UPDATE 5-AIG seeks to recoup billions it says lost to fraud

Thu Apr 28, 2011 5:49pm EDT

* Suit says AIG suffered more than $350 mln in damages

* AIG says suit is start of campaign to recover billions

* Campaign could also take aim at Bank of America, Goldman (Adds comments in paragraphs five-six, 13, 16-18)

By Tom Hals

WILMINGTON, Del., April 28 (Reuters) - American International Group Inc (AIG.N) launched a fight to recoup billions of dollars the bailed-out insurer said it lost due to fraud, setting up a clash with Wall Street's biggest banks.

The insurer, 92 percent-owned by the U.S. government, joined the swelling ranks of investors and insurers who are taking legal action over supposedly safe mortgage-related investments at the heart of the 2008 financial crisis.

The insurance giant sued two money managers in New York State Supreme Court on Thursday, but AIG will likely take aim at Bank of America Corp (BAC.N), Goldman Sachs Group Inc (GS.N) and others, according to a person familiar with AIG's strategy.

The company that was once vilified for shoddy risk management that led to $182 billion taxpayer bail-out, could now be trying to recast itself as the victim.

"I think the more that comes out about the crisis the more they have been revealed to be a victim, or even a patsy," said Isaac Gradman, an attorney who runs the Subprime Shakeout blog and who has brought similar lawsuits.

"It's a very serious effort to recoup losses. They have hired one of the best law firms in country for this type of litigation," Gradman said.

The complaint was filed by Quinn Emanuel Urquhart & Sullivan LLP. It was brought by AIG's Financial Products unit as part of the insurer's "overall efforts to recoup potentially billions of dollars from the fraudulent conduct of these defendants and other parties," the complaint said.

The lawsuit against ICP Asset Management and Moore Capital contended that AIG suffered losses by insuring mortgage securities that one of the financial firms created.

ICP could not be immediately reached for comment. A Moore spokesman said in a statement: "We haven't seen the complaint, and therefore can't comment on it."

Goldman Sachs and Bank of America declined to comment.

BILLIONS SOUGHT

AIG could be taking aim at smaller firms before taking on the more formidable opponents.

"If the suit does well, that might put some pressure on Goldman and Bank of America to make some kind of arrangement to avoid a suit," said Robert Hockett, a law professor at Cornell University and an expert in banking regulation.

Investors, bond insurers and federal home loan banks have already sought tens of billions of dollars from the banks for misrepresenting the quality of the home loans that were packaged into bonds known as mortgage-backed securities.

While none of the lawsuits has gone to trial, Bank of America recently reached a $1.6 billion settlement with Assured Guaranty Ltd (AGO.N), which insured mortgage bonds. Some financial and legal analysts said that deal showed the legal claims posed a real risk to the banks. [ID:nN15102036]

Legal experts said it might be three years or more before AIG began to see any money from the legal fight, but many said the cases seem to have strong claims.

Jack Williams, a professor at Georgia State University College of Law, said that recent changes that raised standards for bringing securities cases meant many of the lawsuits were well researched before they were filed.

"I think that we'll see facts develop over time that will show stronger and stronger support for the allegations made," said Williams, adding that the cases could lead to a broad settlement so costly that it could require the involvement of the federal government.

DAMAGES OF $350 MILLION ALLEGED

A big profit from the AIG rescue and the government's eventual disentanglement ahead of U.S. elections in 2012 would be a boost for the Obama administration, coming on the heels of successes at Citigroup Inc (C.N) and General Motors Co (GM.N).

A U.S. Treasury spokesman it was not involved in the decision to sue the money managers.

Thursday's lawsuit said the defendants breached obligations to AIG related to the creation of complex collateralized debt obligations, or CDOs.

AIG said it has suffered more than $350 million in damages from the alleged misconduct, which included using inflated values on the mortgage bonds that were packaged into the CDOs. By inflating the values, ICP created windfall profits for itself and swelled its management fees, the lawsuit argues.

The complaint draws on last year's SEC lawsuit against ICP in Manhattan federal court, accusing the investment advisory firm of repeatedly violating federal securities laws.

The AIG case is AIG Financial Products v ICP Asset Management LLC et al, Supreme Court of New York, New York County, No. 651117/2011.

(Additional reporting by Martha Graybow, Noeleen Walder, Rachelle Younglai and Joseph Ax; Editing by Howard Goller, Gerald E. McCormick and Ted Kerr)

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