WASHINGTON (CN) – In a federal class action, investors say AIG Group rolled them for more than $5 billion at the height of the financial crisis by selling “equity units” whose value AIG then deflated by 95 percent, to reinflate the price of its own stock.
Lead plaintiff Kathryn Lynn Campbell sued American International Group, its CEO R.H. Benmosche and the other 13 members of its Board of Directors.
Campbell claims the “equity units” were designed to fail so AIG’s regular stock could be inflated.
The complaint states: “In January 1987, defendant established its infamous AIG Financial Products unit. Permeated by ‘recklessness and greed,’ the Financial Products Division manufactured ‘immensely profitable’ and ‘deceptive’ financial products that eventually poisoned the entire global financial system resulting in a taxpayer funded ‘massive bailout’ of AIG in 2008 to the tune of 182 billion
dollars! ‘AIG’s Financial Products Unit finally died the week of August 6, 2011. It was 24.'”
(In a footnote, apparently to explain the source of the apparent quotations, the complaint states: “Defendant has a long history of unrelenting dishonest business practices. See, inter alia, In re American International Group, Inc., 965 A.2d 763 (Del. Ch., 2009).”)
The complaint continues: “Aware of the impending financial crises its reckless and deceptive activities are about to unleash, AIG embarked upon a 20 billion dollars capital raising effort in May 2008. Among the devices it concocted to raise new capital was the issuance of what it called AIG Equity Units.
“The Equity Units were offered in what defendant called ‘Prospectus Supplement’ dated May 12, 2008. It asserted that the subject prospectus was a supplement to the ‘Prospectus dated July 13, 2007’. But, as set forth below, the Equity Units are original issue securities and had nothing alike to supplement.
“The Prospectus for the Equity Units was in accord with the infamous tradition of
AIG’s Financial Products Division for devising complex and dishonest financial instruments devoid of good faith and fair dealing, permeated by deliberately confusing formulas set forth in the context of its specialized knowledge and expertise, and further imbued in bad faith. Thus, the Prospectus consisted of two-hundred-and-five (205) pages – all in fine print; all in 10 point pitch!” (Citations to exhibits omitted.)
The class claims AIG “used multiple confusing nomenclatures to refer to the Equity Units.”
The class claims the pitch was deliberately confusing, and set the stage for AIG to score $5.8 billion by selling more than 72 million units at $75 a pop.
“The defendants knew and had every reason to know that the terms they concocted in language inclusive of sentences where a single sentence alone contains 153 words is far beyond even the reading comprehension of ‘public investors’ as well as the public at large,” the complaint states. “They did so in complete abnegation of their statutory good-faith duty to ensure that prospectuses provided to the investing public should be in simple, plain language and structure to avert misapprehension, confusion and loss.”
The class claims that while AIG was pushing the poisoned equity units on investors for $75 a share, it also sold the units to “the ‘Who’s Who’ of Wall Street titans” to spread them throughout the investment community. These underwriters, which included Citigroup, JP Morgan and Bank of America, bought the units from AIG at the bargain price of $1.31 a unit: “a 98.25% discount on the issue price of the units!” according to the complaint.
“The defendants never intended to fulfill their afore-going commitments to the Equity Units holders,” the complaint states. “In such order, they permeated the 205-page, all in fine print, Prospectus with incomprehensible formulas to camouflage their bad faith intent to abnegate their commitments as to the exchange value of the Equity Units.”
Once members of the class held the equity units, AIG “embarked upon distinct and specific measures designed to eradicate their commitments and convert and divert the returns due the EU holders to themselves,” the complaint states.
“Defendants simply chose the Equity Unit holders – who churned in $5.88 billion dollars – as immaterial to any decision they voluntarily engaged in exclusively in their self-interest and gain. Hence, Equity Unit holders whose settlement or exchange rates was wiped out by more than 95 percent purportedly because of the so-called 20-for 1 reverse split were simply ignored when defendants re-inflated the outstanding shares by over 1.8 billion shares!” according to the complaint.
The class claims their Equity Units were mandatorily converted into shares on three dates: Feb. 15, 2011; May 1, 2011; and Aug. 1, 2011.
They seek punitive damages for unjust enrichment, and breach of faith and fair dealing, and want their equity units converted into stock at a fair rate.
The class is represented by Wendu Mekbib of Vienna, Va.