In a September 27, 2010 order (here), Judge Laura Taylor Swain denied the dismissal motions in the subprime-related securities class action lawsuit pending against AIG, certain of its former directors and officers, its accountant and its offering underwriters. Andrew Longstreth’s September 27 Am Law Litigation Daily article about the decision can be found here.


AIG, of course, was rescued from collapse only by a massive government bailout. Following the bailout, the company’s share price plummeted and securities class action litigation ensued. As discussed in detail here, the plaintiffs allege that the defendants violated the securities laws through various disclosures and omissions related to the company’s securities lending program and its credit default swap portfolio.


Both the credit default swap portfolio and the securities lending program entailed exposures to subprime mortgages. In many instances, the CDSs were placed in connection with securities backed by subprime mortgages. In the securities lending business, the cash received in exchange for the loaned securities was invested in mortgage-backed securities. Additional collateral requirements for these transactions triggered by the subprime mortgage meltdown led to the government bailout. The plaintiffs contend that these exposures were not adequately disclosed. The defendants moved to dismiss.


In her September 27 opinion denying the dismissal motions, Judge Swain held that the plaintiffs’ allegations were "adequate to plead material misrepresentations and omissions on the part of AIG," particularly with respect to the company’s exposure through its CDS portfolio to subprime mortgages.


Judge Swain rejected the defendants’ contention that the allegedly misleading statements were forward-looking statements protected by the bespeaks caution doctrine, observing that "generic risk disclosures are inadequate to shield defendants from liability for failing to disclose known specific risks" and that "statements of opinion and predictions may be actionable if they are worded as guarantees or supported by specific statements of fact." Judge Swain cited in particular the defendants’ alleged failure to disclose a litany "of hard facts critical to appreciating the magnitude of the risks described."


With respect to scienter, Judge Swain, after reciting a list of adverse undisclosed facts and developments allegedly known to defendants, concluded that the plaintiffs had "satisfied their burden of alleging facts giving rise to a strong inference of fraudulent intent," adding that "no opposing inference is more compelling."


Finally, Judge Swain also denied the defendants’ motion to dismiss on loss causation grounds. The defendants had argued that AIG’s stock price decline was "attributable to the decline experienced in the stock market generally, and in the financial services sector specifically." Judge Swain found that "the sharp drop in AIG’s stock price in response to certain corrective disclosures, and the relationship between the risks allegedly concealed and the risks that subsequently materialized, are sufficient to overcome the argument at the pleading stages" – although she added that the defendants ultimately may be able to prove that "some or all" of plaintiffs’ losses are "attributable to forces other than AIG."


Finally, Judge Swain held that the plaintiffs had standing to assert Section 11 claims, and that the Section 11 claims were timely, because, Judge Swain concluded, the plaintiffs were not on "inquiry notice" of possible misrepresentations until the September 2008 bailout. Judge Swain also denied the motions to dismiss the Section 11 claims against the offering underwriter defendants and AIG’s outside auditor.



The AIG lawsuit is one of the highest profile cases filed as part of the subprime litigation wave. Given the magnitude and causes of the company’s losses, its near collapse, and the massive size of the government bailout, it may come as no surprise that this particular case managed to get passed the initial pleading hurdles.


But now that the case is going forward, the question arises of where the case ultimately will lead given the U.S. taxpayer’s stake in the company. Even if the company’s D&O insurance program is not substantially eroded by defense fees alone, the remaining insurance is unlikely to represent a significant percentage of the claimed losses of the plaintiff class. The underwriter defendants and auditor might be expected (at least by plaintiffs) to contribute substantially toward the case resolution, but the banks’ financial health is not what it once was.


All factors considered, especially the political peril associated with a significant taxpayer funded contribution toward settlement, there are certain questions about the ultimate resolution of this case.


The dismissal denial in the AIG case, coming close on the heels of the dismissal motion denial in the Sallie Mae case, does serve as a reminder that there are subprime-related lawsuits that are going to survive the initial motions stage, particularly those involving higher profile companies.


In any event, I have added the AIG opinion to my running tally of subprime and credit crisis lawsuit dismissal motion rulings, which can be accessed here.


Where are the Criminal Prosecutions?: As I noted in a recent post (here), members of Congress are asking why there have been so few criminal prosecutions in the wake of the subprime meltdown. Wayne State Law School Professor Peter Henning has an interesting September 27, 2010 column on the Dealbook blog (here) discussing these issues and presenting his theories on the reasons why there haven’t been more criminal cases.


NYSE Corporate Governance Commission Report: In yesterday’s post, the link to the NYSE Corporate Governance Commission’s report was faulty. I have now corrected the link. Readers who wanted the report but were unable to access it due to the faulty link can refer here for a copy of the report. I apologize for the faulty link (now corrected) in yesterday’s post.