SANTA ANA, Calif. (CN) - Dozens of Pimco funds claim they suffered huge losses during the financial meltdown because American International Group put more than $27 billion into risky and misvalued "exotic securities."
The Pimco funds sued AIG on March 27 in Orange County Court. The 144-page lawsuit accuses AIG of one count of violation of Section 11 of the Securities Act.
The list of AIG's alleged sins, however, is considerably more than one.
Pacific Investment Management Company (Pimco) claims that AIG:
made false statements in SEC filing from 2005 to 2008;
had a history of "accounting scandals;"
turned to "exotic securities as a result of its ratings downgrade;"
massively exposed itself to subprime mortgages through credit default swaps;
"chase(d) profits through risky investments in its securities lending program;"
weakened its risk controls;
failed to mark down its CDS portfolio as the subprime mortgage crisis escalated;
falsely reassured investors at its Dec. 5, 2007 investor meeting, though PriceWaterhouseCoopers had warned it about its weak controls;
admitted making misstatements in the valuation of its CDS portfolio;
was investigated by the SEC and Justice Department in 2008 after raising $20 billion in additional capital after its first-quarter 2008 report;
required a $180 billion federal bailout after its securities portfolio collapsed;
and that "extensive information (was) revealed after AIG's bailout that further confirm(ed) the falsity of AIG's representations to investors."
Pimco opted out of the class in In re American International Group, Inc. 2008 Securities Litigation, Master File No. 1:08-cv-04772 (LTS) (S.D.N.Y.)
The complaint states: "AIG's colossal bets on unregulated credit default swaps and residential mortgage-backed securities for which the company claimed its exposure was 'remote, even in severe recessionary market scenarios' lay at the heart of the financial crisis and carried AIG, once the world's largest insurance company, to the brink of insolvency. Were it not for an emergency bailout by the federal government, AIG would have been forced to file for bankruptcy protection, triggering cascading losses and collapses throughout the global financial system. While AIG was rescued by the federal government, its investors suffered significant harm, including plaintiffs and other investors in the company's securities offerings between 2006 and 2008 pursuant to which AIG raised more than $27 billion in violation of the federal securities laws."
It quoted Federal Reserve Chairman Benjamin Bernanke as saying: "AIG exploited a huge gap in the regulatory system. ... This was a hedge fund basically that was attached to a large and stable insurance company."
Pimco seeks damages and costs.
It is represented by Blair Nicholas with Bernstein Litowitz Berger & Grossmann, of San Diego.