Case 1:08-cv-04772-LTS Document 95 Filed 05/19/2009 Page 1 of 289 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK IN RE AMERICAN INTERNATIONAL GROUP, Master File No. : INC. 2008 SECURITIES LITIGATION 08 - CV- 4772 - LTS ECF Case This Document Relates To: All Actions JURY TRIAL DEMANDED CONSOLIDATED CLASS ACTION COMPLAINT BARRACK, RODOS & BACINE THE MILLER LAW FIRM, P.C. Leonard Ban-aek E. Powell Miller Oro hac vice) Jeffrey W. Golan (pro hoc vice) Marc L. Newman Oro hac vice) M. Richard Komins David H. Fink Robert A. Hoffman Jayson E. Blake Lisa M. Lamb Brian E. Etzel Julie B. Palley Miller Building 3300 Two Commerce Square 950 West University Drive, Suite 300 2001 Market Street Rochester, MI 48307 Philadelphia, PA 19103 Tel: (248) 841-2200 Tel.: (215) 963-0600 Fax: (248) 652-2852 Fax: (215) 963-0838 ;t and _ 141. A. Arnold Gershon (AG - 3809) N PIO il\ Regina M. Calcaten-a (RC- 3858) • l 1350 Broadway Suite 1001 ItrilS'471 New York, New York 10018 Tel.: (212) 688-0782 Fax: (212) 688-0783 Attorneys for Lead Plaintiff Stcrte ofillichigcui Retirement Systems, and Lead Counsel for the Putative Class Case 1:08-cv-04772-LTS Document 95 Filed 05/19/2009 Page 2 of 289 TABLE OF CONTENTS Pape NATURE OF THE ACTION 2 JURISDICTION AND VENUE 14 PARTIES 15 1. Plaintiffs 15 A. Lead Plaintiff 15 B. Other Plaintiffs 15 II. Defendants 17 A. AIG 17 B. The Executive Defendants 17 C. The Underwriter Defendants 19 D. The Director Defendants 22 E. PricewaterhouseCoopers LLP 26 CLASS ACTION ALLEGATIONS 27 BACKGROUND FACTS 30 1. AIG and the Establishment of AIGFP 30 II. AIGFP Starts Writing Credit Default Swap Contracts 31 III. AIGFP's Decision to Stop Writing Credit Default Swaps 39 IV. AIG's Exposure to the Unhedged Risks of AIGFP's Credit Default Swaps 42 V. AIG Loosens Controls on AIGFP After Greenberg's Departure 47 VI. AIGFP Ignores Valuation Impact as the Subprime Mortgage Crisis Begins to Manifest 52 Case 1:08-cv-04772-LTS Document 95 Filed 05/19/2009 Page 3 of 289 VII. AIG Is Placed on Notice of Valuation Issues Concerning the CDS Portfolio Through Goldman Sachs' Collateral Demands 57 VIII. AIG Is Placed on Notice of Further Valuation Issues Stemming from Exclusion of Joseph St. Denis from Valuation Process and His Subsequent Resignation 59 IX. PwC Informs AIG of a Potential Material Weakness in Controls at AIGFP 63 X. AIG Falsely Reassures Investors at the December 5, 2007 Investor Meeting 64 XI. AIG Admits Certain Misstatements Concerning Its Valuation of the CDS Portfolio 67 XII. OTS Letter of March 10, 2008 Advising of Material Weaknesses Due to Lack of Access to AIGFP 72 XIII AIG Reports its First Quarter 2008 Results, Raises Additional Capital and Becomes the Subject of an SEC and DOJ Investigation 73 XIV. The Full Extent and Risks of AIG's Exposure to the Subprime Market in the CDS Portfolio and through its Securities Lending Prop-am Are Revealed When The Government Is Forced to Provide an $85 Billion Bailout to AIG 76 XV. Further Disclosures Made After the Government Bailout Confirm the Falsity of Defendants' Class Period Statements 79 AIG'S FALSE PORTRAYAL OF ITS FINANCIAL CONDITION AND RISK EXPOSURES 98 1. 2005 Financial Results 98 II. 2006 Interim Financial Results 108 III. 2006 Financial Results 114 IV. First Quarter 2007 Financial Results and May 31, 2007 Investor Meeting 119 V. Second Quarter 2007 Financial Results 121 VI. Third Quarter 2007 Financial Results and December 5, 2007 Investor Meeting 134 VII February 11, 2008 Form 8-K and 2007 Year-End Results 153 VIII. First Quarter 2008 Financial Results and the May 12, 2008 Offering 168 Case 1:08-cv-04772-LTS Document 95 Filed 05/19/2009 Page 4 of 289 IX. May 20, 2008 Investor Conference 177 X. Disclosure of Government Investigations and Ouster of Defendant Sullivan 178 XI. AIG's Second Quarter 2008 Financial Results 178 DEFENDANTS' VIOLATIONS OF GAAP AND SEC RULES 184 AIG USES FALSE AND MISLEADING STATEMENTS TO RAISE CAPITAL BY ISSUING SECURITIES DURING THE CLASS PERIOD 198 FACTS RELEVANT TO THE SCIENTER OF THE SECTION 10(b) DEFENDANTS 200 1. Additional Facts Establishing the Section 10(b) Defendants' Scienter 208 II. Defendants' Motive to Perpetrate Fraud 214 LOSS CAUSATION/ECONOMIC LOSS 219 APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD ON THE MARKET DOCTRINE 228 CLAIMS BROUGHT PURSUANT TO THE EXCHANGE ACT 231 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 231 SECOND CLAIM FOR RELIEF For Violations of Section 20(a) of the Exchange Act against the Executive Defendants 234 ALLEGATIONS RELATING TO CLAIMS BROUGHT PURSUANT TO THE SECURITIES ACT 238 THIRD CLAIM FOR RELIEF For Violations of Section 11 of the Securities Act against Defendants AIG, the Signing Executive Defendants and the Director Defendants 259 FOURTH CLAIM FOR RELIEF For Violations of Section 11 of the Securities Act against the Underwriter Defendants 261 FIFTH CLAIM FOR RELIEF For Violations of Section 11 of the Securities Act against Defendant PwC 266 SIXTH CLAIM FOR RELIEF For Violations of Section 12(a)(2) of the Securities Act against the Underwriter Defendants 280 Case 1:08-cv-04772-LTS Document 95 Filed 05/19/2009 Page 5 of 289 SEVENTH CLAIM FOR RELIEF For Violations of Section 15 of the Securities Act against the Executive Defendants 282 JURY TRIAL DEMAND 284 iv Case 1:08-cv-04772-LTS Document 95 Filed 05/19/2009 Page 6 of 289 Lead Plaintiff, The State Treasurer of Michigan, as custodian of the Michigan Public School Employees Retirement System, the State Employees' Retirement System, the Michigan State Police Retirement System, and the Michigan Judges Retirement System ("the State of Michigan Retirement Systems," hereafter referred to as "Lead Plaintiff' or "SMRS"), by its undersigned counsel, brings this action for violations of the federal securities laws on behalf of itself and all other similarly situated persons or entities (the "Class," as defined in lf 72 herein), who purchased or otherwise acquired publicly traded securities issued by American International Group, Inc. ("AIG" or the "Company") from March 16, 2006 through September 16, 2008 (the "Class Period"). The allegations in this Complaint are based on Lead Plaintiff's personal knowledge as to itself, personal knowledge of other named Plaintiffs as to themselves, and on information and belief, including the investigation of counsel, as to all other matters. The investigation of counsel is predicated upon, among other things, review and analysis of public filings by AIG with the United States Securities and Exchange Commission ("SEC") including, among other things, 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, testimony, statements and documents submitted to Congressional committees, and interviews with former employees and others with personal knowledge of information pertinent to this Complaint. Lead Plaintiff believes that substantial, additional evidentiary support for the allegations set forth herein will be obtained after a reasonable opportunity for discovery. 1 Case 1:08-cv-04772-LTS Document 95 Filed 05/19/2009 Page 7 of 289 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 Class Period. Its roots stretch back to 1919, with the founding of American Asiatic Underwriters in Shanghai by Cornelius Vander Starr. Under the guidance of Starr and his successor, Maurice "Hank" Greenberg, who became the Company's CEO in 1968, and took it public in 1969, AIG grew to be recognized as the world's leading international insurance and financial services organization. 2. In its SEC filings, AIG described itself as "the leading international insurance organization with operations in more than 130 countries and jurisdictions. AIG companies serve commercial, institutional, and individual customers through the most extensive worldwide property-casualty and life insurance networks of any insurer. In addition, AIG companies are leading providers of retirement services, financial services and asset management around the world." 3. Commensurate with its rising importance in the U.S. economic and financial market, its stock started trading on the New York Stock Exchange ("NYSE") in 1984 and, on April 8, 2004, AIG became one of the thirty component companies of the Dow Jones Industrial Average. By the end of 2005, AIG and its subsidiaries employed more than 97,000 people around the world; it wrote more than $41.87 billion in net premiums; and it had more than 65 million customers worldwide. 4. 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 2 Case 1:08-cv-04772-LTS Document 95 Filed 05/19/2009 Page 8 of 289 and tlu-ee 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 Si billion interest rate swap with the Italian government, which was 10 times larger than the typical Wall Street swap deals at the time.