Information

 

Foreclosure Laws

 

REST Report

 

Quiet Title Packages from Licensed Attorneys

 

Advertise on CFLA

 

Advertising Space: Mortgage Securitization, Quiet Title

 

Certified Forensic Loan Auditors, LLC
13101 West Washington Blvd.
Suite 444
Los Angeles, CA 90066

Phone: 832-932-3951
Toll Free: 888-758-CFLA (2352)
Mobile Users: CLICK TO CALL
info@certifiedforensicloanauditors.com

   
 
CFLA IS NOT A LAW FIRM AND DOES NOT PROVIDE ANY LEGAL ADVICE. CFLA DOES NOT OFFER FORECLOSURE CONSULTING OR FORECLOSURE RELIEF
SERVICES. CFLA DOES NOT OFFER OR ASSIST WITH ANY LOAN MODIFICATION SERVICE. CFLA ALWAYS RECOMMENDS THAT CLIENTS RETAIN COMPETENT COUNSEL IN THEIR RESPECTIVE JURISDICTION. CFLA HAS A FREE PROGRAM TO REFER CFLA CLIENTS TO LAW FIRMS IN NEARLY EVERY STATE AND CFLA
DOES NOT CHARGE OR OBTAIN REFERRALS FEES FOR THESE SERVICES. SERVICES NOT OFFERED TO RESIDENTS OF THE STATE OF NEVADA.

 
Home About Us Privacy Policy Terms of Service Disclaimer SERVICES Careers Contact Us
 
COPYRIGHT © 2007-2016 Certified Forensic Loan Auditors ™ All rights reserved