A federal judge has directed regulators to stop blocking a hedge fund from conducting discovery into the government's decision to sweep Fannie Mae and Freddie Mac's profits in the coffers of the U.S. Treasury.

In making her decision, U.S. Court of Federal Claims Judge Margaret Sweeney dismissed objections raised by the Federal Housing Finance Agency.

"FHFA cannot evade judicial review simply by invoking its authority" as the conservator of the two government sponsored enterprises, she said.

"This ruling is a clear indication from the court that the discovery process will continue," crowed Tim Pagliara, executive director of Investors Unite, a group representing private shareholders of the GSEs whose investments were diluted in the 2008 government takeover. "Investors deserve to know when the U.S. Treasury knew that Fannie and Freddie would become profitable and how that factored into their decision-making process" regarding the sweep.

When the GSEs were placed in conservatorship in September 2008, Fannie and Freddie started to pay a 10% dividend on their borrowings from the U.S. Treasury. As the GSEs recovered financially, Treasury decided to amend the conservatorship agreements in August 2012 and sweep all their profits, leaving each GSE with a $3 billion buffer.

Freddie Mac ended 2012 with a net worth of $8.8 billion. But as part of the new conservatorship agreement signed in August of that year, it made a $5.8 billion payment to the Treasury in March 2013. These quarterly sweeps continue to this day.

In March 2014, Fannie made a $7 billion dividend payment to Treasury and Freddie made a $10 billion dividend payment.

Fairholme Capital Management and Investors Unite claim Treasury's decision to sweep the GSE profits constitutes a taking of dividends owed to Fannie and Freddie shareholders.

The claims court granted the hedge fund discovery rights in February. But FHFA continued to object on the grounds that the Housing and Economic Recovery Act of 2008 bars the court from taking any action to restrain or affect the powers and functions of FHFA as a conservator.

Judge Sweeney brushed that argument aside.

"There is no request by the plaintiffs that would potentially restrain or affect the exercise of powers or functions of the FHFA as conservator," Sweeney said in a July 16 opinion and order.

FHFA declined to comment the decision.

The judge limited initial discovery to two time periods: April 1, 2008 through December 2011; and June 1, 2011 through August 17, 2012.

She also directed the GSE regulator to prepare a detailed log of any materials FHFA considers privileged and wants to exclude from the discovery process.

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