AIG has agreed to pay $960 million to settle the consolidated securities class action lawsuit that had been filed against the company and certain of its directors and officers in the wake of the company’s near collapse at the peak of the credit crisis. The settlement, which AIG disclosed in its August 4, 2014 filing on Form 10-Q (here, see footnote 10 to the financial statements), is one of the largest to arise out of the wave of litigation that followed the global financial crisis. While other credit crisis related lawsuits remain pending, this settlement may represent just about the last of the major credit crisis-related securities lawsuits to be resolved. The settlement is subject to court approval
In the plaintiffs’ lawyers’ August 4, 2014 press release about the settlement (here) the amount of the “settlements” in the case are described as “totaling $970.5 million.” According to a statement by one of the plaintiffs’ lawyers quoted in Law 360’s August 4, 2014 article about the settlement (here, subscription required), the additional amount above the $960 million to be paid by AIG represents a payment from a defendant (not identified in the article) against whom the plaintiffs’ claims had already been dismissed.
As discussed here, the consolidated AIG litigation has a long history going all the way back to May 2008, when the first of the lawsuits were filed. After the company’s near collapse and massive government bailout in September 2008, the company’s share price plummeted and further securities class action litigation ensued. In their consolidated amended complaint (here), the plaintiffs alleged 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.
As discussed here, on September 27, 2010, Southern District of New York Judge Laura Taylor Swain denied the defendants’ motions to dismiss. 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.”
According to AIG’s recent 10-Q, further proceedings followed after Judge Swain’s ruling on the motion to dismiss. The case had been stayed earlier this year at the parties request during the pendency of the Supreme Court’s reconsideration of the fraud on the market theory and class certification issues in the Halliburton case.
The 10-Q also states that on July 15, 2014, the parties accepted a mediator’s proposal to settle the consolidated litigation for a cash payment by AIG of $960 million. The plaintiffs’ lawyers’ press release states that the mediation process had been spread over a period of two years.
According to the company’s SEC filing, the amount of AIG’s settlement contribution “has been accrued.” Neither the SEC filing nor the plaintiffs’ lawyers’ press release makes any mention of a contribution to the settlement by AIG’s insurers or, for that matter, by any other named defendant. There are as yet no filings related to the settlement available on the electronic court docket.
A settlement of $970.5 million obviously is massive, but it is still not large enough to crack the Top Ten list of all-time largest securities class action settlements. As reflected on the Stanford Law School Securities Class Action Lawsuit Clearinghouse list of the Top Ten securities class action settlements (here), a settlement would have to exceed $1.1 billion to crack the Top Ten list.
The plaintiffs’ lawyers’ press release does assert that ““the proposed securities class action settlement is one of the largest ever achieved in the absence of a criminal indictment or an SEC enforcement action.”
The $970.5 million is, in any event, one of the largest settlements to arise out of the wave of securities litigation that followed in the wake of the global financial crisis. By my reckoning, this settlement is exceeded among credit crisis-related securities suit settlements only by the $2.43 billion BofA/Merrill Lynch securities suit settlement (about which refer here). This latest AIG securities suit settlements far exceeds the other credit crisis-related securities suit settlements, including the $730 million Citigroup bondholders’ action settlement (about which refer here), the $627 million Wachovia Preferred Securities and Bondholder action settlement (refer here) and the $624 Countrywide securities suit settlement (here).
There is of course further credit crisis-related securities litigation that remains pending. However, with the settlement of the consolidated AIG securities litigation, all or almost all of the highest-profile securities suits to arise out of the credit crisis have now been resolved. Or at least it seems unlikely that there will be many further settlements of securities suits from that era that would rival the size of the largest credit crisis-related settlements.