American International Group (AIG), the battered insurance conglomerate that was taken over by the government in September, won a significant case last week in what proved to be the good hands of a Minnesota law firm.
A federal jury in New York City awarded AIG and several other plaintiffs $141 million in damages and interest stemming from a 2003 lawsuit brought against Bank of America Securities. The verdict followed a six-week trial that ended Friday.
The investors, including AIG, St. Paul-based Travelers Insurance and Allstate Insurance, accused Bank of America of fraud and deceit over the 1998 sale of $648 million in securities offered by Heilig-Meyers, a publicly traded retailer of home furnishings and onetime Wall Street darling that went bankrupt in 2000. The asset-backed securities were secured by pools of customer debt owed by Heilig-Meyers customers.
"Bank of America had a long-standing lending relationship with, and $200 million in loans to, Heilig-Meyers that were backed by the company's receivables," said Jeff Ross, an attorney with Minneapolis-based Anthony Ostlund Baer Louwagie & Ross. "Bank of America knew that this portfolio had high delinquencies. They sold the loans to my client and other investors without telling the buyers about all the portfolio problems."
At trial, Ross argued that Bank of America had represented the loans as high-quality while failing to disclose a second set of books that reflected high levels of losses. Ultimately, Heilig-Meyers defaulted on the bonds.
At its peak in the late 1990s, Heilig-Meyers had more than $2.7 billion in annual revenue and nearly 1,300 stores in 38 states. The company catered to lower-income borrowers who needed consumer credit, according to an October story in the New York Times. The receivables were the company's main source of income.
AIG argued that Heilig-Meyers was less profitable than represented by Bank of America. The investors contended that Bank of America failed to disclose that Heilig-Meyers used a "recency" accounting method rather than the standard "contractual" method, and that actual loss and delinquency rates on the contracts were in fact twice as high as stated by the underwriter.
U.S. District Court Judge John G. Koeltl in Manhattan dismissed an initial lawsuit filed by the investors in 2001, who then filed an amended claim in 2003. The original lawsuit included First Union, now part of Wachovia Financial, as a defendant. Wachovia, weakened by the recent mortgage-backed securities debacle, settled earlier with investors. Wachovia is about to be acquired by Wells Fargo & Co.
