Look Who's Holding The Reins
Unprecedented government intervention in the economy has changed the rules for litigation. Just ask AIG.
The American Lawyer
By Andrew Longstreth
September 01, 2009
Since the government bailout of American International Group, Inc., last September, American taxpayers have owned 80 percent of a company engaged in many lines of business, most too complex for human comprehension. There are many simple truths buried amid that corporate complexity--bonuses are still too big for the public's taste, and loan payback time is a long way off. But for lawyers, the starkest truth is this one: For the first time, the U.S. government is the controlling shareholder in a company that routinely carries a gigantic litigation docket; in its last quarterly filing, American International Group, Inc. devoted ten pages to disclosures about pending litigation. But now when AIG makes a major decision involving a big case, AIG's trustees, the Federal Reserve, and the U.S. Department of the Treasury are in the loop.
And with public money involved, AIG is now faced with plenty of armchair litigators. Take the company's litigation against its former CEO, Maurice "Hank" Greenberg. Ever since the insurance company ousted him in 2005 amid an accounting scandal, they've been lobbing allegations at each other in courts from Panama to New York. Their biggest showdown so far was a three-week trial in federal court in Manhattan over a block of AIG stock worth more than $4 billion, starring two of the highest-profile and highest-paid lawyers in the country--David Boies of Boies, Schiller & Flexner for Greenberg and Theodore Wells, Jr., of Paul, Weiss, Rifkind, Wharton & Garrison for AIG.
A few months before the trial, AIG CEO Edward Liddy (who resigned in August) testified before the House Committee on Oversight and Government Reform. Representatives browbeat him on issues ranging from bonuses to the firm's corporate governance to its selloff strategy. Congressman Lynn Westmoreland (R-Georgia) took a lead role in questioning Liddy about the Greenberg case. Westmoreland, who is not a lawyer, is best known for his plan to place the Ten Commandments in the House of Representatives and the Senate--and for his jaw-dropping appearance on The Colbert Report during which he could not name all ten.
Westmoreland asked Liddy about the wisdom of AIG's multiple battles with Greenberg, and whether AIG should arbitrate the case scheduled for trial that summer, as Boies had suggested:
Now that AIG is about 80 percent taxpayer-owned, I would think that if this binding arbitration was an offer that was out there for both sides to do, that it might be in the best interests of the American taxpayer to get these things settled rather than going on for years and years and years paying these legal fees. . . . How much more money are we going to spend on lawyers, and what would be the harm in going to a binding arbitration?
Liddy responded that "now all of the work and effort has been teed up to actually take this to trial, so we think we have an excellent chance of [winning]." Then, just days before the trial began, AIG said that it would use some of the winnings to repay its debt to the government. In fact, if not for a motion by Boies, Wells might have told the jury that he was trying to win the case on behalf of the taxpayers.
The jury took only about five hours to render an advisory decision that AIG deserved nothing. Speaking to Bloomberg after the trial, the forewoman described AIG's case as "weak." So AIG, which turned down an offer to settle the case for $250 million, according to a source familiar with the negotiations, came away with nothing for the taxpayers except bills from Paul, Weiss. During the three-week trial, four Paul, Weiss partners sat beside Wells at the counsel table. A source familiar with the AIG–Greenberg litigation estimates that the case cost AIG more than $100 million. (A final ruling is still due from Judge Jed Rakoff.)
The verdict gave fresh ammunition to those who say that government ownership has changed AIG's litigation calculus. "A private company would never have done this," says Boies. "The way you deal with other people's money is sometimes different than the way you deal with your own money." When asked what he thought about the government-oversight arrangement, securities litigation expert Joseph Grundfest of Stanford Law School said, "I have no idea. Go ask a Russian lawyer or a Chinese lawyer."
AIG deputy general counsel Michael Leahy defends the company's decision to go to trial. He points out that the company brought its claims three years before the government stepped in and that the bulk of the costs had been incurred prior to that time. He also says that the government rescue did not change the fact that AIG was a plaintiff seeking $4 billion. "Putting off the trial in favor of arbitration did not make sense," says Leahy.
Another through-the-looking-glass moment occurred in May, when Representative Dennis Kucinich (D-Ohio) blasted Liddy for not settling class actions involving misstatements made when Greenberg was CEO. The consolidated class action is being led by three pension funds from Kucinich's state that used to hold AIG stock. Said Kucinich:
Mr. Liddy, I'm the chairman of the subcommittee on domestic policy, and until this matter is resolved you are going to keep getting called in front of Congress to explain why it's okay for AIG to cheat police, firemen, teachers, and public employees. I'm not going to let you go, Mr. Liddy, and I'll talk to you after the meeting, but you're not going to roll this member, guaranteed.
Kucinich hasn't gotten a deal yet, but the two sides did agree to a mediation, and the congressman felt good enough to send out a press release headlined, "Kucinich Secures Promise from AIG." If the Ohio pension funds are successful, they will receive millions of taxpayer dollars. Lawyers at New York's Labaton Sucharow & Rudoff and Cleveland's Hahn Loeser & Parks, co–lead counsel in the case, could make millions as well.
With that much money at stake, the legal department will do what it has always done in similar situations: inform important constituencies within the company. Only now, many of those constituencies are in Washington, D.C. "We make sure the government is aware of any significant decisions the company makes," says Leahy.
That dynamic has not made everyone sanguine. J.W. Verret of George Mason University School of Law, who testified at the AIG hearing in May, is worried about politics entering the decision-making process. In addition, the checks that might constrain an ordinary controlling shareholder don't necessarily apply in the case of AIG, because the government has sovereign immunity and is protected from many types of suits.
"We've designed all kinds of rules based on a certain understanding about the power relationships between shareholders and companies," says Verret. "The presence of the government as a controlling shareholder completely changes that power relationship. I think we're going to see politically influenced settlements, and I think it's going to be bad for shareholders."
This unprecedented government intervention makes even wilder scenarios plausible, according to Verret. Imagine that AIG is breaking the law, and the government sues the company. Is it a conflict of interest if the government wants to see the defendant survive? Adam Smith never contemplated that.
