The American International Group, the giant insurer rescued by the federal government during the financial crisis, on Thursday will file the first of what could be a series of lawsuits against Wall Street firms, contending that it was the victim of fraud.
The initial suit, against ICP Asset Management and Moore Capital, will claim that A.I.G. suffered losses insuring mortgage securities created by ICP. The suit says ICP manipulated those securities in a way that benefited itself and Moore Capital, which is not accused of fraud, but harmed A.I.G.
Though the insurer received a hefty bailout, much of that money ultimately flowed to banks. Now, A.I.G. is trying to “recoup potentially billions of dollars from the fraudulent conduct of these defendants and other parties,” according to a copy of the suit obtained by The New York Times.
Because A.I.G. is still largely owned by the government, taxpayers would share in any recovery. A.I.G. informed the Treasury Department of the suit on Wednesday but made the decision to sue on its own, according to a person with knowledge of the litigation. A.I.G. did not notify the Federal Reserve Bank of New York, which orchestrated its $182 billion bailout in 2008, because the company has repaid the Fed and is no longer tightly overseen by that regulator.
As part of the bailout, A.I.G. waived its right to sue banks over most of the mortgage securities that it had insured through complex financial contracts known as derivatives. But the company did not give up its right to sue the managers of those deals — like ICP — nor did it cede rights to sue over $40 billion of mortgage bonds that it had purchased outright from banks. These bonds were responsible for a substantial portion of the company’s losses and were held in a unit that handled securities lending, separate from the derivatives unit.
A.I.G. is preparing several suits against banks, like Bank of America and Goldman Sachs, that created the $40 billion in mortgage bonds, according to the person with knowledge of the litigation, who was not authorized to talk about it publicly. The company says it believes the banks issued misleading statements about the quality of the mortgages within those bonds, the person said.
Mark Herr, a spokesman for A.I.G., declined to comment on the company’s planned cases against big banks — which could be settled before going to court — or the ICP case to be filed on Thursday.
A.I.G.’s suit against ICP mirrors a lawsuit filed by the Securities and Exchange Commission last summer. The commission cited four mortgage securities, including two deals known as Triaxx, that were insured by A.I.G. ICP caused Triaxx to overpay for mortgage bonds to benefit itself and a favored client, the commission said.
ICP has denied the S.E.C.’s allegations in court filings and said that the company acted in good faith, did not make misleading statements and did not intend to defraud its investors. Margaret Keeley, a lawyer for ICP, declined to comment on the S.E.C.’s allegations on Wednesday. Ms. Keeley and ICP have not seen the A.I.G. suit.
The S.E.C. did not identify Moore, a large hedge fund in New York run by Louis Bacon, or accuse it of wrongdoing. Moore benefited from some actions of ICP, however, and should give up its gains, the insurer argues. Two spokesmen for Moore, which was also unaware of A.I.G.’s complaint, declined to comment.
A.I.G. believes other investors made similar profits and plans to sue them as well, once it learns their identities, the person briefed on the litigation said.
ICP may be one of few lawsuits brought by A.I.G. involving its derivatives unit called A.I.G. Financial Products, based in Wilton, Conn. Another derivatives case could be brought against Goldman involving seven of its deals known as Abacus. A.I.G. will have trouble suing over most of its other derivatives deals, because when it canceled those contracts, it signed a legal waiver agreeing to release the banks on the other side of the contracts from any future legal claims related to those contracts.
A.I.G. is said to believe it will be far easier to pursue lawsuits related to the unit that ran its securities lending operation because that unit had bought the bonds outright and did not renegotiate them as part of its 2008 bailout. The unit sought to make profits for A.I.G. by using shares of stock and bonds owned by its life insurance subsidiaries. To do so, A.I.G. lent shares to banks and hedge funds in exchange for cash. Then A.I.G. reinvested much of that cash in mortgage bonds that it believed were safe bets. Like many investors, A.I.G. was surprised when the bonds — called residential-mortgage-backed securities — plummeted in value in 2008.
These future lawsuits will focus on misrepresentations that A.I.G. claims banks made when selling the mortgage bonds. Bank of America has the largest exposure because it acquired Countrywide and Merrill Lynch. Other banks that underwrote bonds in A.I.G.’s securities lending unit and may be sued are Goldman, Morgan Stanley and Bear Stearns, which is now owned by JPMorgan Chase. The banks may try to reach settlements with A.I.G. to avoid going to court.
The law firm representing A.I.G., Quinn Emanuel, has filed other suits involving mortgage bonds on behalf of other insurers. A.I.G.’s suits against banks are likely to mimic those cases, which allege misrepresentations to investors over the quality of loans inside the bonds, the person with knowledge of the matter said.
In an unusual twist, A.I.G. no longer owns the mortgage bonds that will be the subject of the suits. The company sold them to the New York Federal Reserve in 2008 in a deal called “Maiden Lane II.” At the time of that sale, A.I.G. was paid about half of the bonds’ face value — locking in a large loss.
The road map for A.I.G.’s lawsuit against ICP was outlined by the S.E.C. Each case involves two collateralized debt obligations — bundles of mortgage bonds — called Triaxx that were worth $7.7 billion. When ICP created the deals in 2006, it partnered with A.I.G. to insure the performance of the deal. That allowed banks like UBS and Goldman — the largest participants — to buy both positive bets on Triaxx and insurance from A.I.G. in case it failed.
ICP managed lots of funds and other deals. A.I.G. says in its suit that those deals presented conflicts. ICP was supposed to ask A.I.G. for permission before it put new bonds inside Triaxx, the suit says. But as the mortgage market worsened, the suit says, ICP failed to do so on several occasions. In addition, A.I.G. says that ICP used Triaxx to help another one of its funds meet a demand for cash. Furthermore, ICP earned money from Triaxx longer than it should have because it overcharged Triaxx for certain assets, A.I.G. says.
