# 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 Protect ive 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 Assoc i ation (“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 F ifth Amendme nt to the United States

Constitution . By way of background, after the national econom y 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 w hile serving as conservator, defendant implemented the so

- called “Net Worth Sweep” for the govern ment stock

, whi ch changed the dividend due on the stock to defendant from 10% to

100% of all current and future profits, direct ing 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 contend s that th e court lacks jurisdiction

because the enterpr i ses are independent entities and not controlled by the federal government

, that plaintiffs’ claims are not ripe, a n d that plaintiff s ha ve failed to state a claim for a regulatory taking

. P laintiffs subsequently moved for discovery in aid of jurisdiction

, which the court granted. Because of the sensitive nature of the information responsive to plaintiffs’ discovery

re quests, o n August 8, 2014, the court entered a protective order to safeguard that material

.

Now pending before the court is p laintiffs ’ mo tion 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 o f 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 p rotective order

. Mr. Howard

is the former C hief Financial O fficer , and former Vice C hairman of the B oard 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 accounti ng practices.” Def.’s Opp’n

1. Defendant states that i n 2006, t he 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

mislea ding 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 shar e 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 mor tgage 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, a nd its counterpart, Freddie Mac ’ and that he sees his book as part of that initiative.” Id. According to defendant, there is “significant reaso n” 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]overn ment’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 stak e in the

outcome of this case . Defendant asserts that a s a shareholder

, Mr. Howard “ would have an

inc entive 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 non te stifying financial consultant. Pl s.’ 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 i n more detail below, made by the trial judge in In re Fannie Mae Litig ation , 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 fo r summary judgment in that case.

2P ursuant 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 speci fic 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 th e types of individuals who could access protect ed

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, t he court notes that “because the analysis of the question of limiting access [to a protect i ve o rder ] is necessarily fact

- bound, there can be no comprehensive

formula for decisionmaki ng.” SOLIDFX, LLC v. Jeppesen Sander son, Inc.

, 2012 WL 2917116

, at *2 ( D. Colo. July 16, 2012). Indeed, “the decision as to access is one best left to the sound

d iscretion of the trial court, a discretion to be exercised in light of the relevant facts and

circumstances of t he partic ular cas e.” Id. Binding precedent i nstructs 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, d efendant previously stated i n it s motion for a protective order that disclosure of

the sensitive information c ould have a “destabilizing effect on the nati on’s housing market and

economy. ” S ee Docket No. 49, Def.’s Mot. for Protective Order 7. Specifically, defendant provided declarations from Melvin L. Watt, Dir ector of the FHFA, and from Michael A. Stegman, Counselor to the Treasury Secretary f or 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 “extraordina rily deleterious consequence,” D ecl. 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

c ould “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 ,” D ecl. of M. Stegman ¶ 19 , a nd 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 pro vided in th e se two declarations and defendant’s arguments, the court grant ed

defendant’s motion for a protective order “out of an abundance of caution, ” in an “ attempt [] to avoid the dire consequences that defendant claim s [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,” i n 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

3decided by an administrative law judge, he agreed to settle the m by paying $6.4 million to the

government. Id. Th ough the court is aware that settlement i s 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 State s government over $31 million

.

Further, p laintiffs cite to other r elated litigation, n amely, 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 Securitie s Exchange Act of 1934, 15 U.S.C. § 78j(b) (2012) (“section 10(b)”) , and S EC Rule 10b

– 5, 17 C.F.R. § 240.10b

– 5 (2011), by intentionally manipulat ing earnings and violating generally accepted accounting principles, cau sing losses to investors. In re Fannie Mae Litig. , 898 F. Supp. 2d at 180. Plaintiffs here reference that case because i n grant i ng the defendants’ motion for summary judgment, the court m entioned, as an aside, that there was “overwhelming evidence of [Mr.] Howard’s g ood 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 definiti on, 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 th e 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 jud gment, 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 require d trial

. Thus, the court’s statement regarding Mr. Howard’s good faith could not be considered a holding or finding. B y 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) t hat require d trial on the merits

. In re Fannie Mae Litigation , 898 F. Supp. 2d at 190

- 91

.

In this case, defen dant has provided sufficient evidence to demonstrate that since the

co nclusion of the district court litigation

, Mr. Howard has w orked 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 “restor ed [ hi s] public identity, ” Pls.’ Ex. 1, ¶ 7. Further , Mr. Howard has a ffirmatively

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. H e 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 ).

P laintiffs 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. I n 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,

4indeed. Even as the court agrees with plaintiffs that Mr. Howard has the right to o pine about

such matters and recognizes plaintiffs’ litigation needs

, his desire for v indication in the public

a rena and his stock ownership give the court pause with respect to his admission to the protective

order

. Thus, th e 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. S ee 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 probabil ity that confidentiality, under any form of protective order, would be seriously at risk”); L evine , 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 “subconscious ly 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” ) ; Maderaz o 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 )); c f. 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]s pace field” and now “simply s [ old

life ] insurance”).

It bears noting that plaintiffs are not foreclosed from utilizing Mr. Howard’s services as a

non testifying 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 exper ts 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 e xpert); 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 produce d” (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, just ify denial of the motion, but rather, to United States financial markets. Indeed, it is evident in this case that

5defendant offers specific facts with a cognizable risk, rather than mere conclusory allegations, of

harm. See Ph x

. 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”)] 2 6(c) and the broad mandate of the admissibility of information in discovery conferred by [FRCP] 26(b)(1),” and examining whether the party o bjecting to access “has a valid risk of harm concerning the disclosure of [] confidential information” 1 ). O verall

, t he “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 m aterial that is the s ubject

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 h is leadership of Fannie Mae

. F or these reasons, the court will not grant him ac cess to the privileged material

. In reaching its conclusion, t he court examin ed the facts s upplied by defendant, including Mr. Howard’s public statements concerning his desir e 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

s hould 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 w ould flow from the

deliberate or inadvertent disclosure of sen sitive 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 co urt 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 D ENIED entry to the protective order in this case.

IT IS SO ORDERED.

s/ Margaret M. Sweeney

MARGARET M. SWEENEY Judge

1 “ T o the extent permitted by this court’ s jurisdiction,” the RCFC “shall be consistent

with the FRCP . . .

. ” RCFC 83(a).

6