A trustee appointed by a federal judge to advocate for First Magnus creditors — including employees — has filed a $1 billion lawsuit against the bankrupt mortgage company's executives.
The suit accuses them of excessive spending that "would make even the most pampered and precocious movie star blush."
Larry Lattig, the litigation trustee, filed the lawsuit in bankruptcy court late Thursday against more than 40 defendants, including the former directors and officers of Tucson-based First Magnus Financial Corp. and their new mortgage company, StoneWater Mortgage Corp.
First Magnus filed for bankruptcy in Tucson Aug. 21, 2007. About a week before that, more than 800 Tucson employees arrived at company headquarters, 603 N. Wilmot Road, to find the doors locked and themselves unemployed. First Magnus employed more than 5,500 people nationwide.
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The suit filed by Dallas-based law firm Lackey Hershman, LLP alleges that First Magnus and "the rest of America" were victims of the "avarice and greed" of top officers Gurpreet Jaggi, Thomas Sullivan Sr., Thomas Sullivan Jr., Bill Gaylord, Gary Malis, Dominick Marchetti and Karl Young.
"They were paying themselves like the Phoenix Suns," Lattig's attorney Jamie R. Welton said in a telephone interview Thursday night.
In a statement through their attorney, Todd Jackson, a number of former First Magnus executives including Gurpreet Jaggi and Karl Young, president of StoneWater Mortgage Corp., vehemently denied the allegations and the claim, dismissing it as "absurd" and "libelous."
"It speaks volumes that this suit was first circulated with a press release, complete with promotional material for its authors," the statement says. "The complaint was obviously prepared and publicized in a purposeful effort to maximize the headlines."
First Magnus Vice Chairman Thomas Sullivan Jr. declined to comment about the complaint, saying he had yet to read it.
Welton said the lawsuit is one of the first major director-officer lawsuits since the mortgage-industry collapse began. "You'll start seeing a lot more of these," Welton said.
First Magnus bundled and sold mortgages to warehouse lenders without keeping cash reserves that it was obligated to have in the event that the loan was returned, Welton said.
When the loans began to fail, there was nothing for the warehouse lenders, such as Washington Mutual, to recoup, he said. Between January 2005 and August 2007, when it filed for bankruptcy, First Magnus made $70 billion worth of loans, Welton said.
"What happened at First Magnus significantly contributed to the financial crisis," he said.
In their statement, the former officers with First Magnus said it was well known that First Magnus collapsed because of "market conditions far beyond its influence or control."
"The credit market collapse was unprecedented in the nation's history, and had nothing to do with any actions of First Magnus or its officers," the statement says.
The statement went on to say that blaming First Magnus for the freezing of credit and the financial crisis was "absurd" and an "opportunistic falsehood."
Welton said the complaint describes executive excess, including a wing of the Tucson headquarters called the "Sullivan Wing" decorated in rich wood and marble, a $170,000 waterfall, a $16,000 fish tank, an air-conditioned garage for the officers, personal use of corporate jets, and an all-expense-paid trip to a Hawaiian resort weeks before filing for bankruptcy.
Most of the former First Magnus employees did not receive their final paychecks, Welton said.
The lawsuit also accuses the executives of theft for taking computer programs to the new mortgage company StoneWater.
First Magnus officers launched StoneWater less than a year after the collapse. The new company is housed in First Magnus' custom-built headquarters, which is co-owned by First Magnus Chairman Thomas Sullivan Sr.
One of the reasons for the success of First Magnus was the business model of designing and using software to search for more loan options that could be shaped to individual needs.
Welton said StoneWater is using the same technology.
"They are literally stealing," he said. "That's given them a huge head start."
Read the Star's coverage of the mortgage lender's saga: First Magnus collapse.