Case 1:12-cv-00523-UA Document 1 Filed 01/20/12 Page 1 of 222 Case 1:12-cv-00523-UA Document 1 Filed 01/20/12 Page 2 of 222 TABLE OF CONTENTS NATURE OF THE ACTION..........................................................................................................2 JURISDICTION AND VENUE....................................................................................................13 PARTIES.......................................................................................................................................14 I. Plaintiffs.................................................................................................................14 II. Defendants.............................................................................................................16 A. AIG............................................................................................................16 B. The Executive Defendants.........................................................................17 BACKGROUND FACTS..............................................................................................................18 I. AIG and the Establishment of AIGFP...................................................................18 II. AIGFP Starts Writing Credit Default Swap Contracts..........................................20 III. AIGFP’s Decision to Stop Writing Credit Default Swaps.....................................27 IV. AIG’s Exposure to the Unhedged Risks of AIGFP’s Credit Default Swaps.....................................................................................................................30 V. AIG Loosens Controls on AIGFP After Greenberg’s Departure...........................33 VI. AIGFP Ignores Valuation Impact as the Subprime Mortgage Crisis Begins to Manifest.................................................................................................36 VII. AIG Is Faced Directly with Valuation Deficiencies Concerning the CDS Portfolio Through Goldman Sachs’ Collateral Demands......................................39 VIII. AIG Is Placed on Further Notice of Valuation Issues Stemming from the Exclusion of Joseph St. Denis from the Valuation Process and His Subsequent Resignation.........................................................................................41 IX. PwC Informs AIG of a Potential Material Weakness in Controls at AIGFP....................................................................................................................45 X. AIG Falsely Reassures Investors at the December 5, 2007 Investor Meeting..................................................................................................................46 i Case 1:12-cv-00523-UA Document 1 Filed 01/20/12 Page 3 of 222 XI. AIG Admits Certain Misstatements Concerning Its Valuation of the CDS Portfolio........................................................................................................48 XII. OTS Letter of March 10, 2008 Advising of Material Weaknesses Due to Lack of Access to AIGFP......................................................................................53 XIII. AIG Reports its First Quarter 2008 Results, Raises Additional Capital and Becomes the Subject of an SEC and DOJ Investigation.................................54 XIV. The Full Extent and Risks of AIG’s Exposure to the Subprime Market in the CDS Portfolio and Through its Securities Lending Program Are Revealed When The Government Is Forced to Provide an $85 Billion Bailout to AIG........................................................................................................57 XV. Further Disclosures Made After the Government Bailout Confirm the Falsity of Defendants’ Purchase Period Statements..............................................61 AIG’S FALSE PORTRAYAL OF ITS FINANCIAL CONDITION AND RISK EXPOSURES.................................................................................................................................77 I. 2005 Financial Results...........................................................................................77 II. 2006 Interim Financial Results..............................................................................87 III. 2006 Financial Results...........................................................................................94 IV. First Quarter 2007 Financial Results and May 31, 2007 Investor Meeting..................................................................................................................99 V. Second Quarter 2007 Financial Results...............................................................101 VI. Third Quarter 2007 Financial Results and December 5, 2007 Investor Meeting................................................................................................................115 VII. February 11, 2008 Form 8-K and 2007 Year-End Results..................................134 VIII. First Quarter 2008 Financial Results...................................................................149 IX. May 20, 2008 Investor Conference......................................................................158 X. Disclosure of Government Investigations and Ouster of Defendant Sullivan................................................................................................................159 ii Case 1:12-cv-00523-UA Document 1 Filed 01/20/12 Page 4 of 222 XI. AIG’s Second Quarter 2008 Financial Results....................................................160 DEFENDANTS’ VIOLATIONS OF GAAP AND SEC RULES...............................................166 FACTS RELEVANT TO THE SCIENTER OF THE SECTION 10(b) DEFENDANTS..........180 I. Additional Facts Establishing the Section 10(b) Defendants’ Scienter..............187 II. Defendants’ Motive to Perpetrate Fraud..............................................................194 LOSS CAUSATION/ECONOMIC LOSS..................................................................................198 APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD ON THE MARKET DOCTRINE...............................................................................................................207 FIRST CLAIM FOR RELIEF For Violations of Section 10(b) of the Exchange Act and Rule 10b-5 against AIG and the Section 10(b) Defendants..................................................209 SECOND CLAIM FOR RELIEF For Violations of Section 20(a) of the Exchange Act against the Executive Defendants................................................................................................211 THIRD CLAIM FOR RELIEF Common Law Fraud.................................................................215 JURY DEMAND.........................................................................................................................217 iii Case 1:12-cv-00523-UA Document 1 Filed 01/20/12 Page 5 of 222 Plaintiffs, Oppenheimer Equity Fund, Inc.; Oppenheimer Variable Account Funds; Panorama Series Funds, Inc.; Oppenheimer Main Street Fund, Inc.; Oppenheimer Main Street Select Fund f/k/a Oppenheimer Main Street Opportunity Fund; Oppenheimer Rising Dividends Fund f/k/a Oppenheimer Quest Value Fund, Inc. (successor by merger to Oppenheimer Dividend Growth Fund); Oppenheimer Global Allocation Fund f/k/a Oppenheimer Quest Balanced Fund; Oppenheimer Capital Appreciation Fund (successor by merger to Oppenheimer Growth Fund and Oppenheimer Enterprise Fund); Oppenheimer Global Fund; Oppenheimer Global Value Fund; Oppenheimer Equity Income Fund, Inc. f/k/a Oppenheimer Quest Capital Value Fund, Inc.; and OFITC Global Fund., bring this action for violations of the federal securities laws and common law fraud related to the purchase or acquisition of publicly traded securities issued by American International Group, Inc. (“AIG” or the “Company”) from March 16, 2006 through September 16, 2008 (the “Purchase Period”). The allegations in this Complaint are based on Plaintiffs’ personal knowledge, information and belief, and, among other things, public filings by AIG with the United States Securities and Exchange Commission (“SEC”) including, but not limited to, Forms 10-K, 10-Q, 8-K and S-3, Shelf Registration Statements, Registration Statements, Prospectuses and amendments and supplements thereto, press releases, AIG conference call transcripts and presentation materials, media reports about the Company, publicly available data relating to the prices and trading volumes of AIG securities, reports issued by securities analysts who followed AIG, complaints filed in actions against the Company,1 testimony, and statements                                                              1 The allegations in this Complaint are drawn primarily from the Consolidated Class Action Complaint filed in In re American International Group, Inc. 2008 Securities Litigation, Master File No. 08-cv-4772-LTS. Plaintiffs have opted out of the putative class asserted in that action and bring the claims asserted herein in their individual capacities only.   1 Case 1:12-cv-00523-UA Document 1 Filed 01/20/12 Page 6 of 222 and documents submitted to Congressional committees. Plaintiffs believe that substantial, additional evidentiary support for the allegations set forth herein will be obtained after a reasonable opportunity for discovery. NATURE OF THE ACTION 1. AIG was one of the most storied and distinguished companies in the United States and the world prior to and throughout the Purchase Period. 2. Among the roughly 100,000 persons employed by AIG by the end of 2005 were approximately 400 employed at a subsidiary called American International Group Financial Products Corp. (“AIGFP”), which is headquartered in London, England and Wilton, Connecticut. As more fully described below, AIGFP was established in 1987 as a joint venture between AIG and three former employees of the now-defunct Drexel Burnham Lambert investment banking firm. Finding new and different ways to exploit the use and development of financial derivatives, which are essentially contracts used to mitigate the risk of economic loss arising from changes in the value of the underlying assets, AIGFP signed its first significant deal in July 1987, a $1 billion interest rate swap with the Italian government, which was 10 times larger than the typical Wall Street swap deals at the time. The deal brought more than $3 million to the joint venture. Within its first six months, AIGFP had brought in $60 million in revenues. By 1990, it had offices in London and Tokyo, as well as its New York City headquarters (which were thereafter moved to Wilton, Connecticut). 3. In 1993, after a dispute between Greenberg and the other founders of the AIGFP joint venture, AIG terminated the joint venture and established AIGFP as an operating subsidiary of the Company. By 1995, AIGFP had grown into a 125-person operation with annual profits well   2 Case 1:12-cv-00523-UA Document 1 Filed 01/20/12 Page 7 of 222 above $100 million. From 1995 to 1998, its profits more than doubled, from $140 million to $323 million, and its revenues rose from $289 million to $550 million. 4. From its inception to 1998, AIGFP’s deals were finely calibrated through hedging strategies so that the firm would not risk large losses on any transaction. In 1998, however, AIGFP was approached by JP Morgan with a different type of deal—a credit default swap (“CDS”). For a fee, AIGFP would essentially insure a company’s corporate debt in case of default. After working the deal concept through their models, AIGFP determined that the risk was so remote “that the fees were almost free money.” From 1998 until mid-March 2005, AIGFP had entered into approximately 200 CDS contracts. Most of these contracts insured corporate debt. 5. In March 2005, Greenberg was replaced as AIG’s Chief Executive Officer and Chairman by defendant Martin Sullivan, following government investigations into business transactions unrelated to the CDS business. AIGFP underwent several management changes after it became an operating subsidiary of AIG. In 1994, defendant Joseph Cassano was elevated from a back office position within AIGFP to become its Chief Operating Officer. In early 2002, he was named its Chief Executive Officer. By then, AIGFP was a $1 billion operation with 225 employees working on a multitude of derivatives deals for clients, involving hundreds of billions of dollars in obligations. However, in early 2002, with the collapse of Enron, which had systematically abused derivatives as part of its fraudulent corporate accounting, certain derivatives became the focus of regulatory scrutiny and fell out of favor. 6. Around 2004, AIG began writing credit default swaps on collateralized debt obligations (“CDOs”) backed by securities that included mortgage bonds. Known as “multi- sector CDOs,” these complex instruments often packaged together 100 or more securities, each of which was backed by pools of mortgages, auto loans or credit card receivables. After Greenberg’s   3 Case 1:12-cv-00523-UA Document 1 Filed 01/20/12 Page 8 of 222 departure, the number of CDS contracts written by AIGFP increased dramatically. During the nine month period from March through December 2005, AIGFP wrote about 220 CDS contracts, more than the entire amount of CDS deals written during the period from 1998 through mid-March 2005. Many of these CDS contracts were written to insure multi-sector CDOs. Since the major portion of multi-sector CDOs were backed by mortgages, the dramatic increase in CDS contracts written by AIG had the effect of vastly increasing the Company’s exposure to the U.S. residential mortgage market, including subprime mortgages. By the end of 2005, AIGFP became concerned that underwriting standards for subprime loans had deteriorated, and a decision was made to stop writing CDS contracts on multi-sector CDOs. By then, however, AIG was insuring about $80 billion of multi-sector CDOs, most of which were backed by subprime mortgages. Even though AIG was plainly aware of the downward turn of the mortgage market, it did not undertake to hedge the CDS portfolio because doing so would have undercut the profitability of the business. 7. Paradoxically, while AIG ramped up its writing of CDS contracts during 2005 with the CDS portfolio becoming increasingly concentrated on U.S. residential mortgage loans, AIG’s oversight of AIGFP and the CDS business became significantly diminished. With the transition from Greenberg to Sullivan as CEO, many risk controls were weakened or eliminated. Moreover, even within AIGFP, Cassano and a handful of others kept a tight rein on the origination, valuation and reporting functions relating to the CDS portfolio within the AIGFP group to the deliberate exclusion of key risk management and accounting personnel at AIGFP and its parent, AIG. 8. AIGFP was not the only unit of the Company that increased AIG’s exposure to the U.S. residential housing market and subprime mortgages. Another unit, AIG Investments, also greatly increased such exposure through its investments in residential mortgage-backed securities (“RMBS”) and similar securities. Much of the RMBS investments occurred in connection with   4 Case 1:12-cv-00523-UA Document 1 Filed 01/20/12 Page 9 of 222 AIG’s securities lending program, through which AIG would lend securities to banks and brokers in exchange for cash collateral that AIG would then invest. Contrary to traditional securities lending businesses that would invest their cash collateral in fixed income investments such as Treasury bonds or short-term corporate debt, AIG, in late 2005, set a target for investing up to 75 percent of the cash collateral received from borrowers in RMBS. This was done simply as an effort to boost the return on AIG’s investment portfolio. Thus, at the same time that AIGFP had recognized the significant deterioration in underwriting standards in the U.S. residential mortgage market and stopped writing credit default swaps in this area, AIG Investments made a concerted effort to increase its holdings in this same area. 9. AIG’s CDS portfolio and its investments in RMBS were like ticking time bombs. Although AIG claimed that the CDS portfolio was well-insulated against the risk of loss because a catastrophic level of defaults would need to be realized before it was required to pay the “counterparties” it was insuring, the CDS portfolio posed other significant risks. Because a credit default swap is a form of guarantee, the contracts contained provisions establishing conditions that would require AIG to “post collateral” as an assurance that it would be able to perform its obligation in the event of a default. Generally, AIG could be required to post collateral if its own credit rating was downgraded or if the underlying CDOs were subject to ratings downgrades or experienced a decline in value. Thus, apart from the risk of making payments arising from defaults, the CDS portfolio subjected AIG to the risk of being required to make tens of billions of dollars in collateral postings if the underlying CDOs declined in value due to a downturn in the U.S. residential housing market. 10. AIG’s securities lending investments in RMBS also carried great risk. In a declining housing market, the RMBS investments would also decline in value and become less   5 Case 1:12-cv-00523-UA Document 1 Filed 01/20/12 Page 10 of 222 liquid than traditional securities lending investments such as Treasury bonds. The securities lending division was obligated to repay or roll over most of its loans every 30 days, but much of the RMBS investments matured in two to five years. Thus, if a sufficient number of borrowers demanded the return of their cash collateral without a sufficient injection of new borrowers and new cash collateral into the program, AIG could be forced to sell its RMBS investments at depressed prices or would need to raise funds elsewhere. Its options in this regard were limited since most of the funds invested by AIG Investments were needed for statutory and other capital requirements of the Company’s insurance subsidiaries. As a result, both the securities lending business and the CDS portfolio, with its collateral posting requirements, posed a great risk that AIG would need to raise enormous amounts of cash, placing the Company in a liquidity vise. 11. None of these risks appeared to matter much based on AIG’s reported financial results for much of the Purchase Period. In its year-end 2005 financial statements, AIG reported total net income of $10.48 billion after an arduous restatement process. By year-end 2006, AIG’s reported total net income had risen to $14.05 billion, a 34% increase. And, for the first three quarters of 2007, the Company continued to report impressive earnings, with total net income of $4.39 billion, $4.28 billion and $3.08 billion, respectively, for the quarters. 12. However, lurking behind AIG’s success were the hundreds of billions of dollars of exposure to the U.S. residential mortgage market, including tens of billions of dollars of exposure to subprime debt that would bring the Company down. While the risks inherent in these exposures were continually downplayed by AIG and AIGFP executives throughout the Purchase Period, they ultimately led to a massive liquidity crisis that would have forced AIG into bankruptcy proceedings were it not for the $85 billion Government bailout of AIG announced before the opening of the market on September 17, 2008.   6