Editor: The Casadys of People’s Food Co-op are in the news. Derek and Nancy Casady are suing some of the world’s largest financial institutions alleging fraud and misrepresentation around the federal government bail-outs. They have hired former San Diego City Attorney Mike Aguirre. The Casadys filed their suit as taxpayers. Nancy is the executive director of People’s.
By Miriam Raferty / East County Magazine / Originally published July 7, 2011
Derek Casady, former editor of the Daily Californian newspaper in East County and his wife, Nancy, have filed a lawsuit against several of the world’s biggest financial institutions alleging that AIG and others engaged in fraudulent practices and misled the federal government to get bail-outs. The suit documents fraudulent practices alleged in detail. It also seeks return of bailout monies paid for with taxpayers’ money—plus triple damages and a jury trial.
They hired former San Diego City Attorney Mike Aguirre to sue A.I.G., Goldman Sachs, Deutsche Bank, Merrill Lynch and its successor, Bank of America, and Societe Generale.
Both former Congressional candidates, the Casadys now seek to protect U.S. taxpayers’ financial interests. They contend that instead of Congress considering drastic cuts such as slashing Medicaid funding to solve the nation’s deficit problem, the federal government should join their suit and demand repayment of the bailout funds. Plaintiffs ask the public’s help to urge members of Congress, particularly California’s Senators, to encourage the Department of Justice to join the suit. Find contact info for your Senators here.
Their suit was filed under the False Claims Act, which allows private citizens to sue on behalf of government agencies to recover money for taxpayers in cases where fraud occurred. The suit contends, among other things, that the Federal Reserve erred in doling out bailouts to fund buying up troubled securities and relied on bogus collateral and fraudulent records provided by AIG. The transactions involved mortgage deals underwritten by other defendants and guaranteed by AIG.
AIG has a long history of fraud, the suit reveals. The company has had three injunctions to halt fraud issued by the Securities & Exchange Commission (SEC) and twice been the target of criminal prosecutions by the U.S. Department of Justice-yet has repeatedly reverted to fraudulent practices, breaking numerous promises to avoid such conduct. The past federal cases resulted in establishment of a transaction review committee to ensure no further frauds. But the suit calls that a “farce”, noting that the head of the committee received “hundreds of millions of dollars” and his group “almost a billion dollars in bonuses.” In fact, the suit alleges that it was through the oversight committee that AIG “perpetrated one of the largest financial frauds in American history.”
Specifically, the suit alleges that AIG engaged in five interdependent fraudulent and unlawful business practices, and goes on to describe each in detail:
1. Pooling funds from AIG insurance companies into the AIG Internal Hedge Fund, with the intent to speculate in violation of investment prudency rules;
2. Selling sham and fraudulent insurance and financial products;
3. Using sham and fraudulent reinsurance, guarantees and support agreements;
4. Rigging auction markets for insurance and financial products; and
5. Misrepresenting AIG’s financial condition.
The Casadys filed the whistleblower complaint in February of 2010; records on the suit were unsealed in May, the New York Times reported on May 5, 2011. A website set up by Qui Tam lawyers for whistleblowers nationwide describes the suit this way:
In the suit, the couple accuse AIG of lying about the company’s financial condition in order to secure billions in federal loans. AIG did this, the relators allege, by loading up their balance sheets with fraudulently inflated assets while simultaneously draining the company’s available cash through dividend payouts, lavish bonuses and salaries. AIG also allegedly failed to disclose that it was in financial trouble due to civil and criminal fraud proceedings in 2008. Lastly, the suit alleges that the banks lied about how they used the bailout money from the federal government. The suit says the defendants were all complicit in reckless and fraudulent behavior that resulted in an economic catastrophe that is still echoing throughout the world.
“Fraud allowed them to create phony revenues…You didn’t have a liquidity crisis. You had a worthless asset crisis,” Aguirre said, speaking in San Diego last week at an event sponsored by Democracy for America and Progressive Democrats of America. “Why are they not being prosecuted? Where is law enforcement? That’s why we deputized the Casadys…$40 billion has been stolen. Let’s get it back.”
Aguirre hopes to persuade the U.S. Department of Justice to join the suit against the trio of financial giants who he describes as “crooks who destroyed our economy and destroyed our housing market.”
He urges taxpayers and voters to contact California Senators Dianne Feinstein and Barbara Boxer and ask the Senators to urge U.S. Attorney General Eric Holder to join the lawsuit and seek return of taxpayers’ funds.
If the Dept. of Justice joins the suit, it would strengthen the case and eliminate the possibility that a judge might toss it out on a technical issue of the Casadys’ standing to file suit.
Aguirre contends that when the federal government bailed out AIG, an insurance company, it had a duty to secure the loan with the same sort of liquid, high-quality collateral that it requires when lending to a troubled bank. The suit furthers suggests that elaborate schemes for selling off mortgages was essentially a scheme to line the pockets of top corporate executives at taxpayer expense.
The lawsuit also seeks return of massive bonuses paid to financial executives.
“Bonuses were what it was all about,” Aguirre said of the bailouts, which began under President George W. Bush but continued under President Barack Obama’s administration. “In a free economy, if you make a bad investment, you lose your money,” said Aguirre. By contrast, the big financial institutions profited handsomely off poor and worse, fraudulent investment actions and the selling off of mortgages including mortgages on foreclosed homes, he noted. Yet bank executives received huge bonuses while taxpayers footed the bill. “We’re all against state-sponsored terrorism,” Aguirre said. “We should also be against state-sponsored fraud.”
The suit details numerous questionable deals. For example, it alleges that AIG borrowed cash from other defendants secured by securities that AIG took out of 11 AIG life insurance companies. AIG then “used the cash to buy high risk residential mortgage backed securities with the cash. Under the Securities Lending Program, AIG had to pay the cash back to the banks faster than the RMBS would pay cash to AIG. When the RMBS did not hold their fraudulently inflated values, AIG was unable to sell the RMBS because fraudulent practices destroyed their market.” Eventually the other defendants demanded their money back from AIG, but AIG didn’t have liqiuidity to pay back its debts. So AIG submitted false claims and used taxpayer bailout funds to improve its liquidity for the securities lending program, the suit asserts.
But the plaintiffs allege, “AIG’s most ambitious fraudulent conduct was its practice of insuring high-risk collateralized debt obligations (CDOs) with AIG-issued credit default swap contracts (CDS),” a practice the suit claims destroyed the market. The suit cites damning e-mails including one from Andy Forster, then CEO of AIG Financial Products, which admits that “All the market participants are keenly aware of the dramatic lack of liquidity and inability to pursue price discovery in the segment of the market.”
AIG further strayed from its competencies in the insurance business and grew to become an “internal hedge fund” (an investment fund open only to a limited range of investors) over which “there was no regulatory oversight,” the suit alleges. The suit accuses AIG of “reckless hedge fund speculations” and of treating capital from its life insurance companies as AIG hedge fund capital—essentially using policy holders money in risky ventures. “Over $75 billion was pulled out of AIG’s 11 life insurance companies without adequate disclosure,” the suit staets.
Morevoer, it allegs that “AIG’s reckless intervention into the RMBS and CDS markets was part of a desperate plan AIG adopted to recoup its significant losses from past fraud.” The company then presented false documentation to mislead the federal government about its “dire financial condition” in order to secure bail-outs with taxpayer money. The company claimed its problems were due to falling stock prices and a liquidity crisis when in fact massive losses were due to fraudulent practices, the suit contends, and that further, AIG hid the true amount of its losses. Moreover, the suit contends that a large portion of the bailout funds were used for AIG securities lending and financial products alleged to be at the heart of the fraudulent conduct.
Goldman Sachs bought thousands of mortgages from subprime and other lenders through practices that “caused the underlying CDO and RMBS market to collapse,” the suit alleges.
Casady is no stranger to litigation over financial rip-off schemes. His father, Cy Casady, was once victimized by a fraud scheme set up by financier J. David Dominelli. The senior Casady, also represented by Aguirre, filed a suit and eventually became the only victim in the Dominelli case to get back more money than he lost in the investment scam, Derek Casady said at last week’s meeting.
The Casadys, who now live in La Jolla, say that they obtained information for the complaint by direct first-hand examination of information from inside the mortgage industry, including first-hand analysis and computation of data with investigative methods used by certified fraud examiners. They claim standing for the suit because they are taxpayers within the Southern District of California, where the federal government was induced to purchase cash flows from mortgages on homes here based on “false claims made by defendants.”
East County Magazine contacted U.S.-based defendants for comment on the lawsuit.
“This case is without merit and we will defend ourselves vigorously,” Deutsche Bank assistant vice president Scott Helfman said in an e-mail response to ECM.
Goldman Sachs spokesman David Wells said the company declines to comment on the case.
A.I.G. and Bank America did not respond to ECM’s request for comment, however A.I.G. spokesman Mark Herr has previously told the New York Times that the Casadys’ suit was “devoid of merit” and that Aguirre was recycling discredited legal theories.