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American International Group, Inc. v. Greenberg, C.A. No. 769-VCS (Del. Ch. Feb. 10, 2009)

February 10, 2009

In this opinion, the Delaware Court of Chancery addressed defendants’ motions to dismiss a stockholder derivative complaint, which alleged that directors, officers, and employees of American International Group, Inc. (“AIG”) breached their fiduciary duties by, among other things, causing AIG to engage in widespread illegal misconduct, including phony reinsurance contracts, tax evasion, bid-rigging, conspiracies, and altering the corporate books, and by failures of oversight in the face of clear accounting problems and other red flags. The Court denied the motions of the CEO and former directors and officers (referred to by the court as the “Inner Circle Defendants”), but dismissed claims against non-director employees (referred to by the court as “Employee Defendants”) and against AIG’s accountants, PricewaterhouseCoopers (“PWC”).

After the litigation was commenced, AIG’s Board appointed a special litigation committee to evaluate the claims and make a recommendation. After its investigation, the special litigation committee determined to pursue claims against the CEO and a director and to take a position of neutrality toward the remaining claims, which the stockholder plaintiffs brought derivatively. The Court denied defendants’ motion to dismiss under Chancery Court Rule 23.1 for failure to make demand, finding that demand was excused because the special litigation committee’s intentional neutrality made demand futile.

The Court denied the Inner Circle Defendants’ motions to dismiss the claims for breach of the duty of loyalty, as well as the fraud, conspiracy, and insider trading claims. The Court held that the complaint, taken as a whole and viewed through the “plaintiff-friendly lens required by Rule 12(b)(6),” plead sufficient facts supporting a claim of breach of fiduciary duty. The Court found “a plausible inference arises that [the CEO] and the Inner Circle Defendants themselves inspired and oversaw a business strategy premised in substantial part on the use of improper accounting and other techniques designed to make AIG appear more prosperous than it in fact was.” Noting that the alleged misconduct “permeated AIG’s way of doing business,” the Court found that complaint plead sufficient facts from which to infer that the “Inner Circle Defendants” had personal knowledge of the wrongdoing.

Further, the Court explained that the pleading of direct involvement by the CEO and the Inner Circle Defendants in the alleged wrongdoing permits the inference that the Inner Circle Defendants knew AIG’s internal controls and compliance were inadequate and knew of improper conduct, yet failed to bring those issues to the full AIG board’s attention. Although claims based on failure to monitor are difficult to plead, even under the Rule 12(b)(6) standard, the Court found the stockholder plaintiffs had adequately plead such claims. Describing “[t]he diversity, pervasiveness, and materiality of the alleged financial wrongdoing at AIG [as] extraordinary,” the court found that the complaint plead facts to support the inference that the Inner Circle Defendants consciously did not do their jobs. Accordingly, the Court refused to dismiss the breach of the duty of loyalty claim based on a failure to monitor against two Inner Circle Defendants. The Court did, however, dismiss breach of the fiduciary duty of care claims against one former director defendant due to the protections afforded by a Section 102(b)(7) exculpatory provision in AIG’s certificate of incorporation.

The Court dismissed the claims against the Employee Defendants for participating in the alleged wrongdoing and against PWC for malpractice and breach of contract. As to the Employee Defendants, they had not been directors of AIG and the alleged wrongdoing took place before Delaware’s corporate fiduciary consent-to-jurisdiction statute (10 Del. C § 3114) was amended in 2004 to apply to corporate officers. Accordingly, personal jurisdiction in Delaware over those defendants could not be premised on Section 3114, and the Court found no other basis for asserting jurisdiction over the Employee Defendants, including no basis under Delaware’s long arm statute. As to PWC, New York law applied to plaintiff’s claims for malpractice and breach of contract, and under New York law’s application of the in pari delicto doctrine, an auditor is not liable for breach of its professional duty of care where it fails to detect fraud committed by a corporation’s top insiders. Accordingly, the Court dismissed the claims against PWC.

The full opinion is available here