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Investments

Federal judge sides with Fannie, Freddie shareholders

America's argument rejected

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Court of Federal Claims Judge Margaret Sweeney granted the Fairholme Funds motion for discovery against America.

In December the Defendant, listed as THE UNITED STATES in court documents, filed a motion to dismiss the lawsuit brought by investors in Fannie Mae and Freddie Mac.

"Plaintiffs argue that defendant’s dismissal motion challenges many of the allegations of their complaint and, in light of this, they are entitled to discovery," the documents say.

That discovery is now granted.

At one point during the lawsuit, Fairholme offered to buy parts of Fannie and Freddie.

The United States argued that the plaintiffs' claims were not valid based on the future profitability of Fannie and Freddie being unknown. The conservatorship status was also argued as a reason to not consider the lawsuit.

"Defendant contends that plaintiffs concede that Fannie and Freddie were insolvent; therefore the companies had no reasonable expectation of future profitability — a fact that plaintiffs deny and that plaintiffs argue can and will be proven with discovery," the ruling states.

In summary, the Federal government argued that investors in Fannie and Freddie thought the GSEs would become insolvent. The investors say they expected a path to profitability. Those investors now have a chance to prove it.

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