American International Group Inc. (AIG) will pay $960 million to settle a consolidated securities class action alleging the insurer misrepresented the value of credit default swaps between 2006 and 2008, costing investors billions. AIG revealed the settlement in a filing with the U.S. Securities and Exchange Commission (SEC) last month. The investors, led by the state of Michigan, said the proposed settlement was among the largest ever reached in a securities fraud class action stemming from the 2008 financial crisis, according to statements from the Plaintiffs’ attorneys. The settlement must be approved by a New York federal judge before it becomes final.
AIG disclosed it would pay the sum in its quarterly report. The settlement ends the 2008 consolidated litigation, but not nine individual suits filed between 2011 and 2013 that are still pending, according to the company’s SEC filing. Those lawsuits assert “substantially similar” claims to the 2008 consolidated litigation, AIG said. The investors, led by a quartet of Michigan pension systems, alleged the company concealed the true value of its credit default swaps (CDS) – essentially an insurance policy against potential losses in an investment that itself became a securitized asset that could be bought and sold – for two years, and that the company’s stock plummeted in 2008 when the CDS’ value was revealed to be lower than anticipated.
It appears the proposed securities class action settlement is one of the largest ever achieved in the absence of a criminal indictment or an SEC enforcement action. It is clear proof of the importance of private securities litigation as a means of recovery for injured investors. According to AIG’s 10-Q filing, the company reached an agreement with the Plaintiffs on July 15. A day later, the insurer announced that it had resolved disputes with Bank of America Corp. over residential mortgage-backed securities.
Bank of America will pay AIG $650 million in cash, plus a pro rata share of whatever is paid out to investors in connection with the Countrywide repurchase settlement. The recent settlement covered AIG’s objections to the $8.5 billion settlement of Countrywide’s mortgage repurchase obligations to investors.