Four years into a securities fraud case against insurance giant American International Group Inc., the unthinkable happened. The financial system — and the target company, which had bet unwisely on credit default swaps — collapsed. The government was forced to bail out both, and wound up controlling 80% of AIG.

“We had a defendant unlike any other in securities class action history — a company that economically was troubled but coming back, and recipient of billions in taxpayer aid and effectively owned by the government. We’ve never seen anything like that,” said Thomas Dubbs of New York’s Labaton Sucharow.

Despite that and other obstacles, Dubbs and co-counsel Alan Kopit, partner in charge of the Cleveland home office of Hahn Loeser & Parks, secured settlements surpassing $1 billion. According to Labaton, In re American International Group Inc. Securities Litigation represented the ninth-largest recovery in a securities class action and the largest recovery since the beginning of the financial crisis in September 2008.

Dubbs and Kopit credit their success to their flexibility. “When you have a situation with a lot of different parties and a defendant mostly owned by the government, you’ve got to be flexible and creative in coming up with a solution to the problem,” Dubbs said.

The retirement and pension funds of Ohio’s public employees, teachers, police and firefighters in October 2004 accused AIG and 21 co-defendants of paying or abetting improper contingent commissions and illegal bid-rigging, as well as a massive accounting fraud that wiped out $2.7 billion in shareholder equity.

In six years, the case survived 22 motions to dismiss, multiple recusals by judges and the death on Dec. 16, 2008, of U.S. District Judge John Sprizzo. He was succeeded by U.S. District Judge Deborah Batts in the Southern District of New York.

Batts certified the class on Feb. 23, 2010, which turned out to be the tipping point in reaching a settlement. “The defendants now knew they were going to trial with a certified class,” Dubbs said. “That was a lever.”

In July, the parties reached a $725 million settlement. Counting $115 million that former Chief Executive Officer Maurice “Hank” Greenberg agreed to pay the plaintiffs, a $97.5 million settlement with PricewaterhouseCoopers LLP and a $72 million settlement with Berkshire Hathaway Inc.’s General Reinsurance Corp., the recoveries exceeded $1 billion.

‘THE FINANCIAL WORLD FELL APART’

Although the harm was alleged to be worth billions of dollars more, Dubbs said that in weighing AIG’s offer he had to balance the very real fear that AIG would go under. “After the financial world fell apart in fall 2008, AIG almost fell into bankruptcy — lots of people thought they wouldn’t make it,” Dubbs said.

Then, too, there had not been a billion-dollar settlement since the Tyco International case in 2004. “The lead plaintiff took the settlement because we thought that was a very good number,” said Dubbs.

Kopit agreed that $1 billion was a sufficient figure relative to the likelihood of success at trial. Even though Batts certified the class, he never considered the outcome “a slam dunk. There are no such cases. But you reach a settlement number through negotiation and having settled cases in your career.”

A major factor was having the stamina to fight for so long.

“I wished it wouldn’t have lasted six years,” Dubbs said. “But it did, and if you’re on the plaintiffs’ side against a major defendant and its law firms, you have to have staying power — which is driven by client support, your own psychological toughness and the ability to fund billion-dollar litigation. My firm had the wherewithal to fund it, thank goodness.”

Kopit added: “There were in excess of 20 defendants, all the household names, and they were represented by A-list law firms in New York and elsewhere. No stone goes unturned and you have to respond in kind.”

Asked what lessons the AIG settlement might hold, Dubbs said, “I think you have to understand the financial and political position of the company [you're suing] and try to fashion a settlement structure that fits. You want to be able to settle in a currency they can pay.”

As it turns out, most of the money will come from the sale of securities. The settlement calls for only about $175 million to be paid in cash; the remaining $550 million will come from the future sale of AIG stock. It’s more likely there will be proceeds to pay the settlement with AIG trading at around $38 — two years ago, shares were priced at less than $1.

Dan Kramer of New York’s Paul, Weiss, Rifkind, Wharton & Garrison, who represented AIG, said he couldn’t discuss the case in detail but credited Dubbs as “a tough advocate and a persistent litigator.”

Asked whether the crash contributed to AIG’s desire to settle, Kopit said that it certainly did. “You had a major financial collapse. AIG and the government had a lot on their plate — their first order of business was to bring some stability to the market.”

He agreed with Dubbs that he had never seen anything like the confluence of events that led to the AIG settlement. “It’s seldom the case that the opposing party is actually at ground zero of a financial collapse. We weren’t just litigating against some institution that was related to it — this was the company at the center of all these issues.”

Kopit praised Dubbs as a team player.

“It was the first time I had worked with Tom,” Kopit said. “He’s an incredibly bright guy, and was very collaborative in strategy and in moving the case forward.”

Richard Acello is a freelance reporter in San Diego.