Back in mid August of 2007 I wrote this diary The Mortgage Nightmare Hits Home about the bankruptcy and closure of First Magnus Mortgage Company (not so affectionately called First Maggot by some locals) in Arizona. At the time I knew that things were starting to spiral downward regarding the housing market, that foreclosures were escalating, but I had no idea that this company may have been at the center of what later would become the burst bubble that crashed the entire economy.
In today’s Arizona Daily Star there was a front page story, Suit says First Magnus officers fueled crisis; their reply: 'absurd', which outlines the billion dollar lawsuit that has been filed against the former executives of First Magnus. The story is all too familiar now, the greed, the corruption, the billions swindled for bonuses, private jets and outrageous vacations, all while leaving fired staff unpaid for work completed. But it is worse than that.
More below for the sordid details
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. source
When I first wrote about FM after their closure many of their laid off employees did not receive compensation for work completed. They were given a gift or bonus check of $2000 instead. Offices all over the state closed, thousands lost their jobs and the Execs were in Hawaii drinking the good shit. The anger they must feel in finding out the truth I can only imagine. This is part of the reason for the lawsuit.
The 200 page lawsuit that was filed last week is available in pdf here: In re:
FIRST MAGNUS FINANCIAL CORPORATION, Debtor it states in the preliminary :
The incontrovertible truth is that First Magnus was not the victim of the "credit crisis" or the "collapse of the secondary market." It was, however, along with the rest of America, victimized by the avarice and greed of seven men — Gurpreet Jaggi, Thomas Sullivan, Sr., Thomas Sullivan, Jr., Bill Gaylord, Gary Malis, Dominick Marchetti and Karl Young — its Directors and Officers. On behalf of their victims, including the thousands of employees and other creditors they left unpaid, the Litigation Trust brings this suit to recover the more than $300,000,000 these seven men stripped from First Magnus.
The Daily Star article provides the sickening detail on their self paid bonuses:
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.
I was stunned and amazed to learn that after the bankruptcy these Execs went right back into the same business. The newly named business, StoneWater Mortgage, is housed in the same First Magnus offices. One has to wonder how that could be possible? How is it possible that the Arizona Department of Financial Institutions approved these pirates and thieves to continue their operations? Hopefully they won't be in operation for very much longer.
Another part of the preliminary statement describes these offices with a nice dose of outrage:
. Sadly, while taxpayers are now forced to fund bailouts and stimulus packages in a desperate attempt to treat the systemic effects caused by the excesses of the Directors and Officers, their "new" mortgage companies are built on the very capital taken from First Magnus.
What is even more troubling, their "new" companies were jump-started by the theft of Debtor’s proprietary materials during the course of the bankruptcy. The modus operandi of the Directors and Officers has not changed; they remain at their customized building paid for by First Magnus, secluded in the rich wood and marble of the Sullivan Wing, surrounded by $170,000 waterfalls and $16,000 fish tanks, their luxury vehicles safely tucked away in an air-conditioned garage ready to whisk them to their private planes for exotic vacations.
This lawsuit filing provides explicit details of how these Execs operated and how their malfeasance leading up to bankruptcy then affected a number of other well known institutions, all themselves now either bankrupt or bought out, including: "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."
Here are some of the pertinent sections from the lawsuit:
- FMFC Helped Burst The Housing Bubble. The Directors and Officers knew that the housing bubble was bursting in 2005. As Sullivan, Sr. explained in the Sullivan, Sr. Manuscript, "In 2005 I was feeling uncomfortable with the real estate boom . . . . Just about everyone I knew saw that a real estate [bubble] was forming but they couldn’t foresee when it would collapse . . . . The underwriting guidelines relaxed so more people could qualify for home ownership even though their financial condition made it a risky move. Subprime mortgages with generous returns for the lender became the hot ticket."
- The GAO reported in October 2007 that "the number and percentage of
mortgages in default or foreclosure rose sharply from the second quarter of 2005 through the second quarter of 2007 to levels at or near historical highs." According to the GAO, several Sun Belt states "such as Arizona, California, Florida, and Nevada experienced some of the
largest increases in the number and percentage of defaults and foreclosures," which began to spike "in the second quarter of 2005."
I plan to follow up on this case. If possible I'd love to witness them frogmarched in front of the courthouse. If they walk away from this, however, then I'll know that justice is still broken in this country.
Bless the Daily Star for bringing this story to the forefront.
UPDATE: Here is a photo of one of the CEOs JS Jaggi. Please print a copy and throw darts at it! Every little bit helps. :)