FNMA and FMCC preferreds. In search of the elusive 10 bagger.

[Luke 532]

Oh man

Looking at this from outside the US, one would have to conclude that there is nary a judge there that has a bone of independent thought in their body (or any sort of backbone to speak of). What's wrong with these people and how lazy do they get?

 

Frustrating.

 

Well, this is the lowest level of the federal court system in the United States that is issuing these decisions.  Hopefully the higher level courts (Appeals Court, SCOTUS) don't act in the same way.

[Steve_Berk]

Taking a close look at what the DE judge said, I think he's told us all we need to know about his view of DE law. Let's unpack what he said more precisely:

 

"it is unclear to the court how an answer to Plaintiff's general question of whether or not DE law permits this type of dividend right for preferred stock does much to aid in answering the more specific question at issue in this case: whether the FHFA, acting as a conservator....can amend the senior preferred stock agreements to pay the treasury a quarterly dividend in the amount of the positive net worth of the two GSEs" 

 

So he's saying that the Plaintiff's question about DE law takes a back seat to the more specific question of whether the FHFA as a conservator can amend the stock agreements, etc... And I think he's saying that no matter how you answer the DE question, you still have to answer the more specific question because otherwise you can't resolve the case. Now if the judge believed that the DE law made it illegal to issue the dividend, then why would we need to answer the question, as he presents it about the FHFA act on the APA claim? Either he thinks it's possible that HERA allows them to break the DE law, or he thinks the DE law may not empower an entity to issue a dividend like that, but that doesn't mean another legal authority can't provide a valid legal pathway for the dividend. Notably, he did NOT focus solely on the jurisdictional issue--he's talking substantive law.

 

That means that even if we get a good ruling in the Perry court on jurisdiction, I still think this judge is inclined to avoid ruling for the plaintiffs on DE law alone.

 

 

i would point out that if perry ct remands, and doesnt reverse, that should mean that federal cts have jurisdiction under 4617(f).  if perry does this, then sleet "should" realize that he is empowered to address the delaware corp question.  so Ps dont need more than a perry opinion ordering development of a full admin record in order for sleet to see that lamberth was wrong on jurisdiction.  amazing how all of the district ct judges follow another district ct judge, waiting for an appeals ct panel to say yea or nay

[Steve_Berk]

i don't disagree with your analysis, but I would give different percentages. 60% remand; 15% reversal; 15% rejecting jurisdiction on other grounds that Lamberth didn't consider, and 10% affirmance. Stated differently, 60% remand; 25% rejection on any jurisdictional grounds (including, but not limited to Lamberth), and 15% reversal.

 

i have received two private messages asking about my view of perry appeals court probabilities, given the recent decisions by caldwell and sleet.  i will put this out publicly to all.  please feel free to criticize.

 

first, since caldwell was following lamberth, and i believe lamberth is wrong, i found nothing in caldwell that changes my view (in fact, after reading caldwell, i am even more convinced lamberth is wrong).  also, until sleet decides (or perry appeals court decides and sleet follows) that there is federal jurisdiction, certifying the state law question is not "outcome determinative".  so will perry appeals court overrule lamberth on the anti-injunction bar?

 

i wrote this elsewhere and will copy it here:

 

i think you will see a 2-1 ruling, with ginsburg and brown in majority, and millet in dissent.  i think you will see a remand to district court to develop a full administrative record.  implicit in this is a determination that there is no blanket bar injunction bar, but instead the district court must engage in a full inquiry into the facts to determine whether fhfa was acting within its authority.  i also think you will see a full discussion of the legal standard that the majority will tell the district court to apply in assessing the full administrative record. the devil will be in those details. say 60%.

 

i think there is a small chance there will be full reversal, instead of just vacate and remand. say 30%

 

i think there is a very small chance you will see affirmance.  even if affirmance, i think that at least the breach of contract and fiduciary duty claims will survive, even if in the unlikely scenario that the "purchase" and "bar on injunctive relief" claims are affirmed. say 10%.

 

if perry appeals court holds that there is no blanket anti-injunction bar, but the court must inquire whether fhfa was acting within it authority, then sleet should be empowered to determine whether the NWS is a valid security for it to cause the GSEs to issue, and then the delaware state corporate law question becomes front and center.

 

feel free to critique.

[investorG]

would someone please explain to the non-lawyers what happens if there is a split decision between the ACA claim and the other breach / fiduciary duty avenue?  if both are losers, than that's obvious, and vice versa. 

 

but what happens if one is affirmed and the other remanded, or even reversed?

 

thanks in advance for any thoughts.

[Mephistopheles]

I think we need to hope on a Hail Mary here - Trump '16

[merkhet]

As someone who was also asked in PM re percentages, my percentage estimates are closer to @Steve_Berk than @cherzeca -- though I have a much higher chance for breach of K to work out and therefore a concomitantly higher chance for reversal vs remand. Again, as much as I would like to believe judges are immune to the herd, I know that's not true -- so the last few days have been inauspicious for us.

 

I would also hazard to say that I think that Judge Sleet's view in Delaware is that even if Delaware law does not allow for the kind of dividend implicated here in the NWS, that may not matter if 4617(f) acts as a total removal of jurisdiction. (As opposed to there being some other provision that allows FHFA to create a NWS.) So that if there is a ruling showing that 4617(f) does not cover actions that are ultra vires, then he might then allow for certification.

[merkhet]

would someone please explain to the non-lawyers what happens if there is a split decision between the ACA claim and the other breach / fiduciary duty avenue?  if both are losers, than that's obvious, and vice versa. 

 

but what happens if one is affirmed and the other remanded, or even reversed?

 

thanks in advance for any thoughts.

 

What do you mean by split decision? If one of the claims is denied and the other claim is not, then that's the claim that goes through. I guess I don't understand the question. Alternatively, it may be difficult to provide an answer to the question because it's difficult to know which claim, under what reasoning, etc.

[Steve_Berk]

I do think that Sleet was saying that the jurisdictional issue could knock out the case entirely--but he said more than that. when he was saying that he didn't see how resolving the DE law was dispositive, he talked about the substantive issue regarding the legality of the FHFA acting within its authority as a conservator--he only later brought up the jurisdictional point to strengthen his conclusion. That's what makes it so disappointing.

 

As someone who was also asked in PM re percentages, my percentage estimates are closer to @Steve_Berk than @cherzeca -- though I have a much higher chance for breach of K to work out and therefore a concomitantly higher chance for reversal vs remand. Again, as much as I would like to believe judges are immune to the herd, I know that's not true -- so the last few days have been inauspicious for us.

 

I would also hazard to say that I think that Judge Sleet's view in Delaware is that even if Delaware law does not allow for the kind of dividend implicated here in the NWS, that may not matter if 4617(f) acts as a total removal of jurisdiction. (As opposed to there being some other provision that allows FHFA to create a NWS.) So that if there is a ruling showing that 4617(f) does not cover actions that are ultra vires, then he might then allow for certification.

[Guest cherzeca]

@merk

 

Sleet wasn't clear at all, but I read him to say that one fed d ct judge has said that we don't look beyond the question re power to amend contract to see if there is power to do any particular thing in that amendment. So I saw it more of a jurisdictional question as to whether 4617 lets me even ask the dgcl question and I feel sleet is waiting on perry appeal for that

 

EDIT:  i have reread sleet and comments by merk and steve, and i guess i am utterly confused by what sleet means.  i can understand him to say that the DE caselaw is not dispositive (yet) where he says "it is possible that the case could be resolved on other grounds, Plaintiffs' question is clearly not case-dispositive. Accordingly, the court denies Plaintiffs' Application for Certification to the Delaware Supreme Court." and sleet refers to lamberth's dismissal.  so i understand sleet to say he wants to see if he, like lamberth, can dismiss this case "on other grounds"  what exactly those other grounds are (and what analysis he will use in deciding that) he really doesnt make clear...at least to me.

[Guest cherzeca]

As someone who was also asked in PM re percentages, my percentage estimates are closer to @Steve_Berk than @cherzeca -- though I have a much higher chance for breach of K to work out and therefore a concomitantly higher chance for reversal vs remand. Again, as much as I would like to believe judges are immune to the herd, I know that's not true -- so the last few days have been inauspicious for us.

 

I would also hazard to say that I think that Judge Sleet's view in Delaware is that even if Delaware law does not allow for the kind of dividend implicated here in the NWS, that may not matter if 4617(f) acts as a total removal of jurisdiction. (As opposed to there being some other provision that allows FHFA to create a NWS.) So that if there is a ruling showing that 4617(f) does not cover actions that are ultra vires, then he might then allow for certification.

 

@merk

 

not to quibble, but if perry appeals ct finds that shareholders have a direct claim for breach of K and fid duty, i would think that it would vacate lamberth's dismissal and remand for trial, rather than reverse, as a reversal would result in judgment for Ps...and i dont see the record permitting perry appeals ct to decide that issue

[Eye4Valu]

I agree that reversal in Perry appeal is low prob. Obviously anyone long would like a remand. If there was a remand, and Sweeney released the docs, it could be like the Battle of Midway. But let's assume a worse case scenario for a minute in Perry, affirmance. The pref and common would get a huge haircut. You would still have the Court of Claims. My question is would you buy, sell or hold at that point? Would you capitulate?

 

 

[deadspace]

As someone who was also asked in PM re percentages, my percentage estimates are closer to @Steve_Berk than @cherzeca -- though I have a much higher chance for breach of K to work out and therefore a concomitantly higher chance for reversal vs remand. Again, as much as I would like to believe judges are immune to the herd, I know that's not true -- so the last few days have been inauspicious for us.

 

I would also hazard to say that I think that Judge Sleet's view in Delaware is that even if Delaware law does not allow for the kind of dividend implicated here in the NWS, that may not matter if 4617(f) acts as a total removal of jurisdiction. (As opposed to there being some other provision that allows FHFA to create a NWS.) So that if there is a ruling showing that 4617(f) does not cover actions that are ultra vires, then he might then allow for certification.

 

@merk

 

not to quibble, but if perry appeals ct finds that shareholders have a direct claim for breach of K and fid duty, i would think that it would vacate lamberth's dismissal and remand for trial, rather than reverse, as a reversal would result in judgment for Ps...and i dont see the record permitting perry appeals ct to decide that issue

 

I don't understand how we can have a direct claim for breach of contract if dividend payment on the preferred shares are by definition discretionary and if the GSEs are not adequately capitalized without the deal with treasury to act too fully fund any capital needs.  If the NWS is void it could be argued that all money earned would need to go to build capital for the enterprises so the preferred shares would not be owed dividends.  How do we have a direct claim here ?

[rros]

As someone who was also asked in PM re percentages, my percentage estimates are closer to @Steve_Berk than @cherzeca -- though I have a much higher chance for breach of K to work out and therefore a concomitantly higher chance for reversal vs remand. Again, as much as I would like to believe judges are immune to the herd, I know that's not true -- so the last few days have been inauspicious for us.

 

I would also hazard to say that I think that Judge Sleet's view in Delaware is that even if Delaware law does not allow for the kind of dividend implicated here in the NWS, that may not matter if 4617(f) acts as a total removal of jurisdiction. (As opposed to there being some other provision that allows FHFA to create a NWS.) So that if there is a ruling showing that 4617(f) does not cover actions that are ultra vires, then he might then allow for certification.

 

@merk

 

not to quibble, but if perry appeals ct finds that shareholders have a direct claim for breach of K and fid duty, i would think that it would vacate lamberth's dismissal and remand for trial, rather than reverse, as a reversal would result in judgment for Ps...and i dont see the record permitting perry appeals ct to decide that issue

 

I don't understand how we can have a direct claim for breach of contract if dividend payment on the preferred shares are by definition discretionary and if the GSEs are not adequately capitalized without the deal with treasury to act too fully fund any capital needs.  If the NWS is void it could be argued that all money earned would need to go to build capital for the enterprises so the preferred shares would not be owed dividends.  How do we have a direct claim here ?

 

I do not know if this will answer your question but dividends are paid out of retained earnings. The nws removed that possibility. Regardless of the BOD declaring a discretionary dividend some day or being the companies fully capitalized, the nws eliminated the option forever as retaining earnings is not allowed.

[Guest cherzeca]

As someone who was also asked in PM re percentages, my percentage estimates are closer to @Steve_Berk than @cherzeca -- though I have a much higher chance for breach of K to work out and therefore a concomitantly higher chance for reversal vs remand. Again, as much as I would like to believe judges are immune to the herd, I know that's not true -- so the last few days have been inauspicious for us.

 

I would also hazard to say that I think that Judge Sleet's view in Delaware is that even if Delaware law does not allow for the kind of dividend implicated here in the NWS, that may not matter if 4617(f) acts as a total removal of jurisdiction. (As opposed to there being some other provision that allows FHFA to create a NWS.) So that if there is a ruling showing that 4617(f) does not cover actions that are ultra vires, then he might then allow for certification.

 

@merk

 

not to quibble, but if perry appeals ct finds that shareholders have a direct claim for breach of K and fid duty, i would think that it would vacate lamberth's dismissal and remand for trial, rather than reverse, as a reversal would result in judgment for Ps...and i dont see the record permitting perry appeals ct to decide that issue

 

I don't understand how we can have a direct claim for breach of contract if dividend payment on the preferred shares are by definition discretionary and if the GSEs are not adequately capitalized without the deal with treasury to act too fully fund any capital needs.  If the NWS is void it could be argued that all money earned would need to go to build capital for the enterprises so the preferred shares would not be owed dividends.  How do we have a direct claim here ?

 

you will need to read cert of designation of junior pref stock.  there are contractual rights there which holders are claiming have been breached. common also claiming breach of fid duty

[deadspace]

My point is that these seem to be indirect claims given that it is unlikely that a dividend would have been paid out on the preferred shares without the nws anyway.  So I understand that we will never get a dividend but and perhaps that is enough to make these direct claims.  I just hat to see these cases thrown out on a technicality

[merkhet]

My point is that these seem to be indirect claims given that it is unlikely that a dividend would have been paid out on the preferred shares without the nws anyway.  So I understand that we will never get a dividend but and perhaps that is enough to make these direct claims.  I just hat to see these cases thrown out on a technicality

 

Hume covered this in his oral arguments before the appeals court on April 15.

 

The issue is that prior to the NWS, if the government wanted more than its 10% dividend on the senior preferred, it would have had to declare dividends on the junior preferred first, and then collect the remainder based on its 79.9% ownership of the equity of the GSEs. Instead, they leapfrogged the junior preferred.

 

Alternatively, under a liquidation scenario, the government has essentially taken more than it was supposed to take under the original 10% dividend and repayment of the government preferred at par. If you plot out the cash flows based on this, you'll see that this also breaches the liquidation preference on the junior preferred shares based on their certificate.

[Grenville]

I had a question for the board regarding the motion to supplement the record from 5/25/16 (Document#1615013). The supplement was for documents where protected information designation was removed. Both sides put forth arguments around the motion, but we haven't heard any response from the court regarding the motion. Is this normal, i.e. no response means that the court is ignoring it and it's not important to the decision? Should we expect a response to this motion before a decision?

[Guest cherzeca]

I had a question for the board regarding the motion to supplement the record from 5/25/16 (Document#1615013). The supplement was for documents where protected information designation was removed. Both sides put forth arguments around the motion, but we haven't heard any response from the court regarding the motion. Is this normal, i.e. no response means that the court is ignoring it and it's not important to the decision? Should we expect a response to this motion before a decision?

 

there are a couple of motions to supp record and for court to take judicial notice of fairholme discovery.  my guess is that the perry appeals ct will not separately decide each of these motions (as would be standard practice) but just render its opinion(s), and we will see what they relied on in that context

[Luke 532]

Fairholme e-mail sent out today...

 

Dear Investor,

 

Last Friday, Judge Karen K. Caldwell of the U.S. District Court for the Eastern District of Kentucky entered an opinion dismissing a lawsuit brought by an individual shareholder challenging the Net Worth Sweep (Robinson v. FHFA, No. 15-109, E.D. Ky. Sept. 9, 2016).

 

Judge Caldwell was referred this case on July 11, 2016, and her opinion borrows heavily from Judge Royce Lamberth’s 2014 decision in Perry Capital LLC v. Lew, 70 F. Supp. 3d 208 (D.D.C. 2014). She issued her decision without the benefit of any oral argument or further briefings.

 

We found Judge Caldwell’s decision to be flawed and entirely unpersuasive, and believe that it is unlikely to influence the ruling on the lawfulness of the Net Worth Sweep in our case pending before the U.S. Court of Appeals for the D.C. Circuit.

 

Our counsel in the D.C. Circuit appellate case filed a notice with the Clerk of the appellate court regarding Judge Caldwell’s opinion. The notice succinctly indicates that an implication of Judge Caldwell’s reasoning is that there are no meaningful limits on what a federal conservator may do with the assets of a financial institution under its care and that “[t]o accept this reasoning is to allow not only FHFA but all federal conservators to plunder the assets of financial institutions whose assets they are required to preserve and conserve. No federal conservator has ever been permitted to enrich itself or a sister federal agency at the expense of the company for which it is responsible, and Congress did not authorize FHFA to become the first when it enacted HERA.”

 

Sincerely,

 

Investor Relations

 

Fairholme Funds, Inc.

4400 Biscayne Blvd.

9th Floor

Miami, FL 33137

[Spekulatius]

Is anyone aware of any case, where a regulating body was sued successfully for taking over or subsequent actions dealing with an entity, that was deemed insolvent at the time, the institution was taken over? I am not, neither in the US , nor in Europe.

 

There are hundred of banks taken out by the FDIC and also insurance companies were dealt with in one way or another. Has the government ever been successfully sued, in any form these cases, to the point that the former owners received significant value?

[merkhet]

Is anyone aware of any case, where a regulating body was sued successfully for taking over or subsequent actions dealing with an entity, that was deemed insolvent at the time, the institution was taken over? I am not, neither in the US , nor in Europe.

 

There are hundred of banks taken out by the FDIC and also insurance companies were dealt with in one way or another. Has the government ever been successfully sued, in any form these cases, to the point that the former owners received significant value?

 

Off the top of my head, Winstar. https://en.m.wikipedia.org/wiki/United_States_v._Winstar_Corp.

 

There are others, but I would have to dig.

[Guest cherzeca]

Is anyone aware of any case, where a regulating body was sued successfully for taking over or subsequent actions dealing with an entity, that was deemed insolvent at the time, the institution was taken over? I am not, neither in the US , nor in Europe.

 

There are hundred of banks taken out by the FDIC and also insurance companies were dealt with in one way or another. Has the government ever been successfully sued, in any form these cases, to the point that the former owners received significant value?

 

I would add that Winstar gave forth a progeny of cases. There are several "Winstar" cases

Off the top of my head, Winstar. https://en.m.wikipedia.org/wiki/United_States_v._Winstar_Corp.

 

There are others, but I would have to dig.

[nodnub]

Some of those Winstar cases were in court for many, many years. Consider time value of money too. Can be tough situation when politics and public optics are involved. Govt may act non-rationally with deep pockets to keep paying legal costs in perpetuity. Long enough for other unforeseeable factors to affect your position. 

 

For some reason that link is broken in my browser.

Maybe this one will work.  https://en.wikipedia.org/wiki/United_States_v._Winstar_Corp.

 

also see

https://supreme.justia.com/cases/federal/us/518/839/

[Spekulatius]

Some of those Winstar cases were in court for many, many years. Consider time value of money too. Can be tough situation when politics and public optics are involved. Govt may act non-rationally with deep pockets to keep paying legal costs in perpetuity. Long enough for other unforeseeable factors to affect your position. 

 

For some reason that link is broken in my browser.

Maybe this one will work.  https://en.wikipedia.org/wiki/United_States_v._Winstar_Corp.

 

It is interesting that Ginsburg was involved (dissenting opinion). I guess that this is the same Ginsburg, that is mentioned here in this thread with the FNMA lawsuit?

 

I also think that Winstar is a different case, although I do see some relation to this case here as well.

also see

https://supreme.justia.com/cases/federal/us/518/839/

[merkhet]

Some of those Winstar cases were in court for many, many years. Consider time value of money too. Can be tough situation when politics and public optics are involved. Govt may act non-rationally with deep pockets to keep paying legal costs in perpetuity. Long enough for other unforeseeable factors to affect your position. 

 

For some reason that link is broken in my browser.

Maybe this one will work.  https://en.wikipedia.org/wiki/United_States_v._Winstar_Corp.

 

It is interesting that Ginsburg was involved (dissenting opinion). I guess that this is the same Ginsburg, that is mentioned here in this thread with the FNMA lawsuit?

 

I also think that Winstar is a different case, although I do see some relation to this case here as well.

also see

https://supreme.justia.com/cases/federal/us/518/839/

 

The dissenting Ginsburg is Ruth Bader Ginsburg, a U.S. Supreme Court Justice.

 

The Ginsburg mentioned in this thread is Douglas Ginsburg, a United States Court of Appeals judge for the D.C. Circuit.

 

Totally different people. Totally different courts.