AIG Rejects Shareholder Lawsuit
AIG Rejects Call To Join Shareholder Lawsuit Challenging 2008 Federal Bailout
American financial giant AIG has decided against joining the shareholder lawsuit challenging the terms of the $182 billion federal rescue package to save it from bankruptcy in 2008. The $25 billion litigation filed in 2011 contends that the terms of the bailout, including 92% equity stake surrendered to the government at high interest rates, were detrimental to the interest of shareholders. Popularly known as Greenberg lawsuit, it also accuses the government of unfairly burdening the insurance company facing its worst financial crisis.
The board of American International Group met in New York on January 9, 2013, and rejected the representation made by former CEO and lead plaintiff Maurice Greenberg to join the shareholder lawsuit against the U.S. Government. Though the reason behind the decision was not made public, it is widely believed that fear of widespread public backlash deterred AIG board from joining the litigation. In December 2012, the government sold back the shares it held under the rescue package conditions, and the New Year day saw AIG starting the nationwide “Thank You, America” campaign, expressing gratitude toward taxpayers for bailing it out from the crisis.
Background of Greenberg Lawsuit
The Federal Bailout
In September 2008, downgrading of credit rating agencies following $13.2 billion reported half-yearly losses forced a liquidity crisis on AIG. The U.S. Federal Reserve announced $85 billion secure credit under the Federal Reserve Act to avert collapse of the company. Its Board of Governors authorized the Federal Reserve Bank of New York to formulate a plan to infuse credit-liquidity over 24-months. All AIG assets, including stocks of regulated and non-regulated subsidiaries were collateralized. The federal government got 79.9 percent equity stake and the right to set aside dividend payments to shareholders.
The details about the stockholding by the Federal Reserve were made public only during 8-K filing by AIG on September 18, 2008, two days after the rescue package was announced. The bailout reached $122.8 billion by October end. The U.S. Treasury bought AIG preferred stocks worth $40 billion in November 2008. There was nationwide outrage against the bailout, but the government remained steadfast in its efforts to save AIG from failing, which could have huge ramifications for the U.S. economy. The total bailout touched $182 billion with acquisition of 92.1 percent shares, which helped stabilize the insurance company.
In September 2012, AIG sold its stake in AIA Group, an Asian insurer, and raised $2 billion to pay off government loans. It also sold subsidiaries, such as the American Life Insurance Company, the 21st Century Insurance, AIG Star and AIG Edison, under the stewardship of the government to raise cash and restructure the insurance giant to a manageable and profitable size. AIG bought back all shares and paid off the bailout loan by the end of 2012. The federal treasury made a gain of $22.7 billion as interest on its bailout money.
The Shareholder Lawsuit Litigation
In November 2011, Maurice R. Greenberg, former AIG CEO and one of the major investors, filed a lawsuit representing all shareholders claiming that bailout terms imposed by the government was against the interests of other stakeholders. He also alleged that the rescue terms for AIG was much tougher than those offered to banks and criticized it as an attempt to nationalize the company. Greenberg was forced to resign in March 2005 following allegations of securities fraud, fraudulent business, and violation of insurance laws.
The $25 billion shareholder lawsuit filed in both New York and Washington focuses its claim on three points.
- No AIG bailout by the government was needed.
- The nature of bailout package severely affected shareholders. Acquisition of 92 percent stake by the government, forcing AIG to pay high interest rates, and payment of billions to Wall Street clients of AIG deprived shareholders of their financial gains.
- The federal bailout is violation of the Fifth Amendment that prevents takeover of private firms.
The lawsuit also blames the bailout terms as reason behind hiving off of various subsidiaries and cutting down the private heavyweight to half of its earlier size. Greenberg accused the government of wasting $60 billion from AIG and taxpayer funds to enable plan for “backdoor bailout” of Goldman Sachs and other favored trading companies from legal liability.
2012 Manhattan Court Judgment
In December 2012, the southern district court of New York dismissed the shareholder lawsuit that was filed challenging the federal bailout and repayment of about $205 billion. Judge Paul Engelmayer rejected the lawsuit and ruled that “merely because the AIG Board felt it had ‘no choice’ but to accept bitter terms from its sole available rescuer does not mean that that rescuer actually controlled the company.” He rejected Greenberg’s calling the rescue package a “loan shark” and termed its acceptance by AIG an example of “corporate desperation.” According to him, there was no other alternative before AIG except to file for bankruptcy, which could have resulted in more serious consequences for shareholders.
A petition of appeal has been filed before the Court of Appeals for the Second Circuit.
Reasons Prompting AIG Not To Join Shareholder Lawsuit
AIG has decided against joining the lawsuit and not to allow its shareholders follow claims against the U.S. Government. It has no choice but to reject calls to join the litigants. According to legal experts, the company has no fiduciary obligation to make such a claim as brought out by the Greenberg lawsuit. There is scant chance that it would end up on the winning side if it became party to the lawsuit.
Another key factor that prompted AIG decision is the fear that the escalation could lead to backlash from U.S. public. It also fears to be targeted as a defendant against shareholder claims because bailout terms were approved by its board.
On the other hand, the government is at a stronger position and no claim can be directed against it. The bailout terms were approved by the IG board in 2009, including all details to be paid back. The rescue package saved the company from collapse and helped it regain financial strength. Even AIG has started an ad campaign thanking taxpayers for their support to help it stay afloat. The company made $2 billion profit in 2012 third quarter, which is in sharp contrast to $4 billion loss exactly a year ago.
Other Important Shareholder Lawsuits
The year 2012 saw many big corporate names settling shareholder lawsuits claiming losses from business decisions. In August, Citigroup settled a class-action shareholder lawsuit filed over subprime mortgage exposure by agreeing to pay $590 million. In November, Energy Solutions paid $26 million to get rid of a similar shareholder lawsuit. General Motors paid $277 million and its auditor Deloitte paid $26 million to investors after a lawsuit alleged that both misled shareholders on financial position. El Paso Corporation also settled a similar lawsuit filed in a Delaware court.
The biggest shareholder lawsuit settlement was announced by Bank of America in September 2012. It paid $2.43 billion to shareholders, alleging that the bank did not disclose when it acquired Merrill Lynch & Co during the 2008 financial meltdown.