AIG and Stockholders Join Forces Against Former Officers

On February 10, 2009, Vice Chancellor Leo E. Strine denied motions to dismiss filed by Maurice Greenberg, AIG’s CEO and Chairman since the late 1960s, and members of his “Inner Circle.” The claims against the AIG executives assert breach of the duty of loyalty and breach of other fiduciary duties. AIG itself asserted breach of fiduciary duty and indemnification claims against Greenberg and Howard I. Smith, former AIG director and CFO. American International Group, Inc., Consolidated Derivative Litigation; AIG, Inc. v. Greenberg, et al., 2009 Del. Ch. LEXIS 15 (Feb. 10, 2009).

In addition, AIG stockholders filed derivative claims against Edward E. Matthews, long-time board member and former Vice Chairman of Investments and Financial Services; and Thomas R. Tizzio, former director, Senior Vice Chairman of General Insurance, and member of AIG’s reinsurance security committee.

The First Amended Combined Complaint, which includes both AIG and stockholder claims, alleges that Maurice Greenberg and members of his Inner Circle deceived investors through a series of deliberate actions that included:

• Carrying out a fraudulent $500 million reinsurance transaction with Gen Re Corporation to overstate loss reserves.
• Using secret offshore subsidiaries to hide AIG losses.
• Blatantly misstating accounts, including making “topside adjustments” to AIG’s consolidated financial statements.
• Failing to correct well-documented accounting problems in AIG’s Domestic Brokerage Group.
• Hiding AIG’s controversial “life settlement” investments; namely, the bulk purchase of insurance policies owned by the sick and elderly in the hope that the original policy holders will die sooner rather than later and result in a profit for AIG.
• Avoiding taxes by claiming that workers’ compensation policies were other types of insurance.
• Engaging in “covered calls” to recognize investment gains without paying capital gains taxes.
• Conspiring with other companies to rig municipal derivative and general insurance markets- among those companies was the insurance brokerage Marsh & McLennan run by Greenberg’s son.
• Using their own “expertise” in balance sheet manipulation and special purpose entities to help other companies overstate their own financial results, for a substantial fee.

These misdeeds resulted in the restatement of years of financials and a $3.5 billion reduction in stockholder equity. AIG has also paid over $1.6 billion in fines, while litigation and regulatory proceedings will hobble the company into the foreseeable future.

V.C. Strine determined that each of the inner circle defendants was directly responsible for business units involved in the pervasive misconduct alleged in the Complaint and that the pled facts supported the assertion that each had personal knowledge of the wrongdoing. Moreover, the court found that misconduct was not isolated to certain areas of the company, but instead permeated the corporation's way of doing business.

Further supporting the denial of the motion to dismiss were the equity-heavy compensation packages that each defendant received and the world-class financial sophistication that each possessed. Thus, the defendants were motivated to ensure a high trading price for AIG stock and to use their own expertise to generate illicit profits.

AIG’s auditors, PricewaterhouseCooper LLP (“PWC”), were also defendants. The court, however, applied New York law, the location of AIG’s headquarters and were PWC’s allegedly wrongful conduct occurred. New York law immunizes an auditor’s breach of a professional duty of care where it fails to discover a fraud committed by a corporation’s top insiders. V.C. Strine stressed the outcome would have been different under Delaware law.

In a separate action, Bloomberg reports that Greenberg filed his own suit against AIG on March 2, 2009, alleging that the company’s “material misrepresentations and omissions” caused him to acquire AIG shares in his deferred compensation profit participation plan at an inflated valued.

The primary materials discussed here can be found on the DU Corporate Governance website.