In what is already being called a “blow to shareholders,” by John Carney of the Wall Street Journal, a federal court in Virginia ruled Tuesday that a Freddie Mac shareholder does not have the right to inspect the government-sponsored enterprise’s financial records, thanks to the conservatorship agreements that went into effect when the government took over Freddie Mac and Fannie Mae.
The United States District Court for the Eastern District of Virginia tossed out a lawsuit brought against Freddie Mac by Tim Pagliara, who sought to review the GSE’s books in an attempt to prove that the government is illegally taking the profits of Freddie Mac and Fannie Mae from shareholders.
Pagliara is the CEO of CapWealth Advisors, the leader of Investors Unite, an organization that seeks to protect the rights of all the investors that own shares in Fannie and Freddie, and a prominent member of “#FannieGate”, a viral movement on Twitter that has become shorthand for the government’s supposed theft of Fannie and Freddie.
Pagliara brought the lawsuit against Freddie Mac individually, not as a representative of either CapWealth Advisors or of Investors Unite. According to the court documents, Pagliara is the beneficial owner of approximately 346,000 shares of Freddie Mac’s junior preferred stock, which he purchased in 2009.
Pagliara’s lawsuit aimed to grant him the right to review Freddie Mac’s books, with the hope of finding evidence that the government’s “Third Amendment sweep,” which diverts all the profits from the GSEs’ to the Department of the Treasury, was not only unnecessary, but illegal as well.
But the District Court for the Eastern District of Virginia dismissed Pagliara’s lawsuit Tuesday, ruling that shareholders in Freddie Mac do not have the right to inspect the GSE’s books.
And if even shareholders (Pagliara included) had that right, the court ruled that Pagliara does not have a “proper purpose” in the lawsuit.
The court’s decision is 32 pages long, but here’s the crux of the decision:
The matter before the Court questions whether a preferred stockholder retains the right to inspect Freddie Mac’s corporate records despite a conservator succeeding to “all rights, titles, powers, and privileges . . . of any stockholder . . . with respect to [Freddie Mac] and the assets of [Freddie Mac].” The Court concludes that the statutory transfer of power to the conservator destroyed the stockholder’s right to inspect corporate records. Accordingly, the Court will dismiss Plaintiff’s Complaint.
In the lawsuit, Pagliara argues that the Housing and Economic Recovery Act of 2008 did not remove a shareholder’s right to inspect the financials of a company, which the court denied.
“The Court agrees with Defendant (Freddie Mac) that HERA divested Freddie Mac stockholders of the right to inspect corporate records,” the court states in its opinion. “Accordingly, the Court will dismiss this case.”
In the eyes of the court, the “plain language” of HERA shows Congress’s intent to transfer “as much power as possible” to the Federal Housing Finance Agency, which acts as the conservator of Fannie Mae and Freddie Mac.
“Within that context, the Court may only reasonably read the transfer of ‘all rights, titles, powers, and privileges’ of ‘any stockholder . . . with respect to the regulated entity and the assets of the regulated entity’ to include a stockholder’s right to inspect Freddie Mac’s corporate records,” the court writes.
Additionally, the court ruled that Pagliara did not have the “proper purpose” in seeking the lawsuit, because, in the eyes of the court, Pagliara sued to “seek these corporate records primarily for the purpose of investigating potential claims arising from the ‘Net Worth Sweep.’”
According to the court’s decision, those anticipated claims are lawsuits for breaches of fiduciary and statutory duties by the Freddie Mac board of directors, along with claims regarding the Treasury and the FHFA’s involvement in the board’s operation.
“Pagliara also seeks to investigate claims for breaches of rights arising from the contractual relationship between a stockholder and Freddie Mac,” the court writes.
“Although it may be possible to formulate those claims as direct lawsuits, Pagliara’s hypothetical standing to pursue such claims does not persuade the Court of Pagliara’s proper purpose,” the court continues. “To be proper, a purpose must ‘not adversely affect the corporation’s interests.’”
According to the court, Pagliara’s “past actions” toward Freddie Mac’s board of directors indicates that he will “use his records inspection to undermine FHFA’s administration of Freddie Mac,” which the court denies is a “proper” reason to bring the lawsuit.
It should be noted that on several occasions that court’s ruling references a lower court ruling that involves similar questions as support for its decision. That decision, Perry Capital LLC v. Lew, is currently being appealed by Perry Capital, which seeks return Fannie and Freddie profits to shareholders as well.
In a statement provided to HousingWire, Pagliara said that he disagrees with court’s decision and intends to keep fighting.
"We respectfully disagree with the judge's ruling,” Pagliara said. “HERA makes clear that conservatorship does not mean nationalization, and shareholders have rights. Transparency and public scrutiny are important to ensuring accountability in an eight year conservatorship.”