A federal judge expressed “concern” that the U.S. scared off American International Group Inc. from joining a lawsuit by Maurice “Hank” Greenberg, its former chairman, challenging the insurer’s 2008 federal bailout.
“I had this lingering concern,” Judge Thomas Wheeler said today at a hearing in the U.S. Court of Federal Claims in Washington on whether to grant a request by AIG and the government to dismiss Greenberg’s lawsuit.
“I don’t want to call them threats necessarily. Would I be intimidated by all of this?” Wheeler asked lawyers for the U.S., AIG and Greenberg’s Starr International Co.
AIG directors who took their seats during the bailout, appointed by the U.S., are among the “the board members that considered the demand” to join the suit against the government, Wheeler said.
Starr, Greenberg’s closely held investment firm and an AIG shareholder, sued the government for $25 billion in 2011, calling the assumption of 80 percent of the company’s stock by the Federal Reserve Bank of New York in September 2008 a violation of the shareholders constitutional rights to due process and equal protection of the law.
The government eventually increased its stake to 92 percent as the aid package swelled to $182.3 billion. The New York-based insurer repaid the assistance last year.
Starr also claims AIG’s board, which Greenberg said was unduly influenced by the government, failed to conduct a full and independent review of whether to join the lawsuit. Starr asked Wheeler to find the board wrongly decided to stay out of the case.
Wheeler declined to dismiss Starr’s complaint in July and reaffirmed his ruling in September. The hearing today was on an amended complaint aimed mainly at the board’s actions on the lawsuit.
Joseph Allerhand, of Weil, Gotshal & Manges LLP, an attorney for AIG, told Wheeler that doubts about the board’s independence are misplaced.
AIG demonstrated independence when it sued the government in connection with mortgage-backed securities it had to sell to the New York Fed as part of the bailout, Allerhand said.
Further, Allerhand said, “none of the directors on this board work for the government or rely on the government for their livelihood.”
News that AIG might join the case drew criticism from lawmakers including Democratic Senators Elizabeth Warren of Massachusetts and Robert Menendez of New Jersey, and Representative Elijah Cummings, a Maryland Democrat, who said suing the U.S. would be an insult to taxpayers.
The AIG board was within its rights to weigh how the company was affected by the “media frenzy” surrounding the deliberations over joining the suit, Allerhand said.
“Not to consider that would be a dereliction of duty,” he said.
David Boies, of Boies, Schiller & Flexner LLP, an attorney for Starr, said that it’s “human nature” that AIG directors take “an interest in justifying what they did” in agreeing to the bailout.
“It certainly raises a reasonable doubt about whether the board was acting independently,” in rejecting Starr’s bid to get AIG into the suit, Boies said.
“Everybody knows the U.S. government was doing everything it could to intimidate AIG from bringing this lawsuit,” Boies said.
Getting AIG into the case would allow litigation over Maiden Lane III, one of the financing vehicles created by the New York Fed to help save the company, and broadens the number of shareholders who can share in a recovery, Boies said.
AIG sought to dismiss only the derivative claims asserted by Starr in New York-based insurer’s name.
The Justice Department asked for the dismissal of Starr’s entire complaint, including the direct claim of an illegal taking of property.
Brian Mizoguchi, a Justice Department lawyer, told Wheeler that the claims raised by Starr, which allege harm to all shareholders, can only be pursued by AIG.
“That’s really a harm that’s happened at the corporate level,” Mizoguchi said. “When the U.S. doesn’t deal with you, you don’t have a direct claim,” Mizoguchi said.
A parallel case brought by Starr International against the New York Fed, was dismissed in November by a judge in New York.
Wheeler told lawyers in the Washington case to check calendars for possible trial dates in the second half of 2014. The scope of the arguments might be affected by his ruling on the motions to dismiss, he said.
The Washington case is Starr International Co. v. U.S., 1:11-cv-00779, U.S. Court of Federal Claims (Washington).
The New York case is Starr International Co. v. Federal Reserve Bank of New York, 11-cv-8422, U.S. District Court, Southern District of New York (Manhattan).
The AIG case against the New York Fed is American International Group v. Maiden Lane, 650115/2013, New York State Supreme Court, County of New York (Manhattan).
-- With assistance from Zachary Tracer in New York. Editors: Fred Strasser, Glenn Holdcraft