The alleged fraud at French toymaker Smoby was prior to MGA's purchase of the company. The lawsuit says that due to the banks' manipulation of the finances, MGA stand to lose up to $300 million because of the acquisition.
According to the complaint, The Breuil family, who had the controlling stake in Smoby, had connections to the French legal and financial community. In 2002, Jean-Christophe Breuil was appointed CEO of Smoby Group.
"It was at that time that Breuil began embezzling hundreds of millions of Euros from the company," said Barry Cappello, attorney for MGA and managing partner of Cappello & Noël.
The French government has since opened a criminal investigation into Breuil's actions.
Leila Noël, plaintiff's co-counsel and partner at Cappello & Noël, added: "Breuil was siphoning much of the money into offshore accounts. Breuil's actions could not have gone unnoticed by the banks because they held a dominant position of control and oversight of Smoby."
None of the alleged fraudulent activity was known to MGA when Breuil approached owner Isaac Larian in 2007, about the sale of the company.
"The banks' conduct during the sale's due diligence period led MGA to believe that Smoby was a valuable, legitimate enterprise," explained Cappello.
"MGA relied on financial data provided by Smoby that turned out to be falsified. It also relied on analysis by Ernst & Young and statutory auditors Grant Thornton that stated Smoby financial statements for 2005 and 2006 were accurate and true. In fact, they were not."
Based on the inaccurate information provided, MGA went ahead with the acquisition in May 2007.
Noel continued: "Not surprisingly, Smoby underperformed and now the banks are suing MGA for all the debt Smoby acquired prior to MGA's ownership of the company."
The banks named in the lawsuit are: Deutsche Bank, Barclays Bank, Credit Agricole Corporate and Investment Bank, Caisse Regionale de Credit, Agricole de Franche Compte, Commerzbank 1566148977 Aktiengesellschaft, Deutsche Bank Luxenbourg and Societe Generale.