Why the AIG Ruling Is No Drag for Federal National Mortgage Association(OTCMKTS:FNMA) & Federal Home Loan Mortgage Corp(OTCMKTS:FMCC) Investors
Disclaimer: Author is Long Fannie Mae Preferred and Freddie Mac Preferred.
No sooner then the news that Maurice R. Greenberg lost his appeal of the AIG case, a certain unnamed former WSJ writer was out with his latest piece on why this spelled trouble for Federal National Mortgage Association(OTCMKTS:FNMA) and Federal Home Loan Mortgage Corp(OTCMKTS:FMCC)‘s court cases.
While courts have not been favorable to Fannie and Freddie investors, there are more then a few reasons that this ruling isn’t a big deal.
The AIG case centers on the original bailout and particularly the exaction of equity in addition to the bailout, while nearly all of the Fannie and Freddie cases (except Washington Federal) are centered on the much more unusual, net worth sweep (“NWS”). A much more controversial action.
While there are many Fannie and Freddie cases and the angles are much more varied, the Starr International v US case, began life as a case under the Federal Court of Claims, via the Tucker Act. The Tucker Act grants jurisdiction to the Federal Court of Claims for cases for monetary damages which exceed $10,000 against the United States.
This is the same court and same jurisdiction as the Fairholme v United States case under Judge Margaret Sweeney. The Federal Court of Claims can only grant monetary damages against the United States.
Dismissal for Standing
The reason for dismissal was standing as the court explains a party must satisfy constitutional requirements to have standing and demonstrate that it is not raising a third party’s legal rights. The court reversing the previous ruling (which provided no damages or relief since without a bailout AIG shares would be worthless), ruled that the claims were derivative and that AIG itself had standing to sue, and declined to sue.
The court avoided the illegal exaction and takings question as:
(“Standing is a threshold jurisdictional issue . . .and therefore may be decided without addressing the merits of a determination”)
The court notes that the ability of shareholders to bring derivative claims in Delaware law:
“is limited to situations where the stockholder has demanded that the directors pursue the corporate claim and they have wrongfully refused to do so or where demand is excused because the directors are incapable of making an impartial decision regarding such litigation.”
Further under Federal shareholder standing law:
“generally prohibits shareholders from initiating actions to enforce the rights of [a] corporation
unless the corporation’s management has refused to pursue the same action for reasons other than good-faith business judgment.”
I think we can see key differences there immediately with the Fannie and Freddie cases.
The Judges’ opinion written by Judge Sharon Prost extensively reviews the standing issue and whether the claims were direct and/or derivative and whether there is any exception, particularly the dual-natured exception. This exception in particular has been argued by Fannie and Freddie plaintiffs.
It should be mentioned that while Fannie and Freddie have some clear differences in their favor, shareholders have the additional hurdle to overcome of conservatorship, which cedes additional shareholder rights to the FHFA.
There are many obstacles to overcome when suing the government but this ruling doesn’t throw any additional wrenches in the fight for Fannie and Freddie investors.
The full ruling is available here: Starr International Company V. US
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