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Starr Suit Against N.Y. Fed Over AIG Bailout Dismissed

Starr International Co.’s lawsuit against the Federal Reserve Bank of New York over the government’s bailout of American International Group Inc. was dismissed by a federal judge in New York.

Starr, an AIG shareholder headed by the insurer’s former chief executive officer, Hank Greenberg, claimed the government used its 2008 bailout of the New York-based company to channel money improperly to its trading partners. U.S. District Judge Paul Engelmayer in Manhattan rejected the claims in a decision that was made public Nov. 16.

Starr sued the New York Fed last November, saying it breached its fiduciary duty to AIG shareholders by loaning $85 billion at 14.5 percent interest while offering better terms to banks in a “backdoor bailout.” AIG almost collapsed after bets tied to the housing market soured, and the bailout was revised at least four times before reaching $182 billion.

Starr said in its complaint that the bank coerced, induced and required AIG directors and officers to “violate their duties” to Starr International and AIG. Beginning in 2008 and continuing until at least January 2011, the federal government “imposed a series of transactions” that “resulted in depriving” AIG and its shareholders of tens of billions of dollars, Starr said.

In his decision, Engelmayer said that Starr can’t use the law of Delaware, the state in which AIG is incorporated, because it is pre-empted by federal law.

‘Government Treachery’

Engelmayer also said that despite a complaint that “paints a portrait of government treachery worthy of an Oliver Stone movie,” Starr failed to make a plausible argument that the Fed exercised sufficient control over AIG to support a claim that it had a fiduciary duty to the company.

Starr is considering an appeal, Robert Dwyer, a lawyer with Boies, Schiller & Flexner LLP, which represents the company, said in a statement today. Engelmayer’s ruling doesn’t affect a parallel suit filed against the U.S. government in the Court of Federal Claims in Washington, Dwyer said.

The New York case is Starr International Co. v. Federal Reserve Bank of New York, 11-8422, U.S. District Court, Southern District of New York (Manhattan).

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