Filed Under:Life Insurance, Life Products

Fed wins AIG suit

Judge characterizes suit in colorful terms

The lawsuit brought by Starr International and its head, Maurice “Hank” Greenberg, alleged the Federal Reserve Board acted against AIG with its 2008 bailout. (AP Photo/Louis Lanzano)
The lawsuit brought by Starr International and its head, Maurice “Hank” Greenberg, alleged the Federal Reserve Board acted against AIG with its 2008 bailout. (AP Photo/Louis Lanzano)

A federal district court judge in New York today dismissed as “not plausible” a lawsuit alleging that the Federal Reserve Board acted against the interests of American International Group and its shareholders when it bailed out the company starting in September 2008.

In doing so, it dismissed the claims of Starr International and its head, Maurice “Hank” Greenberg, that amongst other allegations, that AIG was forced by the NY Fed in September 2008 to pay excessive amounts to its counterparties to satisfy its obligations under the CDS contracts. Starr claimed in the suit that that transaction served as a ‘backdoor bailout’ by the NY Fed of these counterparties.

"We are pleased with the Court's decision to dismiss this case, which we have always believed to be without merit," a spokesman for the NY Fed said.

A spokesman for Starr International referred all calls to Starr and Greenberg’s lawyers at Boies, Schiller and Flexner LLP, but did not respond to requests for comment.

The amended suit was filed November 2011. It alleged among other allegations, that the NY Fed controlled AIG, either as a majority shareholder or by the exercise of actual control, and therefore was AIG’s fiduciary.

Still remaining is a $25 billion lawsuit accusing the U.S. government of engineering an unconstitutional bailout of the insurer in the federal Court of Claims in Washington. In a preliminary ruling, a federal judge has allowed that suit to proceed.

Greenberg is a major shareholder, and Starr is the original company from which AIG was created. Greenberg then and now maintained an independent interest in Starr and now controls it as a result of litigation which supported Greenberg’s request that it be divested by AIG. Starr International held a 12 percent stake in AIG before a court settlement allowed it to again become independent.

 “Federal Reserve Bank of New York’s motion to dismiss the amended complaint is granted in its entirety,” said Judge Paul A. Engelmayer in a decision filed today in the Federal Court for the Southern District of New York.

“All of Starr's claims are dismissed with prejudice, with the exception of Starr's takings claim, which was withdrawn, and which is therefore dismissed without prejudice. The Clerk of Court is directed to terminate the motion at docket number 21, and to close this case,” Engelmayer ordered.

At the same time, the judge characterized the suit in colorful terms.

“Starr’s amended complaint paints a portrait of government treachery worthy of an Oliver Stone movie,” Engelmayer said.

“Starr claims that, as the global financial system teetered on the brink of collapse, the NY Fed seized control of AIG,” the judge said.

“Then, Starr claims, the NY Fed, in an act of Napoleonic plunder, stole AIG’s assets, re-distributing some to shore up other flagging financial institutions while keeping much of the residue for itself,” the judge said.

“It is, however, one thing to make a sweeping and dramatic claim of government misconduct. It is quite another to plead plausibly—under the established standards of Delaware law, and based on concrete factual allegations, as [the law requires]—that FRBNY exercised control over AIG,” Engelmayer said.

“The Court puts Starr’s rhetorical declarations about AIG’s lack of choice and volition to one side, because they are the quintessential ‘labels and conclusions’ and ‘naked assertions’ which the Supreme Court has instructed ‘will not do’.”

In his 89-page opinion, Engelmayer said, amongst other findings that Starr failed to allege facts sufficient to carry its heavy burden of calling the trustees’ independence from the NY Fed into question.”

The Court, accordingly, holds that Starr’s claim that FRBNY was a “controlling shareholder” or a “controlling lender” of AIG is not plausible, in light of the facts pled and documents referenced in the amended complaint, the judge said in his opinion.

“Because Starr’s fiduciary duty claims are all premised on such control, those claims must be dismissed,” the judge said.

In his decision, Engelmayer said the facts stated in the case “instead plausibly permit only one conclusion, and it is inconsistent with Starr’s thesis of control.”

It is that, in September 2008, “AIG was in extremis, and its independent board of directors, to save the company, voluntarily accepted the hard terms offered by the one and only rescuer that stood between it and imminent bankruptcy—the NY Fed, ”the opinion said.

“Specifically, based on Starr’s own allegations, (1) AIG, as of mid-September 2008, was in dire straits, whether as a result of its own business decisions, the unraveling state of the financial system, the lack of available liquidity, or a perfect storm of these and other factors, and was actively considering bankruptcy; (2) AIG had not found any effective rescuer in its hour of need other than FRBNY, and had run out of time to keep looking; and (3) AIG’s board, unwilling to accept bankruptcy and the ‘public opprobrium’ and ‘risk of legal liability’,” that would come with it, acceded—regretfully, and perhaps angrily, but, as a matter of law, voluntarily—to the hard terms on which the NY Fed was willing to extend the $85 billion credit facility,” the decision said.

“Far from describing actual control of AIG by an outside party, these allegations describe a moment of corporate desperation, in which AIG’s board grabbed the sole lifeline extended to the company,” Engelmayer said.

“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,” the decision said.

“By Starr’s logic, a loan shark whose usurious interest rate is agreed to by a small business so that it may stay afloat could equally be said to have had actual control over that business so as to compel its agreement to a loan,” the decision said.

“To be sure, AIG’s directors faced wrenching circumstances. But Starr has not pled facts sufficient, under Delaware law, to shift responsibility from the board to the NY Fed for the board’s decision to agree to the term sheet and credit agreement. On the facts alleged, as of September 17 and 22, 2008, AIG’s directors retained actual control of the company. They—not the NY Fed were the ones with fiduciary duties towards AIG and its shareholders.”

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