Barrack, Rodos & Bacine served as a Lead Counsel in the securities class action against American International Group, Inc., representing the State of Michigan Retirement Systems (“State of Michigan”), which served as the Court-appointed Lead Plaintiff. The Firm also represented additional named plaintiffs Maine Public Employees Retirement System and the Port Authority of Allegheny County Retirement and Disability Allowance Plan for Employees Represented by Local 85 of the Amalgamated Transit Union. After six years of contentious litigation, the parties settled the case for $970.5 million, one of the largest achieved in an action stemming from the 2008 financial crisis.
American International Group, Inc., better known as AIG, was one of the world’s largest and most prestigious insurance and financial services companies. At the beginning of the class period in 2006, AIG stood as a colossus in the insurance and financial services sector, employing more than 97,000 people, having more than 65 million customers worldwide and writing more than $40 billion in net premiums. By the end of the class period in September 2008, AIG was on the verge of collapse. The company was saved only by an unprecedented $85 billion bailout by the Federal Reserve. AIG became one of the most recognizable near-failures of the Great Recession. In its reporting on the case, The D&O Diary described the AIG class action as “one of the highest profile cases filed as part of the subprime litigation wave.”
The Prosecution of the Case
The class action against AIG was initially filed in May 2008, after AIG reported significant write-downs of securities exposed to the U.S. residential real estate market. In March, 2009, the Court appointed the State of Michigan as the Lead Plaintiff in the case and appointed BR&B as a Lead Counsel. On May 19, 2009, we filed the Consolidated Amended Complaint on behalf of purchasers of AIG common stock, notes and other publicly-traded securities during the period from March 16, 2006 through September 16, 2008, and who suffered damages as a result. The Amended Complaint named as defendants AIG, various company executives and directors, PricewaterhouseCoopers (AIG’s auditor), and the underwriters of 101 public bond, note and stock offerings issued by AIG during the class period. The Amended Complaint was the product of an extensive and thorough investigation that included a review of public filings, books, articles, transcripts of public hearings, analyst reports, and rating agency reports. We hired and consulted with experts in the fields of investment banking, securitization of mortgage loans, accounting and auditing. We also retained an investigator whose personnel identified and interviewed a number of witnesses with first-hand knowledge of the events leading to the collapse of AIG.
The allegations in the 284-page Amended Complaint related primarily to financial products called credit default swaps, or CDSs, issued by a small unit at AIG called AIG Financial Products, or AIGFP. The Amended Complaint alleged that, while defendants repeatedly assured the market that there would not be losses on this CDS portfolio, certain of the defendants knew or were reckless in not knowing that the risks inherent in this portfolio were massive – exposing AIG to billions of dollars in potential losses on its balance sheet or requiring the company to post tens of billions of dollars of collateral – and could cripple the entire company. The Amended Complaint also alleged that AIG’s disclosures concerning the cash collateral it received from its securities lending program violated the federal securities laws. The Amended Complaint alleged that AIG invested the cash collateral from securities lending in the same types of risky residential mortgage-backed securities (RMBS) as AIGFP, thereby practically doubling AIG’s exposure to this risky sector.
Following extensive briefing, on September 27, 2010, the Court upheld the allegations in the Amended Complaint, rejecting the arguments raised by each group of defendants. The Court found the Amended Complaint sufficiently pleaded material misrepresentations and omissions on the part of AIG, particularly with respect to the company’s exposure through its CDS portfolio to subprime mortgages. The Court held that “generic risk disclosures [were] inadequate to shield defendants from liability for failing to disclose known specific risks” and that the “various general disclosures cited by [the defendants] were insufficient to fulfill defendants’ disclosure obligations.” Judge Swain further found the allegations gave rise to a strong inference of fraudulent intent, adding that “no opposing inference [was] more compelling.” The defendants filed answers to the Amended Complaint in November and December, 2010.
Fact discovery commenced in November 2010 and was substantially complete by June 2012. Document discovery in this case was enormous. In order to gather the documents necessary to prove the allegations, we established document production protocols and issued subpoenas to third parties. To review the documents, we worked with an electronic discovery vendor to create a database to search and review all documents and also entered into an Electronic Discovery Stipulation and Order that governed the technical requirements of the production. In all, we reviewed over 36 million pages of documents during the course of the case. In addition to the typical documents produced in a securities case – Word documents, emails and spreadsheets – the defendants also produced extremely complex financial transactional documents as well as a large number of telephone recordings. These documents formed the back-bone of our deposition program. We prepared for and took 45 fact witness depositions, including witnesses from the company, former employees, PwC witnesses, underwriter witnesses and third-party witnesses. Among the Company witnesses were personnel from AIGFP, AIG Investments, AIG Enterprise Risk Management, AIG Investor Relations, the Board of Directors, and corporate management.
On April 1, 2011, Lead Plaintiff moved for class certification. One month later, the Court terminated the motion without prejudice to renew the filing in light of the potential relevancy of the Erica P. John Fund, Inc. v. Halliburton (“Halliburton I”) case pending in the United States Supreme Court. Halliburton I raised the issue of whether a plaintiff needed to prove a causal relationship between the alleged false statements and the losses of the class in order for the case to proceed as a class action. After the Supreme Court ruled that loss causation did not need to be proven in order to obtain class certification, Lead Plaintiff renewed the class certification motion on July 6, 2011. The parties thereafter engaged in extensive discovery on the class certification motion. We assisted our three institutional investor clients in producing documents and worked with 26 investment advisors and custodians of investment records to produce documents. The parties retained a total of six experts in connection with class certification, each of whom submitted a declaration. Certain experts also submitted reply declarations. Each of the experts was deposed, as were 11 other non-expert class related witnesses. Thereafter, from April 29, 2013 through May 1, 2013, the Court held an evidentiary hearing in connection with Lead Plaintiff’s motion for class certification and AIG’s motion to preclude the declarations, testimony and opinions of our expert. The principal focus of the hearing concerned whether there was an efficient market for AIG securities during the class period, such that plaintiffs should be entitled to a presumption of reliance under the “fraud-on-the-market” doctrine that is necessary to certify a class in a case asserting claims under Section 10(b) of the Securities Exchange Act of 1934. At the hearing, Lead Counsel presented the testimony of plaintiffs’ financial economics expert and cross-examined two of defendants’ experts. The Court did not rule on the motion at the conclusion of the hearing and took the matter under advisement.
After the class certification hearing, the case continued to be vigorously litigated. The parties engaged in motion practice over a number of additional issues. These included a motion for judgment on the pleadings by certain defendants following a new decision by the Second Circuit concerning the requirements for pleading falsity in regard to statements of opinion and a motion that we filed to compel certain risk management records from AIG.
On November 15, 2013, the United States Supreme Court granted certiorari in Halliburton Co. v. Erica P. John Fund, Inc. (“Halliburton II”), in which the Supreme Court agreed to consider the viability of the fraud-on-the-market presumption of reliance. On January 30, 2014, Judge Swain ordered a stay of the AIG class action in light of the pendency of Halliburton II. Given the centrality of the Halliburton II appeal to one of the main points of contention on the class certification motion, Barrack, Rodos & Bacine participated in the appeal by working with a Duke University School of Law professor to prepare and file with the Supreme Court an amicus curiae brief on behalf of fourteen renowned financial economists, including Nobel Laureate Eugene Fama. The brief explained that the premise underlying the fraud-on-the market doctrine – that market prices respond to new, material information in well-developed markets – remained valid and that, accordingly, the Supreme Court should not overturn its prior precedent endorsing the doctrine. On June 23, 2014, in a decision that cited favorably to the financial economists’ amicus curiae brief, the Supreme Court decided Halliburton II, sustaining the fraud-on-the-market doctrine. Several weeks later, the parties submitted letters to the Court concerning their views of the impact of the Halliburton II decision.
The Settlements Achieved
In July 2012, the parties participated in a mediation supervised by Layn Phillips, a retired U.S. District Court Judge. Efforts to resolve the case continued until the Supreme Court announced on November 15, 2013, that it would consider the Halliburton II appeal, and were later revived after the issuance by the Supreme Court of the Halliburton II decision. In September 2014, the parties entered into an agreement to settle the case for $970.5 million. AIG paid $960 million of this amount and PricewaterhouseCoopers, which had served as AIG’s outside auditor during the class period, paid $10.5 million. The combined amount is one of the largest achieved in an action stemming from the 2008 financial crisis. Moreover, the settlement amount achieved in this case was and continues to stand as the largest settlement in a securities class action lawsuit in the absence of a criminal indictment, an SEC enforcement action, or a restatement of a company’s financial records.
In approving the settlement at a hearing in March 2015, Judge Swain observed that not a single class member had objected to the settlement, which she found to be an “outstanding result obtained on behalf of the settlement class.”
On October 31, 2016, the State of Michigan filed a motion to conduct an initial distribution of the settlement fund. On January 30, 2017, Judge Swain granted the motion and entered an order directing the distribution of the net settlement fund. The order approved the determinations made by the court-appointed claims administrator, Gilardi & Co. LLC, concerning the claim forms submitted by Settlement Class Members, and directed that an initial distribution of the net settlement fund be made to valid claimants who met the $10 minimum payment requirement and based on their pro rata share of the fund. The order directed that Gilardi to distribute approximately 80% of the net settlement fund in an initial distribution, holding back the remainder for a second distribution that is expected to take place later in the year. Claimants receiving total payments of less than $100 received the full payment amounts in the initial distribution, and will not be receiving an additional payment in the second distribution.
The initial distribution of the net settlement fund was completed during the first week of April 2017. The distribution agent for the settlement mailed out 275,254 checks to claimants with valid claims approved by the Court and with distribution amounts that reached or exceeded the $10 minimum payment provision of the Notice that had been provided to Class Members. The total amount distributed was $676,167,077.78. Class Members who received settlement distribution checks are encouraged to cash them promptly.