No one knows how the Trump Administration will tackle a major piece of unfinished business from the Obama Administration, the fate of the mortgage finance giants Fannie Mae and Freddie Mac. Until that becomes clearer, litigation involving the handling of their eight-year-old conservatorship under the auspices of the federal government will continue to play out in court.
Last month, Judge Margaret Sweeney of the U.S. Court of Federal Claims issued a stunning and sweeping rebuke of the federal government's dogged efforts to wall off thousands of documents related to the conservatorship. Her meticulous and painstaking reasoning affirms the broader principle of the public's right to know about government machinations. As she put it "(t)he 'public's right to know' is a basic (tenet) of our democracy."
By way of background, during the 2008 financial crisis, the federal government placed Fannie and Freddie in a conservatorship under the Federal Housing Finance Agency (FHFA). In 2012, Treasury officials amended the conservatorship and began sweeping all of the profits of the companies into the government's general coffers.
Shareholders of Fannie and Freddie objected to what has become known as the Net Worth Sweep and filed suit alleging a taking of property in contravention of the Fifth Amendment of the U.S. Constitution. To make their case that the government had seized something of value, attorneys for Fairholme Funds had to demonstrate that at the time the government imposed the Net Worth Sweep investors in Fannie and Freddie had a reasonable expectation of profit, i.e., that both companies were expected to reap profits going forward.
Fairholme Funds sought discovery to prove that the mortgage giants had rosy, profit-making, futures. While the federal government handed over some documents, it also insisted upon extraordinary secrecy. With respect to tens of thousands of documents, the government sought and received a protective order from the Court. Under the terms of the order, these documents could be reviewed only by the lawyers and could not be seen by the public.
Further, the federal government asserted executive privilege over roughly 12,000 documents. This privilege meant that the government would not even turn over these documents to the lawyers for Fairholme Funds. The invocation of privilege on such a massive, unprecedented scale would make it difficult, if not impossible, for investors to make their case that the government had seized their private property.
Since George Washington, presidents have sought to keep some correspondence and conversations private to protect matters of national security. In modern times, a Supreme Court ruling on Richard Nixon's efforts to keep his Watergate tapes secret established that executive privilege is hardly sacrosanct. In particular, the interest in confidentiality must be weighed against the right of plaintiffs to prove their case against the government.
With this in mind, Judge Sweeney has been methodically peeling away the government's many layers of secrecy. On September 20, she granted plaintiff's motion to compel the government to produce 56 randomly selected documents over which the government had asserted various privileges.
Her 80-page order, issued October 3, is as careful as it is devastating. With respect to each and every document, she concluded that the government failed to demonstrate that the privilege applied. She then, for argument's sake, assumed that the government had shown that a privilege was applicable. Even under this assumption, she concluded that the shareholders' right to access the information prevailed as to every document. Rarely has the government been given such a black eye.
Though the opinion formally relates to the 56 documents, it perhaps telegraphs that the thousands of documents sought by the plaintiffs must be handed over. After assuming that the 56 documents were privileged, the Court nonetheless held that the plaintiff's pressing evidentiary needs outweighed the government's wish for secrecy. This logic would seem to hold true for each and every one of the over twelve thousand documents that are supposedly privileged.
The ruling also may reverberate in other cases. For over three years, Fannie and Freddie shareholders have been pursuing their rights in courts across the country. One important case lays before a three-judge appellate panel in the U.S. Court of Appeals for the District of Columbia. Revelations from the Court of Federal Claims that the Sweep was instituted to expropriate funds from Fannie and Freddie may cause tremors and aftershocks in the Court of Appeals.
Finally, the case underscores the drawbacks of executive privilege and secrecy. It is becoming increasingly obvious to all fair-minded observers that the government's indiscriminate invocation of privilege and demands for secrecy are nothing more than attempts to shield dubious government actions from the disinfecting sunshine of publicity.
In April, Judge Sweeney strongly hinted that the government was hiding the truth: "The court will not condone the misuse of a protective order as a shield to insulate public officials from criticism in the way they execute their public duties."
Judge Sweeney's order has such repercussions and is such a repudiation of the executive that the latter recently sought a writ of mandamus from the Court of Appeals of the Federal Circuit. Here's hoping that the Court of Appeals denies this attempt to overturn Judge Sweeney's order. The Court of Appeals should reject the government's renewed attempts to shroud the truth.
To be clear, secrecy is often necessary in government. But in this case, there are no matters of national security or foreign affairs, contexts in which claims of privilege have some purchase. We are not talking about military secrets or a list of spies. Rather this case is not about the government's seizure of private property in a manner inconsistent with the Takings Clause and in a method contrary to federal statutes.
Judge Sweeney's welcome opinion begins the long-overdue process of ending the government's stonewalling.
- Prakash is the James Monroe Distinguished Professor of Law at the University of Virginia School of Law
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