Delaware Chancery Court Judge Leo Strine threw out AIG shareholders’ claims that officials at General Re, insurer ACE Ltd. and insurance broker Marsh & McLennan Cos. conspired with Greenberg to manipulate AIG's finances. The judge ruled in February that Greenberg and other former AIG executives could be sued over the allegations of financial misconduct.
Strine concluded yesterday that because officials at New York-based AIG allegedly engaged in fraudulent transactions with rivals, AIG investors couldn’t seek to recover from the other insurers.
Shareholders incorrectly sought to have each company’s role in the conspiracies scrutinized, so that each “gets no more or less than its just share of the unjust desserts of its illegal conduct,” Strine wrote in a 38-page decision. Established legal doctrines bar investors from recovering from third parties for their company’s own wrongdoing, the judge said.
Al Modugno, a spokesman for Marsh & McLennan, declined to comment on Strine’s ruling today. Marc Hamburg, a spokesman for Omaha, Nebraska-based Berkshire, didn’t immediately return calls for comment.
$182.5 Billion
ACE, based in Bermuda, doesn’t comment on litigation, spokesman Stephen Wasdick said in a statement. Stuart Grant, a Wilmington, Delaware-based lawyer representing AIG shareholders, didn’t immediately return a call for comment on the decision.
In the Delaware case, AIG shareholders allege Greenberg and three lieutenants engaged in financial manipulations to inflate the company’s share price. Investors sued Edward Matthews, former vice chairman; Thomas Tizzio, a former director; and Howard Smith, the former chief financial officer, along with Greenberg. All have left the company.
Strine noted in his February opinion that AIG has had to pay more than $1.6 billion in fines over financial restatements that reduced stockholder equity by $3.5 billion.
Bid-Rigging
Among shareholders’ claims are that Greenberg and other former executives conspired with Marsh & McLennan and ACE officials to rig bids for insurance contracts.
The big-rigging allegations, first raised in 2004 by then- New York Attorney General Eliot Spitzer, involved “an unlawful scheme to fix prices and to rig bids in the municipal derivatives market,” according to papers filed in 2005.
Investors also claim General Re officials helped AIG set up fake reinsurance contracts that allowed AIG to add $500 million in loss reserves, a key indicator of an insurer’s financial health.
In December, a federal judge in Connecticut sentenced ex- General Re CEO Ronald Ferguson to two years in prison for his role in the sham transactions. Ferguson, 66, was the highest- ranking of five executives convicted of fraud in connection with AIG deals.
In the Delaware case, investors told Strine that AIG’s co-conspirators shouldn’t get a pass because of the wrongful actions of a few AIG executives.
‘Off the Hook’
“I don’t see any reason to let these guys off the hook,” Grant told Strine in his argument.
Lawyers for General Re, ACE and Marsh & McLennan countered that since no company had clean hands in the case, the law only allowed AIG investors to recover for AIG officials’ wrongdoing.
“ACE and Marsh didn’t cause AIG to do anything,” James Brandon, a lawyer for those companies, told Strine at the hearing. Neither firm held “a gun to AIG’s head.”
Strine said long-standing legal doctrines make it clear investors can’t hold third parties responsible when executives of their own company are involved in wrongdoing.
Allowing shareholders to do so would force judges to make a “determination of who won or lost from a criminal conspiracy, a determination fraught with uncertainty,” the judge said.
Greenberg, 84, currently is facing claims in federal court in New York that he looted an AIG retirement plan after he was ousted as CEO in 2005 amid an accounting scandal. Jurors will decide whether Greenberg’s Starr International Co. wrongfully converted more than $4 billion in AIG shares to its own use.
Greenberg, Matthews, Smith and Tizzio previously agreed to pay $115 million to resolve claims they caused AIG to overpay a firm they controlled to reap bonuses and fees.