A federal judge has granted prejudgment interest for the $299 million portion of a $612 million jury verdict won in August by classes for Fannie Mae and Freddie Mac sharholders who accused the government of wrongfully amending stock purchase agreements to obtain the enterprises profits for itself.
The core disagreement stemmed from whether the plaintiff shareholders who sues the government enterprises should be granted prejudgment interest on their damages and, if they should, the methodology of its calculation.
The court, in its ruling, made it clear that the shareholders have an unequivocal right to prejudgment interest and dismissed the Defendants' opposing stance as groundless. However, the more intricate question of the nature of this interest took center stage in the deliberations.
Drawing upon Delaware law as a reference, the court made decisive conclusions:
- Nature of Interest: The interest to be granted would be simple and not compound. Despite any discretion Delaware courts might possess to award compound interest in contract claim scenarios, the established convention is to confer simple interest. Moreover, the circumstances of this particular case did not provide compelling grounds to stray from this customary practice.
- Rate Determination: The interest rate will remain constant, as opposed to being subject to fluctuations. The court's interpretation of the Delaware statute stipulating the relevant rate was that this rate should be unchanging. The Plaintiffs did not contest this interpretation and failed to offer any persuasive rationale to diverge from it.
As a result, the shareholders will be granted simple prejudgment interest, calculated using a stable rate of 5% above the Federal Reserve discount rate, effective from the date the breach occurred, Aug. 17, 2012.
Various shareholders had sued the enterprises because they claimed the FHFA “shortchanged them $27 billion” by improperly claiming Fannie Mae and Freddie Mac were in their death throes when in fact they were already showing signs of recovering from the 2008 mortgage meltdown.
The trial earlier this summer was the second jury trial on the case. The original jurors could not come to a decision in November. In this trial, Berkley Insurance Co., et al., vs. the Federal Housing Finance Authority, et al., the plaintiffs sought $1.6 billion in damages, which they claimed was the drop in value of stocks related to the government-sponsored entities (GSEs).
The jury determined the Fannie Mae junior preferred shareholders should receive $299.4 million in damages, the Freddie Mac junior preferred shareholders should receive $281.8 million in damages, and the Freddie Mac common stock shareholders should receive $31.2 million.
Private preferred shareholders invested over $32 billion, of which $20 billion was at the behest of government regulators during the housing crisis years of 2007 and 2008. With this verdict, the jury recognized that the government arbitrarily and unreasonably violated the contractual rights and reasonable expectations of those shareholders.”