Fannie and Freddie Investors Win Round in Suit Against U.S.

The United States government improperly withheld documents from investors who were suing the government over its decision in 2012 to seize all of the profits of Fannie Mae and Freddie Mac, the mortgage finance giants, a federal judge has ruled.

The judge, Margaret M. Sweeney of the Court of Federal Claims in Washington, also ordered the release of the documents, some of which appear to reach the highest levels of the Obama administration.

Her decision, released Monday, was a win for the investors, who have contended that the government’s surprise decision to begin extracting all profits from the mortgage finance giants was an illegal taking of private property.

The government initially argued that it acted to protect taxpayers from future losses because the companies were in a death spiral, but the decision to funnel the profits into the Treasury’s general fund came just before Fannie and Freddie returned to profitability.

In September 2008, the government took over Fannie and Freddie, victims of the mortgage crisis. They have since recovered, and as of September had returned $63.1 billion more to the Treasury than they drew down during the crisis.

Fairholme Funds, a mutual fund company that holds shares in Fannie and Freddie, sued the government in 2013. Through the discovery process, the plaintiffs have been trying to learn why the Obama administration abruptly changed the terms of the companies’ rescue four years ago.

Lawyers for the government have responded to the suit with demands for unusual secrecy. The government has withheld 12,000 documents, including emails, memorandums and reports, asserting that they were protected by privilege of three types: privilege of the deliberative process, of bank examination and of presidential communications. Asserting presidential privilege in such a suit is highly unusual.

Fairholme has contended that the government’s assertions of privilege were excessive. Earlier this year, its lawyers asked Judge Sweeney to review some of the documents privately to determine whether the government’s assertions were proper.

In her 80-page ruling on Monday, she concluded that the government had not justified its use of the deliberative process or bank examination privileges on 52 of the 56 documents in the group and ordered their release.

The other four documents were subject to the presidential communications privilege, the government maintained; this “affords the president of the United States considerable autonomy and confidentiality,” the court said.

But Judge Sweeney granted the plaintiffs access to these materials as well, concluding that Fairholme had an “overwhelming” need for the documents and that no other source of evidence available “would similarly inform their understanding” of the events surrounding the profit sweep.

Bruce R. Berkowitz, managing member at Fairholme Funds, praised the judge’s ruling in a statement.

“Finding no clear reason in favor of extraordinary secrecy,” he said, “Judge Sweeney astutely recognized that the government’s attempt to hide thousands of documents is unjustifiable, for the work of our government must withstand public scrutiny.”

Nicole A. Navas, a Justice Department spokeswoman, declined to comment on the ruling or say whether the government would appeal it. In the past, the government has maintained that releasing the documents would roil the markets.

Last year, The New York Times intervened in the case, filing a brief arguing that the court should release certain documents. “Access to the evidence will enable the public to understand more fully the decisions the government has made in the public’s name and to assess the wisdom and effect of those decisions,” The Times argued. The court later unsealed excerpts from those documents.

Many of the materials withheld by the government contain financial projections that reflect the government’s view of Fannie’s and Freddie’s prospects before it decided to seize their profits.

One document dated Jan. 10, 2012, contains “estimates for the president’s budget,” the court said, and “reflects draft analyses and projections regarding estimates of future draws and dividend payments to be made” by Fannie and Freddie.

A document withheld by the government under the presidential communications privilege appears to be a memo prepared for President Obama less than two months before the companies’ profits were diverted.

The memo, dated June 18, 2012, reflects “confidential communication from senior White House advisers to the president regarding housing policy ideas and initiatives.” It was written by Gene B. Sperling, then the director of the National Economic Council, a position he also held under President Bill Clinton.

Mr. Sperling now heads Sperling Economic Strategies, a consulting firm, and is a high-ranking economic adviser to Hillary Clinton. He declined to comment, referring the request to the Justice Department.

In addition to ordering the release of all these documents, Judge Sweeney also gave the Justice Department’s lawyers until Oct. 14 to explain why the government should not pay Fairholme’s expenses, including lawyers’ fees, related to its request that the judge review the materials.