American International Group, the government supported insurance and financial services company, has agreed to pay $725 million to settle a securities class-action lawsuit with three Ohio public pension funds.
The settlement, announced last Friday but approved by AIG last Wednesday, resolves allegations of AIG’s wide-ranging fraud from October 1999 to April 2005 involving anti-competitive market division, accounting violations and stock price manipulation, and brings total expected recovery for AIG shareholders to over $1 billion. The settlement is subject to court approval.
“This historic settlement is an excellent result for all shareholders harmed by AIG’s misconduct, including Ohio’s teachers, firefighters, police officers, and public employees," said Ohio Attorney General Richard Cordray in a statement. "Ohio is determined to send a strong message to the marketplace that companies who don’t play by the rules will pay a steep price.”
Three Ohio public pension funds, represented by the Attorney General, led the class action suit: the Ohio Public Employees Retirement System, the State Teachers Retirement System of Ohio, and the Ohio Police and Fire Pension Fund.
Taken together, recovery for AIG shareholders in this case is expected to be $1.0095 billion, Cordray said. It is the tenth-largest securities class action settlement in U.S. history, and the first and only billion-dollar class action settlement since the financial crisis began to unfold in 2008.
As part of the total case involving AIG, the Ohio Funds and the Ohio Attorney General’s Office previously announced a $72 million settlement with General Reinsurance Corporation, a $97.5 million settlement with PricewaterhouseCoopers LLP and a $115 million settlement with AIG’s former CEO Maurice R. "Hank" Greenberg and other former AIG executives (Howard I. Smith, Christian M. Milton and Michael J. Castelli) and related corporate entities (C.V. Starr & Co., Inc. and Starr International Co., Inc.).
AIG has agreed to pay $725 million to the shareholder class in the primary settlement. An initial payment of $175 million will be payable after entry of a court order granting preliminary approval of the settlement. The remaining $550 million may be funded by AIG through one or more common stock offerings. If AIG does not fund the $550 million before court approval of the settlement, the plaintiffs may terminate the agreement, elect to acquire freely transferable shares of AIG common stock with a market value of $550 million provided AIG is able to obtain all necessary approvals, or extend the period for AIG to complete a stock offering in order to fund the remainder of the settlement.
In the case, the pension funds and the Attorney General accused AIG of engaging in accounting fraud, culminating in a $3.9 billion restatement in May 2005 that included numerous different types of transactions, including allegations relating to a $500 million no-risk fraudulent reinsurance transaction that AIG entered into with General Reinsurance Corp. in order to artificially boost AIG's reported claims reserves. One AIG executive and four Gen Re executives were found guilty of securities fraud in relation to that transaction.
AIG also was accused of paying tens of millions of dollars in undisclosed contingent commissions to insurance brokers and participated in a bid-rigging scheme with insurance brokers and certain insurance companies in order to divide the market for certain types of insurance. The suit also accused AIG of engaging in straightforward stock price manipulation, in which company executives ordered company traders to inflate the company’s stock price.
Last Wednesday, on the day that AIG approved the settlement, chairman Harvey Golub stepped down, citing an “ineffective and unsustainable” working relationship with CEO Robert Benmosche. He is succeeded by Robert S. Miller.
“At this point, I view asking the board to choose between us would be an abdication of my responsibility to lead,” he wrote in his resignation letter. “Consequently, I’m resigning for the simple reason I believe it is easier to replace a chairman than a CEO — particularly a company in the midst of two major activities: (1) a major corporate restructuring, and (2) development of an exit plan from government control, both of which involve executing a long list of difficult tasks.” The company is nearly 80 percent owned by the federal government.