American International Group, Inc., Consolidated Derivative Litigation; AIG, Inc. v. Greenberg, et al., 2009 Del. Ch. LEXIS 15 (Feb. 10, 2009)("AIG I") 965 A.2d 763 (Del. Ch. 2009), read opinion here.

This Chancery Court decision denied a Motion to Dismiss breach of fiduciary duty claims against former AIG Chairman Maurice "Hank" Greenberg and other AIG directors in connection with the long list of claims relating to AIG’s need to restate years of  financial statements, and related losses of billions of dollars in stockholder value. The opinion is 104-pages long in the original slip op.  format  and could easily be the subject of a law review article, but pressing client matters allow me only to identify the decision at this time and add a few highlights.

Notably, the  defendant officers were dismissed on jurisdictional grounds in large part because the claims originated before the Delaware statute was changed to allow jurisdiction in Delaware to be more easily imposed against officers. Also, the auditor, PricewaterhouseCoopers, was dismissed based on the application of New York law (in light of the substantial relationship test for choice of law), and New York law apparently required dismissal of the claims against them.

The best way to highlight a few aspects of a voluminous opinion like this on a blog is via bullet-points.

  • The court found that the complaint stated breach of loyalty claims against directors for "knowingly tolerating inadequate internal controls and knowingly failing to monitor their subordinates’ compliance with legal duties." [Caremark claim] See footnotes 123 and 124.
  • The court emphasized that the Caremark claim was not based on one instance of fraud, but rather on such a pervasive scheme that the court actually uses the term "criminal organization" to describe the extraordinary wrongdoing alleged in the complaint.  See LEXIS format at *78.
  • Acknowledging the difficulty of pleading a breach of loyalty claim under Caremark based on a duty to monitor, even under Rule 12(b)(6),  the court found that the complaint did  so.  FN 125
  • Key quotes from the opinion about Caremark claims include:
  • "Our Supreme Court has recognized that directors can be liable where they ‘consciously failed to monitor or oversee [the company’s internal controls] thus disabling themselves from being informed of risks or problems requiring their attention.’" FN 126.  And although satisfaction of this standard requires scienter, the pled facts support an inference that Matthews and Tizzio were ‘conscious of the fact that they were not doing their jobs.’" FN 127

  • Caremark claims against Greenberg were upheld because the complaint adequately pled that the AIG internal controls were broken and Greenberg knew they were broken (and could get around them), but failed to do anything to fix the internal controls.

  • Breach of fiduciary duty claims were also upheld against directors alleged to have used insider information to profit at the expense of innocent buyers of stock (i.e., they allegedly sold their stock based on material non-public information about the pervasive fraud.) See FNs 128 to 131

  • arguments were rejected that involved attempts to dismiss contribution and indemnity claims based on ripeness and related theories. See FNs 143 to 145 and Section 6302(c) of Title 10 of the Delaware Code (regarding joint tortfeasor partial settlements).

  • When a "Special Litigation Committee" decides to "take no position" on a derivative suit, that is tantamount to "allowing it to proceed", and also supports demand futility.

  • Equitable tolling may, in some situations, extend the three-year statute of limitations for fiduciary duty claims (FNs 181 to183) such as when a fiduciary uses his fraud to conceal his wrongdoing to prevent others from discovering the liability.

  • Quote: "Many of the worst acts of fiduciary misconduct have involved frauds that personally benefited insiders as an indirect effect of directly inflating the corporation’s stock price by the artificial means of cooking the books." See  LEXIS format of opinion at *122.

UPDATE: Professor Larry Ribstein comments here on this case and the recent Citigroup decision also highlighted on these pages here, which should be read together with this case. Here is another analysis by Professor Ribstein about this case and the Citigroup case on the Harvard  Law School Corporate Governance Forum. Prof. Lawrence Cunningham provides insightful commentary here.

UPDATE II:  In a June 17, 2009 decision in this case,  American International Group, Inc. v. Greenberg, No. 729-VCS (June 17, 2009),  read opinion here, the Chancery Court summarized the above decision from February thusly:

 In an earlier opinion in this action, this court addressed the motions to dismiss brought by PricewaterhouseCoopers and several former-AIG officers and employers.5

In that previous decision, this court held that the Complaint survived dismissal as against challenge by insider defendants Hank Greenberg, Edward Matthews, and Thomas Tizzio and that the Complaint stated well-pled claims of breach of fiduciary duty against those defendants.6  The Complaint also adequately alleged fraud and conspiracy claims against Tizzio. 7

By contrast, this court held that New York law governed the claims against AIG’s auditor, PricewaterhouseCoopers, and that New York law’s approach to the doctrine of in pari delicto barred AIG from recovering against PricewaterhouseCoopers. That holding was driven by the court’s choice of law analysis and did not reflect whether AIG could have maintained such a suit under Delaware law.

Finally, in that decision, this court held that it did not have personal jurisdiction over certain AIG officers and employees who had allegedly engaged in improper behavior before 10 Del. C. § 3114 was broadened to cover certain corporate officers.
Because none of the acts relevant to the illegal conduct pled in the Complaint occurred in Delaware and none of those defendants was a Delaware resident, this court could not exercise jurisdiction over them.

I now address the motions to dismiss brought by the third parties who allegedly conspired with AIG to commit illegal acts. The relevant allegations in the Complaint center on two separate courses of illegal conduct: the Fake Reinsurance Conspiracy and the Bid-Rigging Conspiracy.

5 See generally AIG I, 965 A.2d 763.
6 Id. at 799.
7 Id. at 807