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$1 billion lawsuit: First Magnus wasn't

a victim; it caused credit crisis


Posted: Friday, March 6, 2009 12:00 am
By Joe Pangburn, Inside Tucson Business
Tucson-based First Magnus Financial Corporation wasnt
a victim of the credit crisis in 2007 it was a significant
cause of it.
And maybe if more people had been paying attention to
the kinds of things the officers and directors of the
company were doing, clues would have surfaced of the
impending economic crisis that has since hit the nation
and the world.
Thats the gist of a $1 billion lawsuit filed Feb. 26 in U.S.
Bankruptcy Court by Larry Lattig, trustee appointed by
the court to advocate for creditors of First Magnus,
including, through his attorneys at Lackey Hershman in
Dallas: Jamie Welton and Deborah Deitsch-Perez.
The suit argues the former directors and officers stripped
millions of dollars from First Magnus that was supposed
to be kept in reserve for repurchase and indemnity
obligations owed to the commercial banks that financed
the 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 the
directors and officers originated bad loans, in the worst
markets, paid themselves hundreds of millions in stock
redemptions, bonuses, and distributions when they sold
the loans to Wall Street, and then said sorry Charlie,
were broke when Wall Street asked for their money

back. Now the taxpayers are holding the bag. Its not
right. Its why the economy is in the mess its in. We will
make certain that the creditors of First Magnus, including
the thousands of employees left unpaid, recover every
last penny they are owed from these defendants.
The lawsuit says more than 70 percent of the loans
originated by First Magnus from January 2005 through
Aug. 21, 2007, when it filed for bankruptcy protection,
were purchased by Lehman Brothers and Countrywide
Financial. Lehman filed for bankruptcy in September
2008 and was subsequently liquidated. Countrywide was
acquired by Bank of American in July 2008.
The purchases by Lehman and Countrywide from First
Magnus contained financial covenants and provisions
which, if triggered, would have required First Magnus to
repurchase the loans. The triggers included such as
things as a home-owner missing the first or second
months partments or if a loan were paid off within the
first 90 days. But First Magnus kept only $400,000 for
repurchases on about $2 billion in loans.
During bankruptcy proceedings, Lehman Brothers said
First Magnus owed it more than $395 million and
Countrywide said it was owed more $100 million in
obligations for loan repurchases.
Despite what First Magnus officials publicly maintained,
the lawsuit claims the company was a big player in
selling riskier mortgages. Leading up to its bankruptcy
filing, at least half of all the mortgages handled by First
Magnus were either Alt-A riskier than prime but not
as risky as subprime or below. The company was the
eighth
largest
originator
of
Alt-A
mortgages,
representing almost 2.4 percent of all such loans sold in
the United States.

As defaults and foreclosures skyrocketed in First


Magnus primary markets, so did the repurchase and
indemnification claims made by the [mortgage
purchasers], according to the lawsuit. When First
Magnus failed to honor its repurchase and indemnity
obligations, the Wall Street firms and commercial banks
that did business with First Magnus had to write-down
the collateral they held, pay the heightened premiums
for CDS (credit default swap) contracts, and honor the
CDS contracts they sold, and horde cash reserves to
account for losses. The credit crisis resulted and
spiraled into an unprecedented global financial crisis.
Jaggi, Young and other former First Magnus executives
issued a statement denying the allegations in the lawsuit
saying theyre absurd and libelous. It was wellknown First Magnus collapsed because of market
conditions far beyond its influence or control, they said.
The credit market collapse was unprecedented in the
nations history, and had nothing to do with any actions
of First Magnus or its officers, the statement said.
Contact reporter Joe Pangburn
at jpangburn@azbiz.com or at (520) 295-4259.