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AIG Sues ILFC Co-Founder Alleging Theft of Trade Secrets

Posted on 25 Apr 2012

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Aircraft LeasingAmerican International Group Inc. (AIG) sued Steven Udvar-Házy, co-founder and former chief executive of its aircraft-leasing business, accusing the industry veteran of stealing trade secrets and other confidential information for a rival company he now runs.

AIG and its International Lease Finance Corp. unit Tuesday filed a civil lawsuit in a California state court against Mr. Udvar-Házy, his current company Air Lease Corp., AL -1.09% and various executives of the Los Angeles-based firm who previously worked at ILFC.

The suit alleged that Mr. Udvar-Házy and Air Lease were able "to effectively steal a business," and reap a windfall at the expense of ILFC, the world's second-largest aircraft lessor by fleet size. It described how some employees, while still working at ILFC, downloaded confidential files and allegedly diverted deals with certain ILFC customers to Air Lease, before leaving to join that firm. The companies are in the business of buying aircraft and leasing them to commercial airlines all over the world.

A spokeswoman for Air Lease called the trade-secrets lawsuit from AIG and ILFC "baseless" and said the company "will vigorously contest and defeat" the case. She added that Air Lease has, since its founding in 2010, "experienced terrific success in the marketplace and among investors" under Mr. Udvar-Házy's leadership, and said ILFC has perceived Air Lease as a growing threat.

Mr. Udvar-Házy couldn't be reached for comment.

Mr. Udvar-Házy, 66 years old, co-founded ILFC in 1973 and sold the business to AIG in 1990. He remained CEO of the company until February 2010, when he resigned to run Air Lease, a company he formed shortly before leaving ILFC.

Over a two-year period, Air Lease hired roughly 30 individuals from ILFC and went public on the New York Stock Exchange following a successful stock sale. Air Lease now has a market value of $2.5 billion and its book value, or assets minus liabilities, was $2.2 billion at the end of 2011, versus ILFC's $7.5 billion book value. Mr. Udvar-Házy owns roughly 5% of Air Lease.

AIG, which is 70% owned by the U.S. government, is seeking damages of at least several hundred million dollars, according to the lawsuit. The amount represents a "substantial portion" of the value of Air Lease's business, which was given "a critical head start at the expense of ILFC," the lawsuit alleges. The case isn't related to AIG's plans for an initial public offering for ILFC this year, according to a person familiar with the matter.

The rift between AIG and Mr. Udvar-Házy is rooted in the insurer's 2008 federal bailout, which imposed compensation curbs for top executives and limits on ILFC's ability to buy new planes. From late 2008 through 2009, AIG considered selling many assets, including ILFC, to repay U.S. taxpayers. But after bids for ILFC came in much lower than AIG expected, the company decided against selling the entire business.

It then looked at selling a portion of ILFC's aircraft fleet to raise capital for the debt-laden unit.

Mr. Udvar-Házy had sought to extricate ILFC from its struggling parent and tried to buy all or part of the business by joining with some potential investors. When those efforts were unsuccessful, he resigned and started a new aircraft-leasing company in early 2010 to compete with ILFC.
The lawsuit said Mr. Udvar-Házy "actively recruited" numerous ILFC executives to work for the rival firm while he was still ILFC's CEO, and alleged he breached his fiduciary duty to the AIG unit. The individuals who left ILFC to join Air Lease departed in two waves—one batch in 2010, and another in 2011.

It was after the second group of departures, that an internal investigation at ILFC and forensic computer analyses found that several ILFC employees downloaded thousands of electronic files with information on customer contracts, pricing and marketing strategies over the two years. The lawsuit alleged these were used by Air Lease.

An AIG spokesman said: "We regret having to file this suit, but the defendants' misconduct left us no choice but to go to court to protect our rights and the rights of our shareholders, including our largest shareholder, the American taxpayer."