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222 Pages·2012·0.85 MB·English

Case 1:12-cv-00523-UA Document 1 Filed 01/20/12 Page 1 of 222
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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
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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
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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

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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.
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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
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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
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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
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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
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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.
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