IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
PERRY CAPITAL LLC,
Plaintiff,
v.
JACOB J. LEW, et al.,
Defendants.
Civil Action No. 1:13-cv-1025-RCL
FAIRHOLME FUNDS, INC., et al.,
Plaintiffs,
v.
FEDERAL HOUSING FINANCE AGENCY,
et al.,
Defendants.
Civil Action No. 13-cv-1053-RCL
ARROWOOD INDEMNITY COMPANY, et
al.,
Plaintiffs,
v.
FEDERAL NATIONAL MORTGAGE
ASSOCIATION, et al.,
Defendants.
Civil Action No. 13-cv-1439-RCL
PLAINTIFFS’ CROSS-MOTION FOR SUMMARY JUDGMENT
Plaintiffs Perry Capital LLC, Fairholme Funds, Inc., Fairholme Fund, Berkley Insurance
Company, Acadia Insurance Company, Admiral Indemnity Company, Admiral Insurance
Company, Berkley Regional Insurance Company, Carolina Casualty Insurance Company,
Midwest Employers Casualty Insurance Company, Nautilus Insurance Company, Preferred
Employers Insurance Company, Arrowood Indemnity Company, Arrowood Surplus Lines
Case 1:13-cv-01053-RCL Document 38 Filed 03/21/14 Page 1 of 106
2
Insurance Company, and Financial Structures Limited, pursuant to Rule 56 of the Federal Rules
of Civil Procedure and Local Civil Rule 7(h), move for the Court to enter summary judgment in
their favor and to “hold unlawful and set aside,” 5 U.S.C. § 706(2), the Third Amendment to the
Amended and Restated Senior Preferred Stock Purchase Agreements entered into on August 17,
2012, by the Department of Treasury and the Federal Housing Finance Agency, as conservator
for the Federal National Mortgage Association and the Federal Home Loan Mortgage
Corporation. As set forth in the accompanying Memorandum of Law in Opposition to
Defendants’ Motions to Dismiss and Motions for Summary Judgment and in Support of
Plaintiffs’ Cross-Motion for Summary Judgment on Administrative Procedure Act Claims,
Plaintiffs are entitled to judgment as a matter of law.
Pursuant to Local Rule 7(f), Plaintiffs respectfully request oral argument on this Motion.
Respectfully submitted,
Dated: March 21, 2014
/s/ Charles J. Cooper
Charles J. Cooper, SBN 24870
Vincent J. Colatriano, SBN 429562
David H. Thompson, SBN 450503
Peter A. Patterson, SBN 998668
COOPER & KIRK, PLLC
1523 New Hampshire Avenue, N.W.
Washington, D.C. 20036
Telephone: 202.220.9600
Facsimile: 202.220.9601
Attorneys for Plaintiffs Fairholme Funds, Inc.,
et al.
/s/ Theodore B. Olson
Theodore B. Olson, SBN 367456
Douglas R. Cox, SBN 459668
Matthew D. McGill, SBN 481430
Nikesh Jindal, SBN 492008
Derek S. Lyons, SBN 995720
GIBSON, DUNN & CRUTCHER LLP
1050 Connecticut Avenue, N.W.
Washington, D.C. 20036
Telephone: 202.955.8500
Facsimile: 202.467.0539
Janet M. Weiss (Pro Hac Vice)
GIBSON, DUNN & CRUTCHER LLP
200 Park Avenue
New York, N.Y. 10166
Telephone: 212.351.3988
Facsimile: 212.351.5234
Attorneys for Plaintiff Perry Capital LLC
Case 1:13-cv-01053-RCL Document 38 Filed 03/21/14 Page 2 of 106
3
/s/ Drew W. Marrocco
Drew W. Marrocco, SBN 452305
DENTONS US LLP
1301 K Street, N.W., Suite 600, East Tower
Washington, D.C. 20005
Telephone: 202.408.6400
Facsimile: 202.408.6399
Michael H. Barr (Pro Hac Vice)
Richard M. Zuckerman (Pro Hac Vice)
Sandra Hauser (Pro Hac Vice)
DENTONS US LLP
1221 Avenue of the Americas
New York, N.Y. 10020
Telephone: 212.768.6700
Facsimile: 212.768.6800
Attorneys for Plaintiffs Arrowood Indemnity
Co., et al.
Case 1:13-cv-01053-RCL Document 38 Filed 03/21/14 Page 3 of 106
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
PERRY CAPITAL LLC,
Plaintiff,
v.
JACOB J. LEW, et al.,
Defendants.
Civil Action No. 1:13-cv-1025-RCL
FAIRHOLME FUNDS, INC., et al.,
Plaintiffs,
v.
FEDERAL HOUSING FINANCE AGENCY,
et al.,
Defendants.
Civil Action No. 13-cv-1053-RCL
ARROWOOD INDEMNITY COMPANY, et
al.,
Plaintiffs,
v.
FEDERAL NATIONAL MORTGAGE
ASSOCIATION, et al.,
Defendants.
Civil Action No. 13-cv-1439-RCL
MEMORANDUM OF LAW OF PLAINTIFFS PERRY CAPITAL LLC, FAIRHOLME
FUNDS, INC., FAIRHOLME FUND, BERKLEY INSURANCE COMPANY, ACADIA
INSURANCE COMPANY, ADMIRAL INDEMNITY COMPANY, ADMIRAL
INSURANCE COMPANY, BERKLEY REGIONAL INSURANCE COMPANY,
CAROLINA CASUALTY INSURANCE COMPANY, MIDWEST EMPLOYERS
CASUALTY INSURANCE COMPANY, NAUTILUS INSURANCE COMPANY,
PREFERRED EMPLOYERS INSURANCE COMPANY, ARROWOOD INDEMNITY
COMPANY, ARROWOOD SURPLUS LINES INSURANCE COMPANY, AND
FINANCIAL STRUCTURES LIMITED IN OPPOSITION TO DEFENDANTS’
MOTIONS TO DISMISS AND MOTIONS FOR SUMMARY JUDGMENT AND IN
SUPPORT OF PLAINTIFFS’ CROSS-MOTION FOR SUMMARY JUDGMENT ON
ADMINISTRATIVE PROCEDURE ACT CLAIMS
Case 1:13-cv-01053-RCL Document 38 Filed 03/21/14 Page 4 of 106
i
TABLE OF CONTENTS
Page
INTRODUCTION .......................................................................................................................... 1
STATEMENT OF THE FACTS .................................................................................................... 4
A. Fannie Mae And Freddie Mac. ..................................................................................... 4
B. The Housing And Economic Recovery Act Of 2008. .................................................. 6
C. The Federal Government Takes Control Of Fannie Mae And Freddie Mac. ............... 7
D. Treasury Amends The Purchase Agreements Twice Before The Expiration Of
Its Statutory Authority On December 31, 2009. ......................................................... 11
E. The Government Establishes A Policy That The Companies Should Never
Exit Conservatorship. .................................................................................................. 13
F. The Companies Regain Profitability. .......................................................................... 13
G. Treasury And FHFA “Amend” The Treasury Stock In 2012 To Permit
Treasury To Seize All Of The Companies’ Net Worth. ............................................. 15
STANDARD OF REVIEW .......................................................................................................... 18
ARGUMENT ................................................................................................................................ 20
I. This Court Has Jurisdiction Over Plaintiffs’ APA Claims. .................................................... 20
A. Plaintiffs Are “Aggrieved” By The Sweep Amendment And Have Standing
To Challenge Its Legality. ........................................................................................... 20
1. The Sweep Amendment Has Injured Plaintiffs. ................................................ 21
2. The Prudential Shareholder-Standing Doctrine Has No Application To
Plaintiffs’ APA Claims. ..................................................................................... 24
3. HERA Does Not Strip Plaintiffs Of Their Rights In Their Stock...................... 25
B. HERA’s Jurisdictional Bar Does Not Prohibit Plaintiffs’ Claims. ............................. 29
1. Section 4617(f) Does Not Bar The Claims Against Treasury. .......................... 29
2. Section 4617(f) Does Not Bar The Claims Against FHFA. .............................. 31
II. The Sweep Amendment Exceeded Treasury’s Statutory Authority. ...................................... 36
A. The Sweep Amendment Cannot Be Characterized As An Exercise Of Rights
Under Treasury’s Previously Purchased Preferred Stock. .......................................... 37
B. The Sweep Amendment Constitutes A Purchase Of The Companies’
Obligations Or Securities That Is Expressly Barred By HERA’s Sunset
Provision. .................................................................................................................... 41
Case 1:13-cv-01053-RCL Document 38 Filed 03/21/14 Page 5 of 106
Table of Contents
(Continued)
Page
ii
III. FHFA Lacked Authority To Agree To The Sweep Amendment On The Companies’
Behalf. ..................................................................................................................................... 46
A. FHFA’s Failure To Produce An Administrative Record Deprives The Court
Of A Sufficient Basis To Uphold FHFA’s Entry Into The Sweep Amendment. ....... 46
B. FHFA Violated HERA By Acting At Treasury’s Direction. ...................................... 51
C. In Agreeing To The Sweep Amendment, FHFA Violated The APA By Acting
In Excess Of Its Statutory Authority As Conservator. ................................................ 51
1. As Conservator Of The Companies, FHFA Is Obligated To Preserve
And Conserve Their Assets With The Aim Of Rehabilitating The
Companies. ........................................................................................................ 52
2. The Sweep Amendment Exceeded FHFA’s Powers As The Companies’
Conservator. ....................................................................................................... 55
3. FHFA’s Post Hoc Justifications For The Sweep Amendment Lack Merit. ....... 58
IV. The Sweep Amendment Was An Arbitrary And Capricious Exercise Of Treasury’s
And FHFA’s Authority. .......................................................................................................... 74
A. Treasury’s And FHFA’s Decision To Execute The Sweep Amendment Was
Based On A Knowingly Erroneous View Of The Companies’ Financial
Performance And Prospects. ....................................................................................... 75
B. Neither Treasury Nor FHFA Considered Obvious Alternative Solutions. ................. 79
C. Treasury And FHFA Failed To Consider The Factors Prescribed By Congress
As Relevant To Such A Change In Course. ................................................................ 82
D. Treasury And FHFA Failed To Heed State-Law Fiduciary Duties Owed To
Other Shareholders Or Explain The Departure From Them. ...................................... 85
CONCLUSION ............................................................................................................................. 88
Case 1:13-cv-01053-RCL Document 38 Filed 03/21/14 Page 6 of 106
iii
TABLE OF AUTHORITIES
Page(s)
Cases
7547 Corp. v. Parker & Parsley Dev. Partners, L.P.,
38 F.3d 211 (5th Cir. 1994) ................................................................................................ 42, 44
Abbott Bldg. Corp. v. United States,
951 F.2d 191 (9th Cir. 1991) .................................................................................................... 30
Abrahamson v. Fleschner,
568 F.2d 862 (2d Cir. 1978) ............................................................................................... 42, 44
Adagio Inv. Holding Ltd. v. FDIC,
338 F. Supp. 2d 71 (D.D.C. 2004) ............................................................................................ 65
Air Transp. Ass’n of Am., Inc. v. Nat’l Mediation Bd.,
719 F. Supp. 2d 26 (D.D.C. 2010),
aff’d, 663 F.3d 476 (D.C. Cir. 2011) ........................................................................................ 20
Albrecht v. Comm. on Emp. Benefits of Fed. Reserve Emp’t Benefit Sys.,
357 F.3d 62 (D.C. Cir. 2004) .................................................................................................... 88
Am. Library Ass’n v. FCC,
406 F.3d 689 (D.C. Cir. 2005) .................................................................................................. 37
Am. Radio Relay League, Inc. v. FCC,
524 F.3d 227 (D.C. Cir. 2008) .................................................................................................. 48
Ameristar Fin. Servs. Co. v. United States,
75 Fed. Cl. 807 (2007) .............................................................................................................. 61
Ams. for Safe Access v. DEA,
706 F.3d 438 (D.C. Cir.),
cert. denied, 134 S. Ct. 267 (2013) ........................................................................................... 21
Appalachian Power Co. v. EPA,
249 F.3d 1032 (D.C. Cir. 2001) ................................................................................................ 77
Armstrong v. Exec. Office of President, Office of Admin.,
1 F.3d 1274 (D.C. Cir. 1993) .................................................................................................... 48
Ashcroft v. Iqbal,
556 U.S. 662 (2009) .................................................................................................................. 19
Bank of Am. N.A. v. FDIC,
--- F. Supp. 2d. ---, 2013 WL 4505424 (D.D.C. Aug. 26, 2013) .............................................. 22
Bank of Am. Nat’l Ass’n v. Colonial Bank,
604 F.3d 1239 (11th Cir. 2010) ................................................................................................ 29
Beatty v. Guggenheim Exploration Co.,
122 N.E. 378 (N.Y. 1919) ......................................................................................................... 39
Case 1:13-cv-01053-RCL Document 38 Filed 03/21/14 Page 7 of 106
Table of Authorities
(Continued)
Cases
(Continued)
Page(s)
iv
Bell Atl. Corp. v. Twombly,
550 U.S. 544 (2007) .................................................................................................................. 19
Blue Chip Stamps v. Manor Drug Stores,
421 U.S. 723 (1975) .................................................................................................................. 42
Bowen v. Mich. Acad. of Family Physicians,
476 U.S. 667 (1986) ............................................................................................................ 29, 34
Bragdon v. Abbott,
524 U.S. 624 (1998) .................................................................................................................. 52
Bryce v. Nat’l City Bank of New Rochelle,
17 F. Supp. 792 (S.D.N.Y. 1936),
aff’d, 93 F.2d 300 (2d Cir. 1937) .............................................................................................. 73
Burlington Truck Lines, Inc. v. United States,
371 U.S. 156 (1962) .................................................................................................................. 50
Camp v. Pitts,
411 U.S. 138 (1973) .................................................................................................................. 50
Chamber of Commerce of U.S. v. SEC,
412 F.3d 133 (D.C. Cir. 2005) .................................................................................................. 82
Chaplaincy of Full Gospel Churches v. Navy,
697 F.3d 1171 (D.C. Cir. 2012) ................................................................................................ 21
Chem. Futures & Options, Inc. v. RTC,
832 F. Supp. 1188 (N.D. Ill. 1993) ........................................................................................... 36
Citizens to Pres. Overton Park, Inc. v. Volpe,
401 U.S. 402 (1971),
overruled on unrelated grounds by Califano v. Sanders, 430 U.S. 99 (1977) ................... 47, 49
City of Arlington v. FCC,
133 S. Ct. 1863 (2013) .............................................................................................................. 32
City of Kan. City v. HUD,
923 F.2d 188 (D.C. Cir. 1991) .................................................................................................. 68
Clapper v. Amnesty Int’l USA,
133 S. Ct. 1138 (2013) .............................................................................................................. 21
Cnty. of Los Angeles v. Shalala,
192 F.3d 1005 (D.C. Cir. 1999) ................................................................................................ 75
Cnty. of Sonoma v. FHFA,
710 F.3d 987 (9th Cir. 2013) .............................................................................................. 31, 33
Case 1:13-cv-01053-RCL Document 38 Filed 03/21/14 Page 8 of 106
Table of Authorities
(Continued)
Cases
(Continued)
Page(s)
v
Cobell v. Babbitt,
30 F. Supp. 2d 24 (D.D.C. 1998) .............................................................................................. 30
Cobell v. Norton,
240 F.3d 1081 (D.C. Cir. 2001) ................................................................................................ 85
Coit Independence Joint Venture v. Fed. Sav. & Loan Ins. Corp.,
489 U.S. 561 (1989) .................................................................................................................. 32
Constellation Energy Commodities Grp., Inc. v. FERC,
457 F.3d 14 (D.C. Cir. 2006) .................................................................................................... 22
Cook v. FDA,
733 F.3d 1 (D.C. Cir. 2013) ...................................................................................................... 52
Courtney v. Halleran,
485 F.3d 942 (7th Cir. 2007) .................................................................................................... 65
Dallas Aerospace, Inc. v. CIS Air Corp.,
352 F.3d 775 (2d Cir. 2003) ..................................................................................................... 39
Davis Trust Co. v. Hardee,
85 F.2d 571 (D.C. Cir. 1936) .................................................................................................... 53
De Csepel v. Republic of Hungary,
714 F.3d 591 (D.C. Cir. 2013) .................................................................................................. 19
Del E. Webb McQueen Dev. Corp. v. RTC,
69 F.3d 355 (9th Cir. 1995) ................................................................................................ 53, 58
Delta Sav. Bank v. United States,
265 F.3d 1017 (9th Cir. 2001) ............................................................................................ 27, 28
Deutsche Bank Nat’l Trust Co. v. FDIC,
717 F.3d 189 (D.C. Cir. 2013) .................................................................................................. 28
Dickson v. Sec’y of Def.,
68 F.3d 1396 (D.C. Cir. 1995) ............................................................................................ 74, 75
Dillmon v. NTSB,
588 F.3d 1085 (D.C. Cir. 2009) ................................................................................................ 84
Dopico v. Goldschmidt,
687 F.2d 644 (2d Cir. 1982) ..................................................................................................... 49
Douglas Timber Operators, Inc. v. Salazar,
774 F. Supp. 2d 245 (D.D.C. 2011) .......................................................................................... 37
Dura Pharm., Inc. v. Broudo,
544 U.S. 336 (2005) .................................................................................................................. 23
Case 1:13-cv-01053-RCL Document 38 Filed 03/21/14 Page 9 of 106
Table of Authorities
(Continued)
Cases
(Continued)
Page(s)
vi
ECCO Plains, LLC v. United States,
728 F.3d 1190 (10th Cir. 2013) ................................................................................................ 30
Eisenberg v. Chi. Milwaukee Corp.,
537 A.2d 1051 (Del. Ch. 1987) ................................................................................................ 85
Elmco Props., Inc. v. Second Nat’l Fed. Sav. Ass’n,
94 F.3d 914 (4th Cir. 1996) ...................................................................................................... 63
EME Homer City Generation L.P. v. EPA,
696 F.3d 7 (D.C. Cir. 2012),
cert. granted, 133 S. Ct. 2857 (2013). ...................................................................................... 37
Ensley v. Cody Res., Inc.,
171 F.3d 315 (5th Cir. 1999) .................................................................................................... 23
Esther Sadowsky Testamentary Trust v. Syron,
639 F. Supp. 2d 347 (S.D.N.Y. 2009) ...................................................................................... 26
FAIC Sec. Inc. v. United States,
768 F.2d 352 (D.C. Cir. 1985) .................................................................................................. 24
FCC v. Fox Television Stations, Inc.,
556 U.S. 502 (2009) .................................................................................................................. 85
FDA v. Brown & Williamson Tobacco Corp.,
529 U.S. 120 (2000) .................................................................................................................. 61
First Hartford Sav. Corp. Pension Plan & Trust v. United States,
194 F.3d 1279 (Fed. Cir. 1999) .......................................................................................... 27, 28
Franchise Tax Bd. of Cal. v. Alcan Aluminium Ltd.,
493 U.S. 331 (1990) ............................................................................................................ 23, 24
Freeman v. FDIC,
56 F.3d 1394 (D.C. Cir. 1995) ........................................................................................... passim
Fund for Animals v. Babbitt,
903 F. Supp. 96 (D.D.C. 1995) ................................................................................................. 20
Gelles v. TDA Indus., Inc.,
44 F.3d 102 (2d Cir. 1994) ................................................................................................. 42, 44
Gentile v. Rossette,
906 A.2d 91 (Del. 2006) ........................................................................................................... 25
Gilardi v. U.S. Dep’t of Health & Human Servs.,
733 F.3d 1208 (D.C. Cir. 2013) ................................................................................................ 24
Case 1:13-cv-01053-RCL Document 38 Filed 03/21/14 Page 10 of 106
Table of Authorities
(Continued)
Cases
(Continued)
Page(s)
vii
Glass v. Glass,
321 S.E.2d 69 (Va. 1984) ......................................................................................................... 85
Goldstein v. FDIC,
No. 11-1604, 2014 WL 69882 (D. Md. Jan. 8, 2014) ............................................................... 23
Gosnell v. FDIC,
No. 90-1266, 1991 WL 533637 (W.D.N.Y. Feb. 4, 1991),
aff’d, 938 F.2d 372 (2d Cir. 1991) ............................................................................................ 66
Greater Slidell Auto Auction, Inc. v. Am. Bank & Trust Co. of Baton Rouge, La.,
32 F.3d 939 (5th Cir. 1994) ...................................................................................................... 63
Gross v. Bell Sav. Bank Pa SA,
974 F.2d 403 (3d Cir. 1992) ............................................................................................... 32, 33
Grubbs v. Bailes,
445 F.3d 1275 (10th Cir. 2006) ................................................................................................ 23
Helmerich & Payne Int’l Drilling Co. v. Bolivarian Rep. of Venez.,
--- F. Supp. 2d ----, 2013 WL 5290126 (D.D.C. Sept. 20, 2013) ....................................... 24, 25
Henrichs v. Valley View Dev.,
474 F.3d 609 (9th Cir. 2007) .................................................................................................... 31
Houlihan v. Anderson-Stokes, Inc.,
434 F. Supp. 1330 (D.D.C. 1977) ....................................................................................... 42, 43
In re Ames Dep’t Stores, Inc.,
115 B.R. 34 (Bankr. S.D.N.Y. 1990) ........................................................................................ 46
In re Fed. Home Loan Mortg. Corp. Derivative Litig.,
643 F. Supp. 2d 790 (E.D. Va. 2009) ....................................................................................... 27
In re Kaplan,
143 F.3d 807 (3d Cir. 1998) ..................................................................................................... 24
In re Tenney Village Co., Inc.,
104 B.R. 562 (Bankr. D.N.H. 1989) ......................................................................................... 46
In re Tri-Star Pictures, Inc., Litig.,
634 A.2d 319 (Del. 1993) ......................................................................................................... 25
Ingenito v. Bermec Corp.,
376 F. Supp. 1154 (S.D.N.Y. 1974) ......................................................................................... 42
Int’l Ladies’ Garment Workers’ Union v. Donovan,
722 F.2d 795 (D.C. Cir. 1983) .................................................................................................. 81
Case 1:13-cv-01053-RCL Document 38 Filed 03/21/14 Page 11 of 106
Table of Authorities
(Continued)
Cases
(Continued)
Page(s)
viii
James Madison Ltd. by Hecht v. Ludwig,
82 F.3d 1085 (D.C. Cir. 1996) ............................................................................................ 29, 32
Jerdine v. FDIC,
730 F. Supp. 2d 218 (D.D.C. 2010) .......................................................................................... 19
Jerome Stevens Pharms., Inc. v. FDA,
402 F.3d 1249 (D.C. Cir. 2005) ................................................................................................ 19
Jicarilla Apache Nation v. U.S. Dep’t of Interior,
613 F.3d 1112 (D.C. Cir. 2010) ................................................................................................ 74
Kahn v. Lynch Commc’n Sys. Inc.,
638 A.2d 1110 (Del. 1994) ....................................................................................................... 86
Katz v. Gerardi,
655 F.3d 1212 (10th Cir. 2011) ................................................................................................ 43
Kellmer v. Raines,
674 F.3d 848 (D.C. Cir. 2012) ............................................................................................ 26, 27
Kent Cnty., Del. Levy Court v. EPA,
963 F.2d 391 (D.C. Cir. 1992) .................................................................................................. 48
Keys v. Wolfe,
709 F.2d 413 (5th Cir. 1983) .............................................................................................. 42, 44
Laclede Gas Co. v. FERC,
873 F.2d 1494 (D.C. Cir. 1989) ................................................................................................ 81
LaRoque v. Holder,
650 F.3d 777 (D.C. Cir. 2011) .................................................................................................. 19
* Leon Cnty. v. FHFA,
700 F.3d 1273 (11th Cir. 2012) .......................................................................................... 31, 32
Local 2, OPEIU v. FDIC,
962 F.2d 63 (D.C. Cir. 1992) .................................................................................................... 60
Marcum v. Salazar,
751 F. Supp. 2d 74 (D.D.C. 2010) ...................................................................................... 47, 50
MBIA Ins. Corp. v. FDIC,
708 F.3d 234 (D.C. Cir. 2013) ............................................................................................ 53, 60
* MBIA Ins. Corp. v. FDIC,
816 F. Supp. 2d 81 (D.D.C. 2011),
aff’d, 708 F.3d 234 (D.C. Cir. 2013) ...................................................................... 53, 62, 63, 64
Case 1:13-cv-01053-RCL Document 38 Filed 03/21/14 Page 12 of 106
Table of Authorities
(Continued)
Cases
(Continued)
Page(s)
ix
McAllister v. RTC,
201 F.3d 570 (5th Cir. 2000) .................................................................................................... 54
MCI Telecomms. Corp. v. AT&T,
512 U.S. 218 (1994) .................................................................................................................. 43
McLaughlin v. CIR,
113 F.2d 611 (7th Cir. 1940) .................................................................................................... 45
* Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co.,
463 U.S. 29 (1983) .................................................................................................. 50, 74, 83, 85
Nat’l Ass’n of Home Builders v. Defenders of Wildlife,
551 U.S. 644 (2007) .................................................................................................................. 74
Nat’l Trust for Historic Pres. in U.S. v. FDIC,
995 F.2d 238 (D.C. Cir. 1993),
as modified, 21 F.3d 469 (D.C. Cir. 1994) ................................................................... 31, 32, 33
Northland Capital Corp. v. Silver,
735 F.2d 1421 (D.C. Cir. 1984) .......................................................................................... 42, 43
Parsch v. Massey,
72 Va. Cir. 121 (Va. Cir. Ct. 2006) .......................................................................................... 25
Parsch v. Massey,
79 Va. Cir. 446 (Va. Cir. Ct. Nov. 5, 2009) .............................................................................. 86
Pls. in All Winstar-Related Cases at the Court v. United States,
44 Fed. Cl. 3 (1999) .................................................................................................................. 26
Pub. Citizen v. Fed. Motor Carrier Safety Admin.,
374 F.3d 1209 (D.C. Cir. 2004) ................................................................................................ 82
Rawoof v. Texor Petroleum Co.,
521 F.3d 750 (7th Cir. 2008) .................................................................................................... 24
Reno v. Catholic Soc. Servs.,
509 U.S. 43 (1993) .................................................................................................................... 30
Royer v. Fed. Bureau of Prisons,
933 F. Supp. 2d 170 (D.D.C. 2013) .......................................................................................... 30
RTC v. CedarMinn Bldg. Ltd. P’ship,
956 F.2d 1446 (8th Cir. 1992) ............................................................................................ 54, 73
Sacks v. Reynolds Sec., Inc.,
593 F.2d 1234 (D.C. Cir. 1978) .......................................................................................... 42, 43
Case 1:13-cv-01053-RCL Document 38 Filed 03/21/14 Page 13 of 106
Table of Authorities
(Continued)
Cases
(Continued)
Page(s)
x
SEC v. Banner Fund Int’l,
211 F.3d 602 (D.C. Cir. 2000) ............................................................................................ 31, 84
* SEC v. Chenery Corp.,
318 U.S. 80 (1943) .............................................................................................................. 47, 50
SEC v. Nat’l Sec., Inc.,
393 U.S. 453 (1969) ............................................................................................................ 42, 45
SEC v. Sloan,
436 U.S. 103 (1978) ............................................................................................................ 37, 46
Sofonia v. Principal Life Ins. Co.,
465 F.3d 873 (8th Cir. 2006) .................................................................................................... 43
Stanford Hosp. & Clinics v. NLRB,
370 F.3d 1210 (D.C. Cir. 2004) ................................................................................................ 39
Tenn. Gas Pipeline Co. v. FERC,
926 F.2d 1206 (D.C. Cir. 1991) ................................................................................................ 57
Tooley v. Donaldson, Lufkin & Jenrette, Inc.,
845 A.2d 1031 (Del. 2004) ...................................................................................................... 24
Town of Babylon v. FHFA,
699 F.3d 221 (2d Cir. 2012) ............................................................................................... 33, 34
United States v. Petty Motor Co.,
327 U.S. 372 (1946) .................................................................................................................. 38
United States v. Rogers,
461 U.S. 677 (1983) .................................................................................................................. 55
Upton v. S. Produce Co.,
133 S.E. 576 (Va. 1926) ........................................................................................................... 86
Verizon v. FCC,
740 F.3d 623 (D.C. Cir. 2014) ............................................................................................ 35, 83
Volges v. RTC,
32 F.3d 50 (2d Cir. 1994) ......................................................................................................... 33
Walter O. Boswell Mem’l Hosp. v. Heckler,
749 F.2d 788 (D.C. Cir. 1984) ............................................................................................ 49, 79
Ward v. RTC,
996 F.2d 99 (5th Cir. 1993) .......................................................................................... 33, 65, 66
Warth v. Seldin,
422 U.S. 490 (1975) .................................................................................................................. 19
Case 1:13-cv-01053-RCL Document 38 Filed 03/21/14 Page 14 of 106
Table of Authorities
(Continued)
Cases
(Continued)
Page(s)
xi
Waterview Mgmt. Co. v. FDIC,
105 F.3d 696 (D.C. Cir. 1997) ............................................................................................ 26, 66
Weinberger v. UOP, Inc.,
457 A.2d 701 (Del. 1983) ......................................................................................................... 86
Whatley v. RTC,
32 F.3d 905 (5th Cir. 1994) ...................................................................................................... 63
Whelan v. Abell,
953 F.2d 663 (D.C. Cir. 1992) .................................................................................................. 23
WLR Foods, Inc. v. Tyson Foods, Inc.,
869 F. Supp. 419 (W.D. Va. 1994) ........................................................................................... 85
Statutes
* 5 U.S.C. § 702 ......................................................................................................................... 20, 29
* 5 U.S.C. § 706 ........................................................................................................................ passim
11 U.S.C. § 364 ............................................................................................................................. 46
* 12 U.S.C. § 1455 .................................................................................................................... passim
* 12 U.S.C. § 1719 .................................................................................................................... passim
12 U.S.C. § 1821 .................................................................................................................... passim
12 U.S.C. § 4511 ....................................................................................................................... 6, 48
12 U.S.C. § 4513 ............................................................................................................................. 6
* 12 U.S.C. § 4617 .................................................................................................................... passim
15 U.S.C. § 77c ............................................................................................................................. 45
15 U.S.C. § 78j .............................................................................................................................. 42
44 U.S.C. § 2901 ........................................................................................................................... 48
44 U.S.C. § 3101 ........................................................................................................................... 48
Housing and Economic Recovery Act of 2008, Pub. L. No. 110-289 .......................... 6, 31, 33, 60
Housing and Urban Development Act of 1968, Pub. L. No. 90-448 .............................................. 4
Rules
Fed. R. Civ. P. 12 .................................................................................................................... 19, 20
Fed. R. Civ. P. 56 .................................................................................................................... 19, 20
Case 1:13-cv-01053-RCL Document 38 Filed 03/21/14 Page 15 of 106
Table of Authorities
(Continued)
Page(s)
xii
Regulations
12 C.F.R. § 1237.13 ...................................................................................................................... 58
12 C.F.R. § 1237.3 .................................................................................................................. 63, 64
26 C.F.R. § 1.1001-3 ............................................................................................................... 45, 46
* 76 Fed. Reg. 35,724 (June 20, 2011) ..................................................................................... passim
Other Authorities
A.A. Sommer, Jr., Federal Securities Act of 1933 (2013) ............................................................ 45
Barclays, A Fresh Look at the GSEs (May 15, 2013) ................................................................... 22
Black’s Law Dictionary (9th ed. 2009) ................................................................................... 40, 63
Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure (3d ed. 2004) ......... 20
CNBC, Fannie, Freddie Adequately Capitalized: Lockhart (July 8, 2008) .................................. 5
Cong. Budget Office, Fannie Mae, Freddie Mac, and the Federal Role in the Secondary
Mortgage Market (Dec. 2010) .................................................................................................... 5
Cong. Budget Office, The Budget and Economic Outlook: 2014 to 2024 (Feb. 2014) ......... 19, 74
David H. Carpenter & M. Maureen Murphy, Cong. Research Serv., RL34657, Financial
Institution Insolvency: Federal Authority over Fannie Mae, Freddie Mac, and
Depository Institutions (2008) ................................................................................ 54, 56, 57, 65
Dep’t of Treasury, Treasury Dep’t Announces Further Steps to Expedite Wind Down of
Fannie Mae and Freddie Mac (Aug. 17, 2012) ................................................................. passim
Donald Resseguie, Banks & Thrifts: Government Enforcement & Receivership (2013) 55, 62, 63
E. Allan Farnsworth, Farnsworth on Contracts (3d ed. 2004) ..................................................... 40
Fannie Mae Offering Circular (May 13, 2008) ............................................................................... 6
Fannie Mae Offering Circular, Universal Debt Facility (May 14, 2013) ..................................... 59
FDIC, Managing the Crisis: The FDIC and RTC Experience (1998) ......................................... 55
FHFA Office of Inspector General, Analysis of the 2012 Amendments to the Government
Stock Purchase Agreements (Mar. 20, 2013) ........................................................................... 76
FHFA, 2012 Report to Congress (June 13, 2013) ........................................................................ 60
Fitch, Improved GSE Results May Ease Push for Immediate Reform (Aug. 13, 2012) ............... 15
Fletcher Cyclopedia of the Law of Corporations (2011 rev. vol.) ......................................... 26, 46
Folk on Delaware General Corporation Law .............................................................................. 46
Gov’t Accountability Office, Fannie Mae & Freddie Mac, Analysis of Options for
Revising the Housing Enterprises’ Long-Term Structures (Sept. 2009) .................................. 11
Case 1:13-cv-01053-RCL Document 38 Filed 03/21/14 Page 16 of 106
Table of Authorities
(Continued)
Other Authorities
(Continued)
Page(s)
xiii
Height, GSE Reform Muddles Along, Prospects Look Grim; MI Capital Standards Held
(Feb. 11, 2014) .......................................................................................................................... 23
James D. Cox & Thomas Lee Hazen, Treatise on the Law of Corporations (3d ed. 2012) ......... 26
John W. Head, Lessons from the Asian Financial Crisis: The Role of the IMF and the
United States, 7 Kan. J.L. & Pub. Pol’y 70 (1998) ............................................................. 56, 57
Joint Status Report, McKinley v. FHFA, No. 10-cv-1165 (D.D.C. Sept. 16, 2011) ..................... 28
Keefe, Bruyette & Woods, GSE Profitability Should Continue but Shareholders Are
Unlikely to Benefit (Apr. 4, 2013) ............................................................................................. 22
Louis Loss et al., Securities Regulation (4th ed. 2007) ................................................................ 45
Michael P. Malloy, Banking Law and Regulation (2011) ...................................................... 55, 61
N. Eric Weiss, Cong. Research Serv., RL34661, Fannie Mae’s and Freddie Mac’s
Financial Problems (Aug. 10, 2012) .................................................................................. 70, 85
Office of Management & Budget, Fiscal Year 2015 Analytical Perspectives: Budget of
the U.S. Government (2014) ............................................................................................... 19, 23
Office of the Comptroller of the Currency, Interpretative Letter No. 964 (May 2003) ................. 5
Oxford English Dictionary Online (Dec. 2013) ................................................................ 40, 47, 63
Remarks of Edward J. DeMarco, Getting Our House in Order (Oct. 24, 2013) .......................... 60
Statement of Edward J. DeMarco Before the U.S. Senate Committee on Banking,
Housing and Urban Affairs (Apr. 18, 2013) ............................................................................. 60
Williston on Contracts (4th ed. 2013) ........................................................................................... 41
Case 1:13-cv-01053-RCL Document 38 Filed 03/21/14 Page 17 of 106
1
INTRODUCTION
This is a case about agencies that exceed the power given them by Congress.
In response to the mortgage finance crisis, Congress enacted the Housing and Economic
Recovery Act of 2008 (“HERA”), taking the extraordinary step of authorizing the government to
invest in and operate Fannie Mae and Freddie Mac. Congress granted the Department of
Treasury authority to invest in Fannie and Freddie, but only for a limited time—until December
31, 2009. After that date, Treasury’s authority was strictly limited to exercising the rights it
previously had received in connection with its investments.
HERA also created a new regulator for Fannie and Freddie, the Federal Housing Finance
Agency (“FHFA”), and granted FHFA authority to install itself as Fannie’s and Freddie’s
conservator to “preserve and conserve” their assets so as to restore them to a “sound and solvent”
condition. Alternatively, in the event that there was no hope of reviving the institutions as going
concerns, Congress granted FHFA the power to act as their receiver, to wind them up and
liquidate them.
FHFA placed the Companies into conservatorship—not receivership—on September 7,
2008. According to FHFA’s Director, conservatorship would preserve the possibility that the
Companies could return to “normal business operations.” FHFA, on the Companies’ behalf, then
agreed to sell Treasury a new class of senior preferred stock (“Treasury Stock”) under the terms
of a purchase agreement permitting each company to draw funds from Treasury. The Treasury
Stock gave Treasury a liquidation preference of $1 billion in each Company that increases dollar
for dollar with the Companies’ draws from Treasury. Treasury also received a fixed dividend on
the total amount of its liquidation preferences and the right to purchase 79.9 percent of the
Companies’ common stock at a nominal price. While this extraordinary governmental
investment in the Companies was highly dilutive to existing shareholders, Treasury and FHFA
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each emphasized that their agreement left the existing capital structure in place, consistent with
conservatorship’s goal of returning the Companies to normal business operations.
The Companies’ financial situation improved over time and, by 2010, some market
participants (including some Plaintiffs here) forecast that the Companies would soon again be
profitable. But by that same year, according to an internal Treasury memorandum—disclosed
for the first time in this litigation—the Administration had adopted a “commitment” to
“ensur[ing] [that] existing common equity holders will not have access to any positive earnings
from the [Companies] in the future.” The meaning of the Treasury memorandum is crystal clear:
The government of the United States established a policy to destroy private shareholder value.
Then, in 2012, just as the Companies were becoming immensely profitable, the
Administration found the opportunity to execute the previously undisclosed “commitment” to
wipe out shareholders. Notwithstanding that under HERA Treasury’s authority was now limited
to the exercise of rights it had previously received in connection with its earlier investments,
Treasury and FHFA agreed to amend the Treasury Stock, radically transforming that stock by
replacing Treasury’s fixed dividend with the so-called “Net-Worth Sweep” that is the subject of
these lawsuits.
Under the Net-Worth Sweep, beginning in 2013 and continuing in perpetuity, each
Company must pay to Treasury as a “dividend” virtually every cent of its net worth each and
every quarter. The conservator’s statutory mandate to restore the Companies to sound and
solvent operations notwithstanding, the Sweep Amendment ensures that—in Treasury’s words—
the Companies cannot “retain profits, rebuild capital, [or] return to the market in their prior
form”; in other words, the Sweep Amendment initiates the Companies’ liquidation. By
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3
depriving the Companies of any ability to retain earnings, the Net-Worth Sweep places the
Companies in a financial coma with the explicit intention of slowly killing them.
Predictably, in its short life, the Net-Worth Sweep has been a spectacular boon for
Treasury. The government contends that it did not anticipate that Treasury would receive any
more under the Net-Worth Sweep than the $19 billion per year it previously received under the
fixed dividends. But in 2013, Treasury received more than $130 billion as a “dividend” from the
Companies. From the government’s telling, it had no idea that the Net-Worth Sweep would
cause Treasury to receive an additional $111 billion—or nearly 600 percent more—than it would
have received under the original Treasury Stock, a preposterous notion that becomes more so
upon closer inspection. Indeed, with the collection of this outlandish “dividend,” the $189.5
billion that the Companies owe to Treasury now has been fully repaid. Yet the government
predicts that the largesse to Treasury will continue; it anticipates reaping an additional $181
billion from the Companies over the next decade.
The Net-Worth Sweep is nothing less than a nationalization of the Companies that is both
unauthorized by Congress and that belies the government’s earlier promise to keep in place the
Companies’ existing capital structure. The Sweep Amendment simply discards the conservator’s
commitment—and statutory mandate under HERA—to operate the Companies with the goal of
returning them to financial health and normal business operations. By disregarding the authority
granted to it by Congress, and turning its back on the policies it established when it invested in
the Companies, Treasury and FHFA have also violated the Administrative Procedure Act several
times over—exceeding the limits on their statutory authority and engaging in conduct that lacks
any foundation in fact or logic. Defendants’ arguments are defeated by ample, well-known
precedent under the APA, HERA and analogous statutes, and the securities laws. Plaintiffs here,
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4
holders of preferred and common stock that the government intends to—and has tried to—wipe
out, ask the Court to put an end to this illegal conduct and to vacate and set aside the Net-Worth
Sweep.
STATEMENT OF THE FACTS
A. Fannie Mae And Freddie Mac.
Fannie Mae and Freddie Mac (the “Companies”) are federally chartered financial
institutions, known as Government Sponsored Enterprises, whose mission is to increase liquidity
in the residential mortgage market.1 Congress created Fannie Mae in 1938 in the Federal
National Mortgage Act and privatized the Company in 1968. See Housing and Urban
Development Act of 1968, Pub. L. No. 90-448. Two years after privatizing Fannie Mae,
Congress chartered Freddie Mac under the Federal Home Loan Corporation Act. For the next
thirty-eight years, the Companies conducted business as publicly traded corporations, owned by
private shareholders and governed by state corporation law: Delaware law for Fannie Mae,
Virginia law for Freddie Mac.
The Companies increase liquidity in the mortgage market primarily through mortgage
securitization. The Companies purchase mortgages from lenders, pool them, and sell the pooled
assets as mortgage-backed securities to investors. See generally Cong. Budget Office, Fannie
Mae, Freddie Mac, and the Federal Role in the Secondary Mortgage Market 1 (Dec. 2010),
available at http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/120xx/doc12032/12-23-
fanniefreddie.pdf. For a fee, the Companies guarantee that investors will receive payments due
under those securities, even if the mortgages default.
1 Fannie Mae’s official name is the Federal National Mortgage Association; Freddie Mac’s official name is the
Federal Home Loan Mortgage Corporation.
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The Companies have long been attractive to investors. Up until 2008, the Companies
were successful enterprises. Fannie Mae had not reported a full-year loss since 1985, and
Freddie Mac had never reported a full-year loss since becoming owned by private shareholders
in 1989. In addition, the government encouraged investors to purchase the Companies’ equity.
Federal regulators repeatedly signaled that the Companies were extraordinarily safe investments.
For example, the Office of the Comptroller of the Currency permitted banks to carry certain
types of the Companies’ stock on their balance sheets at 20 percent risk weighting (versus 100
percent for other companies’ stock). See Office of the Comptroller of the Currency,
Interpretative Letter No. 964 (May 2003), http://www.occ.gov/static/interpretations-and-
precedents/may03/int964.pdf. This allowed banks to hold less capital if they owned the
Companies’ stock than if they owned similar securities of other companies. Indeed, on July 8,
2008—a mere two months before the Federal Housing Finance Agency (“FHFA”) placed the
Companies into conservatorship—James Lockhart, Director of the Companies’ then regulator,
the Office of Federal Housing Enterprise Oversight (“OFHEO”), and later Director of FHFA,
declared that the Companies were “adequately capitalized,” the agency’s “highest criteria” for
capitalization. CNBC, Fannie, Freddie Adequately Capitalized: Lockhart (July 8, 2008),
http://www.cnbc.com/id/25584136.
This favorable treatment generally applied to the Companies’ “preferred stock,” which
differs from common stock because it carries rights to contractually agreed-upon dividends and
liquidation preferences. A liquidation preference is a priority right to receive distributions from
the Companies’ assets in the event they are dissolved. For example, Fannie Mae issued preferred
stock on May 23, 2008, that offered investors an 8.5 percent annual dividend and a $25-per-share
liquidation preference. See Fannie Mae Offering Circular (May 13, 2008), available at
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http://www.fanniemae.com/resources/file/ir/pdf/stock-info/series_T_05152008.pdf. Plaintiffs in
these cases own various series of preferred stock issued by the Companies.2
B. The Housing And Economic Recovery Act Of 2008.
Notwithstanding Director Lockhart’s assurances, Congress perceived that the Companies
might require government intervention during the downturn in the housing market and passed the
Housing and Economic Recovery Act of 2008, Pub. L. No. 110-289 (“HERA”), on July 30,
2008. HERA changed the Companies’ regulatory framework in two ways.
First, HERA abolished OFHEO and created FHFA to serve as the Companies’ regulator.
12 U.S.C. § 4511. HERA authorized FHFA to exercise “general regulatory authority” to ensure
that the Companies operated in a safe and sound manner and accomplished their statutory
missions. Id. §§ 4511(b)(2), 4513(a)(1).
HERA also empowered FHFA to take control of the Companies under certain
circumstances linked to the Companies’ financial stability. See id. § 4617(a)(1), (3). FHFA can
elect to exercise that power through one of two means: as a “conservator” or as a “receiver.”
But FHFA cannot simultaneously act as both conservator and receiver. See id. § 4617(a)(4)(D)
(“The appointment of [FHFA] as receiver . . . shall immediately terminate any
conservatorship.”).
FHFA’s choice affects its authority. As a conservator, FHFA may “take such action as
may be—(i) necessary to put the [Companies] in a sound and solvent condition; and
(ii) appropriate to carry on the business of the [Companies] and preserve and conserve the assets
of the property of the [Companies].” Id. § 4617(b)(2)(D). But if FHFA chooses to act as a
2 See Decl. of Michael C. Neus (Mar. 21, 2014); Decl. of Eugene G. Ballard (Mar. 21, 2014); Decl. of Bruce R.
Berkowitz (Mar. 20, 2014); Decl. of Sean Beatty (Mar. 21, 2014); filed as attachments hereto.
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receiver, HERA grants it the “additional” power to “place the [Company] in liquidation and
proceed to realize upon the assets of the [Company] in such manner as [FHFA] deems
appropriate.” Id. § 4617(b)(2)(E) (emphasis added). FHFA as receiver may also adjudicate
claims against the Companies in accordance with certain procedures. Id. § 4617(b)(3)(A).
FHFA’s powers as receiver thus exceed its powers as conservator.
Second, Congress granted Treasury “temporary authority” to recapitalize the Companies
by purchasing their “obligations or other securities.” Id. §§ 1455(l)(1)(A) (Fannie Mae),
1719(g)(1)(A) (Freddie Mac) (emphasis added). Before making any purchases, the Secretary of
the Treasury was required to “determine that such actions are necessary to (i) provide stability to
the financial markets; (ii) prevent disruptions in the availability of mortgage finance; and (iii)
protect the taxpayer.” Id. §§ 1455(l)(1)(B), 1719(g)(1)(B) (the “required findings”). In addition,
Treasury must also “take into consideration” six factors, the most relevant here being: (i) “[t]he
[Companies’] plan[s] for the orderly resumption of private market funding or capital market
access,” and (ii) “[t]he need to maintain the Corporation[s’] status[es] as . . . private shareholder-
owned compan[ies].” Id. §§ 1455(l)(1)(C), 1719(g)(1)(C) (the “required considerations”).
Treasury’s temporary authority expired on December 31, 2009. Id. §§ 1455(l)(4), 1719(g)(4).
C. The Federal Government Takes Control Of Fannie Mae And Freddie Mac.
On September 6, 2008, FHFA placed the Companies into conservatorships. At the time,
FHFA’s Director described the conservatorship as a temporary measure “to put [the Companies]
in a sound and solvent condition” and “return[ ] the entities to normal business operations.”
FHFA 0016, 0026-0027; Treasury 0090, 0094.3 FHFA explained that it understood its
3 Citations to the Administrative Record and briefs are as follows, with all docket citations referring to No. 13-cv-
1025 unless otherwise indicated: “FHFA” refers to the “Document Compilation” filed by FHFA and Defendant
Edward DeMarco on December 17, 2013 (Dkt. 27); “Treasury” refers to the Administrative Record filed by
(Cont’d on next page)
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conservatorship powers to be those specified in HERA: The “powers of the Conservator” are to
“take all actions necessary and appropriate to (1) put the Company in a sound and solvent
condition and (2) carry on the Company’s business and preserve and conserve the assets and
property of the Company.” FHFA 0027. FHFA also made clear that, as the Companies’
conservator, FHFA could not “make a determination to liquidate the Company.” FHFA 0028.
The next day, Treasury exercised its temporary authority to purchase a new class of
senior preferred stock in the Companies (the “Treasury Stock”). Certificates of Designation set
forth the terms of the Treasury Stock, and Treasury purchased those securities under terms and
conditions set forth in Preferred Stock Purchase Agreements (the “Purchase Agreements”).
Treasury 0017-0040 (Fannie Mae), 0051-0074 (Freddie Mac).
Under the Purchase Agreements, Treasury committed to provide each Company up to
$100 billion (Treasury 0020, 0054 (§ 2.1)), which the Companies could draw upon at the end of
any quarter to ensure that their assets were equal to their liabilities (Treasury 0018, 0052
(“Deficiency Amount”); Treasury 0020, 0054 (§ 2.2)). In exchange, Treasury received 1 million
senior preferred shares in each Company. The Treasury Stock and the Purchase Agreements
gave Treasury four rights. First, the Treasury Stock entitled Treasury to a senior liquidation
preference of at least $1,000 per share—or $1 billion—for each Company. The Agreements
(Cont’d from previous page)
Treasury and Defendant Jacob J. Lew on December 17, 2013 (Dkt. 26); “FHFA Br.” refers to the FHFA
Defendants’ Memorandum in Support of Motion to Dismiss All Claims and, in the Alternative, for Summary
Judgment as to Plaintiffs’ Arbitrary and Capricious Claims filed on January 17, 2014 (Dkt. 32); “Treasury Br.”
refers to the Treasury Defendants’ Memorandum in Support of Their Motion to Dismiss, or in the Alternative, for
Summary Judgment filed on January 17, 2014 (Dkt. 31); “Treasury Discovery Opp.” refers to the Department of the
Treasury’s Memorandum in Opposition to Fairholme Funds’ Motion to Supplement the Administrative Records, to
Take Discovery, to Suspend the Agreed Briefing Schedule, and for a Status Conference filed on March 4, 2014 (No.
13-cv-1053 Dkt. 33); and “FHFA Discovery Opp.” refers to the Opposition of Defendants FHFA as Conservator for
Fannie Mae and Freddie Mac, FHFA Director Melvin L. Watt, Fannie Mae and Freddie Mac to Plaintiffs’ Motion
for Supplementation of the Administrative Records, for Limited Discovery, for Suspension of Briefing on
Defendants’ Dispositive Motions, and for a Status Conference filed on March 4, 2014 (No. 13-cv-1053 Dkt. 34).
Case 1:13-cv-01053-RCL Document 38 Filed 03/21/14 Page 25 of 106
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further provided that Treasury’s liquidation preference in a Company would increase dollar-for-
dollar every time that Company drew upon Treasury’s funding commitment. Treasury 0100,
0133; FHFA 0133, 0147 (§§ 3.1, 3.3). Second, the Treasury Stock granted Treasury the right to
cash dividends equal to 10 percent of the value of its liquidation preference or an “in kind”
dividend equal to 12 percent of the liquidation preference, which would be added to Treasury’s
liquidation preference. Treasury 0033, 0067-0068 (§ 2(c)). Third, the Purchase Agreements
gave Treasury warrants allowing it to purchase up to 79.9 percent of the Companies’ common
stock at a nominal price. Treasury 0020, 0054. Fourth, the Purchase Agreements gave Treasury
the right to collect Periodic Commitment Fees from the Companies—in addition to the
dividends—beginning in 2010. Treasury 0022, 0056.
Before purchasing its stock in the Companies, Treasury purported to make the findings
required by HERA. Treasury found that the purchases were “necessary to provide stability to the
financial markets, prevent disruptions in the availability of mortgage finance, and protect the
taxpayer.” Treasury 0001. In making those findings, the Treasury Secretary approved a
memorandum analyzing the required considerations. Treasury 0001-0005.
The Purchase Agreements provide Treasury with control over the Companies. In
addition to its warrants to purchase 79.9% of the Companies’ common stock, the Purchase
Agreements grant Treasury veto power, while the Treasury Stock remains outstanding, over a
variety of the Companies’ activities such as paying dividends on other classes of stock, issuing
new stock, transferring certain assets, making certain fundamental changes to their operations,
and increasing their indebtedness above a specified amount. See Treasury 0024-0025, 0058-
0059. Indeed, the Purchase Agreements also require FHFA to obtain Treasury’s consent before
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returning the Companies to private control by terminating the conservatorship. Treasury 0024,
0058.
Both Treasury and FHFA emphasized that the conservatorships and Treasury’s
investments did not nationalize the Companies, and that the Companies’ equity structures would
remain intact. Consistent with HERA’s goal of maintaining the Companies’ private-ownership
status, then-Secretary Paulson explained that “conservatorship does not eliminate the outstanding
preferred stock.” FHFA 0022; see also Treasury 0005 (Treasury memorandum stating that
“[c]onservatorship preserves the status and claims of the preferred and common shareholders”).
FHFA similarly confirmed that the conservatorships did not alter the Companies’ statuses as
privately owned entities. FHFA 0028 (“Stockholders will continue to retain all rights in the
stock’s financial worth; as such worth is determined by the market.”); see also FHFA 0018
(Director Lockhart’s statement that “the common and all preferred stocks will continue to remain
outstanding”); FHFA 0061-0062 (Director Lockhart’s testimony that “the shareholders are still
in place; both the preferred and common shareholders have an economic interest in the
[C]ompanies”). Significantly, maintaining each Company’s privately owned status and capital
structure forestalled any accounting obligation to consolidate the Companies’ debts onto the
federal balance sheet. See Gov’t Accountability Office, Fannie Mae & Freddie Mac, Analysis of
Options for Revising the Housing Enterprises’ Long-Term Structures 18 (Sept. 2009), available
at http://www.gao.gov/assets/300/295025.pdf.
In the months after the Companies entered conservatorship, the value of residential
mortgage-backed securities fell. The Companies, whose long-term assets and liabilities are
sensitive to market prices, incurred substantial non-cash losses as a result of the mark down of
assets and the increase in reserves set aside for potential future losses. These paper losses
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decreased the Companies’ on-paper net worth, requiring the Companies to make several draws
against Treasury’s funding commitment. By the end of 2009, the Companies had drawn a total
of $125.9 billion—$75.2 billion for Fannie Mae and $50.7 billion for Freddie Mac—to remedy
the negative net worth generated largely by the Companies’ substantial non-cash losses arising
from write-downs of assets and increases in loss reserves. Treasury 4351.
D. Treasury Amends The Purchase Agreements Twice Before The Expiration
Of Its Statutory Authority On December 31, 2009.
In 2009, Treasury and FHFA twice agreed to amend the Purchase Agreements to increase
the total amount that the Companies could draw from Treasury. On May 6, 2009, Treasury and
FHFA executed the First Amendment, in which Treasury agreed to provide each Company up to
$200 billion and permitted the Companies to increase the size of their loan portfolios and
outstanding debt. Treasury 0165-0169 (Fannie Mae), 0170-0174 (Freddie Mac); FHFA 0676-
0680 (Fannie Mae), 0681-0685 (Freddie Mac). Treasury explained that it did not expect the
Companies to need these additional funds, but that they would “increase market confidence.”
Treasury 0162. Before executing the amendment, Treasury purported to make the statutorily
required findings based on the statutorily required considerations. Treasury 0163-0164.
On December 24, 2009, on the eve of the expiration of Treasury’s temporary authority,
Treasury and FHFA agreed to a Second Amendment. Treasury 0189-0194 (Fannie Mae), 0195-
0200 (Freddie Mac). As Treasury explained, its “authority to purchase [the Companies’]
obligations and securities [would expire] at year end” and “[t]herefore, after December 31, [its]
ability to make further changes to the [Purchase Agreements], particularly with respect to the
commitment amount, is constrained.” Treasury 0177. The Second Amendment thus converted
the $200 billion per Company maximum funding commitment into a formulaic maximum
commitment that enabled each Company to draw either $200 billion or $200 billion plus the
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Companies’ negative net worth, if any, for 2010-2012, whichever amount was greater. Under
this formula, the Companies could draw unlimited sums from Treasury until the end of 2012, but
Treasury’s commitment to each Company would thereafter be capped at the amount drawn from
2010 through 2012, plus $200 billion. Treasury 0178. The Second Amendment also adjusted
other features of the Purchase Agreements, delaying the beginning of the required decrease in the
size of the Companies’ portfolios and delaying the implementation of the Periodic Commitment
Fee by one year. Treasury 0183, 0190, 0192-0193, 0196, 0198-0199 (§§ 3, 8, 9). Treasury also
characterized the three-year, infinite draw permitted by the Second Amendment as a “temporary”
measure “to support [the Companies] until Congress determines a more sustainable long-term
path.” Treasury 0178. As it did before executing the First Amendment, Treasury purported to
make the required findings and address the required considerations when it executed the Second
Amendment. Treasury 0188.
At this point, Treasury still asserted that the Companies could exit conservatorship. It
explained that “[t]he structure of the [Purchase Agreements] . . . enhance[s] the probability [that]
both Fannie Mae and Freddie Mac [will] ultimately repay[ ] amounts owed” to Treasury.
Treasury 0184. Because of this “probability,” Treasury recognized that “Fannie Mae and
Freddie Mac may emerge from conservatorship to resume independent operations.” Id.
Significantly, Treasury expressly recognized that “[c]onservatorship, [accordingly,] preserves the
status and claims of the preferred and common shareholders.” Id.
Treasury’s temporary authority ended seven days later, on December 31, 2009. FHFA
confirmed this fact two months later, when it described the Second Amendment to Congress as
the “final adjustment” to Treasury’s commitment. FHFA 1181. FHFA’s statement to Congress
also acknowledged limitations on FHFA’s own authority, explaining that its only “option”
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“under existing law” with respect to the Companies’ futures would be “to reconstitute the two
companies under their current charters.” FHFA 1185.
E. The Government Establishes A Policy That The Companies Should Never
Exit Conservatorship.
Not long after the Second Amendment, Treasury changed course. Though it was not
announced to the public, an internal memorandum reveals that sometime before December 2010,
the Administration embarked upon a policy of “ensur[ing] [that] existing common equity holders
will not have access to any positive earnings from the [Companies] in the future.” Treasury
0202. Treasury suggested that the objective could be achieved by “[s]et[ting] the [Periodic
Commitment Fee] equal to any generated positive net income,” though it noted that this option
was “subject to further legal review.” Id. A 2011 white paper thereafter set forth the
Administration’s goal of “ultimately wind[ing] down both [Companies].” Treasury 0217. It
would “seek opportunities, wherever possible, to accelerate Fannie Mae and Freddie Mac’s
withdrawal.” Treasury 0218.
FHFA made similar statements, including in September 2011 remarks by the Acting
Director, and again in its February 2012 Strategic Plan, that the Companies “will not be able to
earn their way back to a condition that allows them to emerge from conservatorship” (FHFA
2397), and, as a result, the Companies’ “stock lower in priority” than the Treasury Stock—
including the preferred stock—“is not likely to have any value” (FHFA 2640).
F. The Companies Regain Profitability.
FHFA’s pessimistic forecasts proved incorrect. As the Companies staunched their losses
in 2010, FHFA altered its 2010 projections of the Companies’ likely draws from Treasury,
observing that the Companies’ “actual results” “were substantially better than projected.”
Treasury 1900; FHFA 2410. FHFA’s October 2011 analysis predicted that, by 2013, the
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Companies’ annual draws from Treasury—including those needed to pay the 10 percent
dividend—would approach zero: Even under FHFA’s worst-case scenario, Freddie Mac’s draws
were predicted to cease altogether. Treasury 1901; FHFA 2411. For Fannie Mae, FHFA’s
positive and baseline scenarios projected that its annual draws would decline substantially, such
that Fannie Mae would require only an additional $3 billion during 2014, and leave the Company
$84 billion below Treasury’s funding cap. Compare FHFA 2412 ($150 billion cumulative draws
by 2014), with Treasury 4351 ($233.7 billion funding cap after January 1, 2013). It was only
under FHFA’s worst-case scenario that Fannie Mae continued to make substantial draws on
Treasury’s funding commitment. FHFA 2412. By late 2011, Treasury recognized that the
Companies possibly would have “positive net income after dividends.” Treasury 2359.
The Companies’ financial fortunes continued to improve—dramatically so—in 2012. In
May 2012, both Fannie Mae and Freddie Mac announced that they had posted net profits in the
first quarter of 2012: Fannie Mae reported net income of $2.7 billion, and Freddie Mac reported
$577 million in net income. FHFA 3157, 3351. This performance meant that Fannie Mae did
not require any funds from Treasury that quarter to pay Treasury’s then 10 percent cash
dividend, and Freddie Mac required only $19 million. Treasury 4351. FHFA’s April 2012
report on the Companies’ finances noted that the Companies’ performances had exceeded even
its most optimistic projections. FHFA had projected that the Companies would draw at least a
combined $33 billion during the second half of 2011 and the first quarter of 2012; the actual
draw was only $19 billion. Treasury 3865, 3879; FHFA 3125, 3139, 3145. The Companies’
performances further improved in the second quarter, as Fannie Mae and Freddie Mac reported
net income of $5.1 billion and $3.0 billion, respectively, easily out-earning Treasury’s 10 percent
cash dividend. For the first time since 2008, both Companies had positive net worth. See
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Treasury 3351 (Fannie Mae Q1 2012 10-Q (May 2012)); FHFA 3589 (Freddie Mac Q2 2012 10-
Q (Aug. 2012)); FHFA 3848-3849 (Fannie Mae Q2 2012 10-Q (Aug. 2012)); Treasury 3910,
4087; FHFA 3589, 3848; see also FHFA 4069 (FHFA report explaining that the Companies’
second quarter performance again exceeded FHFA’s most optimistic projection). In view of the
steadily improving outlook, Fitch told bond investors that “absent changes in the terms of
government support for Fannie and Freddie under the conservatorship agreement, we do not
expect any near-term pressure on [the Companies’] ratings.” Fitch, Improved GSE Results May
Ease Push for Immediate Reform (Aug. 13, 2012), available at http://in.reuters.com/article/2012/
08/13/idINWNA330420120813.
G. Treasury And FHFA “Amend” The Treasury Stock In 2012 To Permit
Treasury To Seize All Of The Companies’ Net Worth.
On August 17, 2012—less than two weeks after the Companies released their second
quarter earnings reports showing dramatic growth in net income—Treasury and FHFA decided
to change fundamentally the nature of Treasury’s investment in the Companies. In the Third
Amendment (the “Sweep Amendment,” or what Treasury characterizes as “the Net-Worth
Sweep,” see Treasury Br. 50), Treasury and FHFA replaced the fixed-rate dividend with a “net-
worth sweep” of each Company’s net worth above a capital reserve of $3 billion that steadily
declines to zero by 2018. See Treasury 4337, 4345; FHFA 4034, 4042 (§ 3).4 The Sweep
Amendment thus permits Treasury to take virtually every cent of each Company’s net worth,
4 The Third Amendment also made two additional changes to the terms of the Treasury Stock. First, it suspended
Treasury’s authority to set a Periodic Commitment Fee. Treasury 4338, 4346; FHFA 4035, 4043 (§ 4). Second, it
accelerated the decrease of the Companies’ retained portfolio. Treasury 4339, 4347; FHFA 4036, 4044 (§ 6). The
original Purchase Agreements required the Companies to decrease the size of their portfolios by 10 percent per year
until they reached $250 billion—a requirement that was waived in the First and Second Amendments through 2010.
Treasury 0025, 0059 (§ 5.7); Treasury 0168, 0173 (§ 8); Treasury 0192-0193, 0198-0199 (§ 9). The Third
Amendment increased the pace of this reduction, requiring the Companies to reduce their assets by 15 percent per
year. Treasury 4339, 4347 (§ 6).
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leaving them with no operating capital cushion. Importantly, none of these payments reduces
Treasury’s liquidation preference; all payments are characterized as dividends. Thus, under the
Sweep Amendment, the Companies will collectively owe Treasury at least $189.5 billion for as
long as they exist and no matter how much they pay Treasury.
Publicly, Treasury and FHFA gave conflicting justifications for the Sweep Amendment.
On the one hand, the agencies claimed that the Sweep Amendment was needed to avert a
“downward spiral,” in which the Companies would deplete Treasury’s funding commitment in
order to pay Treasury’s dividends. Treasury’s press release explained that replacing the 10
percent dividend “[e]nd[ed] the circular practice of the Treasury advancing funds to the
[Companies] simply to pay dividends back to Treasury.” Dep’t of Treasury, Treasury Dep’t
Announces Further Steps to Expedite Wind Down of Fannie Mae and Freddie Mac (Aug. 17,
2012), available at http://www.treasury.gov/press-center/press-releases/Pages/tg1684.aspx
(“2012 Press Release”). FHFA said that eliminating the 10 percent dividend would “ensure
[financial] stability” by eliminating investors’ concerns about “the adequacy of the financial
commitment contained in the [Purchase Agreements].” FHFA 4047.
On the other hand, the agencies also justified the Sweep Amendment as consistent with
the Administration’s policy of “ultimately wind[ing] down both” Companies. Treasury 0217.
Indeed, Treasury’s press release announcing the Sweep Amendment was titled: “Treasury
Department Announces Further Steps to Expedite Wind Down of Fannie Mae and Freddie Mac.”
2012 Press Release (emphasis added). “Acting upon the commitment made in the
Administration’s 2011 White Paper” to “ultimately wind down” the Companies and to “seek
opportunities, wherever possible, to accelerate” this process, Treasury explained that—with the
Net-Worth Sweep—the Companies “w[ould] be wound down” and “w[ould] not be allowed to
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retain profits, rebuild capital, and return to the market in their prior form.” 2012 Press Release;
see also Treasury 0207, 0218 (White Paper). Moreover, Treasury said, the Net-Worth Sweep
would “[en]sure that every dollar of earnings that Fannie Mae and Freddie Mac generate will be
used to benefit taxpayers.” 2012 Press Release. FHFA, too, justified the Sweep Amendment on
the ground that it would “fully capture financial benefits for taxpayers.” FHFA 4047.
The Sweep Amendment has been an enormous windfall for the government. Fannie Mae
and Freddie Mac were hugely profitable in 2013, posting cumulative net income of $84.0 billion
and $51.6 billion, respectively. Fannie Mae 2013 10-K, at 2 (Feb. 21, 2014); Freddie Mac 2013
10-K, at 1 (Feb. 27, 2014).5 Indeed, Fannie Mae declared that it had reported “the highest annual
net income . . . in [its] history.” Fannie Mae 2013 10-K, at 2. The Companies—under FHFA’s
supervision—achieved large profits in part by reversing some of the non-cash accounting losses
that led to negative net income in 2009 and 2010. For example, the Companies recognized
deferred tax assets—an accounting term for losses that a company can use to offset future
income—that increased Fannie Mae’s and Freddie Mac’s net incomes by $50.6 billion and $23.9
billion, respectively. See Fannie Mae Q1 2013 10-Q, at 2 (May 9, 2013); Freddie Mac Q3 2013
10-Q, at 1 (Nov. 7, 2013).6
These gains were immediately captured by Treasury, resulting in “dividend” payments of
$130 billion in 2013. Treasury 4352. With these payments, the Companies have given Treasury
5 Fannie Mae’s annual and quarterly SEC filings are available at http://www.fanniemae.com/portal/about-
us/investor-relations/quarterly-annual-results.html. Freddie Mac’s annual and quarterly SEC filings are available at
http://www.freddiemac.com/investors/sec_filings/index.html.
6 Deferred tax assets are assets (such as net operating loss carry forwards) that a company can use to reduce income
tax liability in a subsequent tax period. Because these assets operate only to reduce tax liability, deferred tax assets
only have value if the company will have positive income in the future to generate tax liability. These assets must
be written down if a company does not expect to generate sufficient income to use these assets. In contrast, a
company may recognize once-written down deferred tax assets if it expects to generate sufficient income to use the
deferred tax assets to offset future tax liability.
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$185.2 billion since 2008—97.7 percent of Treasury’s liquidation preference, Treasury 4352,
and they will pay an additional $17.6 billion during the first quarter of 2014, Fannie Mae 2013
10-K, at 4 ($7.2 billion); Freddie Mac 2013 10-K, at 102 ($10.4 billion). The Companies’
enormous profits will continue to fill Treasury’s coffers over the coming years, as the Office of
Management and Budget estimates that Treasury will receive $181.5 billion from the Companies
over the next decade. See Office of Management & Budget, Fiscal Year 2015 Analytical
Perspectives: Budget of the U.S. Government 323 (2014), available at
http://www.whitehouse.gov/sites/default/files/omb/budget/fy2015/assets/spec.pdf (“OMB
Analysis”); see also Fannie Mae 2012 10-K, at 12 (Apr. 2, 2013) (“[A]nnual net income [will]
remain strong over the next few years.”). Though it will have fully recovered its investment,
Treasury will maintain its liquidation preference of more than $189 billion, meaning that, if the
Companies are wound down as Treasury suggests, after all liabilities are paid, no other
shareholders could recover from the net assets until Treasury first is paid $189 billion. But, such
repayment is impossible under the Sweep Amendment, which requires the Companies to pay out
all net assets as dividends to Treasury. Indeed, the Congressional Budget Office predicts that the
Companies will send an additional $81 billion to Treasury in 2014. Cong. Budget Office, The
Budget and Economic Outlook: 2014 to 2024, at 64 (Feb. 2014), available at
http://www.cbo.gov/sites/default/files/cbofiles/attachments/45010-Outlook2014_Feb.pdf (“CBO
Report”).
STANDARD OF REVIEW
Treasury and FHFA move to dismiss Plaintiffs’ complaints for lack of jurisdiction under
Federal Rule of Civil Procedure 12(b)(1) and for failure to state a claim for relief under Rule
12(b)(6). In the alternative, they move for summary judgment under Rule 56, with Treasury
moving for summary judgment on all of Plaintiffs’ claims and FHFA moving for summary
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judgment only on Plaintiffs’ claims that FHFA violated the Administrative Procedure Act
(“APA”) by acting arbitrarily and capriciously when it executed the Sweep Amendment.
Plaintiffs oppose those motions and, in addition, cross-move for summary judgment on their
claims under the APA.
“In ruling on a motion under Rule 12(b)(1), the Court ‘must accept as true all material
allegations of the complaint, and must construe the complaint in favor of the complaining
party.’” Jerdine v. FDIC, 730 F. Supp. 2d 218, 222-23 (D.D.C. 2010) (quoting Warth v. Seldin,
422 U.S. 490, 501 (1975)); see also 5B Charles Alan Wright & Arthur R. Miller, Federal
Practice and Procedure § 1350 (3d ed. 2004). “While the district court may consider materials
outside the pleadings . . . , the court must still accept all of the factual allegations in the
complaint as true.” Jerome Stevens Pharms., Inc. v. FDA, 402 F.3d 1249, 1253 (D.C. Cir. 2005)
(citations, internal quotation marks, and brackets omitted).
To survive a motion to dismiss under Federal Rule of Procedure 12(b)(6), “a complaint
must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible
on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly,
550 U.S. 544, 570 (2007)). The court “‘must accept as true all material allegations of the
complaint, drawing all reasonable inferences from those allegations in plaintiffs’ favor.’” De
Csepel v. Republic of Hungary, 714 F.3d 591, 597 (D.C. Cir. 2013) (quoting LaRoque v. Holder,
650 F.3d 777, 785 (D.C. Cir. 2011)). “If, on a motion under Rule 12(b)(6) or 12(c), matters
outside the pleadings are presented to and not excluded by the court, the motion must be treated
as one for summary judgment under Rule 56.” Fed. R. Civ. P. 12(d).
The APA directs courts to “hold unlawful and set aside agency action, findings, and
conclusions found to be . . . (A) arbitrary, capricious, an abuse of discretion, or otherwise not in
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accordance with law; . . . [or] (C) in excess of statutory jurisdiction, authority, or limitations, or
short of statutory right.” 5 U.S.C. § 706(2). In APA challenges to agency action, summary
judgment “serves as the mechanism for deciding, as a matter of law, whether the agency action is
supported by the administrative record and otherwise consistent with the APA standard of
review.” Air Transp. Ass’n of Am., Inc. v. Nat’l Mediation Bd., 719 F. Supp. 2d 26, 32 (D.D.C.
2010) (internal quotation marks omitted), aff’d, 663 F.3d 476 (D.C. Cir. 2011). This Court must
“thoroughly review[ ] the agency’s actions,” and “consider[ ] whether the agency acted within
the scope of its legal authority, whether the agency has explained its decision, whether the facts
on which the agency purports to have relied have some basis in the record, and whether the
agency considered the relevant factors.” Fund for Animals v. Babbitt, 903 F. Supp. 96, 105
(D.D.C. 1995).
ARGUMENT
I. This Court Has Jurisdiction Over Plaintiffs’ APA Claims.
Having embarked on a policy to ensure that private shareholders in the Companies “will
not have access to any positive earnings in the future,” and having swept into Treasury more than
$110 billion beyond the amount owed under the pre-Sweep-Amendment dividend, Defendants
now claim that Plaintiffs have no recourse to judicial review. Either, Defendants say, Plaintiffs
lack standing, or HERA bars their APA claims. Both arguments lack merit.
A. Plaintiffs Are “Aggrieved” By The Sweep Amendment And Have Standing
To Challenge Its Legality.
The APA grants standing to “[a] person suffering legal wrong because of agency action,
or adversely affected or aggrieved by agency action within the meaning of a relevant statute.” 5
U.S.C. § 702. Aside from one frivolous argument based on a misinterpretation of HERA,
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Defendants do not dispute that Plaintiffs are aggrieved by the Sweep Amendment, but Treasury
nevertheless maintains that Plaintiffs lack standing. See Treasury Br. 33-36. Treasury is wrong.
1. The Sweep Amendment Has Injured Plaintiffs.
To establish Article III standing, a plaintiff must “show a substantial probability that it
has been injured, that the defendant caused its injury, and that the court could redress that
injury.” Ams. for Safe Access v. DEA, 706 F.3d 438, 443 (D.C. Cir.), cert. denied, 134 S. Ct. 267
(2013). A plaintiff need not establish that a future injury will occur with absolute certainty, but
rather need only “demonstrate[ ] a likelihood of injury that rises above the level of unadorned
speculation—that is, a realistic danger that [it] will suffer future harm.” Chaplaincy of Full
Gospel Churches v. Navy, 697 F.3d 1171, 1178 (D.C. Cir. 2012) (internal quotation marks
omitted); see also Clapper v. Amnesty Int’l USA, 133 S. Ct. 1138, 1150 n.5 (2013) (collecting
cases finding standing based on substantial risk of harm).
The Sweep Amendment harms Plaintiffs in at least two ways: First, by prohibiting the
Companies from accumulating any capital, the Sweep Amendment eliminates the possibility of
any recovery under the liquidation preference of Plaintiffs’ preferred stock. Because, under the
Sweep Amendment, Treasury takes all of the Companies’ net worth (i.e., the amount by which
the Companies’ assets exceed their liabilities) without reducing Treasury’s $189 billion
liquidation preference, the Sweep Amendment means both that the Companies’ private
shareholders will have no access to the Companies’ earnings for as long as they remain going
concerns (per Administration policy), and that, if the Companies are liquidated, they will enter
liquidation with no excess capital and a $189 billion bill from Treasury. The Sweep Amendment
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thus makes it impossible for Plaintiffs to recover anything in a liquidation scenario.7 This
“increased risk of non-recovery” suffices to establish Article III standing. Constellation Energy
Commodities Grp., Inc. v. FERC, 457 F.3d 14, 18, 20 (D.C. Cir. 2006).8
Treasury and FHFA say that the Sweep Amendment causes Plaintiffs no harm because
Section 4617(e) of HERA limits any recovery by Plaintiffs “to the amount that shareholders
would have received had the [Companies’] assets and liabilities been liquidated at the time the
conservator was appointed in September 2008.” Treasury Br. 28 (emphasis added); see also
FHFA Br. 28, 33; Treasury Br. 34, 62. That is incorrect. Section 4617(e) caps FHFA’s liability
in the event of receivership, not conservatorship. The provision Treasury and FHFA invoke
limits liability of the “receiver or the regulated entity for which such receiver is appointed.” 12
U.S.C. § 4617(e)(2). By limiting claimants’ recoveries to “the amount that such claimant would
have received if the Agency had liquidated the assets and liabilities of the regulated entity
without exercising the authority of the Agency under subsection (i)”—a provision that empowers
FHFA “as receiver” to operate something called “a limited-life regulated entity”—the statute
simply ensures that FHFA cannot be liable for a failed company’s debts and otherwise prohibits
recovery from assets generated by FHFA’s decision to create a limited-liability regulated entity.
Id. § 4617(e)(2), (i)(1)(A)(ii) (emphasis added); see also Bank of Am. N.A. v. FDIC, --- F. Supp.
2d. ---, 2013 WL 4505424, at *6-7 (D.D.C. Aug. 26, 2013) (explaining that, under analogous
FDIC provision, the maximum liability provision enforces the order-of-priority scheme);
7 Analysts project that the Companies’ total earnings will long exceed Treasury’s 10 percent cash dividend. See,
e.g., Keefe, Bruyette & Woods, GSE Profitability Should Continue but Shareholders Are Unlikely to Benefit 7 (Apr.
4, 2013); Barclays, A Fresh Look at the GSEs 3 (May 15, 2013); Height, GSE Reform Muddles Along, Prospects
Look Grim; MI Capital Standards Held 4, 7 (Feb. 11, 2014); OMB Analysis at 323 (estimating that the Companies
will have paid Treasury $366.7 billion by the end of FY2024). There is thus no question that, had the 10 percent
dividend remained, the Companies would have out-earned Treasury’s dividend, therefore holding open the
possibility that the Companies could amass sufficient capital to satisfy Treasury’s liquidation preference.
8 Treasury’s argument that Plaintiffs’ APA claims are not ripe fails for the same reason. See Treasury Br. 33-34.
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Goldstein v. FDIC, No. 11-1604, 2014 WL 69882, at *6 (D. Md. Jan. 8, 2014) (“Put another
way, if no receivership assets are available to satisfy the claims of creditors, the creditors cannot
recover from the FDIC as receiver.”). The provision has no relevance outside of receivership,
and even in receivership does not remotely suggest that shareholders are prohibited from seeking
the injunctive relief sought here. Plaintiffs’ APA claims do not seek to recover FHFA assets;
rather, Plaintiffs ask the Court to vacate the Sweep Amendment so that the market will
accurately reflect the value of their shares, unencumbered by the unlawful Sweep Amendment.9
Second, that depression in stock value is itself an Article III injury. See Franchise Tax
Bd. of Cal. v. Alcan Aluminium Ltd., 493 U.S. 331, 336 (1990); Whelan v. Abell, 953 F.2d 663,
672 (D.C. Cir. 1992); Grubbs v. Bailes, 445 F.3d 1275, 1280 (10th Cir. 2006); Ensley v. Cody
Res., Inc., 171 F.3d 315, 319-20 (5th Cir. 1999). Here, the announcement of the Sweep
Amendment on August 17, 2012, predictably battered the value of the Companies’ publicly
traded stock. See, e.g., FMCCH, Bloomberg Terminal (shares traded at $3.55 on August 15 and
$1.15 on August 20). While the shares have since increased in value—thanks to the Companies’
improved performance—the Sweep Amendment continues to depress the shares’ value, which is
sufficient to establish standing. See Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 342-43 (2005)
(recognizing that a “share’s higher price” may still be “lower than it would otherwise have
been”).
9 Treasury suggests that Plaintiffs would reap a “windfall” if this Court vacates the Sweep Amendment. Treasury
Br. 34. But Plaintiffs seek only to be returned to the position that Treasury and FHFA assured shareholders that they
occupied when the conservatorships were imposed. See Treasury 0005 (“Conservatorship preserves the status and
claims of the preferred and common shareholders.”); FHFA 0021 (“[C]onservatorship does not eliminate the
outstanding preferred stock.”). And, coming from the party that has already benefitted to the tune of more than $147
billion under the Sweep Amendment, Treasury’s complaint of any potential “windfall” is deeply ironic.
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2. The Prudential Shareholder-Standing Doctrine Has No Application
To Plaintiffs’ APA Claims.
Treasury contends that Plaintiffs lack prudential standing under the “shareholder-standing
rule,” which generally prohibits shareholders from enforcing rights that belong to the
corporation. See Alcan Aluminium, 493 U.S. at 336; Treasury Br. 34-36. Treasury is incorrect.
Notably, Treasury does not cite a single case in which a court has held that the shareholder-
standing doctrine applies in APA cases, and there are good reasons to conclude that it does not.
See FAIC Sec. Inc. v. United States, 768 F.2d 352, 357 (D.C. Cir. 1985) (“The zone of interests
adequate to sustain judicial review is particularly broad in suits to compel federal agency
compliance with law, since Congress itself has pared back traditional prudential limitations by
the Administrative Procedure Act, which affords review to any person ‘adversely affected or
aggrieved by [federal] agency action within the meaning of the relevant statute.’”). In any event,
none of Plaintiffs’ claims runs afoul of the shareholder-standing doctrine because their claims
seek to redress personal injuries and vindicate rights that belong to Plaintiffs, not the Companies.
The shareholder-standing rule under Delaware law, and more generally, affects only
derivative actions. See, e.g., Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1036
(Del. 2004).10 It has no application where a plaintiff asserts “a direct, personal interest,” “even if
the corporation’s rights are also implicated.” Alcan Aluminium, 493 U.S. at 336; see also Gilardi
v. U.S. Dep’t of Health & Human Servs., 733 F.3d 1208, 1216 (D.C. Cir. 2013) (citing Rawoof v.
Texor Petroleum Co., 521 F.3d 750, 757 (7th Cir. 2008)); In re Kaplan, 143 F.3d 807, 812-13
(3d Cir. 1998) (Alito, J.); Helmerich & Payne Int’l Drilling Co. v. Bolivarian Rep. of Venez., ---
F. Supp. 2d ----, 2013 WL 5290126, at *17 (D.D.C. Sept. 20, 2013). This includes cases where
10 Fannie Mae’s and Freddie Mac’s corporate governance practices are governed by Delaware law and Virginia law,
respectively.
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the plaintiff challenges conduct that benefits one class of shareholders at the expense of another,
as when a controlling shareholder expropriates the company’s economic value for its own
benefit, to the other shareholders’ detriment. Gentile v. Rossette, 906 A.2d 91, 100 (Del. 2006)
(“A separate harm also results: an extraction from the public shareholders, and a redistribution
to the controlling shareholder . . . .”); In re Tri-Star Pictures, Inc., Litig., 634 A.2d 319, 330-32
(Del. 1993); 12B Fletcher Cyclopedia of the Law of Corporations § 5914 (2011 rev. vol.).11
Accordingly, where a plaintiff claimed that the defendant had impaired its “‘essential right . . . to
share in the profits and in the distribution of assets on liquidation in proportion to their interest in
the enterprise’” (much as Plaintiffs assert here), Judge Wilkins held that the shareholder-standing
doctrine was inapplicable. Helmerich & Payne Int’l Drilling Co., 2013 WL 5290126, at *20
(quoting 1 James D. Cox & Thomas Lee Hazen, Treatise on the Law of Corporations § 7:2 (3d
ed. 2012)) (brackets omitted). So, too, here.
3. HERA Does Not Strip Plaintiffs Of Their Rights In Their Stock.
FHFA and Treasury contend that HERA vested FHFA, as the Companies’ conservator,
with any “rights, titles, powers, and privileges” that inhered in Plaintiffs’ stock, and that
Plaintiffs accordingly have no rights in that stock left to vindicate. See FHFA Br. 36-37 (citing
12 U.S.C. § 4617(b)(2)(A)); Treasury Br. 29-33, 45-46 (same). This argument is meritless for
two independent reasons.
First, HERA does not grant the conservator all of the rights of the shareholders; if it had,
it would have effected a taking, and it would have meant that Treasury’s assurances that it was
retaining the Companies’ existing capital structure were lies from the day they were uttered. See
11 Virginia law also recognizes that shareholders may bring individual actions where the alleged harm accrued to
the shareholder directly. See Parsch v. Massey, 72 Va. Cir. 121, 128 (Va. Cir. Ct. 2006) .
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Waterview Mgmt. Co. v. FDIC, 105 F.3d 696, 699 (D.C. Cir. 1997) (“[T]o hold that the federal
government could simply vitiate the terms of existing assets, taking rights of value from private
owners with no compensation in return, would raise serious constitutional issues.”). Rather,
consistent with established principles of conservatorship, the conservator succeeds to the
shareholders’ rights “with respect to the regulated entity and the assets of the regulated entity.”
12 U.S.C. § 4617(b)(2)(A)(i) (emphasis added). That does not include the shareholders’ rights
that are personal to shareholders, such as the right to receive dividends or a liquidation
preference, or the right to bring direct actions when those rights are impaired. See supra pp. 21-
23, 25; see also Pls. in All Winstar-Related Cases at the Court v. United States, 44 Fed. Cl. 3, 10
(1999) (shareholders of thrift in FDIC receivership “have a direct, vested interest in such excess
portion of any recovery” after liquidation). This is not contrary to Kellmer v. Raines, on which
FHFA relies, FHFA Br. 36, and which stands for the very different proposition that FHFA may
represent the Companies’ interests in derivative suits. See 674 F.3d 848, 851 (D.C. Cir. 2012);
see also Esther Sadowsky Testamentary Trust v. Syron, 639 F. Supp. 2d 347, 351 (S.D.N.Y.
2009) (same).
HERA itself recognizes that the shareholders retain the “right to payment, resolution, or
other satisfaction of their claims” if the Companies are placed in receivership. See 12 U.S.C.
§ 4617(b)(2)(K)(i). Indeed, that provision provides that most shareholder rights “terminate”
upon “appointment of [FHFA] as receiver,” presupposing that, prior to receivership, the
Companies’ shareholders retain an array of rights. Id. A FHFA internal memorandum, disclosed
in prior litigation, explains that it is only “[t]he appointment of the FHFA as receiver—as
opposed to conservator—[that] terminates all rights and claims [of] the stockholders . . . as a
result of their status as stockholders.” See Joint Status Report, Attachment A at 7, McKinley v.
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FHFA, No. 10-cv-1165 (D.D.C. Sept. 16, 2011) (emphasis added) (internal memorandum dated
August 18, 2008). Treasury’s Purchase Agreements similarly recognize that shareholders retain
their contractual rights during conservatorship, as the Agreements grant Treasury the otherwise
wholly unnecessary right to veto dividends during conservatorship. See Treasury 0102, 0135
(§ 5.1); FHFA Br. 14, 42; Treasury Br. 13. If the Companies’ shareholders lost all rights that
could be asserted, there would be no “dividends” for FHFA to pay subject to Treasury’s veto,
and the Purchase Agreements merely would have prohibited FHFA from giving the Companies’
shareholders an unwarranted gift—a result that makes little sense. Indeed, the senselessness of
this line of argument is reinforced by Treasury’s failure to cite any authority for its contention
that HERA also bars direct claims under the APA, Treasury Br. 32—an omission even more
notable because FHFA does not invoke 12 U.S.C. § 4617(b)(2) to bar Plaintiffs’ APA claims.
Second, to the extent that Plaintiffs’ APA claims are incorrectly construed as derivative
claims—Plaintiffs’ APA claims are direct—shareholders of an entity in conservatorship retain
the right to bring derivative suits where, as here, the conservator has a “manifest conflict of
interest.” Kellmer, 674 F.3d at 850 (citing First Hartford Sav. Corp. Pension Plan & Trust v.
United States, 194 F.3d 1279, 1295 (Fed. Cir. 1999)); see also Delta Sav. Bank v. United States,
265 F.3d 1017, 1021-24 (9th Cir. 2001) (allowing shareholder to bring derivative suit against
OTS based on FDIC’s conflict of interest as receiver); In re Fed. Home Loan Mortg. Corp.
Derivative Litig., 643 F. Supp. 2d 790, 798 (E.D. Va. 2009) (“Absent a showing of a clear
conflict of interest similar to the conflicts at issue in First Hartford and Delta Savings, the
plaintiffs lack standing to pursue these claims.”). First Hartford is instructive. There, the
shareholder of a bank in FDIC receivership brought a derivative suit alleging that the FDIC
breached a contract between the government and the bank under receivership. See 194 F.3d at
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1282-86. The court of appeals held that the FDIC could not prohibit the shareholder’s suit
because the FDIC had a conflict of interest when it “was asked to decide on behalf of the
depository institution in receivership whether it should sue the federal government based upon a
breach of contract, which, if proven, was caused by the FDIC itself.” Id. at 1296. Like the FDIC
in First Hartford, FHFA here could not possibly impartially decide whether to pursue claims
against itself for violating the APA and Plaintiffs’ contractual and fiduciary rights.12
FHFA attempts to distinguish this precedent by arguing that neither First Hartford nor
Delta Savings considered the import of HERA’s language granting FHFA the “rights, titles,
powers and privileges” of shareholders. FHFA Br. 52 (citing 12 U.S.C. § 4617(b)(2)(A)(i)). But
both decisions apply the Financial Institutions Reform, Recovery, and Enforcement Act
(“FIRREA”), which contains a materially identical provision. See 12 U.S.C. § 1821(d)(2)(A)(i).
Treasury’s citation to Deutsche Bank National Trust Co. v. FDIC, 717 F.3d 189 (D.C. Cir.
2013), also is unavailing. See Treasury Br. 31. That case dealt with whether a creditor with no
interest in a particular contract dispute could intervene in that litigation, a concern far afield from
Plaintiffs’ claims here. See id. at 192.
Because FHFA could not possibly dispassionately pursue litigation against itself, and
because Plaintiffs’ APA claims seek to vindicate rights that are personal to themselves—their
right to their contractual liquidation preferences—and are not claims of the Companies, the fact
that the conservator has succeeded to the shareholders’ rights “with respect to [the Companies]”
has no relevance to the standing analysis here.
12 Treasury suggests that the First Hartford rule advocated here would allow shareholders to bring any derivative
action during a conservatorship, Treasury Br. 32—a result that Treasury says is unworkable. Treasury errs, for not
every derivative suit involves a “manifest conflict of interest” like the one at issue here, as demonstrated by the
numerous cases Treasury cites in which courts held that no such conflict existed.
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B. HERA’s Jurisdictional Bar Does Not Prohibit Plaintiffs’ Claims.
Treasury and FHFA contend that HERA’s limitation on judicial review, 12 U.S.C.
§ 4617(f), prohibits all APA claims concerning the Sweep Amendment. It does not. Courts
embrace a “strong presumption that Congress intends judicial review of administrative action.”
Bowen v. Mich. Acad. of Family Physicians, 476 U.S. 667, 670 (1986); see also 5 U.S.C. § 702
(“A person suffering legal wrong because of agency action, or adversely affected or aggrieved by
agency action within the meaning of a relevant statute, is entitled to judicial review
thereof.”). Indeed, courts must “assume . . . that the [APA] authorizes” review unless some other
statute specifically precludes review or the action is committed to agency discretion by law. See
James Madison Ltd. by Hecht v. Ludwig, 82 F.3d 1085, 1092 (D.C. Cir. 1996). Here, Section
4617(f)’s instruction that courts not “restrain or affect the exercise of powers or functions of the
Agency as a conservator or a receiver” does not implicate claims against Treasury at all. Nor
does it preclude claims that FHFA exceeded the “powers” and “functions” granted to it by
HERA because the Sweep Amendment was not an “exercise” of conservatorship powers. See
Bank of Am. Nat’l Ass’n v. Colonial Bank, 604 F.3d 1239, 1243 (11th Cir. 2010) (applying
analogous provision under FIRREA, 12 U.S.C. § 1821(j)).
1. Section 4617(f) Does Not Bar The Claims Against Treasury.
Though HERA includes no provision limiting judicial review of claims against Treasury,
Treasury nevertheless argues Section 4617(f) bars judicial review of its conduct with respect to
the Sweep Amendment because a court’s setting aside the Sweep Amendment would “affect”
FHFA’s power to enter into it. Treasury cites no authority for this broad assertion of implied
immunity. See Treasury Br. 22-29. If Treasury were correct, FHFA would be empowered to
immunize a wide range of illegal conduct by third parties simply because that illegal conduct had
a peripheral connection to FHFA’s activities as the Companies’ conservator. For example,
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courts would be impotent to review a decision of the Department of Education to begin
guaranteeing the Companies’ mortgage-backed securities, even though it has no statutory
authority to do so. See Reno v. Catholic Soc. Servs., 509 U.S. 43, 63-64 (1993) (“[T]here is a
well-settled presumption favoring interpretations of statutes that allow judicial review of
administrative action, and we will accordingly find an intent to preclude such review only if
presented with clear and convincing evidence.” (internal quotation marks omitted)); see also
Royer v. Fed. Bureau of Prisons, 933 F. Supp. 2d 170, 181-82 (D.D.C. 2013) (reviewing
constitutional claim in prisoner-location case because “Congress has not explicitly precluded
review”); Cobell v. Babbitt, 30 F. Supp. 2d 24, 32 (D.D.C. 1998) (“[T]he statutory language
relied upon by the defendants falls well short of evidencing a congressional intent to preclude
judicial review . . . .”). It would immunize unlawful conduct by private parties as well. Under
Treasury’s theory, persons statutorily prohibited from owning mortgage securities could
purchase those securities from FHFA; persons barred from the mortgage finance industry could
also work for FHFA in their prohibited roles; and in each case, no court could stop it.
But law rejects these absurdities and recognizes instead the common-sense proposition
that the conservator’s “powers and functions” do not include the power to contract with other
persons or entities to take actions that violate the law. Judicial action that holds private persons
or entities or government agencies to their independent statutory obligations accordingly “do[ ]
not affect the receiver’s [or conservator’s] own powers.” Abbott Bldg. Corp. v. United States,
951 F.2d 191, 195 (9th Cir. 1991). That is why courts construing FIRREA’s analogous
provision concerning FDIC conservatorships and receiverships, 12 U.S.C. § 1821(j), have held it
“only applies to a claim for injunctive relief against FDIC.” ECCO Plains, LLC v. United States,
728 F.3d 1190, 1202 n.17 (10th Cir. 2013); see also Nat’l Trust for Historic Pres. in U.S. v.
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FDIC, 995 F.2d 238, 241 (D.C. Cir. 1993) (noting “[t]he prohibition against restraining the
FDIC” (emphasis added)), as modified on other grounds, 21 F.3d 469 (D.C. Cir. 1994); Henrichs
v. Valley View Dev., 474 F.3d 609, 614 (9th Cir. 2007) (FIRREA bar did not defeat jurisdiction
because the “FDIC was not a party”). Treasury suggests no reason to give HERA’s nearly
identical provision its radical interpretation, there is no textual support for Treasury’s view, and
the absurdities that interpretation invites are reason enough to reject it. See SEC v. Banner Fund
Int’l, 211 F.3d 602, 617 (D.C. Cir. 2000) (rejecting interpretation because it would “lead to
absurd results”). Even accepting FHFA’s argument that “Section 4617(f) exists to prevent . . .
‘second-guessing’ of the Conservator’s decisions,” FHFA Br. 29, questioning Treasury’s
statutory authority does not require this Court to “second-guess” FHFA’s actions as
conservator.13
2. Section 4617(f) Does Not Bar The Claims Against FHFA.
a. HERA’s jurisdictional bar is inapplicable to Plaintiffs’ claims that FHFA
exceeded its statutory authority. By its terms, Section 4617(f) applies only where FHFA is
acting within the scope of its statutory authority as conservator or receiver; it “is inapplicable
when FHFA acts beyond the scope of its conservator power.” Cnty. of Sonoma v. FHFA, 710
F.3d 987, 992 (9th Cir. 2013). Courts interpreting HERA agree on this point. Id.; Leon Cnty. v.
FHFA, 700 F.3d 1273, 1278 (11th Cir. 2012). And their interpretations mirror the judicial
treatment of Section 1821(j), which “does not bar injunctive relief when the FDIC has acted or
proposes to act beyond, or contrary to, its statutorily prescribed, constitutionally permitted,
13 Unlike FHFA, Treasury does not claim that Section 4617(f) excuses it of the responsibility to compile and file an
administrative record. Compare Administrative Record of the Department of Treasury (Dec. 17, 2013) (Dkt. 26),
with Notice of Filing Document Compilation by Defs. FHFA and Edward DeMarco at 2 (Dec. 17, 2013) (Dkt. 27).
If FHFA is correct—and it is not—Treasury’s submission of an administrative record effectively concedes that
Section 4617(f) does not bar claims against Treasury.
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powers or functions.” Nat’l Trust for Historic Pres., 995 F.2d at 240; see also James Madison
Ltd., 82 F.3d at 1093 (same); Freeman v. FDIC, 56 F.3d 1394, 1398 (D.C. Cir. 1995) (same); cf.
Coit Independence Joint Venture v. Fed. Sav. & Loan Ins. Corp., 489 U.S. 561, 572 (1989).
Indeed, even Treasury acknowledges that the jurisdictional bar does not apply where FHFA “‘is
acting clearly outside its statutory powers.’” Treasury Br. 23 (quoting Gross v. Bell Sav. Bank
Pa SA, 974 F.2d 403, 407 (3d Cir. 1992)). FHFA’s ipse dixit that the Sweep Amendment was an
exercise of its statutory authority does not affect this analysis: “FHFA cannot evade judicial
scrutiny by merely labeling its actions with a conservator stamp.” Leon Cnty., 700 F.3d at 1278.
As explained in Part III, infra, FHFA exceeded its conservatorship powers.
Rather than accept binding circuit precedent, Treasury and FHFA grab hold of Gross’s
“clearly outside” language to argue, in effect, that courts are powerless to prevent FHFA from
engaging in unlawful conduct, so long as FHFA’s conduct is not too obviously unlawful. See
Treasury Discovery Opp. 13-14; see also FHFA Discovery Opp. 19-20. That is not the law.
Indeed, the Supreme Court recently rejected any distinction between unlawful agency conduct
and conduct beyond the scope of the agency’s powers: The “power to act and how [agencies]
are to act is authoritatively prescribed by Congress, so that when they act improperly, no less
than when they act beyond their jurisdiction, what they do is ultra vires.” City of Arlington v.
FCC, 133 S. Ct. 1863, 1869 (2013). FHFA either acted unlawfully and exceeded its powers
when it executed the Sweep Amendment, or it did not. Before the Court can determine whether
Section 4617(f) has any applicability to the claims in this lawsuit, it must first determine whether
the Sweep Amendment exceeded FHFA’s authority as a conservator.14
14 To the extent that Treasury argues that it benefits from a similarly flaccid mode of judicial review, Treasury
“clearly” exceeded its authority under HERA by executing the Sweep Amendment two and a half years after its
authority expired. See infra Part II.
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FHFA and Treasury also argue that this Court cannot rule on Plaintiffs’ APA claims
because Section 4617(f) applies “even if the conservator is ‘improperly or even unlawfully
exercising’ the conservatorship power.” See Treasury Discovery Opp. 14 (quoting Ward v. RTC,
996 F.2d 99, 103 (5th Cir. 1993)); see also FHFA Discovery Opp. 22. They are wrong yet again.
HERA does not prohibit courts from enjoining FHFA if it exceeds its statutory authority as
conservator. See Cnty. of Sonoma, 710 F.3d at 992; Nat’l Trust for Historic Pres., 995 F.2d at
240. Indeed, the source of this “rule,” Ward, concerned a plaintiff’s attempt to thwart a
receiver’s sale of a single property—an action clearly within a receiver’s powers. 996 F.2d at
103-04; see also infra pp. 64-66 (explaining that a conservator’s or receiver’s authority to sell
assets cannot sustain the Sweep Amendment). Ward’s endorsement of “unlawful” conduct refers
instead to the fact that HERA bars injunctions where the conservator—acting perfectly within its
conservatorship authority—happens to violate a separate substantive law, as demonstrated by
Ward’s citations to National Trust for Historic Preservation and Gross. 996 F.2d at 103-04. In
National Trust for Historic Preservation, the court held that an analogous jurisdictional bar
(Section 1821(j)) prohibited a suit requiring the FDIC as receiver to comply with the National
Historic Preservation Act. 995 F.2d at 238-39. And in Gross, the plaintiffs sought recovery of
pension assets on the ground that the Resolution Trust Corporation (“RTC”) had violated the
Employee Retirement Income Security Act of 1974. 974 F.2d at 405. See also Volges v. RTC,
32 F.3d 50, 52 (2d Cir. 1994) (plaintiff could not enjoin sale of home in reliance on oral
modification to contract). By contrast, Defendants have violated HERA, the statute that gives
FHFA its conservatorship powers in the first place—and, in doing so, violated the APA as well.15
15 FHFA’s and Treasury’s reliance on Town of Babylon v. FHFA, 699 F.3d 221 (2d Cir. 2012), is similarly
misplaced. The court’s statement that “[a] conclusion that the challenged acts were directed to an institution in
conservatorship and within the powers given to the conservator ends the inquiry,” did not proffer a two-step test to
(Cont’d on next page)
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That courts cannot prohibit FHFA from violating separate substantive laws while it
validly exercises its conservatorship powers is itself a reason to construe FHFA’s
conservatorship powers narrowly. On FHFA’s view, so long as it is exercising its powers as
conservator, no court could stop it from dumping toxic waste into the Potomac River. That is an
extraordinary power at odds with the “strong presumption that Congress intends judicial review
of administrative action.” Bowen, 476 U.S. at 670. For that reason, FHFA’s authority to violate
other substantive laws—provided that it is acting within the scope of its “conservatorship
powers”—should be understood to extend only to situations in which it is taking emergency
action to preserve and conserve its ward’s assets. FHFA’s more sweeping understanding of its
own powers conflicts not only with the long-standing presumption in favor of judicial review of
administrative action but also would, in effect, expand the carefully circumscribed and
enumerated list of conservatorship powers that appears in Section 4617(b).
b. FHFA’s statutory powers as conservator do not include the power to act
arbitrarily, capriciously, or irrationally, and therefore Section 4617(f) cannot preclude claims that
FHFA acted arbitrarily and capriciously in agreeing to the Sweep Amendment. Section 706(2)
of the APA sets a single baseline for agency conduct, providing that agency conduct must both
be “in accordance with law” and “statutory . . . authority, or limitations,” and not “arbitrary” or
“capricious.” 5 U.S.C. § 706(2)(A), (C). Indeed, there is no bright line distinguishing between
the exercise of an agency’s discretion and the limits of its statutory authority, as a prior exercise
of agency discretion can limit the agency’s statutory authority. See, e.g., Verizon v. FCC, 740
(Cont’d from previous page)
determine when Section 4617(f) applies. Id. at 228. That statement instead addressed the plaintiff’s contention that
FHFA “did not rely on powers as a conservator when issuing the Directive.” Id. at 227-28. Plaintiffs here do not
contend that FHFA exceeded its authority by failing to state that it had purported to act as the Companies’
conservator, but rather that FHFA exceeded its powers as conservator under HERA.
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F.3d 623, 649-50 (D.C. Cir. 2014) (explaining that the FCC’s decision to classify broadband
providers as “information services” rather than “telecommunications services” prohibited the
agency from imposing regulations permitted only for “telecommunications services”). The APA
thus establishes that no agency has authority to act arbitrarily and capriciously, and it is against
that background that Plaintiffs’ challenge to FHFA’s authority must be evaluated.
Nothing in HERA suggests that, in granting FHFA conservatorship authority, Congress
was granting FHFA the power to act in an arbitrary or capricious manner without regards to the
limits of its conservatorship powers. To the contrary, HERA spells out the powers and
obligations of the conservator in some detail, 12 U.S.C. § 4617(b)(2), (d), and it grants FHFA
rulemaking authority regarding the conduct of conservatorships, id. § 4617(b)(1); see also 12
C.F.R. pt. 1237. In light of those statutory provisions, it cannot follow that Congress intended to
grant FHFA authority to conduct its conservatorships arbitrarily and with caprice. As FHFA
itself observed in issuing its conservatorship regulations, “[a]s Conservator, FHFA is authorized
to take such action as may be ‘necessary to put the regulated entity in a sound and solvent
condition’ and ‘appropriate to carry on the business of the regulated entity and preserve and
conserve the assets and property of the regulated entity.’” 76 Fed. Reg. 35,724, 35,725 (June 20,
2011) (quoting 12 U.S.C. § 4617(b)(2)(D)). Those powers are broad, as FHFA often observes,
see FHFA Br. 20, 21, 27, but they do not embrace the power to act arbitrarily without regard to
those congressionally sanctioned goals. Section 4617(f) therefore cannot preclude judicial
review of Plaintiffs’ claims that FHFA’s decision to enter into the Sweep Amendment was
arbitrary and capricious. Far from “restrain[ing] or affect[ing]” the “exercise” of FHFA’s
powers as conservator, Plaintiffs’ APA claims operate only to ensure that FHFA is not operating
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“above the law.” See Chem. Futures & Options, Inc. v. RTC, 832 F. Supp. 1188, 1192 (N.D. Ill.
1993).
* * *
The Sweep Amendment has clearly injured Plaintiffs in a direct and personal way. Their
right to an opportunity to benefit from the liquidation preferences in their preferred stock—once
valuable—is now worthless, as the Sweep Amendment guarantees that the Companies will never
build any capital even to repay Treasury’s senior liquidation preference. Although Treasury and
FHFA insist that this Court is powerless to redress Plaintiffs’ injuries, HERA does not bar
Plaintiffs’ APA claims as to either Defendant. This Court must address the merits.
II. The Sweep Amendment Exceeded Treasury’s Statutory Authority.
HERA granted Treasury carefully circumscribed authority “to purchase any obligations
and other securities issued by the [Companies].” 12 U.S.C. §§ 1455(l)(1)(A), 1719(g)(1)(A).
Recognizing the dangers of unfettered governmental intrusion into the private market, Congress
limited Treasury’s authority in two important ways. First, Treasury’s authority to purchase
obligations or securities of the Companies expired on December 31, 2009. Second, before
exercising its new power, Treasury was required to make an “emergency determination,” based
on consideration of several factors, including “the [Companies’] plan for the orderly resumption
of private market funding or capital market access” and “the need to maintain the [Companies’]
status as . . . private shareholder-owned compan[ies].” Id. §§ 1455(l)(1)(C)(iii), (v),
1719(g)(1)(C)(iii), (v).
Other than this limited purchasing authority, Treasury has no statutory authority to
participate in the market for the Companies’ securities. As of 2010, Treasury’s authority as a
market participant was limited to “hold[ing], exercis[ing] any rights received in connection with,
or sell[ing] any obligations or securities purchased.” Id. §§ 1455(l)(2)(D), 1719(g)(2)(D). As
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concerns the Companies, Congress authorized Treasury to do nothing else after 2009. That is
because “[a] federal agency ‘literally has no power to act . . . unless and until Congress confers
power upon it.’” Douglas Timber Operators, Inc. v. Salazar, 774 F. Supp. 2d 245, 257 (D.D.C.
2011) (quoting Am. Library Ass’n v. FCC, 406 F.3d 689, 698 (D.C. Cir. 2005)).
Treasury’s argument that the Sweep Amendment was not a purchase of securities thus
misses the key point: The Sweep Amendment was authorized only if it was the “exercise” of a
“right[ ] received in connection with . . . securities purchased.” 12 U.S.C. §§ 1455(l)(2)(D),
1719(g)(2)(D). It is not. In any event, the transformative nature of the Sweep Amendment—
effectively nationalizing the Companies—so fundamentally changed the nature of the securities
held by Treasury that they must be regarded as new securities. And Treasury’s exchange of its
fixed dividend and commitment fee rights for these new securities amply qualifies their
acquisition as a purchase. The Sweep Amendment violated Congress’s express statutory
command and must be vacated and set aside. See SEC v. Sloan, 436 U.S. 103, 111-12 (1978)
(holding that an agency exceeds its authority by acting after a statutorily prescribed date); EME
Homer City Generation L.P. v. EPA, 696 F.3d 7, 23 (D.C. Cir. 2012) (“An agency may not . . .
violate a statute’s limits.”), cert. granted, 133 S. Ct. 2857 (2013).
A. The Sweep Amendment Cannot Be Characterized As An Exercise Of Rights
Under Treasury’s Previously Purchased Preferred Stock.
Treasury does not dispute that, unless the Sweep Amendment falls within the Secretary’s
authority “to hold, exercise any rights received in connection with, or sell, any obligations or
securities purchased,” Treasury lacked authority to enter into it. See Treasury Br. 37, 39
(quoting 12 U.S.C. § 1719(g)(2)(D)). Treasury’s argument is that the Sweep Amendment was
merely the “exercise” of its supposed “right” under Section 6.3 of the Purchase Agreements to
amend those agreements. Treasury Br. 39. This litigation-inspired argument appears nowhere in
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Treasury’s contemporaneous analysis of the Sweep Amendment and, in any event, fails because
Section 6.3’s acknowledgment that the Agreements could be amended by a subsequent writing
did not confer on Treasury a “right” that Treasury could “exercise.”
A contractual “right” is an entitlement to certain performance from the counter-party, and
it is “exercised” through unilateral action that does not require negotiation or mutual assent. A
“right” to act means “[a] legal, equitable, or moral entitlement to do something.” Oxford English
Dictionary Online (Dec. 2013) (“OED”) (accessed Mar. 3, 2014) (“right, n.,” definition 9d).
Similarly, “exercise”—in the context of contracts—means “[t]o implement the terms of; to
execute,” as in to “exercise the option to buy the commodities.” Black’s Law Dictionary 654
(9th ed. 2009). A party has a contractual “right” when it “can initiate legal proceedings that will
result in coercing” the other party to act. 1 E. Allan Farnsworth, Farnsworth on Contracts § 3.4,
at 205 n.3 (3d ed. 2004). Even if FHFA was likely to agree to proposed amendments, an
arrangement that depends on a subsequent “mutual consent” of the parties “does not add to their
rights.” United States v. Petty Motor Co., 327 U.S. 372, 380 n.9 (1946).
The Agreements, which of course were drafted against the background of HERA and its
limitation on Treasury’s authority, grant Treasury a suite of rights that it can exercise at its
option. Most significant among them is Treasury’s right under the common-stock Warrant to
purchase 79.9 percent of the Companies’ common stock at a nominal price. See Treasury 0043.
The Warrant provides that “Treasury . . . is entitled to purchase at the Exercise Price . . . common
stock” and “may be exercised in whole or in part at any time” by delivering a “Notice of
Exercise.” Treasury 0041, 0043 (emphasis added). The Notice of Exercise informs the
Companies that the “undersigned hereby elects to purchase ____ shares” in the Companies under
the terms of the Warrant. Treasury 0050 (emphasis added). The Warrant provisions of the
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Agreements thus reflect that a “right” is an entitlement to performance that can be “exercised” at
the right-holder’s election.
Far from according Treasury an entitlement that it unilaterally may elect to exercise,
Section 6.3 simply specifies how the Purchase Agreements may be amended: “by a writing
executed by both of the parties.” See Treasury 0027-0028. This type of exclusion of oral
modifications is a standard feature of most sophisticated contracts. See, e.g., 10 Williston on
Contracts § 29:43 (4th ed. 2013). Parties can always agree to change a contract. See Beatty v.
Guggenheim Exploration Co., 122 N.E. 378, 381 (N.Y. 1919) (Cardozo, J.). But the fact that the
contract recognizes the parties’ ability to amend it does not accord Treasury any entitlement to
do so unilaterally. Like the underlying contract, any amendments require mutual assent. See
Stanford Hosp. & Clinics v. NLRB, 370 F.3d 1210, 1214 (D.C. Cir. 2004) (referencing need “‘to
demonstrate mutual assent’ to modification of agreement” (quoting Dallas Aerospace, Inc. v.
CIS Air Corp., 352 F.3d 775, 783 (2d Cir. 2003))). As a party to a contract, Treasury could not
coerce the other party, FHFA, to agree to an amendment.16 Treasury’s ability to seek FHFA’s
assent to an amendment thus cannot be construed as a “right” Treasury received in connection
with its purchase of the Companies’ securities, and the Sweep Amendment accordingly cannot
be construed as the “exercise” of such a “right.”
If Treasury were correct that its continuing authority to exercise rights received in
connection with the Agreements embraced the authority to amend those Agreements, Congress’s
limitations on Treasury’s purchasing authority quickly could be nullified. On this view of
Treasury’s continuing authority, although Treasury no longer has authority to purchase securities
16 Indeed, doing so would violate HERA. See 12 U.S.C. § 4617(a)(7) (“When acting as conservator or receiver,
[FHFA] shall not be subject to the direction or supervision of any other agency of the United States.”).
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in the Companies, Treasury could agree with FHFA to amend the terms of the Agreements to
provide for the Companies to issue an additional million shares of senior preferred stock to
Treasury, or to change the terms of the Warrant so that Treasury has a right to receive 99.9
percent of the Companies’ common stock, or to convert Treasury’s preferred stock into a 100-
year, zero-coupon bond. And on Treasury’s view, so long as these measures were styled as
amendments, they would constitute only the “exercise” of a “right” Treasury received to seek
amendments of the Agreements, rather than the exercise of purchasing authority, which would
require “emergency determination[s],” consideration of statutorily prescribed factors, and
observance of HERA’s sunset date.
Treasury did not claim to “exercise” a “right” when it executed the Second Amendment,
further undermining its litigation-inspired rationale for the Sweep Amendment. Executed in
December 2009, the Second Amendment made several changes to the Purchase Agreements: It
increased Treasury’s funding commitment from a fixed amount to a three-year unlimited draw; it
increased the maximum size of the Companies’ investment portfolios; and it delayed for one year
the setting of the Periodic Commitment fee. See Treasury 0175, 0189-0194. This Amendment
did not grant Treasury any additional securities. Yet Treasury made a “Determination”—which
is nearly identical to the one it executed in September 2008 when it first purchased the Treasury
Stock—making the required findings and addressing the considerations set forth in HERA.
Compare Treasury 0187-0188 (Dec. 24, 2009 “Determination”), with Treasury 0001-0002 (Sept.
7, 2008 “Determination”). This act by itself suggests that Treasury believed that its authority to
“amend” the Purchase Agreements was coextensive with its power to “purchase” new securities.
If there were any doubt as to this point, Treasury’s “Determination” explained that it made
findings and addressed the considerations because the Second Amendment not only “modif[ied]
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the Treasury’s funding commitment,” but also because it “amend[ed] the terms of the Original
Agreements.” Treasury 0188 (emphasis added). Thus, prior to the Sweep Amendment, Treasury
believed that “amendments” to the Purchase Agreements were akin to purchases requiring
findings and considerations, rather than exercises of rights that it may execute at its whim.
Given that Treasury itself previously regarded much less significant amendments to the
Agreements to be exercises of HERA’s authority requiring an emergency determination and
consideration of statutorily prescribed factors, this Court should reject Treasury’s boundless
construction of the clause empowering it to exercise rights received in connection with the
securities. Treasury’s construction would allow it to circumvent HERA’s sunset provision with
ease, styling every action as an “exercise” of its “right” to “amend” the Agreements. The Sweep
Amendment was not the exercise of a right Treasury received in connection with the
Agreements, and accordingly it must be vacated and set aside.
B. The Sweep Amendment Constitutes A Purchase Of The Companies’
Obligations Or Securities That Is Expressly Barred By HERA’s Sunset
Provision.
There was a good reason Treasury treated the First and Second Amendments to the
Purchase Agreements as exercises of its purchasing authority. Securities law and Treasury’s
own IRS regulations both recognize that an amendment that substantially changes the economic
substance of a security is, in fact, an exchange for a new security. Under these tests, the Sweep
Amendment plainly created a new security. And there can be no doubt that Treasury
“purchased” the new security, giving in exchange an old security that provided for a fixed
dividend and a commitment fee. FHFA 0005 (¶ 9). So, even if the Sweep Amendment validly
could be characterized as Treasury’s exercise of a right granted to Treasury in the Companies’
senior preferred stock—and it cannot—it still would constitute a purchase of securities expressly
barred by HERA’s sunset provision.
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Courts applying federal securities law long have recognized that amendments that
fundamentally change the nature of the security result in a new security, and the law treats such a
transformation as a purchase of the new security. For example, plaintiffs alleging fraud under
Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), must establish that
they have either purchased or sold a security. See Blue Chip Stamps v. Manor Drug Stores, 421
U.S. 723, 737-38 (1975). Courts treat amendments to existing securities as purchases of new
securities for purposes of Section 10(b) when the amendment brings about “‘such a significant
change in the nature of the investment or in the investment risks as to amount to a new
investment.’” Gelles v. TDA Indus., Inc., 44 F.3d 102, 104 (2d Cir. 1994) (quoting Abrahamson
v. Fleschner, 568 F.2d 862, 868 (2d Cir. 1978)); see also Sacks v. Reynolds Sec., Inc., 593 F.2d
1234, 1240 (D.C. Cir. 1978); Northland Capital Corp. v. Silver, 735 F.2d 1421, 1427 (D.C. Cir.
1984); Houlihan v. Anderson-Stokes, Inc., 434 F. Supp. 1330, 1337-39 (D.D.C. 1977). This
“fundamental change” analysis focuses on the “economic reality of the transaction,” Keys v.
Wolfe, 709 F.2d 413, 416-17 (5th Cir. 1983), including the risk profile of the investment, see
7547 Corp. v. Parker & Parsley Dev. Partners, L.P., 38 F.3d 211, 229 (5th Cir. 1994) (plaintiff
exchanged “units in a financially solvent limited partnership” for stock in a financially unstable
corporation); Ingenito v. Bermec Corp., 376 F. Supp. 1154, 1178 (S.D.N.Y. 1974) (subsequent
amendments to notes including “extended payment terms and waiver and estoppel provisions”).
Where a security undergoes a fundamental change, holders whose securities have been so altered
are treated as having purchased the new security. See SEC v. Nat’l Sec., Inc., 393 U.S. 453, 467
(1969) (“[A]n alleged deception has affected individual shareholders’ decisions in a way not at
all unlike that involved in a typical cash sale or exchange.”).17
17 Treasury criticizes the fundamental change doctrine, observing that some courts have “declined to adopt” it.
(Cont’d on next page)
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What is more, Treasury’s own taxation regulations similarly recognize that a substantial
change in a security results in an exchange of an old security for a new one. To prevent evasion
of taxes due upon the sale of a security, the IRS treats any “significant modification” to a debt
security, such that the new security “differs materially either in kind or in extent” from the old
security, as a sale of the old security. 26 C.F.R. § 1.1001-3(b). Under the regulations, a
modification is “economically significant” if it alters the security’s annual yield by “1/4 of one
percent” or “5 percent of the annual yield of the unmodified instrument (0.5 x annual yield),” or
if it converts a debt security into an equity security. Id. § 1.1001-3(e)(1), (2)(ii) , (5) .
Under these standards, the Sweep Amendment plainly resulted in a new security.
Contrary to Treasury’s protestation, Treasury Br. 42 n.16, this was no mere modification.
“‘Modify’ . . . connotes moderate change.” MCI Telecomms. Corp. v. AT&T, 512 U.S. 218, 228
(1994). Unlike the First and Second Amendments to the Agreements, the Sweep Amendment
required the Companies to amend the underlying Treasury preferred stock certificates, meaning
Treasury literally was issued new securities as a result of the Sweep Amendment. Compare
Treasury 0165-0169 (First Amendment amending only terms of Purchase Agreements), and
Treasury 0189-0194 (Second Amendment amending only terms of Purchase Agreements), with
Treasury 4335-4337 (§§ 2-3) (Sweep Amendment amending the “Senior Preferred Stock”). And
(Cont’d from previous page)
Treasury Br. 41 (citing Katz v. Gerardi, 655 F.3d 1212, 1221 (10th Cir. 2011)). But this Court, following the D.C.
Circuit, has applied versions of it for decades. See Sacks, 593 F.2d at 1240; Northland Capital, 735 F.2d at 1427;
Houlihan, 434 F. Supp. at 1337-39. The doctrine similarly is applied under the Securities Act of 1933, with a “sale”
occurring when a “modification in the terms of a security” makes “a fundamental change in the nature of the
investment it represents.” 1 A.A. Sommer, Jr., Federal Securities Act of 1933 § 2.02 (2013); 2 Louis Loss et al.,
Securities Regulation 1149 (4th ed. 2007) (when “the rights of security holders have been so substantially affected
by the particular change in the terms of the outstanding security[,] . . . it becomes a new security” for purposes of the
Securities Act). It also has been applied under the Securities Litigation Uniform Standards Act of 1998, which
preempts state-law actions for fraud “in connection with [the] purchase or sale” of a security. See Sofonia v.
Principal Life Ins. Co., 465 F.3d 873, 878 (8th Cir. 2006). Even the Tenth Circuit case invoked by Treasury did not
reject the doctrine; it held only that the plaintiff could not be viewed as a purchaser because he never came to own
the security he claimed was new. Katz, 655 F.3d at 1223.
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looking to the “economic reality of the transaction,” Keys, 709 F.2d at 416-17, the Sweep
Amendment resulted in an increase in dividends of more than $110 billion in year one.
Treasury’s annual yield soared from 10 percent of the liquidation preference to almost 70 percent
of the preference—many times more than the IRS’s test for economic significance.
If that were not enough, the fact that the Sweep Amendment transformed Treasury’s
stock from a fixed-rate dividend investment to a variable dividend would be an independently
sufficient basis for finding that the Sweep Amendment resulted in a new security under either the
securities law, see 7547 Corp., 38 F.3d at 229, or IRS regulations, see 26 C.F.R.
§ 1.1001-3(e)(5). Indeed, the Treasury Stock now bears all the salient characteristics of
perpetual common stock. Preferred shares “generally give the holder a claim to a fixed dividend
that must be satisfied before any dividend is paid on common shares. . . . In contrast to common
shares, preferred shares do not provide an unlimited claim on the corporation’s residual
earnings . . . .” 11 Fletcher Cyclopedia of the Law of Corporations § 5283 (2011 rev.
vol.). Under the Sweep Amendment, by contrast, Treasury takes virtually all of the Companies’
net worth in perpetuity—but only their net worth; no fixed dividends, no commitment fee. So
there is no longer any lower-ranked equity over which Treasury’s stock could take “priority.”
See Folk on Delaware General Corporation Law § 151.04. The Sweep Amendment thus
effected “‘such significant change in the nature of the investment [and] in the investment risks as
to amount to a new investment.’” Gelles, 44 F.3d at 104 (quoting Abrahamson, 568 F.2d at
868).
One need not rely on the fundamental change doctrine to establish that Treasury in fact
“purchased” this new investment. Treasury points to a dictionary definition of “purchase” to
mean “to acquire in exchange for payment in money or an equivalent; to buy,” and argues that
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because the Sweep Amendment “did not commit additional funds from Treasury ([or] increase
the amount of [Treasury’s] liquidation preference),” there could be no purchase. Treasury Br. 38
(citing OED (3d ed. Sept. 2007) (viewed online)). The securities laws again belie Treasury’s
position, as the Securities Act of 1933 makes clear that exchanges of securities “by the issuer
with its existing security holders” “where no . . . remuneration is paid” would be regulated sales
of securities but for a statutory exemption that is inapplicable here. 15 U.S.C. § 77c(a)(9). In
other words, Congress clearly does not believe that sales or purchases are confined to cash
transactions.
Moreover, that Treasury did not commit additional funds to obtain the rights to all the
Companies’ future profits is beside the point. As FHFA explains, the Sweep Amendment
“transfer[red] an Enterprise asset—potential future profits—to Treasury in exchange for relief
from an obligation—10% dividends,” FHFA Br. 27, as well as relief from the obligation to pay
Treasury the periodic Commitment Fee. Both the rights to a fixed dividend and the Commitment
Fee are “equivalent[s]” to money because each was payable in cash, and Treasury certainly could
have sold either or both of them on the open market for cash. See Nat’l Sec., Inc., 393 U.S. at
467 (exchange of shares is a “purchase”); cf. McLaughlin v. CIR, 113 F.2d 611, 613 (7th Cir.
1940) (a financial instrument is “equivalent to cash” if the instrument may be “exchange[d],
either for cash, or for property of value substantially equivalent to the face of the instrument”).
Thus, even Treasury’s cherry-picked definition of “purchase” is satisfied: It “acquired” new
rights in the Companies using the “equivalent” of money.
Treasury asserts repeatedly that its decision in 2008 to provide the Companies with
funding somehow justifies its 2012 decision to sweep the Companies’ net worth every quarter
until the last syllable of recorded time. Treasury Br. 3, 15. Treasury provides no support for this
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proposition, and it is entirely erroneous. The financial support Treasury provided—no matter
how substantial—does not authorize Treasury to violate the strict limits Congress imposed on
Treasury’s investment authority in HERA. And the factual premise on which the argument is
based—that private investors would have received nothing if the Companies had been liquidated
in 2008—even if true (and it is quite doubtful) is undone by the fact that the government did not
put the Companies into receivership, but instead chose the path of conservatorship, investing
funds into the Companies to restore them to a sound and solvent condition and preserve and
conserve their assets.18
Treasury thus purchased securities in the Companies after 2009, in direct contravention
of Congress’s express command in HERA and in violation of the APA. That purchase
accordingly must be vacated and set aside. See Sloan, 436 U.S. at 111-12.
III. FHFA Lacked Authority To Agree To The Sweep Amendment On The Companies’
Behalf.
A. FHFA’s Failure To Produce An Administrative Record Deprives The Court
Of A Sufficient Basis To Uphold FHFA’s Entry Into The Sweep Amendment.
The APA requires an agency to produce an administrative record so that the reviewing
court can evaluate the agency’s decisionmaking process to ensure that the process, its rationales,
and its conclusions conform to applicable law and are not arbitrary and capricious. FHFA,
however, filed no administrative record in this case, claiming that it was not required to create
one. See Dkt. No. 27, at 2. Instead, the agency filed a “Document Compilation,” headlined by a
18 In this sense, the conservatorship closely resembles a reorganization under the bankruptcy code, 11 U.S.C. § 101
et seq. Similarly, Treasury resembles a lender to a reorganizing bankruptcy debtor. Such lenders may receive
priority over other creditors, but the overall terms of the financing must be fair and reasonable, benefitting the debtor
and its stakeholders. See In re Ames Dep’t Stores, Inc., 115 B.R. 34, 39 (Bankr. S.D.N.Y. 1990) (“[A] proposed
financing will not be approved where it is apparent that the purpose of the financing is to benefit a creditor rather
than the estate.”); In re Tenney Village Co., 104 B.R. 562, 568 (Bankr. D.N.H. 1989) (refusing to approve debtor
financing because constraints of financing, including requirement that all proceeds from asset sales be remitted to
lender, “pervert[ed] the reorganization process”); see also 11 U.S.C. § 364.
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declaration created only for purposes of this litigation, 16 months after the Sweep Amendment
was implemented. See FHFA 0001-0010. FHFA is asking this Court evaluate its decision with
cherry-picked documents and post hoc rationalizations. That is not permitted. See Citizens to
Pres. Overton Park, Inc. v. Volpe, 401 U.S. 402, 419 (1971) (“These affidavits [submitted to the
district court] were merely ‘post hoc’ rationalizations, which have traditionally been found to be
an inadequate basis for review[,] [a]nd [which] clearly do not constitute the ‘whole record’
compiled by the agency.” (citations omitted) (citing SEC v. Chenery Corp., 318 U.S. 80, 87
(1943))), overruled on unrelated grounds by Califano v. Sanders, 430 U.S. 99 (1977). It is the
agency’s actual rationales that control, and FHFA provides virtually no contemporaneous
documents that substantiate its actual decisionmaking. The Court should vacate the Sweep
Amendment on the present record; it certainly cannot sustain it.
Well-established standards govern administrative records in APA cases:
Judicial review of agency action under the APA is generally confined to the
administrative record. The record is comprised of those documents that were
before the administrative decision maker. A court should consider neither more
nor less than what was before the agency at the time it made its decision. It is the
agency’s responsibility to compile for the court all information it considered
either directly or indirectly.
Marcum v. Salazar, 751 F. Supp. 2d 74, 78 (D.D.C. 2010) (Lamberth, C.J.) (citations and
internal quotation marks omitted) (emphasis added).
FHFA claims that it was “not required to . . . create or maintain an administrative record
relating to the execution of the [Sweep] Amendment because FHFA took that action expressly in
its capacity as Conservator.” FHFA Discovery Opp. 28. FHFA is wrong. FHFA is a federal
agency. See 12 U.S.C. § 4511(a). Under the Federal Records Act, “[t]he head of each Federal
agency shall make and preserve records containing adequate and proper documentation of the . . .
decisions . . . and essential transactions of the agency and designed to furnish the information
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necessary to protect the legal and financial rights . . . of persons directly affected by the agency’s
activities.” 44 U.S.C. § 3101; see also Armstrong v. Exec. Office of President, Office of Admin.,
1 F.3d 1274, 1278 (D.C. Cir. 1993). The Federal Records Act excludes some governmental
actors from its recordkeeping requirements, but FHFA is not one of them. 44 U.S.C. § 2901(14)
(“the term ‘Federal agency’” excludes only “the Supreme Court, the Senate, the House of
Representatives, and the Architect of the Capitol”). Similarly, HERA exempts FHFA from some
legal requirements when acting as conservator, see 12 U.S.C. § 4617(j), but recordkeeping is not
one of them. FHFA was thus required to document its decision to execute the Sweep
Amendment.
FHFA’s substitute “Document Compilation” is insufficient for at least two reasons: (1) it
allows FHFA to cherry-pick documents and disclose only the ones that further its legal
contentions; and (2) it transparently relies on post hoc rationalizations, see FHFA 0001-0010,
4051-4087. Without a contemporaneous administrative record, this Court cannot sustain
FHFA’s decision to enter into the Sweep Amendment.
An agency that does not compile a complete record of contemporaneous documents may
be tempted to “exclude[ ] from the record evidence adverse to its position.” Kent Cnty., Del.
Levy Court v. EPA, 963 F.2d 391, 396 (D.C. Cir. 1992) (citation omitted); see also Am. Radio
Relay League, Inc. v. FCC, 524 F.3d 227, 245 (D.C. Cir. 2008) (Tatel, J., concurring)
(“reviewing less than the full administrative record might allow a party to withhold evidence
unfavorable to its case” (citation and brackets omitted)). Such skewed records thwart judicial
review: “The fact that [the agency] presented documents that seemed to support the rationality
of [its] actions does not mean that the same conclusion would have been reached if the Court had
been aware of other information that was before the agency.” Dopico v. Goldschmidt, 687 F.2d
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644, 654 (2d Cir. 1982). For APA review to be more than a judicial rubber stamp, the agency
must disclose all documents relied upon, including adverse documents.
Recognizing this, the APA requires a court to “review the whole record.” 5 U.S.C. § 706.
That “whole record” includes everything that was before the agency at the time of the decision.
See, e.g., Citizens to Pres. Overton Park, 401 U.S. at 420 (judicial review of whether “the
Secretary acted within the scope of his authority” is “to be based on the full administrative record
that was before the Secretary at the time he made his decision”); Walter O. Boswell Mem’l Hosp.
v. Heckler, 749 F.2d 788, 792 (D.C. Cir. 1984) (“If a court is to review an agency’s action fairly,
it should have before it neither more nor less information than did the agency when it made its
decision.”). Yet FHFA in this case has not filed the “whole record” with this Court. Indeed,
FHFA has admitted that the record before the Court is incomplete, because the agency failed to
“create[ ] or maintain[ ] an administrative record relating to the execution of the Sweep
Amendment.” Dkt. No. 27, at 2; see also FHFA Discovery Opp. 28 (“[T]he FHFA Defendants
were not required to—and did not—create or maintain an administrative record relating to the
execution of the Third Amendment because FHFA took that action expressly in its capacity as
Conservator.”). FHFA’s failure to maintain an administrative record hardly can allow FHFA to
substitute a partial “document compilation” of its choosing.
FHFA now claims that its Document Compilation is “complete,” asserting that “no
documents considered by FHFA in connection with the decision to execute the [Sweep]
Amendment were excluded from the Document Compilation.” FHFA Discovery Opp. 29
(emphasis added). This is a remarkable claim. First, because its Document Compilation does
not contain any internal FHFA documents memorializing the agency’s independent assessment
of the Sweep Amendment, it strongly implies that FHFA did not rely on a single agency
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document in deciding to enter into the highly consequential Sweep Amendment. Second, when
combined with FHFA’s admission that it has not maintained an administrative record, the
assertion that no documents were “excluded” is not the same as an assertion that the record is a
complete set of documents FHFA relied upon in deciding to execute the Sweep Amendment.
For example, there is no indication that FHFA kept, or recorded, a complete set of
contemporaneous documents. This is plainly insufficient. By its own admission, FHFA’s patchy
Document Compilation does not reveal “all information it considered either directly or
indirectly” in executing the Sweep Amendment. Marcum, 751 F. Supp. 2d at 78. And merely
producing the documents that, in its judgment, “reflect[ ] the considerations and views FHFA as
Conservator took into account in connection with execution of the [Sweep] Amendment,” see
FHFA Discovery Opp. 29, is simply inconsistent with the requirement that APA review be based
on the “whole record.” FHFA’s refusal to produce the “whole record” justifies vacatur of the
Sweep Amendment.
Moreover, while the Chenery doctrine holds that “[t]he grounds upon which an
administrative order must be judged are those upon which the record discloses that its action was
based,” Chenery, 318 U.S. at 87, the story that emerges from FHFA’s “Document Compilation”
largely comes from a new declaration by a FHFA employee, written mid-litigation. See FHFA
0001-0010. Courts do not accept such “post hoc rationalizations for agency action.” Motor
Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 50 (1983); see
also Burlington Truck Lines, Inc. v. United States, 371 U.S. 156, 168 (1962) (same). “[T]he
focal point for judicial review should be the administrative record already in existence, not some
new record made initially in the reviewing court.” Camp v. Pitts, 411 U.S. 138, 142 (1973).
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Without an appropriate administrative record, FHFA’s attempted defense of the Sweep
Amendment must fail.
B. FHFA Violated HERA By Acting At Treasury’s Direction.
To ensure that the Companies and their billions of dollars of assets may not be hijacked
by other federal agencies with their own policy priorities, Congress mandated that when FHFA
acts as a conservator, it “shall not be subject to the direction or supervision of any other agency
of the United States.” 12 U.S.C. § 4617(a)(7). But the Administrative Record—including
FHFA’s “Document Compilation”—shows that Treasury invented the net-worth sweep concept
with no input from FHFA, and it chose to pursue that arrangement with no apparent concern that
FHFA might not consent to such a one-sided deal. See Treasury 3775-3802, 3833-3862, 3883-
3894, 3895-3903 (Treasury presentations). Indeed, even FHFA’s litigating declaration does not
claim that FHFA attempted to negotiate a more favorable arrangement with Treasury on the
Companies’ behalf or undertook its own independent analysis of the probable effects of the
Sweep Amendment. See FHFA 0001-0010. The only reasonable inference is that FHFA
considered itself bound to do whatever Treasury ordered, contrary to HERA, and in violation of
the APA.19
C. In Agreeing To The Sweep Amendment, FHFA Violated The APA By Acting
In Excess Of Its Statutory Authority As Conservator.
Since 2008, FHFA has operated the Companies as their conservator. This formal legal
status requires FHFA to “preserve and conserve” the Companies’ assets to “put the
[Companies]” in a “sound and solvent condition.” 12 U.S.C. § 4617(b)(2)(D). These statutory
duties are in keeping with the well-established and understood functions of conservatorships
19 Even more evidence supporting this conclusion is likely to be disclosed if the Court orders Defendants to
supplement the inadequate administrative records they have submitted thus far.
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generally. Yet, far from preserving or conserving the Companies’ assets and ensuring that the
Companies remain “solvent,” the Sweep Amendment dissipates the Companies’ assets by giving
away every cent of their net worth to Treasury. By ignoring its statutory charge, FHFA exceeded
its authority. Cook v. FDA, 733 F.3d 1, 5, 11 (D.C. Cir. 2013) (FDA’s failure to comply with its
“mandatory duties” rendered its decision “‘not in accordance with law’” and in violation of the
APA).
1. As Conservator Of The Companies, FHFA Is Obligated To Preserve
And Conserve Their Assets With The Aim Of Rehabilitating The
Companies.
When Congress enacts a statute using “a well-established term,” courts presume that
“Congress intended the term to be construed in accordance with pre-existing . . . interpretations.”
Bragdon v. Abbott, 524 U.S. 624, 631 (1998). Conservatorship is among those “well-established
term[s]” and has been employed frequently in the context of financial regulation. As the
Congressional Research Service has explained, “a conservator is appointed to operate the
institution, conserve its resources, and restore it to viability.” David H. Carpenter & M. Maureen
Murphy, Cong. Research Serv., RL34657, Financial Institution Insolvency: Federal Authority
Over Fannie Mae, Freddie Mac, and Depository Institutions 5 (2008), available at http://fpc.
state.gov/documents/organization/110098.pdf. This authority stands in contrast to that of a
“receiver,” which “is appointed to liquidate the institution, sell its assets, and pay claims against
it to the extent available funds allow.” Id.
Courts, regulators, and commentators have emphasized that a conservator’s purpose is to
revive a troubled entity. Since the Great Depression, the Court of Appeals for the D.C. Circuit
has explained that Congress granted the Comptroller of the Currency authority to place a bank in
conservatorship where the bank’s “situation was not so hopeless as then to require the
appointment of a receiver” because “there was a prospect that the bank . . . might, under [the
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conservator’s] direction and control, later reopen and resume its corporate functions.” Davis
Trust Co. v. Hardee, 85 F.2d 571, 572-73 (D.C. Cir. 1936). Case law continues to emphasize
that conservatorship is intended to operate entities so that they “might someday be rehabilitated.”
Del E. Webb McQueen Dev. Corp. v. RTC, 69 F.3d 355, 361 (9th Cir. 1995); see also MBIA Ins.
Corp. v. FDIC, 708 F.3d 234, 236 (D.C. Cir. 2013) (conservatorship is intended to “‘carry on the
business of the institution’”). The FDIC also espouses this view. See FDIC, Managing the
Crisis: The FDIC and RTC Experience 216 (1998), available at http://www.fdic.gov/
bank/historical/managing/history1-08.pdf (“A conservatorship is designed to operate the
institution for a period of time in order to return the institution to a sound and solvent
operation.”). And commentators explain that a conservatorship’s “basic statutory assumption is
that the institution may well return to the transaction of its business.” 3 Michael P. Malloy,
Banking Law and Regulation § 11.3.4.2 (2011); see also Donald Resseguie, Banks & Thrifts:
Government Enforcement & Receivership § 11.01 (2013) (“The intent of conservatorship is to
place the insured depository institution in a sound and solvent condition, rather than liquidating
the institution as in the case of a receivership.”).
This goal—rehabilitation with a view to a return to viability as a going concern—informs
the scope of a conservator’s power. For example, this Court concluded that the FDIC as
conservator was not required to exercise its statutory authority to repudiate contracts
“immediately” upon placing the entity in conservatorship because “[t]his would put the
conservator ‘in the untenable position of trying to operate the business as an ongoing concern
with one hand, while at the same time calculating the . . . repudiation issue as if it were shutting
the business down.’” MBIA Ins. Corp. v. FDIC, 816 F. Supp. 2d 81, 96-97 (D.D.C. 2011)
(quoting RTC v. CedarMinn Bldg. Ltd. P’ship, 956 F.2d 1446, 1454 (8th Cir. 1992)), aff’d, 708
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F.3d 234 (D.C. Cir. 2013). The Fifth Circuit explained that “a conservator only has the power to
take actions necessary to restore a financially troubled institution to solvency” and that it cannot
“as a matter of law” take actions reserved to a receiver. McAllister v. RTC, 201 F.3d 570, 579
(5th Cir. 2000) (emphasis added); see also id. (“Expenses of liquidation cannot be incurred by a
conservator as a matter of law, as liquidation is not a function of the conservator.”). Thus, when
exercising their incidental powers, conservators must always act consistent with their
overarching goal of rehabilitating their charges.
A conservator’s inherently optimistic outlook contrasts with the inherently pessimistic
outlook of a receiver. Receivers act to “liquidat[e] [an] institution and wind[ ] up its affairs.”
Carpenter & Murphy, supra, at 6. During this process of liquidation, receivers sell the financial
institution’s assets and “distribute[ ]” the proceeds to creditors with claims against the failed
entity. See John W. Head, Lessons from the Asian Financial Crisis: The Role of the IMF and
the United States, 7 Kan. J.L. & Pub. Pol’y 70, 76-78 (1998) (“[T]he bank’s assets would be sold
and the proceeds from that sale would be distributed among depositors and other selected
creditors.”); Freeman, 56 F.3d at 1401 (Receivership “‘ensure[s] that the assets of a failed
institution are distributed fairly and promptly among those with valid claims against the
institution.’”). As this distribution process leaves the receivership entity with no remaining
assets, receivership requires a “determination . . . that the institution is not viable.” Carpenter &
Murphy, supra, at 6. Indeed, “[p]lacing a bank in receivership acknowledges that restoration is
impossible.” Head, supra, at 77.
Both HERA’s text and FHFA’s regulatory constructions of its conservatorship powers
under HERA embrace an optimistic outlook. HERA requires FHFA as conservator to “put the
[Companies] in a sound and solvent condition” and “preserve and conserve [their] assets and
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property.” 12 U.S.C. § 4617(b)(2)(D). FHFA’s regulations explain that these statutory powers
“charge[ ] [FHFA] with rehabilitating the regulated entity.” 76 Fed. Reg. at 35,727; id. (“the
essential function of a conservator is to preserve and conserve the institution’s assets”); id. at
35,730 (“A conservator’s goal is to continue the operations of a regulated entity, rehabilitate it
and return it to a safe, sound and solvent condition.”). This is consistent with FHFA’s statement
at the outset of the conservatorships that FHFA’s mission was to “return[ ] the entities to normal
business operations,” FHFA 0016, and with its February 2010 letter to Congress explaining that
FHFA’s “only” legally authorized option with respect to the Companies’ futures would be “to
reconstitute” them, FHFA 1185. Indeed, FHFA’s own regulations generally prohibit
distributions of capital such as dividends precisely because they would “deplete the entity’s
conservatorship assets” and therefore “would be inconsistent with the agency’s statutory goals,
as they would result in removing capital at a time when the Conservator is charged with
rehabilitating the regulated entity.” 76 Fed. Reg. at 35,727. Even FHFA’s briefing in this
litigation has emphasized that a conservator must act to “preserv[e] the capital available to the
[Companies].” FHFA Discovery Opp. 17; see also FHFA Br. 22-23.20
2. The Sweep Amendment Exceeded FHFA’s Powers As The
Companies’ Conservator.
The Sweep Amendment contravenes FHFA’s basic obligation to preserve and conserve
the Companies’ assets, and to place the Companies in a sound and solvent condition, with the
goal of rehabilitating them.
20 Treasury argues, puzzlingly, that FHFA had no obligation to “preserve and conserve” the Companies’ assets
because HERA “expresse[s]” this power “in permissive, not mandatory, terms.” Treasury Br. 27-28; see also 12
U.S.C. § 4617(b)(2)(B)(iv) (“The Agency may, as conservator . . . preserve and conserve . . . .”). This argument
lacks merit. Here, FHFA’s own conservatorship regulations recognize that preserving and conserving assets is its
“statutory charge” as a conservator. 76 Fed. Reg. at 35,727. While use of the word “may” “usually implies some
degree of discretion,” it can have a mandatory meaning when “the structure and purpose of the statute” dictate as
much. See United States v. Rogers, 461 U.S. 677, 706 (1983).
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First, the Sweep Amendment depletes the Companies’ capital, a consequence that FHFA
has elsewhere determined is “inconsistent with [its] statutory goals.” 76 Fed. Reg. at 35,727.
Rather than allow the Companies to build up their capital, the Sweep Amendment places the
Companies in an untenable position, siphoning off every dollar earned by the Companies into
Treasury’s coffers, precluding them from strengthening along with the improving economy.
Indeed, Treasury made clear at the time of the Sweep Amendment that its very purpose was to
prevent the Companies from “retain[ing] profits” or “rebuild[ing] capital.” 2012 Press Release.
This perpetual and complete giveaway to Treasury is certainly more offensive to the Companies’
chances of rehabilitation than other capital distributions that FHFA has prohibited altogether.
See 12 C.F.R. § 1237.13 (prohibiting payment of securities litigation claims). And, even though
FHFA’s own regulations require FHFA’s Director to explicitly authorize any capital distribution,
id. § 1237.13(a), FHFA’s contemporaneous documentation does not disclose any such
authorization here, see FHFA 4047.
Second, the Sweep Amendment guarantees that the Companies will never resume
“normal business operations.” “Normal” companies recovering from financial distress save their
profits to withstand the next downturn, as Treasury recognized when it waived the Periodic
Commitment Fee in 2011. See Treasury 2359 (“Even if the [Companies] generated positive net
income after dividends . . . that income could be used to offset potential draws in future
quarters.”). Indeed, FHFA agreed to the original Purchase Agreements, and First and Second
Amendments thereto, in order to “enhance the probability of both Fannie Mae and Freddie Mac
ultimately repaying amounts owed” to Treasury and “resum[ing] independent operations.”
Treasury 0184. But, after the Sweep Amendment, the Companies’ opportunities to operate as
normal, private companies exist in name only because the Sweep Amendment depletes every
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dollar of their net worth, depriving them of the “future income flows” that represent a company’s
“fundamental value.” See Tenn. Gas Pipeline Co. v. FERC, 926 F.2d 1206, 1208 n.2 (D.C. Cir.
1991). Indeed, the Companies themselves have described the Sweep Amendment as a “risk
factor” because it “do[es] not allow [them] to build capital reserves.” See Fannie Mae Offering
Circular, Universal Debt Facility 11 (May 14, 2013), available at http://www.fanniemae.com/
resources/file/debt/pdf/tools-resources/519479ACL.pdf. FHFA has clearly and impermissibly
abandoned its conservatorship duty to “rehabilitate” the Companies and has instead converted
them into government functionaries, prohibited from “retain[ing] profits” or “rebuild[ing]
capital.” See 2012 Press Release; 76 Fed. Reg. at 35,727, 35,730.
Third, the government has made clear that, far from rehabilitation, the Sweep
Amendment is aimed at winding down the Companies’ operations. FHFA told Congress that its
goal was to “wind down” the Companies and prepare for “a housing industry . . . without Fannie
Mae and Freddie Mac.” FHFA, 2012 Report to Congress 13 (June 13, 2013), available at http://
www.fhfa.gov/webfiles/25320/FHFA2012_AnnualReport.pdf. FHFA’s Acting Director tied the
Sweep Amendment to this goal, telling Congress that the Sweep Amendment was part of the
Administration’s “clear” policy of “wind[ing] down the [Companies].” Statement of Edward J.
DeMarco Before the U.S. Senate Committee on Banking, Housing and Urban Affairs 3 (Apr. 18,
2013), available at http://fhfa.gov/webfiles/25114/DeMarcoSenateBankingTestimony41813.pdf.
As then Acting Director DeMarco explained it, the Sweep Amendment “reinforce[d] the notion
that the [Companies] will not be building capital as a potential step to regaining their former
corporate status.” Id.21 Treasury has been even more candid. At the time of the Sweep
21 See also Remarks of Edward J. DeMarco, Getting Our House in Order 6 (Oct. 24, 2013), available at
http://www.fhfa.gov/webfiles/25634/ZillowspeechFinal102413.pdf (explaining that FHFA is “winding up the affairs
of Fannie and Freddie”).
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Amendment, Treasury explained that the Sweep Amendment would “help expedite the wind
down of Fannie Mae and Freddie Mac [and] make sure that every dollar of earnings each firm
generates is used to benefit taxpayers,” such that the Companies will not be allowed to “retain
profits [or] rebuild capital.” 2012 Press Release.
These actions—depleting capital, eliminating the possibility of normal business
operations, and doing so with the intent to wind down, rather than revive, the Companies—
cannot be reconciled with FHFA’s obligations as a conservator to “preserve and conserve” the
Companies’ assets with an eye to the Companies’ financial rehabilitation. See Del E. Webb
McQueen Dev. Corp., 69 F.3d at 361. These actions instead resemble those of a receiver
charged to “ensure that the assets of [the Companies] are distributed” outwards, leaving the
Companies with no remaining capital. See Freeman, 56 F.3d at 1401. But that liquidation
function is an “additional” receivership power that conservators lack. See 12 U.S.C.
§ 4617(b)(2)(E). There may indeed come a time when FHFA legitimately concludes that one or
both of the Companies cannot be rehabilitated and must be placed in liquidation under
receivership. Until that happens, however, FHFA must “assum[e]” that the Companies “may
well return to the transaction of [their] business” outside of governmental control. See Malloy,
supra, § 11.3.4.2. FHFA’s actions to the contrary exceeded its authority under HERA and
violated the APA.
3. FHFA’s Post Hoc Justifications For The Sweep Amendment Lack
Merit.
FHFA May Not Wind Up The Companies In Preparation For a.
Liquidation.
FHFA argues that the Sweep Amendment was not a step towards “winding up” the
Companies’ affairs and that, even if it was, FHFA has authority to exercise its conservatorship
powers to shrink the Companies in preparation for liquidation. These arguments are meritless.
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1. FHFA contends that Treasury’s statement that the Companies would be “w[ound]
down” referred only to the planned reduction in their investment portfolios. FHFA Br. 31. This
is incorrect. Treasury expressed its views clearly on the day Treasury and FHFA executed the
Sweep Amendment: “The [Companies] will be wound down and will not be allowed to retain
profits, rebuild capital, and return to the market in their prior form.” 2012 Press Release. This
“wind down” was thus tied directly to the Net-Worth Sweep, which prohibited the Companies
from “retain[ing] profits” or “rebuild[ing] capital.” Id. Indeed, one of Treasury’s internal
memoranda uses the term “wind down” as synonymous with liquidation: “Some will say we
should wind-down the [Companies] instead of continuing to allow them to operate in
conservatorship.” See Treasury 0179. These references to a “wind down” thus had nothing to do
with FHFA’s separate plan to reduce the size of the Companies’ portfolios. FHFA’s argument
regarding its authority to “minimize [the Companies’] risk exposure,” FHFA Br. 31, is thus
designed to distract this Court’s attention away from FHFA’s ultra vires conduct.
2. FHFA next contends that it has “ample statutory authority” to wind down the
Companies and to “prepare them for potential liquidation,” and need not maintain an objective of
“rehabilitation.” FHFA Br. 30. FHFA is wrong. Liquidation is exclusively the province of a
receiver, as both HERA’s text and FHFA’s regulations acknowledge, and allowing FHFA to
nudge the Companies towards liquidation under conservatorship would allow FHFA to ignore
the important procedural protections provided during receivership.
HERA makes clear that only FHFA as receiver—not as conservator—may place the
Companies in liquidation. 12 U.S.C. § 4617(b)(2)(E) (liquidation is among FHFA’s
“[a]dditional powers as receiver”). This separation of authority—rehabilitation for conservators
and liquidation for receivers—is again echoed throughout the case law and treatises. See MBIA
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Ins. Corp., 708 F.3d at 236 (receivers “liquidate the remaining assets of the failed institution,”
whereas conservators “carry on the business of the institution and preserve and conserve the
assets and property”); Resseguie, supra, § 11.01 (“When acting as a receiver the function of the
FDIC is to liquidate the institution . . . . Conservatorship serves a different purpose.”).
FHFA’s own regulations draw this same distinction. In a separate subsection titled
“Agency as receiver,” FHFA’s regulations provide that, “as receiver, [FHFA] shall place the
regulated entity in liquidation, employing the additional powers expressed in [HERA]
§ 4617(b)(2)(E).” 12 C.F.R. § 1237.3(b) (emphasis added). It further explained this dichotomy
as inherent in the different functions of a conservator and a receiver: While “[a] conservator’s
goal is to continue the operations of a regulated entity, rehabilitate it and return it to a safe, sound
and solvent condition,” “[t]he ultimate responsibility of FHFA as receiver is to resolve and
liquidate the existing entity.” 76 Fed. Reg. at 35,730.
By prohibiting FHFA from liquidating the Companies while it acts as their conservator,
HERA also prohibits FHFA from “winding [them] up” in preparation for liquidation. Indeed,
HERA, case law, commentators, and even dictionaries all use “liquidation” and “wind up”
synonymously. For example, HERA imposes specific requirements on FHFA when it initiates
“the liquidation or winding up of the [Companies’] affairs.” 12 U.S.C. § 4617(b)(3)(B)
(emphases added). Similarly, case law regarding the FDIC’s receivership authority underscores
this point, holding that the purpose of receivership is “to expeditiously ‘wind up the affairs of
failed banks.’” Freeman, 56 F.3d at 1401 (quoting Local 2, OPEIU v. FDIC, 962 F.2d 63, 64
(D.C. Cir. 1992)). Treatises explain that receivers “liquidate the institution and wind up its
affairs.” Resseguie, supra, § 11.01. Dictionaries also define “liquidation” and “winding up” as
virtually the same. See Black’s Law Dictionary, supra, at 1738 (“winding up, n. (1858) The
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process of settling accounts and liquidating assets in anticipation of a partnership’s or a
corporation’s dissolution.”); OED, supra (“liquidation, n.” defined as “[t]he action or process of
winding up the affairs of a company”). Because HERA prohibits FHFA as conservator from
liquidating the Companies, it also prohibits FHFA as conservator from winding them up.
FHFA argues that—contrary to the traditional limitations of conservatorship authority—
HERA empowers conservators to wind up regulated entities because 12 U.S.C. § 4617(a)(2)
states that FHFA may “be appointed conservator or receiver for the purpose of reorganizing,
rehabilitating, or winding up the affairs of a regulated entity.” See FHFA Br. 30-31; see also
Treasury Br. 26-27. FHFA misreads the statute. It does not follow that the powers articulated in
Section 4617(a)(2) belong to conservators and receivers alike. After all, “the words of a statute
must be read in their context.” FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 133
(2000). As explained above, HERA, case law, commentators, and dictionaries use “liquidation”
and “winding up” as synonyms. And, given that it is well established that liquidating the
Companies is beyond FHFA’s conservatorship powers, it follows that steps to wind up the
Companies are also forbidden to FHFA as conservator. Further, concluding that FHFA as
conservator may wind up the Companies generates absurd results: If FHFA as conservator has
all three powers listed in Section 4617(a)(2)—“reorganizing, rehabilitating, [and] winding up”—
it follows that FHFA as receiver must also have these three powers, including rehabilitation. But
that cannot be, as even FHFA explains that as receiver it “shall place the [Companies] in
liquidation,” leaving no room to rehabilitate them. 12 C.F.R. § 1237.3(b).
FHFA’s reliance on Ameristar Financial Services Co. v. United States, 75 Fed. Cl. 807
(2007), is similarly misplaced. Ameristar’s statement that a conservator “manage[s] and protects
the troubled institution’s assets until the institution has stabilized or has been closed by the
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chartering authority,” id. at 808 n.3, merely acknowledges that a conservatorship can be
successful (with the “stabilized” entity exiting conservatorship), or it can fail, ending in
receivership. See 12 U.S.C. § 4617(a)(4)(D) (“Receivership terminates conservatorship”). To be
sure, there could come a time when FHFA’s Director concludes that the Companies cannot be
rehabilitated or returned to normal business operations. At that point—and after observing all
other required procedures—FHFA can place the Companies in receivership. See Carpenter &
Murphy, supra, at 6 (“[A] conservatorship may be followed by a receivership if a determination
is made that the institution is not viable.”). That does not mean that a conservator can operate an
entity with the goal of receivership and liquidation. FHFA’s view that as conservator it may
push the Companies toward eventual liquidation—contrary to the language of HERA and
FHFA’s own expressed goal of using the conservatorship to “return[ ] the [Companies] to normal
business operations,” FHFA 0016—is simply “untenable.” MBIA Ins. Corp., 816 F. Supp. 2d at
96-97.
If FHFA were correct—and it could wind down the Companies as conservator—FHFA
would have license to evade the procedural protections afforded by receivers. In receivership,
with competing claims against the Companies’ assets, HERA requires FHFA, “as receiver, [to]
determine claims in accordance with the requirements of” 12 U.S.C. § 4617(b). 12 U.S.C.
§ 4617(b)(3)(A). These rules require FHFA to “promptly publish a notice to the creditors of the
entity to present their claims, together with proof . . . not less than 90 days after the date of
publication of such notice,” and to provide a mailing to the same effect. Id. § 4617(b)(3)(B), (C).
After considering these claims, FHFA may allow or disallow a creditor’s claim under its
prescribed rules. Id. § 4617(b)(5)(B), (C). These rules ensure that receivers “fairly adjudicat[e]
claims against failed financial institutions.” Whatley v. RTC, 32 F.3d 905, 909-10 (5th Cir.
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1994) (describing similar procedures for FDIC and RTC). Indeed, the Court of Appeals for the
D.C. Circuit has explained that a receiver’s failure to provide statutorily required notice raises
“serious due process concerns.” Freeman, 56 F.3d at 1403 n.2; see also Greater Slidell Auto
Auction, Inc. v. Am. Bank & Trust Co. of Baton Rouge, La., 32 F.3d 939, 942 (5th Cir. 1994)
(“Mailing of notice to claimants known to the receiver is constitutionally required.”); Elmco
Props., Inc. v. Second Nat’l Fed. Sav. Ass’n, 94 F.3d 914, 922 (4th Cir. 1996) (“[I]t would
violate the Due Process Clause of the Fifth Amendment to allow the RTC to treat Elmco’s claim
as untimely, hence permanently denied.”).
The Sweep Amendment, in FHFA’s view, allows it to circumvent this adjudication
process. By FHFA’s own admission, the net-worth sweep transfers the Companies’ “potential
future profits” to Treasury. FHFA Br. 27. Without future profits, the Companies will never be
able to repay Treasury’s liquidation preference, which will necessarily overwhelm the
Companies’ dwindling capital cushion if they are ever formally liquidated—leaving preferred
shareholders with nothing. This result is identical to what would happen if FHFA as receiver
had adjudicated, and disallowed, Plaintiffs’ claims. See MBIA Ins. Corp., 816 F. Supp. 2d at 87
(describing FDIC receivership notice that the entity’s funds “are insufficient to pay claims below
the depositor class and that all non-depositor creditor claims have no value”). Yet FHFA
provided no notice to Plaintiffs, who have valid claims against the Companies’ assets. FHFA’s
action, if permitted, would deprive Plaintiffs of due process. See Freeman, 56 F.3d at 1403-04
n.2. Judicial endorsement of FHFA’s effort to side-step Congress’s procedural protections will
simply provide other agencies with a roadmap for similar evasion and overreach.
3. Clearly prohibited from winding down the Companies, FHFA argues that it may
accomplish the same end by virtue of its authority under HERA to “‘transfer or sell any asset’ of
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the [Companies] ‘without any approval, assignment, or consent.’” FHFA Br. 27 (citing 12
U.S.C. § 4617(b)(2)(G)). This is not the law. As an initial matter, this death-by-a-thousand-cuts
argument is undermined by Treasury’s and FHFA’s decision to wind down the Companies.
FHFA cannot be heard to argue that it is just going about its business as a conservator, in light of
this declared purpose.22
Even accepting FHFA’s outlandish claim, this argument fails. FHFA as conservator may
engage in a wide array of conduct while it oversees the Companies: For example, it may “collect
all obligations and money due” to the Companies, or contract with third parties to “fulfill[ ] any
function, activity, action, or duty of the Agency as conservator,” or pay valid obligations
incurred by the Companies. See 12 U.S.C. § 4617(b)(2)(B)(ii), (b)(2)(H). But FHFA does not
exercise these powers in a vacuum, devoid of statutory goals or its own regulatory guidance.
HERA instructs FHFA as conservator to “preserve and conserve” the Companies’ assets, which
FHFA has explained requires it to use its powers to “rehabilitate” the Companies. Id.
§ 4617(b)(2)(D)(ii); 76 Fed. Reg. at 35,730. These goals shape the nature of FHFA’s powers—
what may be appropriate for a receiver may not be appropriate for a conservator. See MBIA Ins.
Corp., 816 F. Supp. 2d at 96-97 (explaining that the limits on the FDIC’s authority to repudiate
contracts may vary depending on whether the FDIC acted as a conservator or as a receiver). This
simple truth governs many areas: An emergency-room doctor might have the power to amputate
a patient’s arm without the patient’s formal consent, but that general rule does not empower that
doctor, during a standard office visit, to forcibly sedate the patient and amputate his foot.
22 FHFA asserts that its “improper motive or intent when carrying out its statutory powers and functions . . . is
irrelevant” to whether FHFA acted within its powers as conservator. FHFA Discovery Opp. 20. However true that
may be in some instances, it is irrelevant here. Plaintiffs’ argument is that FHFA acted beyond its statutory
authority in executing the Sweep Amendment. That FHFA had improper motives serves only to illuminate why
FHFA undertook the extraordinary and risky decision to ignore the congressionally prescribed limits on its
authority.
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Context matters. And in the context of a conservatorship, FHFA lacks the authority to “transfer
assets” if doing so means that the Companies could not be rehabilitated.
FHFA rests its argument to the contrary on the Seventh Circuit’s decision in Courtney v.
Halleran, 485 F.3d 942, 949 (7th Cir. 2007). See FHFA Br. 28-29. But Courtney cannot bear
the weight FHFA would place on it. First, Courtney expressly declined to follow this Court’s
decision in Adagio Investment Holding Ltd. v. FDIC, 338 F. Supp. 2d 71 (D.D.C. 2004), which
reached the common sense conclusion that the FDIC may not use its transfer authority to
circumvent specific statutory restrictions. Id. at 81. Tellingly, FHFA does not even cite Adagio.
Second, Courtney involved the powers of a receiver, not a conservator. Third, Courtney does not
stand for the proposition that a receiver may transfer assets in derogation of statutory constraints
on its authority. Rather, Courtney, addressing an agreement entered into by the FDIC as receiver
with a third party to pursue legal claims against another entity and divide the proceeds of any
recovery, held that the receiver’s power to settle legal claims in 12 U.S.C. § 1821(p)(3)(A), “if it
is to mean anything at all,” must “operate independently” of any statutory priority distribution
scheme. 485 F.3d at 949. That ruling provides no support at all to FHFA’s argument here that
its power to transfer assets is unbounded by the goals of conservatorship.
FHFA and Treasury also cite Ward for the proposition that it is within a conservator’s
authority to sell any asset, even if those sales “fail[ ] to maximize the value of the failed entity’s
assets [or] unfairly favor[ ] a potential purchaser.” FHFA Discovery Opp. 22; see also Treasury
Br. 23; Treasury Discovery Opp. 12-13. This proposition—even if correct—cannot support the
Sweep Amendment, particularly in light of Ward’s inapposite context. First, Ward was a
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receivership case and thus sheds no light on the powers of a conservator. 996 F.2d at 101.23
Second, even if Ward were relevant to the powers of a conservator, that case dealt with the sale
of a single property and the court’s opinion does not suggest that the sale would have left the
institution unable to be rehabilitated. Id. at 100. In contrast, the Sweep Amendment involves the
sale of not just one asset, but the transfer of the Companies’ entire net worth in perpetuity,
ensuring that they cannot “retain profits [or] rebuild capital” to rehabilitate themselves.
The Sweep Amendment Did Not Arrest A Purported “Downward b.
Spiral.”
FHFA argues that trading away the Companies’ net worth in exchange for eliminating the
obligation to pay dividends each quarter “preserved” Treasury’s funding commitment because it
arrested a “downward spiral” caused by the Companies’ draws from Treasury to pay Treasury’s
10 percent cash dividend. FHFA Br. 23, 22; see also Treasury Br. 24. This “downward spiral”
narrative is pure fiction—a mere pretext designed to mask the Defendants’ true aim: To seize all
of the Companies’ enormous profits for the federal government. And, even if this fiction were
reality, this “downward spiral” could never justify the Sweep Amendment.
First, the “downward spiral”—which FHFA describes as a “harmful practice,” FHFA
Discovery Opp. 3—was entirely of FHFA’s own creation. The Companies had no obligation to
pay the 10 percent dividend in cash. They could have instead paid Treasury “in kind” by
increasing Treasury’s liquidation preference. See Treasury 0033 (Treasury Stock § 2(c)).
Indeed, seven days before Treasury and FHFA executed the Sweep Amendment, the
Congressional Research Service noted that the Companies “could instead pay a 12 percent
23 FHFA’s other featured authorities—Waterview Management Co. v. FDIC, 105 F.3d 696 (D.C. Cir. 1997), and
Gosnell v. FDIC, No. 90-1266, 1991 WL 533637 (W.D.N.Y. Feb. 4, 1991), aff’d, 938 F.2d 372 (2d Cir. 1991), see
FHFA Br. 27—both dealt with receiverships and therefore have nothing to teach regarding the scope of a
conservator’s authority to transfer assets.
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annual senior preferred stock dividend [in kind] indefinitely.” N. Eric Weiss, Cong. Research
Serv., RL34661, Fannie Mae’s and Freddie Mac’s Financial Problems i (Aug. 10, 2012),
available at http://www.fas.org/sgp/crs/misc/RL34661.pdf. This solution would have solved
FHFA’s purported concern—eliminating the need to draw from Treasury to pay dividends—
consistent with its conservatorship obligation to “preserve and conserve” the Companies’ assets.
FHFA thus could have extended the life of Treasury’s commitment without trading away the
Companies’ future opportunities for success.
Second, the data disclosed in Treasury’s Administrative Record and FHFA’s “Document
Compilation” belies FHFA’s “downward spiral” narrative. FHFA’s own projections from
October 2011 showed that the Companies’ draws from Treasury would ebb by 2014. See
Treasury 1902; FHFA 2412. In fact, under those projections, only Fannie Mae, and only under
FHFA’s worst-case scenario, would continue to draw from Treasury at all.24 See Treasury 1902;
FHFA 2412. Because these figures included draws taken to pay Treasury’s dividend, this data
demonstrates that not even FHFA believed the Companies would be in an unstoppable
“downward spiral” absent intervention along the lines of the Sweep Amendment.
FHFA’s “downward spiral” narrative further unravels, as the Companies’ performance
continued to improve and, by June 2012, the Companies had beaten the projections on which
FHFA and Treasury purport to rely. FHFA’s October 2011 estimate projected that, by 2014,
Fannie Mae would draw between $145 billion and $219 billion and Freddie Mac would draw
between $75 billion and $92 billion. Treasury 1901 (October 2011 projections). Near-term
24 Indeed, Treasury was sufficiently confident in Freddie Mac’s financial future—including its ability to withstand a
purported “downward spiral” under a “Downside” forecast, see Treasury 3850 (June 2012 presentation showing that
Freddie Mac would have $102.6 billion remaining in Treasury commitment by FY2023)—that Treasury’s
presentations in July and August 2012 did not even bother to model Freddie Mac’s performance absent the Sweep
Amendment. See Treasury 3883-3894, 3895-3903.
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projected draws were also sizeable, with estimates that, from July 2011 to March 2012 alone, the
Companies would collectively draw at least $33 billion, plus another $2 billion from April 2012
to June 2012. Treasury 3879 (2012 report showing projections of the first three quarters of the
2011-12 reporting period); FHFA 4069 (2012 report showing projections for the four quarters of
the 2011-12 reporting period). After the first quarter of 2012, however, the Companies had
drawn only $19 billion from Treasury since July 2011, beating FHFA’s $33 billion prediction by
42 percent. Treasury 3879. The Companies exceeded expectations again in the second quarter,
drawing nothing, whereas FHFA predicted that they would draw an additional $2 billion during
that period from Treasury. FHFA 4069. They also increased their profitability over and above
Treasury’s 10 percent cash dividend. See FHFA 3832, 4013. There is thus no question that, at
the time FHFA executed the Sweep Amendment, it could not believe that the Companies were in
danger of exhausting Treasury’s funding commitment.
To the extent that FHFA now purports to have relied on the Companies’ SEC filings—or
other analysts’ reports—to support its argument that they did not expect to out-earn Treasury’s
dividend each quarter, FHFA provides no contemporaneous evidence supporting such reliance.
Indeed, FHFA’s only evidence suggesting that it considered these materials is an affidavit
prepared for this litigation. See FHFA 0001-0010. This is exactly the sort of litigation-inspired
reasoning that the APA prohibits. See City of Kan. City v. HUD, 923 F.2d 188, 192 (D.C. Cir.
1991) (“[A]gency rationales developed for the first time during litigation do not serve as
adequate substitutes.”).25
25 Even accepting FHFA’s reliance on the Companies’ SEC filings—which were written under FHFA’s
supervision—those statements do not say that the Companies will never out-earn the dividend. They say only that
the Companies “may experience period-to-period variability in earnings and comprehensive income,” and that “over
the long term” “it is unlikely that [the Companies] will generate net income or comprehensive income in excess of
[their] annual dividends.” FHFA Br. 23 (quoting FHFA 3598, 3857-3858). This statement does not foreclose the
(Cont’d on next page)
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Third, the credibility of FHFA’s “downward spiral” narrative is further undermined by
the comparison of FHFA’s decision to execute the Sweep Amendment in 2012 with its decision
to execute the Second Amendment in 2009. When Treasury and FHFA executed the Second
Amendment in December 2009, the Companies were losing money, forcing sizeable draws from
Treasury, and raising the prospect that the Companies’ “outsized losses” could exhaust
Treasury’s commitment in two years. See Treasury 0177. Treasury and FHFA clearly deemed
the Second Amendment’s provisions—which did not include a net-worth sweep—adequate to
address the Companies’ dire financial condition. By 2012, however, there was no similar
urgency, as Freddie Mac was projected to have more than $100 billion in remaining Treasury
funding in 2023, and Fannie Mae’s funding would run out by 2018 only in the most extreme
downside scenario. Treasury 3849-3850, 3894.
FHFA’s concern in 2012 for the consequences of a “downward spiral” is thus credible
only if events between 2009 and 2012 presented some other changed circumstance. But the only
differences between 2009 and 2012 show the government’s true motivations behind the Sweep
Amendment: By 2012, the government had reached a policy decision to cease attempting to
rehabilitate the Companies, see 2012 Press Release, in order to “ensure [that] existing common
equity holders will not have access to any positive earnings from the [Companies] in the future,”
Treasury 0202. And, by 2012, the Companies were profitable again, giving rise to an
opportunity for Treasury to tap a new and plentiful funding stream. Pursuit of these two
(Cont’d from previous page)
possibility that the Companies could out-earn Treasury’s 10 percent cash dividend. Nor does it estimate the size of
any deficit, leaving the possibility of miniscule draws from Treasury that have little overall impact on the lifespan of
Treasury’s commitment.
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objectives is utterly inconsistent with FHFA’s duty to preserve and conserve the Companies’
assets with an eye towards their rehabilitation.
Fourth, even accepting the existence of the threat of a “downward spiral”—which even
under Treasury’s projections would not materialize for nearly a decade and only for Fannie Mae,
see Treasury 3847-3850 (June 2012 projections for Fannie Mae and Freddie Mac), 3889-3890
(July 2012 projection for Fannie Mae)—FHFA lacked authority to employ the Sweep
Amendment against this supposed threat. FHFA has explained from the beginning of the
conservatorships that their purpose was to “return[ ] the [Companies] to normal business
operations,” Treasury 0089-0090, which FHFA has maintained prohibits it from removing
capital from the Companies “at a time when [it] is charged with rehabilitating [them].” 76 Fed.
Reg. at 35,727 (emphasis added). But the Sweep Amendment takes rehabilitation off the table,
preventing the Companies from “retain[ing] assets” or “rebuild[ing] capital.” 2012 Press
Release. Even if FHFA truly intended to cure the downward spiral, it employed a means
designed to kill its patient. Those are not the actions of a conservator.
FHFA’s Contention That The Sweep Amendment Would Not c.
Increase Payments To Treasury Is Meritless.
FHFA contends that the Sweep Amendment conserved the Companies’ assets because
Treasury would receive the same amount of money under the Sweep Amendment as it would
under the terms of the pre-Sweep Amendment Purchase Agreements.
It first argues that, had Treasury sought to collect the Periodic Commitment Fee, it could
have set that Fee equal to the Companies’ net profits because the value of Treasury’s
commitment was “incalculably large.” FHFA Br. 68. FHFA is mistaken. First, FHFA could not
agree to such a term consistent with its conservator powers. The Periodic Commitment Fee was
designed to be mutually negotiated between Treasury and FHFA, subject to their “reasonable
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discretion.” Treasury 0022 (§ 3.2(b)). Agreeing to a Fee equal to the Companies’ net worth
would be utterly inconsistent with FHFA’s obligations to preserve and conserve the Companies’
assets. Second, FHFA provides no basis for why the Fee would be “incalculably large” and no
way to evaluate whether the additional $110 billion the Companies paid to Treasury in 2013 was
more or less than that “incalculable” sum.26 Third, the Periodic Commitment Fee could not have
forced the Companies to pay Treasury the value of their net worth in cash because the Purchase
Agreements gave the Companies the right to pay the Periodic Commitment Fee in kind by
increasing Treasury’s liquidation preference, rather than by paying in cash. See Treasury 0022
(§ 3.2(c)). Fourth, setting the Periodic Commitment Fee equal to the Companies’ net assets
would not provide Treasury with “the market value” of its financial commitment, Treasury 0022
(§ 3.2(b))—as the Companies’ net worth increased, the Companies would place a lower value
on Treasury’s financial commitment, yet would be required to pay ever greater Commitment
Fees. Fifth, neither Treasury nor FHFA ever explain why the Net-Worth Sweep was appropriate
in August 2012 after Treasury had rejected that exact same idea in December 2010. When
Treasury waived the Periodic Commitment Fee in December 2010, it suggested that it might set
the Fee equal to the Companies’ future profits, but noted that this arrangement would be “subject
to further legal review.” Treasury 0202. Presumably after conferring with counsel, Treasury
abandoned this approach, preferring instead to allow the Companies to retain their income,
which “could be used to offset potential draws in future quarters.” Treasury 2359. FHFA offers
no explanation for this about-face, and no contemporaneous analysis showing why such an
arrangement would be legal.
26 In stark contrast to FHFA’s fuzzy math, the Congressional Budget Office projected that Treasury’s commitment
will cost the government $19 billion over the next decade. CBO Report at 64 (projecting “the net lifetime costs—
that is, the subsidy costs adjusted for market risk—of guarantees that will be issued by as well as loans that will be
held by the [Companies]”).
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FHFA also argues that, even without the Periodic Commitment Fee, FHFA did not
believe that the Net-Worth Sweep would increase payments to Treasury, and that the Sweep
Amendment would thus conserve the Companies’ assets exactly as the 10 percent cash dividend
had. FHFA Br. 67; FHFA 0009. This argument strains credulity, since during the first 12
months of the Sweep Amendment, the Companies paid to Treasury $110 billion more than they
would have absent the Sweep Amendment. Treasury 4352. Even before the Sweep
Amendment, it was clear that the Companies would pay more under the Net-Worth Sweep.
Treasury’s internal presentations show that the Companies would pay more under various
“stress” scenarios and disclosed that they would also do so under “positive scenarios,” though
Treasury did not bother to model them, as the Administrative Record reveals. Treasury 3886-
3888, 3862; see also Treasury 3785-3790, 3846-3850. It was only under a “base” scenario that
the Companies’ payments under the Net-Worth Sweep equaled those under the 10 percent
dividend. Id. But that could occur only if the Companies performed exactly as predicted. If the
Companies beat expectations even once because, for example, they recognized $50 billion in
deferred tax assets, Treasury would receive more. See Treasury 3775-3802, 3833-3862, 3883-
3894, 3895-3903; FHFA 3737 (Freddie Mac Q2 2012 10-Q (Aug. 7, 2012)); Treasury 2705
(Fannie Mae 2011 10-K (Feb. 29, 2012)).
FHFA is conspicuously silent as to whether it considered the Companies’ deferred tax
assets when it agreed to the Sweep Amendment, representing only that it never discussed the
matter with the Companies. FHFA 0009-0010. Even this limited representation is not credible.
The Companies repeatedly identified sizeable deferred tax assets in their SEC filings, see FHFA
3737 (Freddie Mac disclosing $34.7 billion in deferred tax assets on August 7, 2012); Treasury
2705 (Fannie Mae disclosing $64.1 billion in deferred tax assets on February 29, 2012), and the
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Companies’ renewed profitability suggested that the Companies might soon recognize these
massive assets. Indeed, FHFA’s Office of the Inspector General explained soon after FHFA
executed the Sweep Amendment that the Amendment could result in “an extraordinary payment
to Treasury” “due to the accounting treatment surrounding deferred tax assets.” FHFA Office of
Inspector General, Analysis of the 2012 Amendments to the Government Stock Purchase
Agreements 15 (Mar. 20, 2013), available at http://www.fhfaoig.gov/Content/Files/WPR-2013-
002_2.pdf. To the extent that FHFA was blind to the existence of these assets, it was willfully
so.
The Sweep Amendment Did Not Keep The Companies In A d.
“Holding Pattern.”
FHFA contends that it may operate the Companies “in a holding pattern, awaiting major
policy decisions in the future,” and that the Sweep Amendment is simply its chosen means of
doing so. FHFA Br. 31-32. Even if FHFA had such authority, the Sweep Amendment does not
place the Companies in a “holding pattern,” but rather makes the Companies’ wind down
inevitable. Treasury made this point on the date that it and FHFA executed the Sweep
Amendment, explaining that the Companies “w[ould] be wound down” and “w[ould] not be
allowed to retain profits, rebuild capital, and return to the market in their prior form.” 2012 Press
Release. Far from a “holding pattern,” the Sweep Amendment puts the Companies on a planned
descent into liquidation. This certainly does not maintain the “status quo,” which is the bare
minimum the law expects from a conservator. See Bryce v. Nat’l City Bank of New Rochelle, 17
F. Supp. 792, 799 (S.D.N.Y. 1936), aff’d, 93 F.2d 300 (2d Cir. 1937); see also CedarMinn, 956
F.2d at 1454 (“[T]he purpose of a conservator [is] to maintain the institution as an ongoing
concern.”).
* * *
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When FHFA installed itself as the Companies’ conservator, it was obligated to “preserve
and conserve” the Companies’ assets with the goal of rehabilitating the Companies, so that they
might resume “normal business operations.” FHFA 0016. The Sweep Amendment starves the
Companies of the capital necessary to accomplish these goals. FHFA apparently takes pride in
this accomplishment, as both it and Treasury openly proclaimed this as the Sweep Amendment’s
purpose. But FHFA had no authority to ignore its statutory obligation to rehabilitate the
Companies. FHFA thus exceeded its authority and violated the APA.
IV. The Sweep Amendment Was An Arbitrary And Capricious Exercise Of Treasury’s
And FHFA’s Authority.
The APA forbids an agency from acting in a manner that is “arbitrary” or “capricious”
and requires an agency to engage in “reasoned decisionmaking.” 5 U.S.C. § 706(2)(A); State
Farm, 463 U.S. at 52. Reasoned decisionmaking requires federal agencies to “‘consider an
important aspect of the problem’” before it. Nat’l Ass’n of Home Builders v. Defenders of
Wildlife, 551 U.S. 644, 658 (2007) (quoting State Farm, 463 U.S. at 43). An agency’s
contemporaneous account of its decisionmaking “enable[s] the court to evaluate the agency’s
rationale at the time of the decision” and “must minimally contain a rational connection between
the facts found and the choice made.” Dickson v. Sec’y of Defense, 68 F.3d 1396, 1404 (D.C.
Cir. 1995) (internal quotation marks omitted). When an agency acts contrary to its prior
interpretation of a statute or otherwise goes against its prior practice, it must explain its reasons
for “depart[ing] from established precedent.” Jicarilla Apache Nation v. U.S. Dep’t of Interior,
613 F.3d 1112, 1119 (D.C. Cir. 2010).
The Administrative Record and “Document Compilation” disclose devastating flaws in
Treasury’s and FHFA’s decisionmaking process. First, the agencies’ factual basis for the Sweep
Amendment—the so-called “downward spiral”—was the product of stale and stunningly
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inaccurate projections of the Companies’ profitability and of the Sweep Amendment’s impact.
Second, the agencies never considered an alternative solution to the Net-Worth Sweep, although
at least three were obvious and available. Third, Treasury and FHFA ignored both the factors
that Congress mandated they consider and their prior understandings of their own statutory
authority. Fourth, neither agency considered the interests of the Companies’ private
shareholders, to whom Treasury and FHFA both owed fiduciary duties. Each of these failures is
itself grounds for vacatur. Together, they demonstrate regulatory dysfunction that
unquestionably violated the APA.
A. Treasury’s And FHFA’s Decision To Execute The Sweep Amendment Was
Based On A Knowingly Erroneous View Of The Companies’ Financial
Performance And Prospects.
Administrative agencies must justify their actions, providing “a rational connection
between the facts found and the choice made.” Dickson, 68 F.3d at 1404 (internal quotation
marks omitted). An agency must support its decisions with the best available data, and may not
ignore more current information simply because it undermines the agency’s preferred action.
See Cnty. of Los Angeles v. Shalala, 192 F.3d 1005, 1020-23 (D.C. Cir. 1999) (finding agency’s
use of outdated data, without adequate explanation, to be arbitrary and capricious). Treasury and
FHFA ignore these simple commands, as they seek to justify the Sweep Amendment—and
breathe life into their “downward spiral” narrative—with stale data, and erroneous interpretations
of that stale data. The APA requires more.
Treasury used stale projections to support its argument that the Companies were in
danger of exhausting Treasury’s commitment if FHFA continued to require the Companies to
pay Treasury’s dividend in cash. Treasury’s projections—FHFA presents no contemporaneous
analysis—cited projections by Grant Thornton, Treasury 3786, which in turn relied on FHFA’s
October 2011 forecasts, Treasury 3782, 3786. These projections showed that the Companies’
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future revenues would be insufficient to cover Treasury’s 10 percent cash dividend. See
Treasury 3900 (August 8, 2012, presentation on the proposed Sweep Amendment listing
“Source: FHFA and Grant Thornton Projections, Treasury staff estimates”).27 But, by June
2012, those underlying FHFA projections had become obsolete, as the Companies had beaten
even FHFA’s most optimistic projections. See supra pp. 67-68. None of Treasury’s
presentations—on which FHFA purports to have relied, FHFA 0008; FHFA Br. 66—indicates
that it incorporated this new data. See Treasury 3775-3802, 3833-3862, 3883-3894, 3895-3903.
Treasury attempts to fill this gap, explaining that presentations dated before July 2012
used only FHFA’s October 2011 data, while subsequent presentations incorporated the
Companies’ more recent performance. See Treasury Discovery Opp. 21. But that assertion
appears plainly mistaken. Treasury’s profit projections decreased between presentations given
in June and July 2012, even as the Companies continued to earn large profits. Compare Treasury
3847 (June 2012 presentation projecting Fannie Mae comprehensive income of $13.5 billion in
2015 under “base case”), with Treasury 3890 (July 2012 presentation projecting Fannie Mae
comprehensive income of $6.6 billion in 2015 under “base case”). Treasury attributes this
discrepancy to “different set[s] of assumptions” in each projection. According to Treasury, the
June projection assumed that the Companies would increase guarantee fees—thereby increasing
revenue—and decrease the size of their investment portfolios at 10 percent per year as required
by the then-governing Purchase Agreements; the July projection, in contrast, purportedly
assumed that these fees would not increase and that the Companies would decrease the size of
their portfolios by 15 percent annually—the same rate eventually adopted as part of the Sweep
27 Neither Treasury nor FHFA has provided the Grant Thornton projections or these “Treasury staff estimates,”
depriving the Court and Plaintiffs of the ability to assess the reasonableness of Treasury’s and FHFA’s reliance on
them.
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Amendment. Treasury Discovery Opp. 21. These explanations are insufficient. First, the July
2012 projections cited above did provide for a guarantee fee increase, as indicated by the title of
the slide, “Fannie Mae: Base Case II (with g-Fee Increase),” Treasury 3890, and nothing in the
June 2012 slide indicates that it assumed a fee increase, see Treasury 3833-3862. Second,
Treasury does not explain why its July 2012 projections assumed a 15 percent annual decrease in
the Companies’ portfolios, or why that change would more than halve the Company’s profit.
Indeed, one would have thought that, to project the Companies’ performance under pre-Sweep
Amendment conditions, Treasury would have assumed the actual conditions prior to the Sweep
Amendment—including the 10 percent rate of decrease.28 Treasury cannot simply cherry-pick its
favorite assumptions to reach a pre-ordained conclusion, as the APA requires any “model
assumptions [to] have a ‘rational relationship’ to the real world.” Appalachian Power Co. v.
EPA, 249 F.3d 1032, 1053 (D.C. Cir. 2001).
Nor did any of these projections account for the Companies’ tens of billions of dollars in
deferred tax assets. As discussed above, FHFA’s self-serving declaration that neither Treasury
nor FHFA considered these assets, see FHFA 0009-0010, is neither credible nor sufficient to
bring Treasury and FHFA’s conduct into compliance with the APA. The Companies’ pre-Sweep
Amendment financial disclosures—written under FHFA’s supervision—made clear that there
were sizeable deferred tax assets available whenever the Companies began generating profits.
See Treasury 3642 (Freddie Mac Q1 2012 10-Q (May 3, 2012)); Treasury 2504 (Fannie Mae
2011 10-K (Feb. 29, 2012)). And, at virtually the moment that the Sweep Amendment took
effect, Fannie Mae miraculously decided to recognize its deferred tax assets, thereby increasing
28 Treasury also argues that the June and July presentations are different because the June presentation uses fiscal-
year data, whereas the July presentation uses calendar-year data. Treasury Discovery Opp. 21. This distinction
surely cannot support a nearly $7 billion decline in projected revenue, as Treasury implicitly concedes by failing to
explain how different calendars could produce such drastically different revenues. Id.
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Treasury’s dividend by more than $50 billion. See Fannie Mae Q1 2013 10-Q, at 2 (May 9,
2013). Recognition of those assets was inevitable even under Treasury’s most pessimistic
financial projections, all of which showed the Companies earning taxable income that the
deferred tax assets could be used to offset. See Treasury 3900, 3889-3894, 3847-3850.
The availability of these deferred tax assets also undermines entirely Treasury’s and
FHFA’s protestations that the Sweep Amendment was not designed to increase payments to
Treasury. See FHFA Br. 67. Indeed, Treasury’s internal presentations projected that the
Companies would pay Treasury more under both the various “stress” scenarios and under the
“positive scenarios” that Treasury did not bother to model. Treasury 3886-3888, 3862; see also
Treasury 3785-3790, 3846-3850. It was only under a “base” scenario that the Companies’
payments under the Net-Worth Sweep would equal projected payments under the 10 percent
dividend. Id. And, of course, even the base-scenario projections simply ignored billions in
deferred tax assets that both Companies recognized virtually immediately following the Sweep
Amendment.
Treasury and FHFA contend that the Sweep Amendment was necessary to maintain
investor confidence. See Treasury Br. 50; FHFA Br. 66. The record does not support this
conclusion, and is particularly belied by the agencies’ actions around the Second Amendment.
When Treasury and FHFA executed the Second Amendment in December 2009, the Companies
were losing money at a considerable pace, in part due to Treasury’s 10 percent cash dividend.
See Treasury 4351. Treasury recognized that these “outsized losses” could exhaust Treasury’s
commitment to Fannie Mae within two years—by 2011. Treasury 0177.29 Yet neither Treasury
nor FHFA embraced a net-worth sweep at that point. Indeed, by 2011, Treasury had embraced
29 FHFA does not proffer contemporaneous documentation surrounding the Second Amendment.
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the opposite notion—that the Companies’ “positive net income after dividends . . . could be used
to offset potential draws in future quarters.” Treasury 2359.
By 2012, there was no similar urgency, as both Fannie Mae and Freddie Mac were
projected to have funding for more than a decade. See Treasury 3787-3790, 3900. The
Companies were clearly able to fund the 10 percent cash dividend in 2012 and 2013, and could
use the payment-in-kind feature as needed, meaning that Treasury and FHFA had ample time to
gauge investors’ reactions. See Treasury 4352 (dividend payments exceeding the 10 percent
dividend levels). Yet, the agencies claim, the Sweep Amendment was necessary in 2012.
Neither FHFA nor Treasury suggests why the events of 2012—renewed profitability over and
above Treasury’s dividend—justified the Net-Worth Sweep, whereas the events of 2009 did not.
Indeed, the only plausible difference between 2009 and 2012 is that the Companies were
profitable in 2012, and the government saw an opportunity to seize those plentiful profits, while
simultaneously acting on its “commitment” to harm the Companies’ private shareholders. See
Treasury 0202.
B. Neither Treasury Nor FHFA Considered Obvious Alternative Solutions.
“[A]n agency must consider reasonably obvious alternative rules and explain its
reasoning for rejecting alternatives in sufficient detail to permit judicial review.” Walter O.
Boswell Mem’l Hosp., 749 F.2d at 797 (internal quotation marks omitted). The Administrative
Record reveals that neither agency considered alternatives. FHFA proffers no administrative
record at all, and even its litigating declaration does not suggest that it ever considered a different
solution. See FHFA 0001-0010. Treasury’s contemporaneous presentations make clear that
Treasury only ever considered variations on the net-worth sweep theme. See Treasury 3775-
3802, 3833-3862, 3883-3894, 3895-3903.
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At least three viable alternatives were available. First, the Companies could have
exercised their rights under the Treasury Stock to pay Treasury’s dividend in kind by increasing
Treasury’s liquidation preference, rather than in cash. See Treasury 0033, 0067-0068 (§ 2(c)),
3841 (“Dividend Rate”: “Cash 10%; if elected to be paid in kind . . . 12%”). In other words, if
the Companies found themselves unable to out-earn the 10 percent cash dividend, they were not
required to draw from Treasury—they could have increased Treasury’s liquidation preference.
Second, Treasury could have refinanced the Companies’ payment schedule to establish a lower
dividend rate. See Treasury 3286 (Moody’s presentation identifying “[l]ower preferred
dividends” as an “[a]lternative[ ] to reverse GSE capital deficits”); Treasury 3253; FHFA 3101
(Deutsche Bank suggesting, among options, the alternative of amending the Purchase
Agreements to “defer or reduce the dividend”).30 Third, Treasury and FHFA could have
amended the Treasury Stock and the Purchase Agreements (assuming, of course, that Treasury
even had that authority) to allow the Companies to use any excess profit to pay down Treasury’s
liquidation preference, which would in turn decrease the size of the 10 percent dividend.
Treasury argues that any alternative proposal would have been inconsistent with “the
goals of maintaining the solvency of the [Companies] while also protecting the interests of
taxpayers.” Treasury Br. 54. This is incorrect. Surely, Treasury did not believe that the “in
kind” option was contrary to the taxpayers’ interests, since Treasury certified in 2008 that the
terms of the original Purchase Agreements—which included the 12 percent “in kind”
provision—would “protect the taxpayer.” Treasury 0001. Moreover, HERA—the statute
authorizing Treasury to invest in the Companies—provides Treasury with other “goals” with
30 Although FHFA and Treasury both cite the Deutsche Bank report to support the necessity of the Sweep
Amendment, neither agency ever suggests that it considered this alternative proposal. See FHFA Br. 24; Treasury
Br. 53.
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which these alternative proposals would be consistent, specifically the Companies’ “resumption
of private market funding” and their “status as . . . private shareholder-owned compan[ies].” 12
U.S.C. §§ 1455(l)(1)(C)(iii), (v), 1719(g)(1)(C)(iii), (v). In contrast, the Sweep Amendment was
designed to ensure that these goals could never be achieved. See 2012 Press Release.
Treasury implicitly argues that it was not required to consider these alternative solutions,
citing the maxim that an agency need not consider “‘every alternative device and thought
conceivable by the mind of man.’” See Treasury Br. 54 (quoting Laclede Gas Co. v. FERC, 873
F.2d 1494, 1498 (D.C. Cir. 1989)). This non sequitur does not save the Sweep Amendment, as
each of these alternative solutions to the problem the agencies perceived was readily apparent at
the time of Treasury’s action—Treasury was thus obligated to consider those alternative
solutions. See Int’l Ladies’ Garment Workers’ Union v. Donovan, 722 F.2d 795, 816-17 (D.C.
Cir. 1983). The 12 percent “in kind” payment was clearly set forth as a term and condition of the
Treasury Stock, Treasury 0033 (§ 2.5(c)), and was acknowledged in the Sweep Amendment
itself, Treasury 4337 (§ 3). In fact, seven days before Treasury and FHFA executed the Sweep
Amendment, the Congressional Research Service noted that the Companies “could instead pay a
12 percent annual senior preferred stock dividend indefinitely.” Weiss, supra, at i. Paying down
Treasury’s liquidation preference was also explicitly referenced in the Treasury Stock certificate.
See Treasury 0034 (§ 3). The refinancing alternative was included in at least two reports that
Treasury included in its own Administrative Record. See Treasury 3253 (Deutsche Bank report
dated March 14, 2012), 3286 (Moody’s presentation dated April 4, 2012).
These solutions also would have addressed FHFA’s concerns regarding the so-called
“downward spiral” and the longevity of Treasury’s commitment. See FHFA Br. 65-66.
Allowing in-kind dividend payments would have relieved any need the Companies might have
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had to draw additional funds from Treasury. A lower dividend rate commensurate with the
Companies’ reasonable profit expectations would have had the same effect. And allowing the
Companies to pay down Treasury’s liquidation preference would have reduced the 10 percent
dividend. Indeed, if Treasury had the authority to “amend” the Treasury Stock in any way it saw
fit—as it erroneously argues—there is no reason why Treasury and FHFA could not have
amended the Treasury Stock and Purchase Agreements to provide that every dollar paid to
decrease Treasury’s liquidation preference would increase Treasury’s available funding
commitment by one dollar. In other words, the Companies’ excess payments in good quarters
could have increased Treasury’s ability to support the Companies in bad quarters.
In the end, the record does not reflect that Treasury and FHFA considered any alternative
solutions, because they did not consider any. That omission violated their obligations under the
APA.31
C. Treasury And FHFA Failed To Consider The Factors Prescribed By
Congress As Relevant To Such A Change In Course.
Agency action is arbitrary and capricious if the administrative record lacks “any
discussion of a statutorily mandated factor,” as such absence “leaves [the court] with no
alternative but to conclude that the agency failed to take account of [a] statutory limit on its
authority.” Pub. Citizen v. Fed. Motor Carrier Safety Admin., 374 F.3d 1209, 1216 (D.C. Cir.
2004) (internal quotation marks and alterations removed). And, where the agency has previously
31 FHFA contends that requiring it to consider alternative solutions, such as paying Treasury’s dividend in kind at
12 percent, would “constitute pure second-guessing of the means by which the Conservator took action to address a
problem.” FHFA Discovery Opp. 23 n.12. FHFA is incorrect. Requiring FHFA to consider other alternatives does
not mean that FHFA was obligated to adopt those other alternatives; it only requires FHFA to exercise its
conservatorship powers in a rational manner. See Chamber of Commerce of U.S. v. SEC, 412 F.3d 133, 144-45
(D.C. Cir. 2005) (“[T]he Commission’s failure to consider the disclosure alternative violated the APA. . . . The
Commission may ultimately decide the disclosure alternative will not sufficiently serve the interests of shareholders,
but the Commission—not its counsel and not this court—is charged by the Congress with bringing its expertise and
its best judgment to bear upon that issue.”).
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set forth its opinion of its own authority, it must “acknowledge and explain the reasons for a
change [of] interpretation.” Verizon, 740 F.3d at 636. Treasury and FHFA both fail this test.
Treasury did not provide any contemporaneous explanation of how the Sweep
Amendment is consistent with its statutory authority. Treasury’s authority under HERA expired
on December 31, 2009, with a few limited exceptions. 12 U.S.C. §§ 1455(l)(2)(D), (4),
1719(g)(2)(D), (4). Yet none of Treasury’s internal memoranda provide any explanation for why
the Sweep Amendment was a mere “[e]xercise of [r]ights,” as Treasury now argues. See
Treasury Br. 37. Treasury’s belated and litigation-inspired rationale certainly cannot satisfy its
obligation under the APA. See State Farm, 463 U.S. at 50.
Treasury also failed to make the required findings or address the required considerations.
Before Treasury exercised its limited investment authority, HERA required Treasury to
determine that such purchases would “provide stability to the financial markets,” “prevent
disruptions in the availability of mortgage finance,” and “protect the taxpayer.” 12 U.S.C.
§§ 1455(l)(1)(B), 1719(g)(1)(B). This determination would, in turn, be based on specific factors,
such as “the [Companies’] plan[s] for the orderly resumption of private market funding or capital
market access” and “the need to maintain the [Companies’] status as . . . private shareholder-
owned compan[ies].” Id. §§ 1455(l)(1)(C), 1719(g)(1)(C). Treasury’s Administrative Record
lacks any of these findings or considerations in connection with the Sweep Amendment. This is
in sharp contrast to the Second Amendment, where Treasury made findings and addressed the
required considerations, explaining that they were necessary to “amend the terms of the Original
Agreements.” Treasury 0188. If Treasury is correct that it has no obligation to address any of
the required considerations when fundamentally changing its investment, then Treasury could
simply purchase securities on day one on terms that advance HERA’s goals, and then, on day
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two, amend those same securities in ways that destabilize financial markets, disrupt mortgage
finance, and hurt taxpayers. HERA did not contemplate such an absurd result. See Banner Fund
Int’l, 211 F.3d at 617. And Treasury was, at the very least, required to explain why it had
departed from the precedent it set in the Second Amendment. See Dillmon v. NTSB, 588 F.3d
1085, 1089-90 (D.C. Cir. 2009).
Similarly, FHFA has never explained how the Sweep Amendment—which gives away all
of the Companies’ net worth in perpetuity—is consistent with its prior understanding of its
obligations as a conservator. FHFA explained in 2008 that the conservatorships were intended to
“return [the Companies] to normal business operations,” FHFA 0016, and that HERA authorized
FHFA only to “reconstitute the [C]ompanies under their current charters,” FHFA 1185. But the
Sweep Amendment prohibits the Companies from “retain[ing] profits” or “rebuild[ing] capital,”
2012 Press Release, something “normal business[es]” certainly do. In fact, the Sweep
Amendment means that resumption of “normal business operations” is impossible. And the
Sweep Amendment certainly does not allow the Companies to “reconstitute” their pre-
conservatorship operations. FHFA’s 2011 regulations also made clear that “capital distributions”
are “inconsistent with [its] statutory goals” because they “deplete the entity’s conservatorship
assets.” 76 Fed. Reg. at 35,727. But the Sweep Amendment is nothing more than a series of
massive “capital distributions” that “deplete” the Companies’ assets over time. At a minimum,
FHFA had to explain why it changed its position and why asset depletion is consistent with its
conservatorship authority. See Dillmon, 588 F.3d at 1089-90.
FHFA was also required to explain why it dramatically altered the regulatory regime
governing the preferred stock’s rights. Until the Sweep Amendment, preferred stockholders
had—at the very least—an opportunity to share in the Companies’ financial gains, via a
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liquidation preference and annual dividend. FHFA initially preserved this opportunity under the
conservatorships by committing to “rehabilitat[ing] the [Companies]” and “return[ing them] to
normal business operations.” FHFA 0016; 76 Fed. Reg. at 35,730. Indeed, Treasury’s decision
to purchase warrants for a super-majority of the Companies’ common stock presupposes that the
privately held stock had substantial value. But the Sweep Amendment eliminates even the
possibility that Plaintiffs’ preferred stock will have any value because it prevents the Companies
from amassing any capital to repay Treasury’s liquidation preference. Such a dramatic change
required a reasoned explanation. See FCC v. Fox Television Stations, Inc., 556 U.S. 502, 516
(2009) (“[A] reasoned explanation is needed for disregarding facts and circumstances that
underlay or were engendered by the prior policy.”).
D. Treasury And FHFA Failed To Heed State-Law Fiduciary Duties Owed To
Other Shareholders Or Explain The Departure From Them.
When a federal agency acts as a fiduciary over a particular class of persons, the agency’s
normal discretion to choose among reasonable policy options is constrained by that special trust
relationship. See Cobell v. Norton, 240 F.3d 1081, 1099 (D.C. Cir. 2001) (“This duty necessarily
constrains the Secretary’s discretion.”). Like other “important aspects of [any] problem,” an
agency bearing fiduciary responsibilities acts arbitrarily and capriciously—and violates the
APA—when it fails to “offer[ ] an explanation for its decision” that harms its fiduciary charge.
See State Farm, 463 U.S. at 43.
State-law fiduciary duties required FHFA and Treasury to consider the interests of
preferred shareholders. A company’s officers and directors owe fiduciary duties to their
shareholders, including preferred shareholders. See Eisenberg v. Chi. Milwaukee Corp., 537
A.2d 1051, 1062 (Del. Ch. 1987); WLR Foods, Inc. v. Tyson Foods, Inc., 869 F. Supp. 419, 421
(W.D. Va. 1994) (citing Glass v. Glass, 321 S.E.2d 69, 74 (Va. 1984)). As FHFA repeatedly
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emphasizes, it “immediately succeed[ed] to . . . all rights titles, powers, and privileges of . . .
[any] officer or director of [the Companies].” FHFA Br. 2 (quoting 12 U.S.C. § 4617(b)(2)(A));
see also FHFA Br. 9, 36, 48, 46, 50. It thus owes fiduciary duties to Plaintiffs.
Treasury also owed Plaintiffs fiduciary duties as the Companies’ dominant shareholder.
See Kahn v. Lynch Commc’n Sys. Inc., 638 A.2d 1110, 1115 (Del. 1994); Parsch v. Massey, 79
Va. Cir. 446, at *11 (Va. Cir. Ct. Nov. 5, 2009). “Dominant shareholders” are those that
“exercise[ ] control over the business affairs of the corporation,” as demonstrated by “actual
control of corporation conduct.” See Kahn, 638 A.2d at 1114. Any dealings between such
control persons and the corporation must meet a rigorous test to ensure that the transaction was
fair to the minority shareholders. See Weinberger v. UOP, Inc., 457 A.2d 701, 711 (Del. 1983);
see also Kahn, 638 A.2d at 1115; Upton v. S. Produce Co., 133 S.E. 576, 580 (Va. 1926).
Treasury improbably contends that it is not the Companies’ dominant shareholder
because FHFA operates the Companies and, under HERA, “shall not be subject to the direction
or supervision of any other agency.” Treasury Br. 48 (citing 12 U.S.C. § 4617(a)(7)). Treasury
errs. The Purchase Agreements themselves give Treasury veto power over an array of the
Companies’ activities. See, e.g., Treasury 0024 (§ 5.2, issuance of capital stock); Treasury 0025
(§ 5.5, indebtedness). Indeed, Treasury even has veto power over whether FHFA may terminate
the conservatorships. See Treasury 0024 (§ 5.3).
The Administrative Record demonstrates the extent of Treasury’s control, as Treasury
invented the net-worth sweep concept apparently without FHFA’s input, and FHFA’s
“Document Compilation” does not show any effort to negotiate with Treasury or propose
alternative solutions to try to achieve a better deal for the Companies. See Treasury 3775-3802,
3833-3862, 3883-3894, 3895-3903 (Treasury presentations). Indeed, nothing in Treasury’s
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Administrative Record or FHFA’s “Document Compilation” suggests that the Sweep
Amendment was anything other than a fait accompli once Treasury decided to impose that
change to its own great advantage. Treasury does not even attempt to argue otherwise.
The Administrative Record demonstrates that neither FHFA nor Treasury ever considered
its obligations to private shareholders such as Plaintiffs. Indeed, to the extent that the
government ever considered the interests of private shareholders, they were regarded with open
hostility, given the Administration’s “commitment to ensure [that] existing common equity
holders will not have access to any positive earnings from the [Companies] in the future.”
Treasury 0202. And by prohibiting the Companies from “retain[ing] profits” or “rebuild[ing]
capital,” the Sweep Amendment guarantees that Plaintiffs will never recover a cent of their
liquidation preferences.
FHFA and Treasury argue that they were not required to consider state-law fiduciary
duties because they conflict with HERA and are thus preempted. See FHFA Br. 54; Treasury Br.
45. This is incorrect. Treasury concedes that HERA requires it to consider the Companies’
“status as . . . private shareholder-owned compan[ies]” whenever it makes “investment
decisions.” 12 U.S.C. §§ 1455(l)(1)(C)(v), 1719(g)(1)(C)(v); Treasury Br. 46. And FHFA’s
obligation to private shareholders is fully consistent with its obligation to “preserve and
conserve” the Companies’ assets. See 12 U.S.C. § 4617(b)(2)(D)(ii). Indeed, FHFA recognizes
that private shareholders “continue to retain all rights in the stock’s financial worth,” FHFA
0028, and, if the Companies exit conservatorship, it is these private shareholders that would
resume operations as the Companies’ equity owners. It would make little sense for Congress to
grant FHFA the authority to “rehabilitate” the Companies, yet permit it to do so without regard
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for the shareholders that will eventually run the rehabilitated entities. See 76 Fed. Reg. at
35,730.32
Treasury and FHFA contend that they need only consider the “public interest” and not the
interests of private shareholders. FHFA Br. 55; Treasury Br. 46. Again, they are wrong. FHFA
is charged with preserving and conserving the Companies’ assets—none of the “powers and
duties of the Agency as conservator” suggests that FHFA may choose the public interest if it
conflicts with the Companies’ interests. See 12 U.S.C. § 4617(b). And Treasury is clearly
obligated to consider the Companies’ futures as entities to be operated by “private shareholders.”
Id. §§ 1455(l)(1)(C)(v), 1719(g)(1)(C)(v).33 Treasury’s and FHFA’s failure to address their
important duties to the Companies’ private shareholders—basically conceded in their briefs—
violated the APA.
CONCLUSION
Congress granted Treasury and FHFA the authority to seize control over two of the
largest financial institutions in the world, but placed specific limitations on the exercise of that
power. Both agencies ignored their statutory limitations and chose to ransack the Companies’
net worth, contrary to the intent of Congress and to the detriment of holders of the Companies’
32 Citing Albrecht v. Committee on Employee Benefits of Federal Reserve Employment Benefit System, 357 F.3d 62
(D.C. Cir. 2004), Treasury argues that Plaintiffs’ APA claims grounded on fiduciary duties must be brought before
the Court of Federal Claims. Treasury Br. 44. This is incorrect. Plaintiffs’ APA claims here do not seek relief for
Treasury’s or FHFA’s breach of their fiduciary duties—they seek relief from Treasury’s and FHFA’s arbitrary and
capricious decision to execute the Sweep Amendment in violation of the APA; and the breach of fiduciary duties
embodies and illuminates that violation of the APA. In any event, Albrecht does not hold that claims for breach of
fiduciary duty are within the jurisdiction of the Court of Federal Claims, but rather held that a plaintiff cannot
circumvent the Tucker Act by styling breach of contract claims against the United States as breaches of fiduciary
duties, see 357 F.3d at 68-69, a legal rule with no applicability here.
33 Requiring FHFA and Treasury to consider their duties to shareholders would not, as Treasury argues, require
agencies to consider every “arguably relevant statutory [or here, common law] policy.” Treasury Br. 45. HERA
clearly contemplated an ongoing relationship between private shareholders and the Companies, requiring Treasury
to consider “the need to maintain the Corporation’s status as a private shareholder-owned company.” 12 U.S.C.
§§ 1455(l)(1)(C)(v), 1719(g)(1)(C)(v).
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preferred stock. The Sweep Amendment is a blatant example of agency overreach and must be
vacated because both agencies exceeded their statutory authority and acted arbitrarily and
capriciously in violation of the APA.
Respectfully Submitted,
Dated: March 21, 2014
/s/ Charles J. Cooper
Charles J. Cooper, SBN 24870
Vincent J. Colatriano, SBN 429562
David H. Thompson, SBN 450503
Peter A. Patterson, SBN 998668
COOPER & KIRK, PLLC
1523 New Hampshire Avenue, N.W.
Washington, D.C. 20036
Telephone: 202.220.9600
Facsimile: 202.220.9601
Attorneys for Plaintiffs Fairholme Funds, Inc.,
et al.
/s/ Drew W. Marrocco
Drew W. Marrocco, SBN 452305
DENTONS US LLP
1301 K Street, N.W., Suite 600, East Tower
Washington, D.C. 20005
Telephone: 202.408.6400
Facsimile: 202.408.6399
Michael H. Barr (Pro Hac Vice)
Richard M. Zuckerman (Pro Hac Vice)
Sandra Hauser (Pro Hac Vice)
DENTONS US LLP
1221 Avenue of the Americas
New York, N.Y. 10020
Telephone: 212.768.6700
Facsimile: 212.768.6800
Attorneys for Plaintiffs Arrowood Indemnity
Co., et al.
/s/ Theodore B. Olson
Theodore B. Olson, SBN 367456
Douglas R. Cox, SBN 459668
Matthew D. McGill, SBN 481430
Nikesh Jindal, SBN 492008
Derek S. Lyons, SBN 995720
GIBSON, DUNN & CRUTCHER LLP
1050 Connecticut Avenue, N.W.
Washington, D.C. 20036
Telephone: 202.955.8500
Facsimile: 202.467.0539
Janet M. Weiss (Pro Hac Vice)
GIBSON, DUNN & CRUTCHER LLP
200 Park Avenue
New York, N.Y. 10166
Telephone: 212.351.3988
Facsimile: 212.351.5234
Attorneys for Plaintiff Perry Capital LLC
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