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Pershing Square sues U.S. over Fannie Mae, Freddie Mac

By Jonathan Stempel and Svea Herbst-Bayliss

(Reuters) - Pershing Square Capital Management LP, the hedge fund firm run by William Ackman, has sued the U.S. government, claiming that its stripping of Fannie Mae's and Freddie Mac's profit illegally short changes investors in the mortgage companies' common stock.

In a complaint filed on Thursday with the U.S. Court of Federal Claims in Washington, D.C., Pershing is challenging the government's "brazen" practice since 2012 of funneling virtually all profit from Fannie (:FNMA.OB) and Freddie (:FMCC.OB) into the U.S. Treasury Department's coffers.

It said this will have by next month created a $130 billion "windfall" through the "confiscation of the entire net worth" of both companies, with an eye to winding them down.

"The net worth sweeps make plaintiffs - and all of the other common shareholders - 'shareholders' in name only," according to the complaint, which three retirees who own Fannie Mae stock have joined as plaintiffs.

Pershing accused the government of violating the Fifth Amendment of the U.S. Constitution by taking private property for public use without just compensation. It seeks damages and other remedies.

The Treasury Department declined to comment. The Federal Housing Finance Agency, which is Fannie's and Freddie's conservator, did not immediately respond to a similar request.

Pershing's lawsuit adds to public battles being waged by Ackman, including a bid with Valeant Pharmaceuticals International Inc (Toronto:VRX.TO - News) for Botox maker Allergan Inc (NYSE:AGN - News), and a campaign against nutrition company Herbalife Ltd (NYSE:HLF - News), which he calls a pyramid scheme, a characterization the company denies.

Other investors, including hedge fund firm Perry Capital LLC and Bruce Berkowitz's Fairholme Capital Management LLC, have also sued the government over Fannie and Freddie, which were bailed out in September 2008 amid mounting mortgage losses.

But those lawsuits have often focused on the companies' preferred stock, which threw off 10 percent dividends before they were eliminated in 2012.

In contrast, Ackman's lawsuit focuses on common shareholders.

Pershing disclosed last November it had invested close to a half-billion dollars for common share stakes of 9.98 percent in Fannie Mae and 9.77 percent in Freddie Mac.

Both companies' shares have risen by roughly one-half since the week that Ackman revealed his stakes, and Berkowitz proposed that Fairholme and other investors recapitalize both companies.

In Thursday trading, Fannie rose 14 cents to $3.99, and Freddie rose 15 cents to $3.97.

The Court of Federal Claims handles lawsuits seeking money from the government.

It is also where former American International Group Inc (NYSE:AIG - News) Chairman Maurice "Hank" Greenberg is suing the United States over the insurer's $182.3 billion bailout, which he said illegally diluted the AIG stake of his Starr International Co.

The case is Rafter et al v. U.S. et al, U.S. Court of Federal Claims.

(Reporting by Jonathan Stempel in New York, Svea Herbst-Bayliss in Boston and Jason Lange in Washington, D.C.; Editing by Lisa Shumaker and Ken Wills)