A Michigan retirement fund charges in a lawsuit that Thornburg Mortgage Inc. and other financial institutions misled investors into thinking they were buying securities based on high-quality mortgages.

A Thornburg spokeswoman declined comment other than to read a written statement that said the complaint lacks merit and that Thornburg "intends to vigorously defend against these baseless allegations."

The complaint states that "Thornburg represented that it concentrated on only prime, high-quality mortgage loans ... with features geared toward more sophisticated, affluent buyers."

However, the suit claims that Thornburg used "false and misleading statements" to hide that its mortgages were "risky" so it could sell them to investors such as the Genesee County Employees' Retirement Fund.

The complaint charges the company has violated federal securities laws.

Former Bear, Stearns and Co. partner H. Garrett Thornburg came to Santa Fe in 1982 to start the Daily Tax Free Income Fund and expanded it into the Thornburg Companies, including Thornburg Mortgage and Thornburg Investment Management.

Thornburg Mortgage common stock sold for nearly $30 a share a year ago before it began a precipitous slide to about 5 cents a share today. In October, the firm laid off 29 employees. In December, when its stock slipped below $1 a share, it was dropped from the New York Stock Exchange.

Nevertheless, the companies recently began moving from downtown Santa Fe offices to a new 14.4-acre office campus on Ridgetop Road.

The Genesee County Employees' Retirement System represents 3,000 working or retired employees of the southeast Michigan county and manages more than $500 million in assets, according to the complaint filed in state District Court on Feb. 27 by lawyer William Carpenter of Albuquerque and the Labaton Sucharow law firm of New York City.

Thomas Dubss of the New York firm said the Genesee fund lost "many millions" on its Thornburg Mortgage investments. "It's typical of the way a lot of these sub-prime mortgages were packaged and then resold," he said. "It's esoteric, but, unfortunately, it's common and has led to the predicament were in, in no small part."

The 59-page complaint lays out the complex system of selling securities based on mortgages:

u Thornburg originated adjustable-rate mortgages or ARMs with short-term borrowing called Reverse Repurchase Agreements or RPAs.

u Underwriters then pooled together some of these loans into mortgage-backed securities or MBS that were sold to entities called issuing trusts.

u The issuing trusts then sold Thornburg Mortgage Loan Pass-Through Certificates to investors with different monthly distributions based on several classesm or "tranches," of investments.

"Nowhere in the Offering Documents did the Defendants disclose that the Certificates were not supported by high-quality loans, but instead were supported by risky, Alternative-A ('Alt-A') mortgage loans," it says. "Although the borrowers behind these mortgages will typically have clean credit histories, the mortgage itself will generally have some issues that increase its risk profile. ...

"According to confidential witnesses with direct knowledge of Thornburg's loan origination practices, Thornburg frequently originated large amounts of Alt-A loans. By disregarding its underwriting standards for high-quality prime loans, Thornburg was able to close more loans and earn more fees by issuing Alt-A mortgages. Then, by pooling and selling those mortgages to the Issuing Trusts, the Depositor Defendants shifted the undisclosed and increase risk of loss from mortgage defaults to Plaintiff and other unwitting members of the Class."

Contact Tom Sharpe at 986-3080 or tsharpe@sfnewmexican.com.