Filed Under:Markets, Litigation

AIG Will Not Join Greenberg Bailout Lawsuit Against Government

Credit: AP
Credit: AP

American International Group won’t join or take over a lawsuit championed by the company’s former Chairman and CEO, Maurice “Hank” Greenberg, over the government’s 2008 bailout of the insurance giant.

“The AIG board has determined to refuse Starr’s demand in its entirety, and will neither pursue these claims itself nor permit Starr to pursue them in AIG’s name,” the board said in a statement issued at 3 p.m., following a meeting.

The board cited certain reputational damage in deciding not to pursue the action, a statement said.

According to court documents, AIG had been postponing a decision for at least six months.

The AIG board statement says the company expects to file with the courts a formal statement detailing its determination and the reasons underlying it in the coming weeks.

“In considering and ultimately refusing the demand before us, the board properly and fully executed our fiduciary and legal obligations to AIG and its shareholders,” says Robert S. “Steve” Miller, AIG chairman.

David Boies, chairman of Boies, Schiller & Flexner and lawyer for Starr International and Greenberg, says Starr and Greenberg “regret” that the AIG board had decided to act to try to prevent Starr from recovering damages in a lawsuit Starr filed on behalf of AIG stockholders for anyone but Starr and Greenberg.
 
One of the alternatives apparently presented to the AIG board was that Starr be allowed to file a full derivative lawsuit on behalf of all AIG shareholders, Boies said.
 
Boies adds, “We continue to believe that the attempt by the AIG board to prevent Starr International from pursing claims on behalf of AIG shareholders is contrary to the shareholders' interests.”
 
Moreover, he says, “Whether or not the AIG board will be successful in blocking Starr’s efforts to recover damages for their shareholders will ultimately be decided the Court of Claims."
 
It turns out that AIG was considering the lawsuit under duress, through a provision of Delaware law, where it is incorporated, that allows shareholders, such as its former chairman, to file “derivative” lawsuits on behalf of shareholders when a firm decides not to pursue a claim. Starr, the predecessor company of AIG, owns 12 percent of AIG.
 

Industry lawyers say it is not likely that Starr and Greenberg will re-file their lawsuits against the Federal Reserve Board and the Treasury Department as derivative lawsuits.

One lawsuit, against the Fed in New York, was dismissed in November, except for some constitutional claims.

The second lawsuit, in Washington, seeks $25 billion. The suit claims that the nature of the government rescue of AIG was punitive because the Fed originally charged AIG an interest rate of 14 percent on its original $85 billion loan, and that the Fed unfairly paid counterparties to credit default swaps issued by AIG’s Financial Products subsidiary 100 cents on the dollar, when it was possible that the counterparties would have accepted less.

AIG acted today against the background of fierce criticism of its decision to consider joining the lawsuit against the government that bailed it out.

Besides criticism from the general public and some lawyers, Democrats in Congress, both in the House and Senate, voiced outrage that AIG was considering joining the suit.

“It is simply outrageous that the board of the AIG would even consider suing the federal government after America’s taxpayers stepped up and bailed them out over their bad bets on mortgage-backed securities,” said Rep. Maxine Waters, D-Calif., incoming ranking minority member of the House Financial Services Committee.

Sen. Elizabeth Warren, D-Mass., added, “AIG’s reckless bets nearly crashed our entire economy.” She said, “Taxpayers across this country saved AIG from ruin, and it would be outrageous for this company to turn around and sue the federal government because they think the deal wasn’t generous enough.”

The issue had been simmering for many months and the courts in both Washington and New York were forcing AIG to show its hand.

Robert Benmosche, president and CEO of AIG, disclosed late Tuesday that Starr and Greenberg had made a “demand” to the board Sept. 12 to either take over the Starr/Greenberg suit against the government, or have Starr/Greenberg do so under the Delaware provision allowing outsiders to file derivative lawsuits on behalf of shareholders in cases where the company decides not to do so.

The issue was discussed in the November court decision by Judge Paul A. Engelmayer of the Federal Court for the Southern District of New York dismissing Starr’s suit against the Federal Reserve Bank of New York, which oversaw the federal government’s bailout of AIG.

In the final page of his 87-page decision, Engelmayer said he was reserving decision on one aspect of the government’s motion to dismiss the Starr claim because that would have given Starr the authority to pursue some claims against the government on behalf of AIG shareholders without AIG’s involvement.

In the paragraph, Engelmayer had “strongly encouraged” AIG to decide whether it would take control of the suit on behalf of AIG shareholders during oral arguments on the suit in August.

But, Engelmayer said, the AIG board had decided to postpone until January whether to do so.

Benmosche noted that in his statement, “Under applicable law, as well as according to certain court rulings, the AIG board must consider and respond to Starr’s demand, and expects to do so by the end of January 2013.” 

The lawsuit in Washington remains outstanding. Judge Thomas Wheeler is handling that case. He also had delayed action pending the AIG board decision.

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