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GSE Out Of Court Settlement More Likely Than Not

seekingalpha.com | October 20, 2016

By Glen Bradford


  • A settlement was announced and the case was dismissed, so FHFA's motion to intervene as a non-party should meet a similar fate to the one when Ackman dismissed his case.
  • The fact that PwC seemed to settle out of court suggests that PricewaterhouseCoopers didn't feel as strongly about FHFA's legal arguments as FHFA does.
  • This looks like a big win for direct lawsuits against actions taken against shareholders during conservatorships.

Plaintiffs in the second largest accounting fraud lawsuit have voluntarily withdrawn against PricewaterhouseCoopers with respect to potential misrepresentations in their audits for Freddie Mac (OTCQB:FMCC). The largest accounting fraud lawsuit is against Deloitte for audits regarding Fannie Mae (OTCQB:FNMA). Both Fannie Mae and Freddie Mac are Government Sponsored Enterprises (GSEs) under conservatorship. Since the government took control of the enterprises on a net basis it has transferred from the GSEs to itself over $100B of cash in the span of 8 years rending them nearly insolvent.

With the government taking all of the money you may wonder if there is even an investment opportunity here at all because the discounted cash flows of nothing are technically $0. You're right. Owning the publicly traded shares is a bet that the government will be forced to follow the spirit of conservatorship law as plaintiffs in multiple lawsuits interpret it. The governing law in most prior conservatorships is the FDIA whereas in this case it is HERA, which was modeled after the FDIA. While the FDIA governs the FDIC, HERA governs the FHFA.

Investment Thesis: Where there's smoke there's fire. The government opposed the settlement suggesting that plaintiffs shouldn't be allowed to settle because it's not their right to pursue litigation against the auditors. The auditor's move to settle seems to suggest that they believe that the government is wrong or at the very least would lose their motion to substitute. This thought is in line with the court's remark that jurisdictional issues come before merits issues. Nevertheless, after settlement as announced the government tried to step in and stop it, but now the case has been dismissed permanently (with prejudice means permanently). In the event that judges in Perry Capital and other lawsuits come to the same conclusion PwC came to, it's reasonable to expect legal rulings that prevent the government from nationalizing Fannie Mae and Freddie Mac after taking $100B of cash out of them under the veil of conservatorship. In this scenario, preferred shares have a fixed upside and common shares have more upside but also are exposed to the discretionary decision making risk inherent to a conservator that has claimed in court no fiduciary duty to shareholders. William Ackman and Richard Bove suggest that $20 per common share is reasonable because combined the companies make $15B/annum. Yes, these are Fortune 50 companies with $5T of assets that trade like deserted penny stocks. The preferred shares are worth upwards of par and perhaps more if the class plaintiff claims in the DC District Court of Appeals have merit and shareholders are paid back dividends.




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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).

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