The Trump Letter
...as evidence of shareholder damages in Collins...and perhaps causing the 5th Circuit to shift the burden of proof
Former POTUS Trump sat right down and wrote himself a letter (apologies to Fats Waller) to Senator Paul, which was filed with the 5th Circuit Court of Appeals in the Collins case (Exhibit A to the filing). At this point, you should read the Trump Letter if you haven’t already. See also this Real Clear Politics article.
What to make of this letter?
To set things up, recall that SCOTUS pulled a brain freeze in Collins, finding that Acting Director DeMarco could have been removed at will by POTUS (contrary to all expectation), even though the FHFA organic statute (HERA) made clear that the FHFA Director was removable only for cause (and was silent as to removal of the Acting Director)…so SCOTUS interpreted HERA as creating FHFA as an independent agency if the Director was in place, but not an independent agency if the Acting Director was in place, even though at the beginning of HERA, the statute makes clear that FHFA is an independent agency. So the Net Worth Sweep was adopted by a “constitutional” FHFA Acting Director DeMarco, but it was implemented by an unconstitutional FHFA Director Watt.
This is an absurd ruling. This is what happens when SCOTUS becomes a political institution. But I digress.
As a bone tossed to the plaintiffs, SCOTUS held in Collins that inasmuch as Director Watt served as a Director removable only for cause by statute for some two years during the Trump administration, and this was an unconstitutional provision, if plaintiffs could prove that the Trump administration wanted to remove Director Watt at will but couldn't as per HERA, then “clearly” plaintiffs would be entitled to a remedy (damages).
The Trump Letter provides this proof.
Remember, from an evidentiary point of view, there is only one person in the world whose testimony is relevant as to whether POTUS Trump would have removed Director Watt if HERA had so allowed, and that is POTUS Trump.
Now, POTUS Trump has provided that testimony (outside of court).
What does the DOJ do with this letter? DOJ may point out that SCOTUS seemed to indicate that a contemporaneous indication of intent by POTUS Trump is necessary, but I think this is a losing argument. In my view, SCOTUS is really making clear that plaintiffs have to prove that POTUS Trump would have removed Watt at the beginning of his term if he could have…and a letter dated November 2021 by Trump is as probative as to his intent and state of mind in 2016 as would have been a contemporaneous 2016 statement.
DOJ can also point out that plaintiffs have a long row to hoe to prove that the inability of POTUS Trump to remove FHFA Director Watt in 2016 caused the Trump administration to fail to release and recap the GSEs…there is the whole question as to whether a massive recap could have been executed in the capital markets, for example…and plaintiffs would need to prove this to prove damages.
Which is where the burden of proof comes into play. Recall that plaintiffs have asked the 5th Circuit to shift the burden of proof from plaintiffs to the government, with respect to proving that the two year delay in having a Trump appointed FHFA Director scuttled a recap and release of the GSEs during the Trump presidency.
In my view, this is where the Trump Letter has immediate salience.
You have an unconstitutional statutory provision that plaintiffs claim harmed them, because as the plaintiffs claim but for the unconstitutional provision, the GSEs would have been recapped and released…and now, you have the sole relevant actor in this scenario, POTUS Trump, affirming that this is exactly so.
Will this be enough to convince the 5th Circuit to shift the burden to have the DOJ prove that the unconstitutional removal provision was harmless error (harmless since the recap could not have been accomplished even if Director Watt was fired on day1)?
Courts often want an evidentiary showing that plaintiffs’ claim has merit before it considers shifting the burden of proof onto defendants. While shifting the burden of proof is an extraordinary ruling normally, it would be less so in the case of a statutory provision that SCOTUS has ruled to be unconstitutional.
If the 5th Circuit shifts the burden of proof, DOJ will have a difficult evidentiary burden to bear. Simply put, if it is difficult for plaintiffs to prove that a recap and release could have been accomplished if Director Watt was removed on day1, isn’t it also difficult for DOJ to prove to the contrary?
Preview of governments defense in Collins? https://twitter.com/IMFpubs/status/1471170438533468166?s=20
If true seems extremely weak:
1) That isn't event relevant to the damages analysis laid out by SCOTUS (should just come down to, di Trump want to fire Watt or not and was he restricted from doing so).
2) Even if it was relevant, the statement is 100% false. Trump COULDN'T stop the sweep by directing Mnuchin on his own to do it. Needed both parties to tango and if Watt says no, the Sweep doesnt stop.
1. Are the Collin's Plaintiffs mainly Preferred or Common Stock holders?
2. Should the 5th Circuit decide the case in favor of the plaintiffs, do you have an opinion as to which shareholders might yield a better return, the Commons or Preferred Stock holders? And possibly, why?
Thanks for your insightful writings.