Activist investor William Ackman's Pershing Square Capital Management L.P., and three individuals, common shareholder of Federal National Mortgage Association or Fannie Mae (FNMA.OB) and the Federal Home Loan Mortgage Corp. or Freddie Mac (FMCC.OB), have Friday filed a law suit against the U.S. government, including the U.S. Treasury and the Federal Housing Finance Agency or FHFA.
The move comes following the government's ongoing confiscation of all Fannie and Freddie profits as part of the Net Worth Sweep Agreements signed in 2012. Previously, institutional shareholders of both the companies' preferred stock had also challenged the implementation of the Net Worth Sweep Agreements.
The agreement allows the FHFA, purportedly acting as the conservator of Fannie Mae and Freddie Mac, and Treasury to strip all earnings from both companies and to be deposited with the Treasury in cash every quarter in perpetuity. However, the agreement does not provide for any compensation to the shareholders of both the companies.
The agreement had also ensured that existing common equity holders will not have access to any positive earnings from the two companies in the future.
The suit, filed in the U.S. Court of Federal Claims, seeks to remedy the federal government's unlawful taking of shareholders' rights and property in Fannie and Freddie and other violations of law.
The suit challenges the government's illegal actions and vindicate and protect their rights as common shareholders of the privately owned, for-profit Companies as chartered by Congress.
The suit charges that the government's action violates the Takings Clause of the Fifth Amendment to the U.S. Constitution as well as FHFA's implied contractual duties.
The law requires FHFA, as conservator of the companies, to preserve and conserve the assets and property of the companies and to "put them in a sound and solvent condition.
The actions of the government also violates federal statutes and the government's fiduciary duties to the shareholders of both the companies.
New York-based Pershing Square is the largest common shareholder of the companies, with an about 10 percent stake in both the companies. The three individuals include a retired nurse who holds common shares of Fannie Mae first purchased over 25 years ago and a retired scientist and retired psychiatric social worker who have held Fannie Mae common shares for about 15 years.
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