Add Tim Pagliara, the Executive Director of Investors Unite and CEO of CapWealth Advisors, to the list of GSE shareholders that are suing the government over the sweeping of Fannie Mae and Freddie Mac profits into the U.S. Department of Treasury, commonly known as the Net Worth Sweep.
Fannie Mae and Freddie Mac received a combined $187.5 billion bailout from taxpayers in 2008 to remain afloat. In September 2008, they were taken into conservatorship by the Federal Housing Finance Agency (FHFA). In 2012, the GSEs returned to profitability but the terms of the bailout agreement were amended to require all of their profits to be swept into Treasury every quarter.
The Net Worth Sweep has resulted in several lawsuits from GSE investors, notably by Fairholme Funds and Pershing Square Capital Management. Pagliara’s lawsuit, however, is the first one to assert a shareholder’s right to inspect corporate documents under state corporate laws in which Fannie Mae and Freddie Mac each operate—Delaware in the case of Fannie Mae and Virginia in the case of Freddie Mac.
“The rights of shareholders have been trampled on and their access to information has been blocked at every turn since 2012,” Pagliara said. “I owe it to the people who have entrusted me with their investments to pursue all avenues to demonstrate that the Net Worth Sweep violates both federal law and, I strongly believe, state law.”
“The rights of shareholders have been trampled on and their access to information has been blocked at every turn since 2012.”
Tim Pagliara, GSE Shareholder
Although Pagliara is the founder and executive director of Investors Unite, which is a coalition of individual investors committed to preserving shareholder rights for Fannie Mae and Freddie Mac investors, he is not filing these lawsuits on behalf of Investors Unite, according to an announcement from the company.
Pagliara filed his lawsuits in the state courts after written requests to inspect corporate records, which are available to shareholders under state law in both Delaware and Virginia, were denied. Although Fannie Mae and Freddie Mac have been under conservatorship of the FHFA since 2008, and are charted by the government, the Ninth Circuit Court of Appeals ruled earlier in March that the GSEs are private companies in a False Claims Act suit filed by realtors against several of the nation’s largest lenders. The plaintiffs in that case alleged that the defendants certified that certain loans purchased by Fannie Mae and Freddie Mac were free and clear of certain HOA charges and liens when they were not, and further alleged that the false certifications were made to the GSEs as instrumentalities of the U.S. government.
The Ninth Circuit ruling caused a buzz in the mortgage industry and prompted an attorney representing the plaintiff in another Net Worth Sweep lawsuit to write a letter to a federal judge in the U.S. District Court for the District of Delaware, informing the judge of the Ninth Circuit decision.
Pagliara’s complaints point out that the Treasury’s publicly stated goal of the Net Worth Sweep is to ensure that “every dollar of earnings each firm generates is used to benefit taxpayers,” which Pagliara claims ignores shareholder rights and is underpinning the conservatorship that requires Fannie Mae’s and Freddie Mac’s assets to be “conserved.”
“Shareholders have a right to understand how this sweep of earnings from private companies that trampled the rights of shareholders was conceived and executed,” Pagliara said. “By inspecting the companies’ corporate records, we will be better able to answer key questions about that decision making process.”