Reuters reported earlier this week that a federal judge in Manhattan has dismissed a shareholder lawsuit against AIG. The suit accused both current and former American International Group, Inc., directors and executives of ignoring the “red flag” warning signs that lead to the insurers near-demise and necessitated $180 billion in Federal bailout funds.

On Tuesday, U.S. District Judge Laura Taylor Swain accepted the insurers argument that the shareholders, led by the Louisiana Municipal Employees Retirement System pension fund, were equally culpable since they failed to ask the board of directors to either take action or demonstrate the futility of doing so. Mark Herr, a spokesman for AIG, said that the New York-based company was satisfied with the 44-page long ruling.

In the ruling, the complaint, which sought remedies on behailf of AIG which included both restitution and “extraordinary” equitable relief, was labeled “derivative.” In it, AIG officials were accused of ignoring the potential for catastrophic losses due to credit default swaps, largely connected to subprime mortgage-related debt, through its AIG Financial Products division. Those losses led to the series of bailouts that gave the Federal government with an almost 80% stage in the company. Meanwhile AIG has been selling off assets to repay its debt to the government.

The complaint also alleged that the health and risk management practices of AIG had been overstated by the company, which resulted in corporate assets being wasted in many ways, which included:

• authorization of a costly stock buyback and divident increase just prior to a liquidity crises in September, 2008
• awarding excessive salaries to former chief executive Robert Willumstad
• awarding excessive severance pay to Willumstad’s predecessor Martin Sullivan and former AIG Financial Products president Joseph Cassano
• granting “lavish” retention bonuses to employees within Cassano’s unit

In addition, the complaint also said that the plaintiffs thought seeking help from the board would be useless, because “wrongdoers” dominated the board at the time, and they didn’t believe the directors would be inclined to “sue themselves” for their actions, exposing themselves to potential personal liability. Judge Swain, however, said that the shareholders were unsuccessful at demonstrating that the directors were either disinterested or independent, or that they had not properly exercised their business judgment.

A lawyer for the Louisiana fund did not return Reuter’s requests for contact. AIG shares closed down 26 cents on Tuesday on the NYSE; Swain’s decision was handed down after the U.S. Markets had closed.

Tags: AIG, bailout, lawsuits