On September 4, 2015, the U.S. Court of Federal Claims (Sweeney, J.) held a status conference focusing on litigation discovery in Fairholme Funds, Inc., et al. v. United States, et al., Case No. 1:13-cv-00465-MMS. Normally, status conferences are routine. This one is interesting because (1) it was a sealed proceeding and thus closed to the public, and (2) the government has been unusually aggressive in blocking important information from the plaintiffs and the general public.

Although the heart of the case is whether the Federal Housing Finance Agency (“FHFA”) essentially engaged in a Fifth Amendment takings violation, Judge Sweeney must decide whether important evidence and information should be publicly available.

Case Background

The plaintiffs are hedge funds and non-cumulative preferred stock shareholders of Fannie Mae and Freddie Mac, and thus not entitled to past unpaid or omitted dividends. In 2008, Fannie and Freddie teetered on financial disaster’s edge. On July 30, 2008, the Federal Housing Finance Regulatory Reform Act of 2008, part of the Housing and Economic Recovery Act of 2008 (“HERA”), created the FHFA and gave it the statutory authority it needed to place Fannie and Freddie into conservatorship, the largest in American history. Generally, a “conservator” oversees a financially insolvent entity and attempts to return it to solvency, whereas a “receiver” focuses on an orderly liquidation of an entity which cannot be saved.

In September 2008, the U.S. Treasury Department, also pursuant to HERA, agreed to inject approximately $187.5 billion into Fannie and Freddie, and in return receive Fannie and Freddie senior preferred stock with a 10% cash dividend and convertible warrants equaling 79.9% of common stock.
In the beginning of 2012, Fannie and Freddie began turning a profit. In mid-August 2012, however, the FHFA and the Treasury Department agreed to amend their original agreement with a “net worth sweep,” also known as a “profit sweep,” where, instead of a fixed 10% cash dividend, Fannie and Freddie would pay all of their respective profits, in perpetuity, to the Treasury Department, without any credit for amounts such as pay-down of principal. Essentially, the “net worth sweep” prevented Fannie and Freddie from recapitalizing and exiting conservatorship because they could never truly “repay” the Treasury Department.  

The plaintiffs sued, claiming that the “net worth sweep” amendment eliminated their dividends, which amounted to a Fifth Amendment takings violation.  

Transparency v. Public Policy

From the litigation’s beginning, the government battled unusually hard to withhold evidence. It permitted only the plaintiffs’ attorneys, not the plaintiffs themselves, to look at documentary evidence. It extremely forcefully fought discovery requests. In addition to work-product and attorney-client privilege, the government also claimed deliberative process privilege and executive privilege, even though at that point the government admitted that it had not reviewed all of the documents nor generated a privilege log. The government further argued that making even the non-privileged documents publicly available would (a) destabilize financial markets, the housing market, and the general economy, or (b) interfere with negotiations with Congress regarding Fannie Mae and Freddie Mac, or (c) both.

Others have argued that documents which apply to government actions in 2008 and/or 2012 are unlikely to affect the markets, and that the government is fighting so hard against the production and release of evidence and information because it does not want the plaintiffs nor the public to become aware of either potential or actual improprieties.

Eventually, the court ordered the litigants to exchange discovery under a strict protective order pursuant to Rule 26(c) of the Rules of the U.S. Court of Federal Claims. On June 30, 2015 The New York Times Company moved to intervene and for an order de-designating the transcripts of two depositions: Mr. Edward DeMarco (FHFA’s acting director from September 1, 2009 – January 6, 2014) and Mr. Mario Ugoletti (FHFA’s current interim ombudsman; former director of the U.S. Treasury Department’s Office of Financial Institutions Policy; former special adviser to Director DeMarco). The court has not yet ruled on this motion; it will have to determine whether the government demonstrated sufficient good cause to keep those transcripts sealed and, if so, whether that outweighs the public’s interest in understanding the government’s actions regarding the events in question.

The government’s behavior in this litigation appears to directly go against one of the President’s first official announcements.On January 21, 2009, the day after his historic inauguration, President Obama forcefully stated his commitment to “openness” and “transparency” in a speech to his incoming senior staff and cabinet secretaries:

And the way to make government accountable is make it transparent so that the American people can know exactly what decisions are being made, how they're being made, and whether their interests are being well served … For a long time now, there's been too much secrecy in this city … Starting today, every agency and department should know that this administration stands on the side not of those who seek to withhold information but those who seek to make it known … I will also hold myself as President to a new standard of openness … Transparency and the rule of law will be the touchstones of this presidency.

The same day, President Obama issued a “Transparency and Open Government” memo to the heads of all executive departments and agencies, which stated that “My Administration is committed to creating an unprecedented level of openness in Government … Executive departments and agencies should harness new technologies to put information about their operations and decisions online and readily available to the public.”

President Obama has consistently boasted about his administration’s transparency. Perhaps the most famous example is when, during a February 14, 2013 on-line Google “Fireside Hangout,” President Obama firmly stated that “This is the most transparent administration in history.” The White House’s website currently has a section on the “Open Government Initiative,” and the U.S. Justice Department’s website currently states that it “is committed to achieving the President’s goal of making this the most transparent Administration in history … We have worked with every component within the Department to fulfill the Open Government Directive and increase openness and transparency.”

In this litigation, the Obama Administration appears to be doing everything it can to prevent, rather than further, transparency and openness. It may have good public policy reasons to do so, but on the other hand there may be equally good public interest reasons to make at least some, if not all, of the information public. The government’s attorneys should not prevent public availability of the case information, nor misuse the deliberative process or executive privileges, merely to prevent certain officials or entities from “bad optics.”