In one of the biggest and most closely watched cases coming out the global financial crisis, Maurice “Hank” Greenberg and Starr International challenged the United States Government’s financial rescue of American International Group, Inc. (“AIG”) that began in September 2008. Plaintiffs asserted both Fifth Amendment taking and illegal exaction claims on behalf of two classes of AIG shareholders: (1) a Credit Agreement Class comprised of AIG shareholders who held common stock during September 16-22, 2008 when the Government received the right to 79.9 percent ownership of AIG in exchange for an $85 billion loan; and (2) a Reverse Stock Split Class comprised of AIG shareholders who held common stock on June 30, 2009 when the board of AIG proposed a twenty-for-one reverse stock split that reduced the number of AIG’s issued shares, but left the number of authorized shares unchanged. Plaintiffs sought approximately $40 billion in damages ($35.4 billion for the Credit Agreement Class and $4.7 billion for the Reverse Stock Split Class). The Court found for Plaintiffs on their illegal exaction claim, but concluded that AIG shareholders were not damaged because AIG would have filed for bankruptcy but for the Government’s intervention, leaving AIG shareholders with worthless shares. The Court denied Starr’s reverse stock split claim in its entirety, concluding that the motivation for the split was to ensure the continued listing of AIG stock on the New York Stock Exchange, and that contrary to plaintiffs’ claim, there was no evidence that the reverse stock split was designed to allow the Government’s preferred shares to be exchanged for common shares.
Compass Lexecon was retained as experts early in the case and also supported two testifying experts, NYU Courant Institute for Mathematical Sciences Visiting Scholar and Adjunct Professor David K.A. Mordecai and Stanford Law School Professor and Compass Lexecon Affiliate Robert Daines, both of whom submitted reports and testified at deposition and trial.
Dr. Mordecai opined, among other things, that AIG’s shareholders did not suffer an economic loss from the Government’s rescue and that Plaintiffs’ expert’s damage calculations were fundamentally flawed because AIG’s stock price actually increased as a result of the rescue. He also opined that, based on a study of large bankruptcies, it was unlikely that AIG’s shareholders would recover anything if the company had filed for bankruptcy protection. This study was cited prominently by Court of Claims Judge Thomas C. Wheeler in concluding that zero damages should be awarded to Plaintiffs despite prevailing on their illegal exaction claim: “In the end, the Achilles’ heel of Starr’s case is that, if not for the Government’s intervention, AIG would have filed for bankruptcy. In a bankruptcy proceeding, AIG’s shareholders would most likely have lost 100 percent of their stock value. DX 2615 ([Dr. Mordecai’s] chart showing that equity claimants typically have recovered zero in large U.S. bankruptcies).”
Professor Daines opined, among other things, that Plaintiffs’ expert’s analysis of the reverse stock split was fundamentally flawed because the primary purpose of the reverse stock split was to increase AIG’s trading price and thus avoid delisting, many other companies also conducted reverse stock splits that did not reduce the number of authorized shares, and common shareholders (some of whom were the lead plaintiffs) voted for the reverse stock split. The Court agreed, concluding that the “motivation for the reverse stock split was to assure the continued listing of AIG stock on the NYSE,” and accordingly denied Starr’s reverse stock split claim entirely.
Compass Lexecon worked closely with attorneys at the United States Department of Justice including Kenneth Dintzer, Scott Austin, Brian Mizoguchi, John Roberson, Mariana Acevedo, Renee Gerber and Vince Phillips; John Sturc of the U.S. Treasury Department; Kit Wheatley of the Federal Reserve Board of Governors; and outside counsel including John Kiernan and Nick Tompkins of Debevoise & Plimpton LLP and Lynn Earl Busath, Jonathan Martin, Matt Kelly and Alan Tabak of Davis Polk & Wardwell LLP. A Compass Lexecon team led by Peter Clayburgh, Jessica Mandel and David Ross, that included Shawn Chen, Quinn Johnson, Todd Kendall, Michael Kwak, Tim McAnally, James Tam and many others in Compass Lexecon’s Chicago, New York and Pasadena offices provided consulting support to counsel and expert support to Dr. Mordecai and Professor Daines.