When Ohio Attorney General Richard Cordray announced this past Friday that he had entered a massive
$725 million settlement on behalf of three Ohio pension funds in the long
standing securities class action lawsuit against AIG, he definitely
accomplished his objective -his announcement made the front pages of all the
newspapers in Ohio (it was the lead story in Saturday's Cleveland Plain Dealer).
There is only one problem. AIG doesn't have the money to pay
for the settlement. The plan, such as it is, is that AIG is going to fund the
first $175 million following the settlement's preliminary approval. Then, AIG
is going to try to conduct a stock offering to raise the remaining $550
As Susan Beck put it on the Am Law Litigation Daily, there have
been lots of settlement over the years, but "we've never seen one quite
As reflected in greater detail here,
the plaintiffs first sued AIG, certain of its directors and officers, its
auditor and certain third parties in October 2004, shortly after then-New York
Attorney General Eliot Spitzer first announced his investigation of a
"scheme" in connection with commercial insurance transactions
involving bid-rigging and the payment of contingent commissions. Further allegations
made their way into the complaint following additional revelations.
The plaintiffs' 497-page consolidated third amended complaint filed in March
2006 included the bid-rigging and contingent commission allegations,
as well as allegations that AIG falsified its financial statements, among other
things, by entry into a finite reinsurance transaction with General Reinsurance
Corporation, as well as of reinsurance transactions with other offshore
entities. In May 2005 AIG restated five years of earnings, reducing
shareholders' equity by more than $2.7 billion.
Even before the $725 million AIG settlement announced
Friday, the Ohio AG's office had already entered settlements totaling $284.5
million in the case. First, on October 3, 2008, the Ohio AG entered a $97.5
million settlement with PricewaterhouseCoopers, as reflected here.
Second, on February 2, 2009, the Ohio AG announced that Gen Re had agreed to a $72 million
Third, on August 13, 2009, the Ohio AG announced that he had entered a $115 million settlement
with former AIG CEO Maurice Greenberg, and several other former AIG executives,
as well as certain corporate entities affiliated with Greenberg. (Several of
these same individuals and entities also separately settled a related
derivative lawsuit for $115 million, largely funded by insurance, as discussed here.)
The sum of these settlements in the securities class action
case, including the recently announced settlement with AIG, is $1.0095 billion,
which, according to data from Risk Metrics (here), would rank as the tenth largest securities class
action settlement amount. Indeed, the AIG settlement by itself would rank
twelfth on the list.
There is the small problem of how AIG's is going to pay for
the $725 million settlement. The company, you will recall, has received over
$130 billion in U.S government bailout support and is now 80 percent owned by
the U.S. taxpayers. The company is struggling to sell assets to repay the
According to AIG's July 16, 2010 filing on Form 8-K, the settlement is
"conditioned on its having consummated one or more common stock offerings
raising net proceeds of at least $550 million prior to final court
approval." The decision whether "market conditions or pending or
contemplated corporate transactions make it commercially reasonable to proceed
with such an offering will be within AIG's unilateral discretion."
The intent is for AIG to register a secondary offering of
common stock on behalf of the U.S. Treasury. AIG also has the option to fund
the $550 million from other sources. If AIG fails to fund the $550 million, the
plaintiffs have several options. They can terminate the agreement; they can "elect
to acquire freely transferable shares of AIG common stock with a market value
of $550 million provided AIG is able to obtain the necessary approvals";
or they can extend the period for AIG to complete the offering.
A securities offering conducted for the sole purpose of
funding past litigation is not exactly the most attractive investment
opportunity, even under the best of circumstances. But these are not the best
of circumstances for AIG. Indeed, the settlement's announcement comes at a time
when the company's leadership seems in disarray, after the company's board
chair resigned following a "board battle" with the current CEO. The company
faces a daunting array of challenges as it seeks to repay the bailout money, as
reflected in a July 17, 2010 Wall Street Journal article here unrelated to the settlement and the projected stock
A July 16, 2010 New York Times article about the
settlement quotes one commentator as saying, "There's still a lot of
question marks hanging over AIG. How would you write the prospectus for it? The
document would be quite appalling when it described the risks."
The offering would, according to the article, be "rife
with uncertainties" given the fact that the offering would be dilutive of
the government's ownership interest. On the other hand, as the article also
points out, "taxpayers and legislators would cry foul" if the lawsuit
were funded out of the $22 billion that remains available to the company.
Along with the questions of how the company will fund the
$550 million settlement chunk is the question of how the company is paying for
the first $175 million. Given the U.S. taxpayers' interest in the company, it
seems like there should be some explanation somewhere about the source of that
money, but none of the publicly available information provides any explanation.
It is possible that insurance will fund that portion, although none of the
disclosure documents make any suggestion of that possibility, and in addition,
significant insurance funds were previously paid to fund the derivative lawsuit
settlement identified above. The settlement agreement itself might answer the
question, but it is not yet available on PACER.
The lawsuit itself is a vestige of a different time and
place. Though the events involved are only a half dozen years in the past, the
complaint reflects a lengthy roster of individuals whose roles have long-since
changed in ways that no one could possibly have imagined at the time. The
alleged wrongdoing , while involving some fairly egregious circumstances, pales
by comparison with the cataclysmic events that followed. Given this
antediluvian aspect of this case, it does seem high time that it settled.
However, only time will tell if the parties have in fact succeeded in driving a
stake into the heart of this beast.
Somehow it seems fitting that just this past week there were
news reports that during a recent lunch at the Four Seasons
Hotel in New York, where Greenberg was having lunch with former Citigroup CEO
Sandy Weill, Spitzer approached Greenberg, stuck his hand out, and asked
Greenberg if he would appear on Spitzer's CNN show. Unsurprisingly, Greenberg
declined. Can you imagine the look on Greenberg's face? The world is a very
strange place sometimes. Or, at least there are some strange inhabitants.
It is also entirely fitting that Cordray's and Spitzer's
names should be linked in connection with this story. Cordray has definitely
borrowed several key pages out of Spitzer's political play book. Playing the
role of Wall Street Scourge definitely worked for Spitzer, at least until his
extracurricular activities earned him some extended gardening leave followed by
his current rehabilitation assignment on CNN. It also seemed like it was
working for Connecticut AG Richard Blumenthal until it turned out he had
oversold his credentials as a veteran.
Cordray is playing the angle for all it is worth. His
website has a separate page devoted to securities class action litigation
activities, including a June 1, 2010 summary of the current cases. (The document
is headed "Holding Wall Street Accountable.") However, it is probably
worth noting that many of the cases on Cordray's list were actually launched by
his predecessors, although Cordray did demonstrate his own initiative with the
action he recently filed against the rating agencies, about which refer here.
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