PUD and AIG duking it out in New York courtroom

SEATTLE — The county’s utilities officials have sued an embattled financial organization to keep it from backing out of a 30-year deal designed to raise $58 million in bonds.

Snohomish County Public Utilities District sued American International Group (known as AIG) Thursday in U.S. District Court in Seattle. At the same time, the PUD responded to a lawsuit filed by AIG in a New York state court early this month.

“We believe the issue should be handled here,” said Anne Spangler, a lawyer for the PUD.

If a federal judge doesn’t tell AIG to honor the bond agreement, the PUD could be forced to default on other bonds. Spangler said bond revenue is generally used to finance capital improvement projects.

Spokesmen for Manhattan-based AIG could not be reached Friday.

PUD officials said in court documents that they agreed in 1995 to base the bond deal on a 6.2 percent interest rate. The agreement was designed to protect the PUD from market fluctuations, Spangler said. If the standard interest rate fell below 6.2 percent, the PUD would pay the difference to AIG. If the standard interest rate rose above 6.2 percent, AIG would pay the difference to the PUD.

Interest rates remained well below 6.2 percent between 1995 and the middle of 2008, according to the lawsuit. During that time, the PUD paid $25.7 million to AIG.

Those rates began to climb during the middle of last year, PUD officials said in the lawsuit. AIG and PUD discussed at that time whether to end the agreement, but the PUD decided it should continue, Spangler said.

PUD officials say AIG engaged in a series of actions in an effort to save money. According to court documents, PUD officials claim AIG secretly bought a block of the bonds for itself, creating a situation in which they would pay themselves a higher interest rate. Later, PUD officials allege, AIG tried to manipulate the interest rate on the bonds to lower or eliminate its obligation to the PUD.

After months of sparring, AIG on July 2 sued the PUD in New York state seeking to force the PUD to end the agreement — a move that would obligate the PUD to pay a multimillion-dollar termination fee.

It’s not the first time the PUD has accused a major financial organization of secretly trying to artificially massage markets for their own gain. The PUD, suspecting corruption, pulled out of a $180 million contract in 2001 with Enron Corp. The PUD uncovered evidence, including audio recordings of crass conversations about senior citizens, that Enron traders intentionally defrauded thousands of shareholders.

Enron later crumbled in one of the most dramatic financial scandals in recent history. The PUD in 2007 settled its outstanding $180 million contract with Enron for just $18 million — a settlement PUD officials then said sent a message that they’d won.

The PUD’s lawsuit against AIG is laced with references to widespread corruption in the financial industry. The company is made up of “reckless traders whose gambles” have brought AIG to “the brink of insolvency.”

“United States taxpayers, including the residents of Snohomish County, have already contributed almost $200 billion through federal government action to prop up this institution deemed ‘too big to fail,’ ” PUD lawyers wrote in court documents.

Krista J. Kapralos: 425-339-3422, kkapralos@heraldnet.com.

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