Trustee sues First Magnus for 1 BILLON dollars
February 28, 2009
Suit says First Magnus officers fueled crisis; their reply: 'absurd'
With bankruptcy imminent in early August 2007, the executives at First Magnus hopped on their corporate jets and flew to Hawaii, where they sipped Cristal on a lavish party trip that came on the company's dime.
Two weeks later — after Lehman Brothers refused to buy a broken First Magnus that was weighted down by failing loans — the mortgage firm filed for bankruptcy and more than 5,500 people lost their jobs.
The posh Hawaii trip is described in a 200-page lawsuit filed late Thursday against more than 40 defendants, including the former directors and officers of Tucson-based First Magnus Financial Corp.
The $1 billion lawsuit, filed by a trustee appointed to advocate for First Magnus creditors — including former employees — makes larger allegations as well.
It essentially argues that First Magnus executives fueled the financial crisis by stripping the company of hundreds of millions of dollars in the form of bonuses and redemptions while manipulating financial records and failing to keep funds in reserve.
"The 'credit crisis' resulted and spiraled into an unprecedented global financial crisis. First Magnus was not the victim of the 'credit crisis' or 'collapse of the secondary market' ... it was a significant cause," the suit says.
In a statement issued late Thursday, former First Magnus executives Karl Young, Thomas Sullivan Jr. and Gupreet Jaggi called the assertions "absurd," saying lenders stopped purchasing loans First Magnus had originated and that the suit was nothing more than a publicity stunt.
Many of the company's former executives are traveling and said they would like to comment on the lawsuit next week.
Risky loans
Essentially, warehouse lenders advanced First Magnus funds to provide home loans. First Magnus then paid back those funds plus fees within a certain time period — usually 30 days — while selling the loans to Wall Street firms at a greater price.
The majority of the loans First Magnus created were Alt-A quality, meaning they were riskier than prime loans, but not as risky as the sub-prime market.
The suit alleges there were times when First Magnus employees would overstate incomes or assets to qualify potential borrowers and that a large number of borrowers had credit scores below 700.
Between January 2005 and its bankruptcy filing, First Magnus sold more than $70 billion in loans to investors, the complaint says.
Those purchase agreements came with indemnities, meaning First Magnus would repurchase the loans if they became delinquent.
But the suit claims First Magnus officials never set aside any reserve funds for the more than $70 billion in loans, and that it carried only $400,000 to back up the roughly $2 billion in loans it had for sale at any given time.
"The directors and officers reserved nothing on the more than $70 billion in loans sold between January 2005 and (bankruptcy), and never adjusted First Magnus' reserves as the housing bubble burst and loan delinquencies pushed record levels," the lawsuit says. "Through these and other stark violations of generally accepted accounting principles, the directors and officers intentionally inflated the stated 'equity' and 'profit' in First Magnus to funnel more than $160,000,000 directly to themselves in the form of stock redemptions, bonuses, and distributions."
Bonuses, stock redemptions
Beginning in the summer of 2006, First Magnus executives gave themselves a series of stock redemptions totaling about $70 million.
The largest went to First Magnus' founder, Thomas Sullivan Sr., who received a payout of $55 million at $57.08 a share. The suit alleges the redemption was based on fraudulent book values and that Sullivan Sr. knew a large number of First Magnus loans were going to go delinquent.
First Magnus also provided its officers with bonuses of more than $50 million between 2005 and the bankruptcy filing, including nearly $20 million in the year leading up to First Magnus' bankruptcy filing, the suit says. It also provided dividends of roughly $37 million to its executives in 2006 and 2007.
"As one of the largest originators of Alt-A loans in the country, the directors and officers flooded the financial markets with products like interest-only ARMs and stated income loans, only to leave itself in a financial position where it could not possibly honor its repurchase and indemnity obligations," the suit says.
The suit continues by arguing that "the financial institutions that dealt with (First Magnus) suffered the consequences as a result — e.g. Lehman, Bear Sterns, Merrill Lynch, Countrywide and WaMu etc.," while the executives of First Magnus "made out like bandits, pocketing hundreds of millions of dollars that were never truly earned."
If First Magnus had set aside the appropriate funds to back up its loans, it wouldn't have had the money to provide such large bonuses, dividends and redemptions, the suit says.
The bursting bubble
As the housing bubble began to burst, First Magnus found itself saddled with more and more delinquent loans. In February 2007, Lehman Brothers requested $75 million in non-performing loans be repurchased on top of another $25 million other banks had asked to be repur-chased.
"The bad news is we still have loans we own and have already purchased so the reserve is still looking light," wrote Gary Malis, First Magnus' former chief financial officer.
In a separate in-house e-mail, Malis also asked if he could go to jail because he had certified First Magnus' financials and suggested that the directors and officers return the bonuses and distributions they had received.
"If they (the banks) expect us to be in line, we would have to move all the cash back," he wrote. "And I will get fired."
That never happened, and instead officers began to sell off stock in the months leading up to the bankruptcy, the suit claims.
Meanwhile, roughly two weeks after the bankruptcy was filed, a number of First Magnus' executives opened up a new mortgage lending firm that is now StoneWater Mortgage, which operates out of First Magnus' old offices.
By Josh Brodesky
Arizona Daily Star
http://www.azstarnet.com/business/282213
Suit says First Magnus officers fueled crisis; their reply: 'absurd'
With bankruptcy imminent in early August 2007, the executives at First Magnus hopped on their corporate jets and flew to Hawaii, where they sipped Cristal on a lavish party trip that came on the company's dime.
Two weeks later — after Lehman Brothers refused to buy a broken First Magnus that was weighted down by failing loans — the mortgage firm filed for bankruptcy and more than 5,500 people lost their jobs.
The posh Hawaii trip is described in a 200-page lawsuit filed late Thursday against more than 40 defendants, including the former directors and officers of Tucson-based First Magnus Financial Corp.
The $1 billion lawsuit, filed by a trustee appointed to advocate for First Magnus creditors — including former employees — makes larger allegations as well.
It essentially argues that First Magnus executives fueled the financial crisis by stripping the company of hundreds of millions of dollars in the form of bonuses and redemptions while manipulating financial records and failing to keep funds in reserve.
"The 'credit crisis' resulted and spiraled into an unprecedented global financial crisis. First Magnus was not the victim of the 'credit crisis' or 'collapse of the secondary market' ... it was a significant cause," the suit says.
In a statement issued late Thursday, former First Magnus executives Karl Young, Thomas Sullivan Jr. and Gupreet Jaggi called the assertions "absurd," saying lenders stopped purchasing loans First Magnus had originated and that the suit was nothing more than a publicity stunt.
Many of the company's former executives are traveling and said they would like to comment on the lawsuit next week.
Risky loans
Essentially, warehouse lenders advanced First Magnus funds to provide home loans. First Magnus then paid back those funds plus fees within a certain time period — usually 30 days — while selling the loans to Wall Street firms at a greater price.
The majority of the loans First Magnus created were Alt-A quality, meaning they were riskier than prime loans, but not as risky as the sub-prime market.
The suit alleges there were times when First Magnus employees would overstate incomes or assets to qualify potential borrowers and that a large number of borrowers had credit scores below 700.
Between January 2005 and its bankruptcy filing, First Magnus sold more than $70 billion in loans to investors, the complaint says.
Those purchase agreements came with indemnities, meaning First Magnus would repurchase the loans if they became delinquent.
But the suit claims First Magnus officials never set aside any reserve funds for the more than $70 billion in loans, and that it carried only $400,000 to back up the roughly $2 billion in loans it had for sale at any given time.
"The directors and officers reserved nothing on the more than $70 billion in loans sold between January 2005 and (bankruptcy), and never adjusted First Magnus' reserves as the housing bubble burst and loan delinquencies pushed record levels," the lawsuit says. "Through these and other stark violations of generally accepted accounting principles, the directors and officers intentionally inflated the stated 'equity' and 'profit' in First Magnus to funnel more than $160,000,000 directly to themselves in the form of stock redemptions, bonuses, and distributions."
Bonuses, stock redemptions
Beginning in the summer of 2006, First Magnus executives gave themselves a series of stock redemptions totaling about $70 million.
The largest went to First Magnus' founder, Thomas Sullivan Sr., who received a payout of $55 million at $57.08 a share. The suit alleges the redemption was based on fraudulent book values and that Sullivan Sr. knew a large number of First Magnus loans were going to go delinquent.
First Magnus also provided its officers with bonuses of more than $50 million between 2005 and the bankruptcy filing, including nearly $20 million in the year leading up to First Magnus' bankruptcy filing, the suit says. It also provided dividends of roughly $37 million to its executives in 2006 and 2007.
"As one of the largest originators of Alt-A loans in the country, the directors and officers flooded the financial markets with products like interest-only ARMs and stated income loans, only to leave itself in a financial position where it could not possibly honor its repurchase and indemnity obligations," the suit says.
The suit continues by arguing that "the financial institutions that dealt with (First Magnus) suffered the consequences as a result — e.g. Lehman, Bear Sterns, Merrill Lynch, Countrywide and WaMu etc.," while the executives of First Magnus "made out like bandits, pocketing hundreds of millions of dollars that were never truly earned."
If First Magnus had set aside the appropriate funds to back up its loans, it wouldn't have had the money to provide such large bonuses, dividends and redemptions, the suit says.
The bursting bubble
As the housing bubble began to burst, First Magnus found itself saddled with more and more delinquent loans. In February 2007, Lehman Brothers requested $75 million in non-performing loans be repurchased on top of another $25 million other banks had asked to be repur-chased.
"The bad news is we still have loans we own and have already purchased so the reserve is still looking light," wrote Gary Malis, First Magnus' former chief financial officer.
In a separate in-house e-mail, Malis also asked if he could go to jail because he had certified First Magnus' financials and suggested that the directors and officers return the bonuses and distributions they had received.
"If they (the banks) expect us to be in line, we would have to move all the cash back," he wrote. "And I will get fired."
That never happened, and instead officers began to sell off stock in the months leading up to the bankruptcy, the suit claims.
Meanwhile, roughly two weeks after the bankruptcy was filed, a number of First Magnus' executives opened up a new mortgage lending firm that is now StoneWater Mortgage, which operates out of First Magnus' old offices.
By Josh Brodesky
Arizona Daily Star
http://www.azstarnet.com/business/282213
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