AIG Allegedly Undervalued its Subsidiaries in its Bailout Agreements

A former human resources director of American International Group, Inc. (“AIG”) has asked a New York federal judge for permission to amend his False Claims Act complaint against the multinational insurance company, alleging that it defrauded the federal government in connection with the restructuring of the debt that it owed as a result of the bailout. Relator Alex Grabcheski claims that, as a result of AIG’s misrepresentations, the interests in American Life Insurance Co. (“ALICO”) and American International Assurance Limited (“AIA”) that the government acquired were allegedly worth at least $100 million less than what the government had “paid” for them in debt reduction. The amount of debt reduction was based on the valuations of the two subsidiaries, and the valuations were inflated because they were based on the assumption that the facts regarding ALICO and AIA’s business and operations were accurate.

From 2003 to 2007, AIG earned billions of dollars selling credit-default swap derivatives for the default risk on subprime mortgages. AIG’s financial products division entered into credit default swaps to insure $441 billion worth of securities originally rated AAA. Of those, $57.8 billion were structured debt securities backed by subprime loans, all of which proved to be almost worthless. The division was later negatively described as a hedge fund attached to a large, stable insurance company. In September 2008 the Federal Reserve Bank created a two-year, $85 billion credit facility loan to enable AIG to meet its obligations in exchange for approximately 80% of AIG’s equity. Similarly, the Federal Reserve Bank of New York (“FRBNY”) provided AIG with a revolving credit facility of up to $60 billion for a five-year period.

In the summer of 2009, AIG entered into two agreements with the FRBNY. The agreements provided that AIG would give FRBNY an interest in two of its wholly-owned subsidiaries, ALICO and AIA, in exchange for a reduction in the amount of the debt that AIG owed the FRBNY. Together, both agreements provided for a reduction of AIG’s indebtedness by $25 billion. The agreements included representations and warranties regarding ALICO and AIA’s operations, including: (1) that their liabilities were accurately reflected in their financial statements, (2) that they had all necessary licenses, (3) that they were in compliance with all relevant laws, and (4) that they had filed accurate tax returns and paid all taxes that were owed. Such representations, however, were allegedly false, in part because ALICO and AIA were engaged in an insurance business in New York despite not being licensed there. ALICO and AIA were thus not in compliance with all relevant laws, and their financial statements were not accurate in terms of their accounting for the potential liabilities resulting from the unlicensed insurance activities.

The proposed third amended complaint consists entirely of factual details of the sort that AIG claimed were missing from the second amended complaint. More specifically, it identifies the provisions of New York law that ALICO and AIA violated, and provides additional detail supporting the allegation that their conduct violated New York law. It also clarifies that ALICO’s violation of Delaware law consisted, not of lacking a Delaware insurance license, but of improperly taking advantage of regulatory exemptions that were available only to insurers that did not transact insurance business anywhere in the United States. The complaint further identifies provisions of California, Colorado, Illinois, and North Carolina law that ALICO and AIA violated by engaging in unlicensed insurance activity in those states.

Grabcheski is also arguing that his claims are not subject to the False Claims Act’s public disclosure bar. While the debt reduction agreements themselves were presumably in the public domain, Grabcheski maintains that does not amount to a public disclosure of the fact that the agreements contained misrepresentations by AIG. AIG is citing three media reports (in 2000, 2005, and 2008) as revealing the essential elements of its fraud. As one example, the relator claims that none of the reports AIG relied on disclosed that ALICO and AIA were soliciting insurance business in New York. Although the 2008 press release stated that the group management division was “headquartered” in New York, it did not state that the division solicited insurance business in New York on behalf of ALICO or AIA. In addition, AIG’s 2005 annual report does not mention ALICO or AIA at all, and instead referred to overseas activities without saying anything to suggest that it had any presence in the United States, much less that it was conducting insurance business in New York.