Legal News

Suing Uncle Sam After Fannie and Freddie? Probably Not

By Dan Slater

Photo: Associated Press

A flood of shareholder suits followed the last bailout on Wall Street. Will the same happen in the wake of the Fannie and Freddie seizures?

We’re not sure yet, but plaintiffs lawyers would do well to consult today’s WSJ before filing. Ashby Jones reports that, though the seizures wiped out most of the remaining value of the companies’ shares, shareholders who seek relief by suing Uncle Sam are likely out of luck.

“I’m skeptical of whether plaintiffs are going to be able to make much of this,” said James Cox, a securities-law expert at Duke. Treasury Secretary Henry Paulson “seems to have had the authority to do what he did.” Law profs say two federal laws — one passed in 1992 and another passed earlier this year — explicitly authorize Paulson to bring the companies under government control.

How about a federal securities-fraud claim? Yesterday, lawyers from Coughlin Stoia filed a suit on behalf of shareholders in federal court in Manhattan against four former or current Fannie officers or directors, alleging that the four made materially false and misleading statements about Fannie Mae’s business and prospects and misrepresented the Company’s financial statements which, in turn, artificially inflated Fannie’s share price. (Fannie Mae didn’t answer the WSJ’s request for comment.) But GW law prof Larry Mitchell said it was unlikely shareholders could show that officers or board members were derelict in their duties as they agreed to the government takeover. “What are they going to say?” Mitchell asked. “The companies were about to tank, and they needed a cash infusion and they got one.”

Full post as published by Law Blog - WSJ.com on September 09, 2008 (boomark / email).