Twenty-five Nuveen Investments Inc. funds sued American International Group Inc., claiming the company committed securities fraud in the months leading up to the U.S. financial crisis in 2008.
Also named as defendants in a complaint filed yesterday in federal court in Chicago were former Chief Executive Officer Martin J. Sullivan, ex-Chief Financial Officer Steven Bensinger and Joseph Cassano, who led the AIG Financial Products unit.
In a separate suit today, the Regents of the University of California made similar fraud claims against AIG.
“Plaintiffs suffered tens of billions of dollars in losses, at least, based on false and materially misleading statements that AIG, certain of its executives, directors, underwriters and outside auditor made,” according to the complaint.
The Nuveen plaintiffs said they would qualify to be part of litigation against AIG in federal court in Manhattan if the judge decides the case can proceed as group lawsuit, or class action.
The funds accused the company, Sullivan and others of violating Illinois and federal securities laws, committing common law fraud and being unjustly enriched. They asked for unspecified money damages.
Regents’ Suit
The Regents complaint, filed in federal court in San Francisco, alleges the company hid its exposure to subprime mortgages from 2006 to 2008, inflating the price of its stock and causing the university system to take losses when its AIG shares fell.
Matthew Gallagher, a spokesman for New York-based AIG, declined to comment on the allegations in either suit.
Nuveen Investments is based in Chicago. Among funds suing the insurer are the Dow 30 Enhanced Premium and Income Fund, the Nuveen Equity Premium Opportunity Fund and the Nuveen Large Cap Value Fund.
Each bought AIG securities at allegedly inflated prices that plunged “when the truth was disclosed,” according to the complaint.
Starting in 2005, AIG increased its writing of credit default swap contracts, concentrating on U.S. residential mortgage loans including some classified as subprime, according to the complaint. At about the same time, its AIG Financial Products unit stopped insuring some credit default obligations, citing declining subprime loan underwriting standards.
Housing Market
Two years later, as the U.S. housing market began faltering, AIG executives told analysts in an August conference call that risks to the company were “modest and remote” and that they foresaw no financial losses associated with the swaps business, the Nuveen funds alleged.
Those reassurances were repeated by Sullivan and Cassano at a December 2007 investor meeting, according to the complaint.
“Defendants failed to disclose that AIG suffered from an internal control weakness directly pertaining to its valuation of the CDS portfolio,” the funds alleged. Not until February 2008 did the company state in a U.S. Securities and Exchange Commission filing that it has underestimated its swaps portfolio market value losses.
By September 2008, the company needed an $85 billion infusion of federal funds as it teetered on the edge of bankruptcy, with that sum later growing to $182.3 billion. The money was later repaid.
The case is Dow 30 Enhanced Premium & Income Fund v. American International Group Inc., 13-cv-05612, U.S. District Court, Northern District of Illinois (Chicago).
With assistance from Karen Gullo in San Francisco. Editors: Charles Carter, Fred Strasser