American International Group Inc. investors should be able to sue companies that conspired with some of the insurer’s top executives to manipulate its finances, a lawyer told Delaware Supreme Court justices today.
AIG shareholders have valid fraud claims against General Re Corp., an insurer owned by Warren Buffett’s Berkshire Hathaway Inc., insurer ACE Ltd. and insurance broker Marsh & McLennan Cos. over an alleged bid-rigging scheme involving insurance contracts, Stuart Grant, a lawyer for the investors, told the court today in Dover. Investors accused ex-AIG Chief Executive Officer Maurice “Hank” Greenberg of using the rigged agreements and other accounting tricks to artificially inflate the bailed-out company’s results.
A judge found in February 2009 that because Greenberg and other officials at New York-based AIG allegedly engaged in fraudulent transactions with rivals, AIG shareholders couldn’t recover from the other insurers. An established legal doctrine bars investors from recovering from third parties for their company’s own wrongdoing, the judge ruled.
Upholding the lower court ruling would allow wrongdoers to “get away scot-free,” Grant told the justices. He said their job was “to make sure damages lie where the fault lies.”
The U.S. government, which invested about $49 billion in New York-based AIG, plans to convert its preferred stake into 1.66 billion shares of common stock, or 92 percent of the total, by March 15. The securities will then be sold to private investors.
$2.3 Billion Settlements
AIG has paid out more than $2.3 billion in settlements since 2006 to resolve suits over the company’s financial maneuvers during Greenberg’s tenure. Those accords covered allegations that Greenberg and other executives duped investors about the insurers’ financial health.
Greenberg, 85, built AIG into the world’s largest insurer over almost four decades until he was forced to retire in March 2005 amid state and federal probes of the company’s business practices.
Earlier this year, AIG’s insurers agreed to a $90 million settlement of lawsuits alleging Greenberg deceived investors while running the company. The money is being paid to AIG and not to investors as part of the agreement.
AIG investors also sought to recover damages from General Re, ACE and Marsh & McLennan, who they alleged conspired with Greenberg to rig bids for insurance contracts. The scheme allowed AIG to artificially bolster its results, the suits contend.
The big-rigging allegations, first raised in 2004 by then-New York Attorney General Eliot Spitzer, involved “an unlawful scheme to fix prices and to rig bids in the municipal derivatives market,” according to papers filed in 2005.
Investors also claim General Re officials helped AIG set up fake reinsurance contracts that allowed AIG to add $500 million in loss reserves, a key indicator of an insurer’s financial health.
Delaware Chancery Judge Leo Strine in June 2009 ruled because Greenberg and other AIG officials partnered with other insurers in bid-rigging schemes, AIG shareholders were barred from recouping the company’s losses from its alleged co-conspirators.
Grant, who represents AIG investors suing rival insurers over the bid-rigging scheme, urged the Supreme Court to throw out legal doctrines that bar such suits among co-conspirators.
“AIG has plenty of honest board members and shareholders” who should be able to pursue claims against companies that helped Greenberg set up the phony deals, the lawyer said.
Fred Rowley, a lawyer representing General RE, ACE and Marsh & McLennan, countered that a legal doctrine barring suits between co-conspirators in a fraud were based on concerns about problems with apportioning responsibility among wrongdoers.
Invalidating the doctrine would be a “revolutionary change under Delaware law,” he told the five-member court.
The court combined the AIG shareholder suits over the big-rigging scheme with a case against PricewaterhouseCoopers LLC, AIG’s auditor at the time the phony deals were set up, for appeal purposes.
AIG investors sued PWC for failing to uncover the fraudulent deals during Greenberg’s tenure. A Delaware judge threw the case out on the same grounds as the suits against General RE and the other insurers involved in the rigged insurance agreements.
‘Level of Accountability’
Allowing investor suits against auditors in such fraud cases would provide “some level of accountability” for accounting firms, Grant noted.
Thomas Rafferty, a New York-based lawyer representing PWC, countered that PWC shouldn’t be subject to suits by AIG shareholders over Greenberg’s maneuvers since he took steps to hide them from auditors.
“We had auditors in this case who were hoodwinked by their client,” he said. Investors are asking for the right to sue accountants “because their client fooled them.”
The cases are Teachers Retirement System of Louisiana v. General Re Corp., 451-2009; Fragnoli v. American International Group Inc., 574-2009, and Teachers Retirement System of Louisiana v. PricewaterhouseCoopers LLP, 454-2009, Delaware Supreme Court (Dover).