04/29/2011 01:54 pm ET | Updated Jun 29, 2011

AIG Says It Was Victim Of Wall Street's Worst Behaviors In New Lawsuit

Two and a half years after first being bailed out by the federal government, insurance giant AIG has officially begun to place blame on companies it alleges profited at AIG's expense.

In a new lawsuit, AIG is seeking to recoup "potentially billions of dollars" from Wall Street giants, including Bank of America and Goldman Sachs, according to The New York Times. As part of that larger effort, AIG is first seeking $350 million from ICP Asset Management and some of the accompanying profits from Moore Capital.

The case pits AIG, which is still 92 percent-owned by the U.S. government, against money management firms that both sold and invested in exotic Wall Street securities. If the suit ends in the insurance company's favor, it would be yet another strike against Wall Street, which has drawn heavy criticism for selling clients risky securities while often placing bets on those same securities.

News of the lawsuit comes only weeks after Wachovia Capital Markets, now owned by Wells Fargo, paid $11 million to settle similar charges of fraudulently misleading investors. In mid-April, a Senate report found Goldman Sachs had also systematically misled clients allegedly selling them financial investments the bank knew to be junk.

ICP maintained two large bundles of securities, known as collateralized debt obligations (CDOs), valued at $7.7 billion and backed predominately by bundles of mortgage securities. On top of insuring $6 billion worth of those CDOs, AIG had made an additional $900 million investment in them.

The alleged conflict of interest revolves around ICP using money invested in the CDOs to purchase mortgage-backed securities at above-market prices from "favored clients" in exchange for "winning continued or increased business." ICP also knowingly "misappropriate[d] funds" and bought additional collateral never approved by AIG, according to the suit.

As the financial crisis mounted and AIG struggled, those CDOs were then bought for half their original value under the Federal Reserve's "Maiden Lane" program, which helped pull toxic assets off financial firms' balance sheets.

According to the lawsuit, ICP and Moore Capital didn't adequately inform AIG of behind-the-scenes dealing that gave preferential treatment to some clients at the expense of others. AIG alleges the two firms' "fraudulent" and "wrongful self-dealing" surrounding AIG-insured CDOs, "victimized" the company.
"ICP's fraud harmed AIG and the American taxpayer," AIG said in an official statement, "and we are fighting back."

Whether AIG, once a darling of Wall Street, was sophisticated enough to have simply followed the caveat emptor rule of high finance is a matter of debate.

"The question is to what extent AIG has a responsibility to know what it's doing," said Christopher Whalen, co-founder of Institutional Risk Analytics. Whalen, for one, says it is doubtful AIG was completely in the dark about its clients' assortment of high-priced side bets in the CDO market. The insurer, after all, was also making its own bets.

"It's ridiculous," Whalen said, "to assume that people working with financial products were not riding on the razor's edge."

But not everyone is convinced AIG knew what was happening.

"Even sophisticated investors can be deceived," said Janet Tavakoli, President of Tavakoli Structured Finance. But she questions why it took so long for AIG to discover the scheme.

AIG has also made clear that its suit is "closely related" to a lawsuit against ICP filed last year by the Securities and Exchange Commission that similarly alleges off-market trading and securities fraud.

In March, the SEC said the agency would be prioritizing fraud relating to complex financial instruments this year.

Still, Tavakoli says, AIG's lawsuit reflects a lack of effort by the government to reclaim losses for taxpayers and for investors -- even for bailed-out giants like AIG.

"SEC has failed to do the investigation, so investors like AIG are on their own," she said. "The question is, can [they] collect the damage."

ICP did not return call for comment. AIG also declined to comment for this article.