SAN FRANCISCO - Oakland has filed suit against several bond insurers, with charges that include fraud and breach of contract, for the sale of bond insurance policies that the city says turned out to be worthless.
Governments are beginning to take action against an industry that made money off them under false pretenses, according to Nanci Nishimura, principal at Cotchett Pitre.
"The sleeping giant is awakening," she said.
"The insurer defendants' highly risky involvement in the subprime markets was never disclosed by the defendants to plaintiff Oakland and other California cities and municipalities," Oakland's complaint says. "If they had known that the insurer defendants had billions of dollars in exposure to risky subprime and subprime-related instruments, plaintiff would not have purchased bond insurance that has become basically worthless."
"In short, Oakland has paid hundreds of thousands of dollars for insurance premiums that weren't worth the paper they were printed on," Oakland city attorney John Russo said in a statement.
According to the complaint, Oakland bought insurance from four of the five firms named in the suit. The city had to pay 12% interest on one XL CapitalAssurance Inc.-wrapped auction-rate deal after auctions failed this year, according to the complaint.
As with the Los Angeles suit, the Oakland complaint names, along with XL, Ambac Financial Group Inc., MBIA Inc., Financial Guaranty Insurance Co., CIFGAssurance NA, Jason Kissane of MBIA, and Neil Pack of CIFG as defendants. The Los Angeles complaint also named ACAFinancial Guaranty Corp., which since has been placed into runoff.
Nishimura said that the defendants in the Los Angeles and Stockton suits have filed notices of removal in an effort to move the cases to federal court, and that the cities are preparing a response.
Her firm is also representing Los Angeles in another suit filed in state Superior Court in Los Angeles in July, in which the city accuses more than 40 financial institutions of rigging bids on financial instruments such as guaranteed investment contracts and other derivatives.
Nishimura said her firm is also representing San Diego County, which filed a similar GICs and derivatives lawsuit in state Superior court last week.
Oakland, using different law firms, filed a federal class action lawsuit in April against dozens of firms that provided GICs and derivatives.
