Greenberg Seeks Class Action Against AIG Bailout

Starr International Co. Inc. filed a proposed class-action suit in federal court Nov. 21 against the U.S. government, alleging the federal bailout of American International Group three years ago was unconstitutional.

Starr is led by AIG's former long-time chief executive Maurice "Hank" Greenberg. In addition to the United States, AIG Inc., a Delaware Corp., is named as a "nominal defendant."

The suit, filed in the U.S. Court of Federal Claims, contends the U.S. government violated the statutory, contractual, and constitutional rights of the plaintiff and the class in taking approximately 80% interest in the common stock of AIG.

Starr seeks damages of $25 billion, which includes an amount equal to the Jan. 14, 2011 market value of the 562,868,096 shares of common stock the government received under the conversion of the Series C preferred shares, the complaint says. Starr wants the court to rule that it may file the suit on behalf of AIG; find that the United States has taken the property of AIG and Starr in violation of the Due Process, Equal Protection and Takings clauses of the U.S. Constitution; and certify a class of all people who were registered and beneficial owners of AIG's common stock at any time between Sept. 17, 2008 and Jan. 14, 2011, excluding the defendant and any directors, officers, political appointees and affiliates of it.

In September 2008, the federal government first stepped in to provide the insurance giant with an emergency loan. The available bailout grew as high as $182 billion, but AIG said it never borrowed the full amount it was offered. Since then, AIG has been selling noncore assets to pay back what it owes to the federal government.

In the chaos that resulted from the Lehman Brothers' bankruptcy in September 2008, the defendant, including the Department of the Treasury and its agents, concluded that survival of the U.S. financial system required avoiding further bankruptcy filings by major financial institutions, the complaint says.

Instead of providing AIG with the liquidity support offered to comparable firms, the government began several steps that eventually resulted in it taking control of AIG away from its shareholders and then taking a majority of AIG's shareholders' equity, "all without just compensation," the suit contends.

"The government loaned billions of dollars to numerous other financial institutions without taking any ownership in those institutions; when the government did take an equity interest, its interest was limited; it loaned billions of dollars to domestic and foreign institutions at interest rates that were a fraction of those charged to AIG; and it guaranteed hundreds of billions of dollars in loans to various institutions, including Citigroup Inc.," the complaint alleges.

"AIG and its common stock shareholders, by contrast, were singled out for differential — and far more punitive — treatment," the suit alleges.

Providing guarantees to back up AIG's obligations, as the government did with other comparable financial institutions, would have been more efficient and fair, the suit says.

"However, the unprecedented approach the government took with AIG enabled the government to use AIG as a vehicle to covertly funnel billions of dollars to other preferred financial institutions, including billions of dollars to foreign entities, in a now well-documented 'backdoor bailout' of these financial institutions," the suit contends. "In so doing, the government is not empowered to trample shareholder and property rights even in the midst of a financial emergency."

AIG declined to comment. Attempts to get comment from the Department of Treasury were unsuccessful.

Starr is represented by the law firm of Boies, Schiller & Flexner, including attorney David Boies. It's also represented by Skadden, Arps, Slate, Meagher & Flom.

A companion suit was filed in the Southern District of New York.

Earlier this year, C.V. Starr & Co. Inc. and Starr International USA Inc. launched a new corporate brand name: Starr Cos. The companies, led by Greenberg, include managing general agents under the C.V. Starr name and insurance underwriting companies under the Starr International USA name (Best's News Service, March 2, 2011).

Starr International, a private investment vehicle, owned 10.4% of AIG's stock as of March 2010 (Best's News Service, March 22, 2010).

(By Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com)