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Fairholme Funds Sues U.S. for Fannie Mae Profit

Fairholme Funds Inc. (FAIRX), a mutual fund headed by Bruce Berkowitz, accused the U.S. in a lawsuit of expropriating the value of its investors’ preferred shares of Fannie Mae and Freddie Mac by seizing the companies’ profit.

Fairholme said it is seeking “just compensation” for its investors because the U.S. Treasury changed the rules after taking over the companies in 2008 and announced it would collect all of their current and future profit, according to a complaint filed yesterday in the U.S. Court of Federal Claims in Washington.

The result was to “circumvent the rules of priority and to expropriate for the government the value of the preferred stock and common stock held by private investors,” Miami-based Fairholme said in the complaint.

Fannie Mae and Freddie Mac paid fixed dividends of 10 percent on the government’s stock until this year when Treasury amended the terms of the bailout to take all the mortgage-finance companies’ earnings.

Denise Dunckel, a spokeswoman for the Federal Housing Finance Agency, the companies’ overseer which is also named in the suit, didn’t immediately respond to an e-mail and a phone call seeking comment on the suit.

“It is important to remember that U.S. taxpayers provided over $187 billion in exceptional support to these two entities to maintain their solvency, protect the broader economy and support continued access to mortgage credit for millions of American families,” Treasury said in an e-mailed statement. “We fully believe our actions have been lawful and appropriate.”

Similar Suit

Hedge fund Perry Capital LLC filed a similar suit in federal court in Washington on July 7.

The U.S. government seized Fannie Mae and Freddie Mac in 2008 after investments in risky loans pushed them to the brink of bankruptcy. The two companies took $187.5 billion in taxpayer aid before they began reporting record profit this year as the housing market rebounded.

The case is Fairholme Funds Inc. v. U.S., 1:13-cv-00465, U.S. Court of Federal Claims (Washington).

To contact the reporter on this story: Sara Forden in Washington at sforden@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.

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