Judge Refuses to Dismiss Securities Fraud Lawsuit Against AIG

A judge refused to dismiss a securities fraud lawsuit accusing American International Group Inc. of misleading investors about its exposure to subprime mortgages, which led to a liquidity crisis and $182.3 billion of federal bailouts.

Monday’s ruling by U.S. District Judge Laura Taylor Swain allows the case to go forward and could pave the way for a trial over AIG’s near collapse. The government rescue led taxpayers to take a nearly 80 percent stake in the New York-based insurer.

AIG spokesman Mark Herr declined to make an immediate comment.

Investors led by the State of Michigan Retirement Systems accused AIG, executives and directors of failing to disclose the risks that AIG had taken on through its portfolio of credit default swaps (CDS) and a securities lending program.

Swain wrote that the allegations in the class-action lawsuit were sufficient to suggest there was “a strong inference of fraudulent intent” in how AIG communicated publicly about the risks in the portfolio of credit default swaps.

She also said that plaintiffs made sufficient arguments to claim that AIG “materially misled the market” in hiding its “expansive” CDS underwriting, repeatedly expressing confidence in its ability to manage risk and justifying a May 2008 capital raising.

Among the defendants are Martin Sullivan, a former AIG chief executive; Joseph Cassano, who ran AIG’s Financial Products unit, which managed the CDS portfolio; current and former directors; 34 banks that underwrote AIG securities, and former accountant PricewaterhouseCoopers LLP.

The lawsuit covers investors who owned AIG securities between March 16, 2006, and Sept. 16, 2008, when AIG received its first bailout.

E. Powell Miller, a lawyer for the lead plaintiff, declined to make an immediate comment, saying he had yet to confer with his client.

Brad Karp, a lawyer for the banks, declined to make an immediate comment. James Gamble, a lawyer for the outside directors, declined to comment. Lawyers for Sullivan, Cassano and PwC did not immediately return calls seeking a comment.

Shares of AIG rose $1.67, or 4.6 percent, to $38.14 in afternoon trading on the New York Stock Exchange.

The case is In re: American International Group Inc 2008 Securities Litigation, U.S. District Court, Southern District of New York, No. 08-05072.

(Reporting by Jonathan Stempel; Editing by Maureen Bavdek and Steve Orlofsky)