Fairholme Funds, Inc. v. United States

In the United States Court of Federal Claims
No. 13-465 C
(Filed: October 15, 2014)

*************************************
FAIRHOLME FUNDS, INC. et al., *
*
Plaintiffs, * Limiting Access to Protective Order;
* Risk of Disclosure; Valid Risk of Harm
v. *
*
THE UNITED STATES, *
*
Defendant. *
*************************************

Charles J. Cooper, Washington, DC, for plaintiffs.

Kenneth M. Dintzer, United States Department of Justice, Washington, DC, for defendant.

OPINION AND ORDER

SWEENEY, Judge

Plaintiffs, shareholders of the Federal National Mortgage Association (“Fannie Mae”)
and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) (collectively “the
enterprises”), have sued the United States, claiming that it engaged in a taking of their property
without just compensation, in violation of the Fifth Amendment to the United States
Constitution. By way of background, after the national economy collapsed in 2008, the Federal
Housing Finance Agency (“FHFA”) placed the enterprises into conservatorship. At the time, the
United States Department of the Treasury (“Treasury”) provided the enterprises with capital and
entered into agreements to purchase securities from them (“government stock”). Plaintiffs allege
that while serving as conservator, defendant implemented the so-called “Net Worth Sweep” for
the government stock, which changed the dividend due on the stock to defendant from 10% to
100% of all current and future profits, directing all such profits to the Treasury, rather than to
plaintiffs. Defendant responded to the complaint by filing a motion to dismiss for lack of
jurisdiction and for failure to state a claim. Defendant contends that the court lacks jurisdiction
because the enterprises are independent entities and not controlled by the federal government,
that plaintiffs’ claims are not ripe, and that plaintiffs have failed to state a claim for a regulatory
taking. Plaintiffs subsequently moved for discovery in aid of jurisdiction, which the court
granted. Because of the sensitive nature of the information responsive to plaintiffs’ discovery
requests, on August 8, 2014, the court entered a protective order to safeguard that material.

Now pending before the court is plaintiffs’ motion to admit one of its experts to the
protective order. Defendant filed an opposition to the admission and plaintiffs submitted a reply.
Briefing concerning this motion is complete and the court deems oral argument unnecessary.
Because serious injury could flow from the intentional or inadvertent disclosure of the sensitive
material that is the subject of the protective order, the court denies plaintiffs’ motion.

Plaintiffs seek the admission of J. Timothy Howard to the protective order. Mr. Howard
is the former Chief Financial Officer, and former Vice Chairman of the Board of Directors, of
Fannie Mae. He resigned in 2004, defendant explains, “in the face of allegations of financial
improprieties and ongoing investigations into Fannie Mae’s accounting practices.” Def.’s Opp’n
1. Defendant states that in 2006, the Office of Federal Housing Enterprise Oversight
(“OFHEO”) charged Mr. Howard and two other senior Fannie Mae executives with, among other
things, earnings mismanagement, failure to ensure adequate internal controls, and the release of
misleading financial reports. Id. at 2. According to defendant, the charges were “settled
pursuant to consent orders” in which Mr. Howard and his two former colleagues agreed to pay
the OFHEO over $31 million. Id. Of that settlement amount, Mr. Howard’s share was $6.4
million. Def.’s Ex. C at 1.

Defendant further states that in late 2013, Mr. Howard authored a book that “offers his
take on the demise of Fannie Mae and the collapse of the United States home mortgage market.”
Def.’s Opp’n 2. Defendant contends that Mr. Howard “makes clear in his book that he believes
[that] he is the victim of the [g]overnment’s overregulation of the [e]nterprises[,] and that the
2006 charges against him were unfounded.” Id. In addition, defendant notes that Mr. Howard
has stated publicly that he “desires ‘to be part of the debate over the future of Fannie Mae, and its
counterpart, Freddie Mac’ and that he sees his book as part of that initiative.” Id. According to
defendant, there is “significant reason” to be concerned about Mr. Howard potentially violating
the protective order if he is granted access to protected information. Id. Specifically, defendant
argues, because Mr. Howard believes that he “lost his career and reputation” due to the
“[g]overnment’s regulation of the [e]nterprises,” such “deeply-held beliefs may color” his view
of confidential documents in the case and also his willingness to adhere to the protective order,
both during and after this litigation. Id. at 3. Further, because Mr. Howard owns common and
preferred stock in Fannie Mae, defendant contends that he has a personal financial stake in the
outcome of this case. Defendant asserts that as a shareholder, Mr. Howard “would have an
incentive to release confidential information in order to increase the price of his shares.” Id.
Defendant concludes that Mr. Howard’s access to protected information should be barred
because of the risk of its inadvertent or intentional disclosure. Id. at 4.

In response, plaintiffs argue that defendant has engaged in “character assassination,” that
Mr. Howard can be trusted to comply with the protective order, and that plaintiffs require his
assistance in their litigation and have retained him as a nontestifying financial consultant. Pls.’
Reply 1. Plaintiffs explain that Mr. Howard and other Fannie Mae executives settled the
OFHEO’s charges in 2008 by paying $31 million “without any admissions of wrongdoing.” Id.
at 3. Further, plaintiffs reference a comment, discussed in more detail below, made by the trial
judge in In re Fannie Mae Litigation, 898 F. Supp. 2d 176 (D.D.C. 2012), as support for Mr.
Howard’s admission to the protective order. In re Fannie Mae was a class action brought by
Fannie Mae’s investors against Fannie Mae, its auditor, and some executives, including Mr.
Howard. Id. The court granted the defendants’ motion for summary judgment in that case.

2
 Pursuant to Rule 26(c)(1)(F) of the Rules of the United States Court of Federal Claims
(“RCFC”), the court may issue a protective order “requiring that a trade secret or other
confidential research, development, or commercial information not be revealed or be revealed
only in a specific way.” Moreover, the protective order may “designat[e] the persons who may
be present while the discovery is conducted.” RCFC 26(c)(1)(E). In this case, the court entered
a protective order, which designated the types of individuals who could access protected
information. See Docket No. 73, Protective Order, ¶¶ 4-6. The protective order also outlined the
process by which an individual could apply for access to protected information, which plaintiffs
followed here. Id. ¶ 7.

As a preliminary matter, the court notes that “because the analysis of the question of
limiting access [to a protective order] is necessarily fact-bound, there can be no comprehensive
formula for decisionmaking.” SOLIDFX, LLC v. Jeppesen Sanderson, Inc., 2012 WL 2917116,
at *2 (D. Colo. July 16, 2012). Indeed, “the decision as to access is one best left to the sound
discretion of the trial court, a discretion to be exercised in light of the relevant facts and
circumstances of the particular case.” Id. Binding precedent instructs that the court “must
balance the seriousness of potential injury [that] discovery poses against the need for information
in the preparation of a plaintiff's case.” Levine v. United States, 226 Ct. Cl. 701, 701 (1981).

Here, defendant previously stated in its motion for a protective order that disclosure of
the sensitive information could have a “destabilizing effect on the nation’s housing market and
economy.” See Docket No. 49, Def.’s Mot. for Protective Order 7. Specifically, defendant
provided declarations from Melvin L. Watt, Director of the FHFA, and from Michael A.
Stegman, Counselor to the Treasury Secretary for Housing Finance Policy at the Treasury. See
id., App’x at A1 (“Decl. of M. Watt”), A8 (“Decl. of M. Stegman”). Mr. Watt explained that
disclosure of certain information requested by plaintiffs would trigger “extraordinarily
deleterious consequence,” Decl. of M. Watt ¶ 3, including “hav[ing] a destabilizing effect on the
[n]ation’s housing market and economy,” id. ¶ 7. He described in step-by-step, technical detail
how such disclosure would play out in the financial markets, including the process by which it
could “set off a chain of volatile and unpredictable reactions in [such] markets that could not be
contained.” Id. ¶ 9. In addition, Dr. Stegman stated that many of plaintiffs’ discovery requests
“seek material at the heart of the current and ongoing policy deliberations regarding housing
finance reform,” Decl. of M. Stegman ¶ 19, and that disclosure of such information could “result
in significant misunderstanding, disruption, and confusion in the markets,” id. ¶ 28. Both
individuals hold senior positions at their respective agencies, and are well-positioned to speak to
the ramifications that would result from disclosure of sensitive material in this case. Based upon
the information provided in these two declarations and defendant’s arguments, the court granted
defendant’s motion for a protective order “out of an abundance of caution,” in an “attempt[] to
avoid the dire consequences that defendant claims [would] occur” upon the disclosure of such
information. Fairholme Funds, Inc. v. United States, 117 Fed. Cl. 365, 368 (2014).

The court thus examines Mr. Howard’s application in light of these circumstances. In his
declaration, Mr. Howard states that when the OFHEO filed the charges against him, the agency
announced that “civil money penalties . . . could exceed $100 million,” in addition to the
“repayment of certain compensation packages,” of which his share “[was to] exceed[] $25
million.” Pls.’ Ex. 1, ¶ 5. As Mr. Howard indicates, before the charges against him could be

3
decided by an administrative law judge, he agreed to settle them by paying $6.4 million to the
government. Id. Though the court is aware that settlement is not an admission of guilt,
nonetheless, there was, at that time, a cloud surrounding Mr. Howard and his two former fellow
executives who agreed to repay the United States government over $31 million.

Further, plaintiffs cite to other related litigation, namely, In re Fannie Mae Litigation, 898
F. Supp. 2d 176, a class action that was filed against Mr. Howard and others. Pls.’ Reply 1. The
plaintiffs in that case alleged that the defendants violated section 10(b) of the Securities
Exchange Act of 1934, 15 U.S.C. § 78j(b) (2012) (“section 10(b)”), and SEC Rule 10b–5, 17
C.F.R. § 240.10b–5 (2011), by intentionally manipulating earnings and violating generally
accepted accounting principles, causing losses to investors. In re Fannie Mae Litig., 898 F.
Supp. 2d at 180. Plaintiffs here reference that case because in granting the defendants’ motion
for summary judgment, the court mentioned, as an aside, that there was “overwhelming evidence
of [Mr.] Howard’s good faith.” Pls.’ Reply 1. To the extent that plaintiffs in this case rely on
that statement as binding, uncontroverted proof of Mr. Howard’s good faith, that argument is not
availing. Because the In re Fannie Mae Litigation court resolved a motion for summary
judgment, by definition, it did not weigh evidence and make credibility findings, including any
findings regarding Mr. Howard’s character. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242,
249 (1986) (“[A]t the summary judgment stage the judge’s function is not himself to weigh the
evidence and determine the truth of the matter but to determine whether there is a genuine issue
for trial.”); Contessa Food Prods., Inc. v. Conagra, Inc., 282 F.3d 1370, 1376 (Fed. Cir. 2002)
(“On summary judgment, the question is not the ‘weight’ of the evidence, but instead the
presence of a genuine issue of material fact . . . .”), abrogated on other grounds by Egyptian
Goddess, Inc. v. Swish, Inc., 543 F.3d 665 (Fed. Cir. 2008) (en banc); Ford Motor Co. v. United
States, 157 F.3d 849, 854 (Fed. Cir. 1998) (“Due to the nature of the proceeding, courts do not
make findings of fact on summary judgment.”). Rather, in its decision, the court determined that
there was no genuine dispute of material fact that required trial. Thus, the court’s statement
regarding Mr. Howard’s good faith could not be considered a holding or finding. By granting
summary judgment, the court held that the plaintiffs had not met their burden of proof to
establish the existence of a genuine dispute of material fact regarding scienter under section
10(b) that required trial on the merits. In re Fannie Mae Litigation, 898 F. Supp. 2d at 190-91.

In this case, defendant has provided sufficient evidence to demonstrate that since the
conclusion of the district court litigation, Mr. Howard has worked to restore his reputation. It is
undisputed that he stated in his book that the OFHEO’s charges against him were “fictitious” and
“invented,” Pls.’ Ex. 2 at 3, and has characterized the In re Fannie Mae Litigation decision as one
that “restored [his] public identity,” Pls.’ Ex. 1, ¶ 7. Further, Mr. Howard has affirmatively
stated that he “want[s] to re-insert [him]self into the public discussion,” Def.’s Ex. D at 1, as he
has “an interest in contributing to the discussion of policy issues relating to the reform of the
mortgage industry,” Pls.’ Opp’n 7 n.7. He engages in public interviews and discussions about
the charges against him, Fannie Mae’s past and future, and the mortgage industry overall. See
Def.’s Ex. D (Jan. 27, 2014 interview with USA Today).

Plaintiffs put forward that Mr. Howard has a “right[,] as both a citizen and as someone
with . . . expertise regarding issues relating to the mortgage industry[,]to comment on the
subject.” Pls.’ Opp’n 7. In reaction to defendant’s concern that Mr. Howard “wants ‘to play a
public role in the future of the [e]nterprises,’” plaintiffs respond “[s]o what?” Id. So what,
4
indeed. Even as the court agrees with plaintiffs that Mr. Howard has the right to opine about
such matters and recognizes plaintiffs’ litigation needs, his desire for vindication in the public
arena and his stock ownership give the court pause with respect to his admission to the protective
order. Thus, the totality of the circumstances—Mr. Howard’s history with Fannie Mae, the
government, and the mortgage industry; his express desire to be part of the public discussion
regarding each; his public discussion of and opining on such matters; and his stock ownership—
raise concerns that protected information could be disclosed, inadvertent or otherwise, and that
dire consequences would result. See U.S. Steel Corp. v. United States, 730 F.2d 1465, 1469
(Fed. Cir. 1984) (stating that the Court of International Trade had “clear authority . . . to deny
access to all where the specific facts indicate a probability that confidentiality, under any form of
protective order, would be seriously at risk”); Levine, 226 Ct. Cl. at 701 (denying individual
plaintiff access to the protective order due to the risk that he “desire[d] the confidential materials
for purposes other than that of [the] litigation,”); Safe Flight Instrument Corp. v. Sundstrand
Data Control Inc., 682 F. Supp. 20, 21-22 (D. Del. 1988) (barring company president from
access to confidential information under the protective order because even as he was “a man of
great moral fiber,” the “potential for abuse” of that information, whether “subconsciously or
consciously,” was “real”); Ross-Hime Designs, Inc. v. United States, 109 Fed. Cl. 725, 743
(2013) (denying company president entry to the protective order because, among other reasons,
he was “actively involved” in the field in question and “[w]as an author in th[at] field,” which
“create[d] a greater risk [of] inadvertently misus[ing] confidential information”); Maderazo v.
Vanguard Health Sys. , 241 F.R.D. 597, 599 (W.D. Tex. 2007) (stating that the court should
review the factual circumstances surrounding an individual “to determine whether the [other
party’s] concern about inadvertent or accidental disclosure is genuine and real” (discussing U.S.
Steel Corp., 730 F.2d at 1468)); cf. Standard Space Platforms Corp. v. United States, 35 Fed. Cl.
505, 509 (1996) (determining that former employee posed little risk of disclosing confidential
information because he was “no longer active in the [aero]space field” and now “simply s[old
life] insurance”).

It bears noting that plaintiffs are not foreclosed from utilizing Mr. Howard’s services as a
nontestifying expert. Moreover, despite plaintiffs’ argument that Mr. Howard’s prior
employment with Fannie Mae makes him “uniquely positioned” to assist with “interpreting the
complex and often arcane financial information” that may be found in the documents produced
during discovery, they provide no reason why other financial experts would not be able to fulfill
the same task, particularly since Mr. Howard’s employment with Fannie Mae was terminated in
2004, four years prior to the 2008 economic collapse that gave way to its placement in
conservatorship. Pls.’ Opp’n 10; see Safe Flight, 682 F. Supp. at 21-22 (barring company
president from access to the protective order, despite company’s argument that he was “uniquely
qualified” to assess documents produced during discovery, and stating that party could find a
qualified outside expert); Ross-Hime Designs, 109 Fed. Cl. at 744 (denying plaintiff’s president
access, and stating that any potential harm to plaintiff was “minimized” because “through its
attorneys and independent expert, [it] already ha[d] access to all documents produced” (internal
citation and quotation marks omitted)).

Defendant has clearly defined a serious injury that could occur if protected information is
disclosed—not merely to one discrete business, which would, in itself, justify denial of the
motion, but rather, to United States financial markets. Indeed, it is evident in this case that

5
defendant offers specific facts with a cognizable risk, rather than mere conclusory allegations, of
harm. See Phx. Solutions, Inc. v. Wells Fargo Bank, N.A., 254 F.R.D. 568, 581 (N.D. Cal.
2008) (stating that “issues concerning the scope of protective orders for confidential information
entail[] a balancing test for the conflicting interests between the protection of [Federal Rule of
Civil Procedure (“FRCP”)] 26(c) and the broad mandate of the admissibility of information in
discovery conferred by [FRCP] 26(b)(1),” and examining whether the party objecting to access
“has a valid risk of harm concerning the disclosure of [] confidential information” 1). Overall, the
“goals of full disclosure of relevant information and reasonable protection against economic
injury ‘are in tension and each must be fairly balanced against the other.’” Safe Flight, 682 F.
Supp. at 23 (quoting E.I. du Pont de Nemours & C. v. Phillips Petroleum Co., 1982 WL 63780,
at *1 (D. Del. May 17, 1982)).

In sum, the court finds that defendant has presented sufficient evidence to support its
claim that dire harm would flow from the disclosure of the sensitive material that is the subject
of the protective order. Defendant has also demonstrated that Mr. Howard is not a dispassionate,
independent expert, but rather, a stockholder and former Fannie Mae executive with a personal
motivation to resuscitate his career and be vindicated about his leadership of Fannie Mae. For
these reasons, the court will not grant him access to the privileged material. In reaching its
conclusion, the court examined the facts supplied by defendant, including Mr. Howard’s public
statements concerning his desire for vindication, and evaluated them in light of the grave harm to
the nation’s economy that would result from the disclosure of information subject to the
protective order, inadvertent or otherwise. However, the court wishes to stress that this ruling
should not be misconstrued as an adverse ruling concerning Mr. Howard’s character. The court
has not concluded that Mr. Howard is untrustworthy, but has rather determined that the need to
protect United States financial markets from the consequences that would flow from the
deliberate or inadvertent disclosure of sensitive material trumps Mr. Howard’s request for access.
Accordingly, because disclosure of the protected information could place this nation’s financial
markets in jeopardy, a risk that the court is not willing to take, especially in light of the fact that
Mr. Howard is not the sole expert available to assist plaintiffs, Mr. Howard is DENIED entry to
the protective order in this case.

IT IS SO ORDERED.

s/ Margaret M. Sweeney
MARGARET M. SWEENEY
Judge

1
“To the extent permitted by this court’s jurisdiction,” the RCFC “shall be consistent
with the FRCP . . . .” RCFC 83(a).
6