Fairholme Wins Right to Seek Records on Fannie, Freddie

Fairholme Funds Inc. (FAIRX) can pursue government records in its lawsuit seeking compensation for the value of stock lost after the U.S. took over Fannie Mae (FNMA) and Freddie Mac (FMCC) in 2008, a federal judge in Washington ruled.

Rebuffing the government’s bid for an early dismissal of the suit, Judge Margaret Sweeney of the U.S. Court of Federal Claims said Fairholme is entitled to seek the documents so it can respond to the government’s request.

The Miami-based mutual fund has “shown that document and deposition discovery will disclose evidence relevant to the disputed factual issues about Fannie and Freddie’s solvency and the reasonableness of expectations about their future profitability,” Sweeney wrote in her ruling today.

Fairholme, headed by Bruce Berkowitz, sued the U.S. in July, claiming it’s due compensation because the government expropriated the value of investors’ preferred shares in Fannie Mae and Freddie Mac by seizing the companies’ profits.

Fannie Mae and Freddie Mac paid fixed dividends of 10 percent on the government’s stock until last year when Treasury amended the terms of the 2012 bailout of the mortgage-finance companies’ earnings to take all their earnings.

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,” Fairholme said in its complaint.

The Justice Department argued in court papers that Fairholme’s claims are “contingent on uncertain, future events” and that Sweeney lacks jurisdiction to hear the case.

The case is among at least 19 lawsuits challenging the government’s bailout of the companies filed either in the federal claims court or in U.S. District Court in Washington.

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: Andrew Zajac in Washington at azajac@bloomberg.net

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