On September 22, 2008, the United States took a 79.9% equity interest in AIG - contemporaneously valued by the United States and AIG at $23 billion - without paying just compensation to AIG's common shareholders. As a result, the existing common shareholders went from owning 100% of the Company to owning 20.1%.
At the same time, the United States extended an $85 billion line of credit to AIG. That loan was fully secured by all of AIG's assets and initially cost over 14% in interest and fees. Under the applicable statute, Section 13(3) of the Federal Reserve Act, the United States was only entitled to collect a reasonable rate of interest1 and fully secure its loan; at the relevant time, neither the Federal Reserve nor the Treasury Department could own equity in a private company.2 In an attempt to avoid that prohibition, the United States created a trust to hold the equity; the judge presiding over this action characterized the trust as an attempt ''to circumvent" those prohibitions and said that there appeared to be "no meaningful distinction" between ownership by the United States or by the trust.
AIG fully repaid the loan, which was always fully secured, but the United States nevertheless kept the 79.9% equity interest.3 The United States reported that it made a $22.7 billion profit on the loan and its other financial dealings with AIG between the Fall of 2008 and the end of 2012.
On November 21, 2011, Starr International, which had owned 11% of the common stock of AIG prior to the Government's taking, commenced an action in the United States Court of Federal Claims on behalf of a class of AIG shareholders, alleging that the Government's taking and/or illegal exaction of that 79.9% interest without just compensation violated the Fifth Amendment of the United States Constitution. Starr also claims that the United States used the control it acquired over AIG on September 16, 2008, when it made a $14 billion loan to AIG under a short-term demand note, to install its own management in AIG, impose the terms of the taking on AIG, and otherwise operate AIG to serve the interests of the Government and AIG's counterparties to the detriment of AIG and its common shareholders. Starr separately claims that the Government used this control to cause a misleading and coercive vote on a reverse stock split of AIG's stock on June 30, 2009 that permitted the Government to circumvent AIG shareholders' right to block the United States from exchanging its AIG preferred stock for more liquid (and thus more valuable) AIG common stock. Starr will also prove at trial that none of the many other financial institutions that were suffering from a liquidity shortage in 2008 received financial assistance from the United States on terms that remotely approached the terms that were imposed on AIG and its common shareholders.
Judge Thomas Wheeler, to whom the action has been assigned, has denied multiple attempts by the United States to dismiss Starr's claims, certified a class of over 275,000 AIG common shareholders, and set September 29, 2014 as the date to commence a six-week bench trial. Lead trial counsel will be David Boies of Boies, Schiller & Flexner LLP; Skadden, Arps, Slate, Meagher & Flom LLP is acting as co-counsel in the action. Starr's damages expert (Deputy Dean S.P. Kothari of MIT) has opined that AIG's common shareholders suffered damages of over $40 billion ($35.4 billion on the takings claim and $4.67 billion on the reverse stock split claim), plus pre-judgment interest.
Copyright © 2014 Starr Companies. All rights reserved.
Starr International Co., Inc.
v. The United States
Class Action Lawsuit: Boies, Schiller & Flexner for Starr
1 The Federal Reserve discount rate at the time was 3% or less.
2 One of the reasons the United States’ motion to dismiss this action was denied was that Section 13(3) does not
authorize a Federal Reserve bank to demand stock in a corporation in return for a loan.
3 In denying the United States' motion to dismiss, the federal judge presiding over this action rejected the Government's claim that the equity interest was "security" for the extension of credit and stated that he would treat the acquisition of the 79.9% equity interest as a purchase for $500,000 in loan forgiveness to AIG.