Five years after the government bailed out Fannie Mae and Freddie Mac by covering their combined $187.5 billion debt, taxpayers are poised to be made whole—and record profits are set to stream in as far as the eye can see. But in an odd twist, the government may be poised to commit what some critics say could result in the largest securities fraud in history.

Fannie Mae today reported an annual profit of $84 billion for $2013. Under the terms of the 2008 rescue, all of the profits will be sent to the Treasury. Fannie’s smaller rival, Freddie Mac is also set to confirm its astounding rebound next week It’s a surprising turn of events and a windfall for the government—but a looming potential disaster for shareholders who may lose billions for standing by the beleaguered organizations as the housing market seized during the Great Recession.

The two government-sponsored entities (GSEs), which own or guarantee a massive proportion of all home loans in the United States, were on the verge of collapse when the housing market buckled at the height of the financial crisis, prompting the government to put them into conservatorship, an alternative to liquidation that was supposed to protect both taxpayers and shareholders. Now, with the Treasury set to recoup its entire investment and then some, one would expect that the firms would be ready to exit government control and begin repaying their beleaguered investors—more than 21,000 of them. But in a bizarre turn in the Fannie and Freddie saga, the near record windfall is for now mostly symbolic. The government reengineered the original agreement to require the GSEs to send all their profits to the Treasury in perpetuity, meaning they can never exit government control.

Even stranger, an explosive government document has emerged that suggests that the Obama Administration appears determined to liquidate most or all of their investments, and Congress stands by with proposals that only codify the Administration’s derelict —committing what an ‘odd fellows’ coalition of über-liberals, shareholder activists and hedge fund managers say could be the largest securities fraud in the history of the United States.

What’s the story behind the government’s apparent securities fraud?

The burgeoning scandal swirls around what appear to be backroom policy decisions made in 2010, just as the housing market showed signs of recovery and the ink turned from black to red on Fannie and Freddie’s books.

While the government was publicly encouraging shareholders to hang on, officials at Treasury, backed by the Administration, quietly changed policy, hatching a plan to bankrupt them, including new investors who came on board after the crash at the Government’s wooing. According to an internal memo addressed to the Treasury secretary from Jeffrey A. Goldstein, then the under secretary for domestic finance, “the administration’s commitment to ensure existing common equity holders will not have access to any positive earnings from the GSEs in the future.”

The memo, which was produced in a lawsuit filed by Fannie and Freddie shareholders, was dated Dec. 20, 2010 and was made public at a shareholder’s rights forum held earlier this month in Washington. It puts controversial meat on the bone of a more ambiguous statement in Fannie Mae’s annual report: “[W]e are no longer managed with a strategy to maximize shareholder returns” and “every dollar of earnings that Fannie Mae and Freddie Mac generate will be used to benefit taxpayers for their investment in those firms.”

As New York Times ’ business columnist Gretchen Morgensen summarized in a scathing piece last Sunday, two GSEs were not made aware of the new policy that essentially deprived them of future earnings. That appears to be in conflict with securities laws that require the disclosure of any “material” information that might affect an investor’s view of a company. In other words, federal officials were conspiring—that’s a word pregnant with implications but fair in this context—to treat shareholders more like characters in “Night of the Living Dead” than investors helping to keep a fragile agency afloat.

Did the government commit securities fraud? According to James Cummins, a leading securities lawyer who has litigated against Fannie and Freddie since 2004 on various issues, such a sharp switch in policy is “material information because it was going to tell people who might want to buy stock, ‘Hey, by the way, you’re not going to get any dividends and all of the earnings of the company are going to U.S. Treasury.’”

Who are these investors? They include hedge funds like Perry Capital and Pershing Square, but also thousands of other shareholders, including employees, pensioners, 401K funds, mutual funds and small banks, as well as individual shareholders. Among them are shareholder rights groups, including well-known consumer activist Ralph Nader.

Some of these shareholders are long term investors, who saw the stock plummet to pennies on the dollar, while others are funds that took recent but highly risky positions in hopes of benefiting from Fannie’s and Freddie’s recovery. Billions of dollars is at stake.

Fannie Mae’s Stock Chart; $69.49 2007 high

The litigants, including Nader, point to the government’s guarantee that it would “preserve and conserve the assets and property” of each entity. But the internal government document suggests that federal officials were doing anything but. Over the past two years they’ve siphoned off the profits of the GSEs and sent the money to the general treasury instead of repaying Treasury and taxpayers

The litigants seek no damages nor do they want to short the government’s appropriate windfall for the unanticipated market rebound. “Shareholders are not arguing that taxpayers should not be repaid,” writes Nader in a letter sent earlier this week to Treasury Secretary Jacob Lew. “This is not at issue. Taxpayers should recoup their investment in the GSEs; but the Administration does not have to wipe out shareholders for this to happen.” Nader and other shareholders are asking the government to bide by the 2008 law, rather than what appears to be an internally hatched 2010 policy shift –another quiet form of regulatory overreach

Will potential homeowners become collateral damage in Fannie/Freddie wrangle?