Tipping the Scales: Part I

‘Friends of the Court’ Have Hidden Ties to Big Investors

By Zachary R. MiderZachary R. Mider

Chuck Cooper, one of Washington’s top litigators, gives each new lawyer in his firm a full-size broadsword, a reminder of his motto: “Victory or death.”

For the past four years, Cooper has pursued a claim against the U.S. government that could generate a huge payday for his client, Bruce Berkowitz, a wealthy Miami investor. Berkowitz is one of a group of money managers betting on a rebound in the shares of mortgage giants Fannie Mae and Freddie Mac, rescued by the U.S. during the financial crisis. In more than 20 lawsuits, investors are asking courts to order government action that would boost the price of the shares.

Last year, when an unrelated case in a federal appeals court threatened to create a damaging precedent, Cooper’s firm showed just how far it would go to win. Lawyers at Cooper & Kirk PLLC wrote a legal brief to defuse the threat, then recruited another attorney to submit it in her name—effectively hiding their involvement.

Chuck Cooper speaks to reporters after a hearing at the Ninth Circuit Court of Appeals on Dec. 6, 2010, in San Francisco. Photographer: Justin Sullivan/Getty Images

The previously unreported episode casts light on an increasingly influential feature of the U.S. legal system known as the amicus curiae, or friend of the court. Intended to provide judges with outside perspectives, amicus briefs have proliferated in recent years. But sometimes these “friends” are the puppets of financial interests, and judges can’t always see who’s pulling the strings. When that happens, the briefs become a tool for well-funded litigants to try to tip the scales of justice.

Cooper referred questions to his firm’s managing partner, David Thompson, who said in an email that the brief complied with court rules. Berkowitz’s Fairholme Funds said it had “no involvement” in the matter.

Swaying Courts

The Cooper & Kirk brief was just a small part of the effort to sway the courts in favor of Fannie and Freddie investors. The shareholder suits themselves have attracted at least 17 amicus briefs, all but two of which support the investors’ positions. Of the 14 accepted by the courts, Bloomberg News has identified at least eight with ties to those investors, some of which weren’t disclosed to judges.

The U.S. Supreme Court and federal appeals courts require those who file amicus briefs to state if anyone paid them for their participation. They don’t require disclosure of other ties.

Big Investors Have Lots of Friends in Court

Almost all amicus briefs filed in four Fannie Mae and Freddie Mac cases sided with shareholders
Fannie Mae/Freddie Mac shareholder or financial ties to one
Often advocates for causes aligned with corporate donors

PRO-GOVERNMENT

Better Markets

Federal Deposit Insurance Corp.

PRO-SHAREHOLDER

Association of Mortgage Investors et al

Fairholme Funds*

Investors Unite

Investors Unite

Michael Sammons*

Pershing Square et al

Pershing Square et al

Timothy Howard

Timothy Howard et al

Washington Federal et al

60 Plus Association

Center for Individual Freedom

National Black Chamber

of Commerce

John Yoo*

Jonathan Macey

PRO-GOVERNMENT

Better Markets

Federal Deposit

Insurance Corp.

PRO-SHAREHOLDER

John Yoo*

60 Plus

Association

Association of Mortgage

Investors et al

Jonathan Macey

Fairholme Funds*

Center for

Individual

Freedom

National Black

Chamber of

Commerce

Investors Unite

Investors Unite

Michael Sammons*

Pershing Square

et al

Timothy Howard

Timothy Howard

et al

Pershing Square

et al

Washington Federal et al

PRO-GOVERNMENT

PRO-SHAREHOLDER

60 Plus

Association

John Yoo*

Better Markets

Association of Mortgage

Investors et al

Jonathan Macey

Center for

Individual

Freedom

Fairholme Funds*

Federal Deposit

Insurance Corp.

National Black

Chamber of Commerce

Investors Unite

Investors Unite

Michael Sammons*

Pershing Square

et al

Pershing Square

et al

Timothy Howard

Timothy Howard

et al

Washington Federal et al

* Brief not accepted by the court.
Note: Some amici filed briefs in multiple cases
Source: Bloomberg reporting on amicus briefs filed in four federal court cases

A former clerk for Supreme Court Justice William Rehnquist, Cooper, 65, served in the Reagan Justice Department before heading to private practice. He’s known for backing conservative causes, such as defending California’s ban on same-sex marriage before the high court. Recently, he has been advising Attorney General Jeff Sessions, a fellow Alabamian and longtime friend.

In July 2013, a month after Berkowitz disclosed his ownership of Fannie and Freddie shares, Cooper filed complaints in two federal courts in Washington on behalf of Berkowitz’s fund company. He argued that the government had violated the rights of shareholders by diverting profits to the U.S. Treasury.

Fannie and Freddie play a central role in the U.S. mortgage market, buying home loans and repackaging them into guaranteed securities sold to investors. To fend off a collapse in 2008, the government took them over and injected $187.5 billion of aid. Their stocks plummeted. Fannie and Freddie eventually returned to profitability. But in 2013, while Congress debated a long-term resolution, the government began pocketing all the profits, leaving nothing for shareholders.

Fannie’s Wild Ride

Government actions move shares of the giant mortgage company

0

10

$20

‘08

‘09

U.S. government places Fannie in conservatorship

‘10

‘11

Treasury modifies terms of Fannie bailout to begin pocketing all Fannie profits

‘12

‘13

Bruce

Berkowitz’s

Fairholme Funds discloses $2.4B par value stake in Fannie Mae

‘14

‘15

U.S. district court dismisses major shareholder lawsuit

‘16

Donald Trump elected president

Appeals court

upholds

dismissal of shareholders’ suit

‘17

0

10

$20

0

10

$20

2008

‘09

U.S. government places Fannie in conservatorship

‘10

‘11

‘12

Treasury modifies terms of Fannie bailout to begin pocketing all Fannie profits

‘13

Bruce Berkowitz’s

Fairholme Funds discloses $2.4B par value stake in Fannie Mae

‘14

‘15

U.S. district court dismisses major shareholder lawsuit

‘16

Donald Trump elected president

Appeals court

upholds dismissal of shareholders’ suit

2017

0

10

$20

10

$20

0

2008

‘09

U.S. government places Fannie in conservatorship

‘10

‘11

Treasury modifies terms of Fannie bailout to begin pocketing all Fannie profits

‘12

‘13

Berkowitz’s Fairholme Funds discloses $2.4B par value stake in Fannie Mae

‘14

U.S. district court dismisses major shareholder lawsuit

‘15

Donald Trump elected president

‘16

Appeals court

upholds dismissal

of shareholders’ suit

2017

10

$20

0

Note: Fannie Mae Series S preferred shares, Jan. 1, 2008–Sept. 1, 2017
Source: Bloomberg

Known for bold and contrarian bets, Berkowitz wagered that private investors would one day get a slice of the profits. He loaded up on Fannie and Freddie preferred shares, which now constitute almost a third of his $2.2 billion Fairholme Fund.

“Conventional wisdom was that the companies would be liquidated,” Berkowitz told clients on a conference call last year. “We disagreed.”

Several hedge fund managers are pursuing the same trade, including John Paulson, Richard Perry and Bill Ackman. With billions of dollars at stake, and the shares still depressed, they have mounted a lobbying campaign targeting Congress and the Treasury as well as a legal onslaught in the courts.

On the call with Berkowitz last year, Cooper & Kirk’s Thompson mentioned his firm’s motto and the swords he and his partners keep in their offices.

“Let me emphasize in the strongest possible terms,” Thompson said. “We fully intend to win this fight.”

Investor Bruce Berkowitz
Photographer: John Parra/Getty Images for Young Arts Foundation

Piszel Case

One prong of Cooper & Kirk’s attack is in the U.S. Court of Federal Claims in Washington. There, Fairholme is arguing the government’s actions regarding Fannie and Freddie constitute a taking of private property without compensation in violation of the Fifth Amendment.

Last year, an impending ruling in a separate case presented a threat to the Fairholme suit. Judges in the U.S. Court of Appeals for the Federal Circuit were weighing the case of Anthony “Buddy” Piszel, a former Freddie Mac chief financial officer fired after the 2008 government rescue. Piszel didn’t receive a promised $7 million severance and sued, arguing that denying him the money amounted to an illegal taking. But at oral arguments, the appellate judges were openly skeptical.

A few weeks later, the judges got an eight-page amicus brief from the National Black Chamber of Commerce. On the face of it, the Piszel case had nothing to do with the group’s stated mission of promoting black entrepreneurship. In its brief, the Washington-based nonprofit says “a strong interest in the protection of property rights” prompted it to intervene.

The brief bears the name of one lawyer, Rebecca LeGrand, who was working at the time at a three-partner Washington firm. In an interview in April, LeGrand said the document was actually written by lawyers at Cooper & Kirk. She said she signed and filed it as a courtesy to a fellow lawyer who wasn’t authorized to practice at the court.

“I don’t know anything about this case,” said LeGrand, who’s now in a solo practice. “I was involved for five minutes.”

Cooper & Kirk’s Thompson said “we were involved in assisting Rebecca LeGrand with that brief.” He didn’t respond to questions about why his firm was working with her.

LeGrand initially said she was told Cooper & Kirk needed help because no one at the firm was admitted to the appellate court. Presented with information showing lawyers there are authorized to appear, she changed her account. She said in a subsequent email that her memory had been “garbled” and that it was actually the partners at her own firm who requested her help.

LeGrand declined to explain their role in the case, and neither of her former partners responded to calls and emails.

Disclosure Rules

Judges have allowed non-parties to appear as friends of the court for more than a century. But the volume of amicus briefs at the Supreme Court has doubled over the past 20 years, and more than 90 percent of cases the court hears now attract at least one. In the federal appeals courts, the share of cases with at least one amicus brief has doubled since 2010, according to data compiled by LexisNexis.

Friends of the Court Now File in Almost All U.S. Supreme Court Cases
Share of SCOTUS cases with at least one amicus brief

100%

80

60

40

20

0

1946

2013

100%

80

60

40

20

0

1946

1960

1980

2000

2013

100%

80

60

40

20

0

1946

1960

1980

2000

2013

Source: Lee Epstein, et al., The Supreme Court Compendium, 6th ed. (2015)

Responding to concerns that well-funded litigants were using amicus briefs to try to stack the deck, federal appeals courts in 2010 began requiring amici to disclose if a party in the case wrote their briefs or if anyone was paying them. The Supreme Court has required the same since 1997.

But the National Black Chamber filing in the Piszel case and others in Fannie and Freddie shareholder suits show how easy it is for amici to avoid disclosing financial ties without violating court rules.

Timothy Howard, a former Fannie Mae CFO, sought to appear as an amicus supporting separate shareholder cases brought by Berkowitz’s firm and by money manager Gary Hindes. Howard says in the briefs that he wants to offer his “unique perspective.” He doesn’t mention that he had been previously paid for consulting work by Berkowitz’s firm.

In an email, Howard said his work for Fairholme was limited to one visit to the firm in March 2015 that wasn’t connected to the briefs, which were filed months later. For each brief, shareholders’ counsel recruited Howard and connected him with a lawyer who prepared the document. He said he believes these lawyers were paid for their work, but he doesn’t know by whom. The lawyers didn’t respond to inquiries.

Another friend of the court is the Association of Mortgage Investors, created in 2010 to represent owners of mortgage securities. Its board, previously dominated by mortgage investors, expanded in 2015 to include a member of Paulson’s hedge fund, tax filings show. The same year, the association filed an amicus brief in the U.S. Court of Appeals for the District of Columbia Circuit supporting the suit by Fairholme and other shareholders.

The lawyer who submitted the brief, Thomas Vartanian, had previously worked for Paulson. He recruited a more prominent group, Independent Community Bankers of America, to sign on. Paulson’s name doesn’t appear anywhere on the brief.

The ICBA said the brief aligns with its members’ views. Vartanian didn’t respond to inquiries. Chris Katopis, executive director of the Association of Mortgage Investors, said his group has always supported investor rights and wouldn’t say whether Paulson had a role in creating the brief. Paulson declined to comment.

“I don’t think the conspiracy theory holds up,” Katopis said. “The story is why did the Obama Treasury neglect the rights of investors and everyday Americans?”

National Black Chamber

Three more briefs came from nonprofits with a history of advocating for causes aligned with corporate donors. One was the Center for Individual Freedom, formed by the tobacco industry in 1998 to fight smoking regulations and now a booster for a variety of corporate causes. Another was the 60 Plus Association, dubbed a “gun-for-hire” by watchdog Citizens for Responsibility and Ethics in Washington.

“To question our motives, as some do, fails to address the substance of the policy arguments,” Jim Martin, 60 Plus’s chairman, said in an email. The center didn’t respond to inquiries.

The third group was the National Black Chamber of Commerce. It filed a brief in the D.C. Circuit shareholder case, citing a concern that Fannie and Freddie would be liquidated. Such a result “will destroy the housing market for minorities and will have a devastating impact on the overall U.S. economy,” the brief said. Although the group stated it wasn’t taking sides, it repeated a talking point frequently used by the shareholders.

The chamber, which often champions conservative causes, didn’t always value Fannie and Freddie so highly. In a 2011 statement published on the group’s website, founder and President Harry Alford blamed them for the financial crisis and asked: “Is it time to close down these two institutions?”

Alford declined to comment on the amicus briefs. “I won’t speak to you because I may get things twisted, since my memory of this has pretty much faded away,” he said in an email.

The National Black Chamber gets almost all of its money from gifts, contributions and grants, many from undisclosed parties, rather than membership dues, according to a 2014 tax filing, the most recent available. It has been criticized by environmental groups for taking positions that align with those of donors such as Exxon Mobil Corp., which voluntarily disclosed its support.

The chamber’s amicus brief in the Piszel case says no one paid for the group’s participation. LeGrand, the only person to sign the document, said she didn’t independently verify that statement.

Cooper & Kirk’s Thompson said his firm worked for the chamber pro bono. And he said its authorship of the brief didn’t need to be disclosed because the firm wasn’t counsel to a party in the case. “Our involvement was in full compliance with the disclosure requirements,” Thompson said.

Despite the law firm’s efforts, the Federal Circuit judges ruled 3-0 against Piszel in August 2016, finding that the government’s action didn’t amount to an illegal taking. But part of the opinion aligned with the chamber’s argument, and its impact on the shareholder cases remains unclear.

Six months later, in the most consequential decision so far, the D.C. Circuit ruled 2-1 against the shareholders, finding that Treasury’s decision to capture the companies’ profits didn’t overstep its authority under a 2008 bailout law.

At least, the mortgage group’s brief made an impression. In her dissent, Circuit Judge Janice Brown quoted from it approvingly.

Fannie and Freddie investors will probably seek a review by the Supreme Court. It’s a fair bet the high court will soon be hearing from more “friends.”