Casting a ray of sunlight on a case that has been shrouded in secrecy, a federal appeals court ruled on Monday that the government must produce a raft of documents to plaintiffs suing over its decision to seize all the profits of Fannie Mae and Freddie Mac, the mortgage finance giants that were put into conservatorship in September 2008, at the depths of the financial crisis.
The case against the government was brought in 2013 by Fairholme Funds, a mutual fund that owns shares of Fannie Mae and Freddie Mac. Its lawyers contend that the government’s surprise decision to divert the companies’ profits to the United States Treasury in August 2012, just as the companies were turning around, was an illegal seizure of private property.
The government has argued that the profit sweep was necessary to protect taxpayers against further losses; taxpayers advanced $187 billion to the companies after they were put into conservatorship. But documents unsealed last year in the case cast doubt on this argument, showing that the timing of the profit sweep coincided with a rebound in the companies’ operations and occurred just before they began generating profits again.
As it has defended itself against Fairholme, the government has withheld more than 11,000 documents relating to the profit sweep decision, arguing that they should not be disclosed because they are subject to various claims of privilege, including the privilege covering presidential communications. Contending that those claims were an overreach, lawyers for Fairholme asked Margaret M. Sweeney, the judge hearing the case in the Court of Federal Claims in Washington, to review a representative sample of 56 documents.
After her review, she ruled that the documents should be released because Fairholme had an “overwhelming” need for the documents and no other source of available evidence “would similarly inform their understanding” of the events surrounding the profit sweep.
The government appealed. In Monday’s opinion, three judges for the Court of Appeals for the Federal Circuit ruled unanimously that 48 of the 56 documents were not privileged and should be released to the plaintiffs.
“This is a sweeping victory for the plaintiffs and, more broadly, for the rule of law and transparency in our government,” Charles J. Cooper, chairman of Cooper & Kirk, which is representing Fairholme Funds, said in a statement. “It is clear from the Court of Appeals’ unanimous ruling that the vast bulk of the 11,000 documents withheld by the government will now have to be disclosed to the plaintiffs and the courts, and we are confident that these documents will further discredit the government’s defense narrative.”
Officials at the Justice Department did not immediately respond to a request for comment. In the past, lawyers for the government have said that releasing the documents would roil the financial markets.
In 2015, The New York Times filed an amicus curiae brief with the Court of Federal Claims asking for the release of some documents in the case.
The 48 documents could be released in the coming weeks.
Fannie Mae and Freddie Mac remain in conservatorship, even though they have recovered. As of September, the companies had returned $63.1 billion more to the Treasury than they drew down during the recession.
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