Federal Housing Finance Agency v. The Royal Bank of Scotland: The Private Securities Litigation Reform Act is not Applicable to the Federal Housing Finance Agency

The Federal Housing Finance Agency (“FHFA) brought a claim as a conservator for the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) against The Royal Bank of Scotland (“RBS”) and multiple other defendants, alleging violations of federal securities laws.  Defendants sought to invoke the automatic stay of discovery contained in the Private Securities Litigation Reform Act (“PSLRA”). See 15 U.S.C. § 78u-4(b)(3)(B). The United States District Court for the District of Connecticut ruled that the present claim was not a private action under the PSLRA and, as a result, declined to order a stay of discovery. Fed. Hous. Fin. Agency v. The Royal Bank of Scotland Group PLC, No. 3:11-cv-01383 (D. Conn. Aug. 17, 2012).

Fannie Mae and Freddie Mac were formed in order to “make the secondary mortgage market more competitive and efficient.” Both companies are federally chartered. In 2008, Congress created the FHFA and gave it the power to place regulated entities into conservatorship. In 2008, the FHFA became the conservator for Fannie Mae and Freddie Mac for the purpose of stabilizing the two corporations.

In the action brought by FHFA, the defendants filed a motion to dismiss while the plaintiff filed a motion to commence discovery.  In response to plaintiff's motion, defendants sougth a stay of discovery, noting that under the PSLRA, “all discovery and other proceedings shall be stayed during the pendency of any motion to dismiss . . .”  The defendants asserted that because the plaintiff stepped into the shoes of two private corporations, it had become a private plaintiff.  As a result, plaintiff’s action was private, subject to the PSLRA, and subject to the stay of discovery. 

In resolving the applicability of the PSLRA, the court reasoned that “the material distinction for purposes of determining whether an action is a ‘private action’ under the PSLRA is the nature of the plaintiff, not the cause of action.” Thus, the PSLRA applied to actions brought by private plaintiffs, but not those brought by government agencies, such as the Securities and Exchange Commission. The court concluded that the FHFA, did not lose its status as a government agency simply by acting as a conservator for private parties.

In the alternative, the defendants argued that Rule 26(c) of the Federal Rules of Civil Procedure required a stay of discovery during this time period. However, the court ruled that the defendants had not met their burden of “showing that good cause exists” to justify an order to stay the plaintiff’s discovery.

The primary materials for this case may be found on the DU Corporate Governance website.