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7/26/2019 First Magnus: Too Big to Fail
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$1 billion lawsuit: First Magnus wasn'ta victim; it caused credit crisis
Posted: Friday, March 6, 2009 12:00 amBy Joe Pangburn, Inside Tucson Business
Tucson-based First Magnus Financial Corporation wasn’ta victim of the credit crisis in 2007 — it was a significantcause of it.
And maybe if more people had been paying attention tothe kinds of things the officers and directors of thecompany were doing, clues would have surfaced of theimpending economic crisis that has since hit the nation— and the world.
That’s the gist of a $1 billion lawsuit filed Feb. 26 in U.S.Bankruptcy Court by Larry Lattig, trustee appointed bythe court to advocate for creditors of First Magnus,including, through his attorneys at Lackey Hershman inDallas: Jamie Welton and Deborah Deitsch-Perez.
The suit argues the former directors and officers strippedmillions of dollars from First Magnus that was supposedto be kept in reserve for repurchase and indemnityobligations owed to the commercial banks that financedthe loans and the Wall Street firms that purchased them.Among the 40 named defendants are Gurpreet Jaggi,Thomas Sullivan Sr., Thomas Sullivan Jr., Bill Gaylord,Gary Malis, Dominick Marchetti and Karl Young.
Lead attorney Welton said “the complaint details how thedirectors and officers originated bad loans, in the worstmarkets, paid themselves hundreds of millions in stockredemptions, bonuses, and distributions when they soldthe loans to Wall Street, and then said ‘sorry Charlie,we’re broke’ when Wall Street asked for their money
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back. Now the taxpayers are holding the bag. It’s notright. It’s why the economy is in the mess it’s in. We willmake certain that the creditors of First Magnus, includingthe thousands of employees left unpaid, recover every
last penny they are owed from these defendants.”
The lawsuit says more than 70 percent of the loansoriginated by First Magnus from January 2005 throughAug. 21, 2007, when it filed for bankruptcy protection,were purchased by Lehman Brothers and CountrywideFinancial. Lehman filed for bankruptcy in September2008 and was subsequently liquidated. Countrywide wasacquired by Bank of American in July 2008.
The purchases by Lehman and Countrywide from FirstMagnus contained financial covenants and provisionswhich, if triggered, would have required First Magnus torepurchase the loans. The triggers included such asthings as a home-owner missing the first or secondmonth’s partments or if a loan were paid off within thefirst 90 days. But First Magnus kept only $400,000 forrepurchases on about $2 billion in loans.
During bankruptcy proceedings, Lehman Brothers saidFirst Magnus owed it more than $395 million andCountrywide said it was owed more $100 million inobligations for loan repurchases.
Despite what First Magnus officials publicly maintained,the lawsuit claims the company was a big player inselling riskier mortgages. Leading up to its bankruptcy
filing, at least half of all the mortgages handled by FirstMagnus were either Alt-A — riskier than prime but notas risky as subprime — or below. The company was theeighth largest originator of Alt-A mortgages,representing almost 2.4 percent of all such loans sold inthe United States.
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“As defaults and foreclosures skyrocketed in FirstMagnus’ primary markets, so did the repurchase andindemnification claims made by the [mortgagepurchasers],” according to the lawsuit. “When First
Magnus failed to honor its repurchase and indemnityobligations, the Wall Street firms and commercial banksthat did business with First Magnus had to write-downthe collateral they held, pay the heightened premiumsfor CDS (credit default swap) contracts, and honor theCDS contracts they sold, and horde cash reserves toaccount for losses. The ‘credit crisis’ resulted andspiraled into an unprecedented global financial crisis.”
Jaggi, Young and other former First Magnus executivesissued a statement denying the allegations in the lawsuitsaying they’re “absurd” and “libelous.” It was well-known First Magnus collapsed because of “marketconditions far beyond its influence or control,” they said.
“The credit market collapse was unprecedented in thenation’s history, and had nothing to do with any actionsof First Magnus or its officers,” the statement said.
Contact reporter Joe Pangburn
at [email protected] or at (520) 295-4259.
