In one of the largest and most closely watched cases arising from the global financial crisis, Maurice “Hank” Greenberg and Starr International challenged the United States Government’s financial rescue of American International Group, Inc. (“AIG”) that began in September 2008 (Starr International Company, Inc. v. The United States).
The plaintiffs, represented by David Boies, Chairman of Boies, Shiller & Flexnor LLP, asserted both Fifth Amendment taking and illegal exaction claims on behalf of two classes of AIG shareholders:
- a Credit Agreement Class comprised of AIG shareholders who held common stock during September 16-22, 2008 when the Government received the right to 79.9 percent ownership of AIG in exchange for an $85 billion loan; and
- a Reverse Stock Split Class comprised of AIG shareholders who held common stock on June 30, 2009 when the board of AIG proposed a twenty-for-one reverse stock split that reduced the number of AIG’s issued shares, but left the number of authorized shares unchanged. Plaintiffs sought approximately $40 billion in damages ($35.4 billion for the Credit Agreement Class and $4.7 billion for the Reverse Stock Split Class).
The Court found for Plaintiffs on their illegal exaction claim, however concluded that AIG shareholders were not damaged because AIG would have filed for bankruptcy but for the Government’s intervention, leaving AIG shareholders with worthless shares. The Court denied Starr’s reverse stock split claim in its entirety, concluding that the motivation for the split was to ensure the continued listing of AIG stock on the New York Stock Exchange, and that contrary to plaintiffs’ claim, there was no evidence that the reverse stock split was designed to allow the Government’s preferred shares to be exchanged for common shares.
David K.A. Mordecai, President of Risk Economics, and NYU Courant Institute of Mathematical Sciences Visiting Scholar and Adjunct Professor submitted an expert report on behalf of the Government in April 2014, testified at deposition in June 2014, and again at trial in U.S. Federal Claims Court in November 2014.
The Court accepted Dr. Mordecai as an expert in “financial economics, fixed income and credit markets, credit default swap markets, and distressed lending.” Dr. Mordecai was the damages expert for the Government.
At trial, Dr. Mordecai summarized his testimony into four primary points:
- First, he provided an opinion on the initial rescue, asserting that it “did not result in an economic loss to AIG’s shareholders.”
- Second, Dr. Mordecai addressed the need for the Government to obtain an equity component in AIG. Dr. Mordecai opined that “[w]ithout the equity component, the Revolving Credit Facility (“RCF”) [would] not [have] provide[d] a return to adequately compensate for the significant risk of lending to AIG.”
- In his third opinion, he critiqued as economically irrelevant and flawed, Dr. Cragg’s attempts to compare the AIG rescue to other government interventions.
- Finally, he critiqued Dr. Kothari’s estimate of the alleged harm suffered by both the Credit Agreement Class and the Reverse Stock Split Class as being fundamentally flawed. According to Dr. Mordecai, Dr. Kothari’s estimates of the alleged harm suffered by both classes was flawed because share dilution does not equal economic loss, Dr. Kothari ignored that AIG’s stock price actually increased as a result of the initial rescue, and Dr. Kothari did not estimate a value for the losses to shareholders
Dr. Mordecai opined, among other things, that AIG’s shareholders did not suffer an economic loss from the Government’s rescue and that Plaintiffs’ expert’s damage calculations were fundamentally flawed because AIG’s stock price actually increased as a result of the rescue. He also opined that, based on a study of large bankruptcies, it was unlikely that AIG’s shareholders would recover anything if the company had filed for bankruptcy protection.
Dr. Mordecai’s study was cited prominently by Federal Court of Claims Judge Thomas C. Wheeler in his decision, concluding that zero damages should be awarded to Plaintiffs despite prevailing on their illegal exaction claim: “In the end, the Achilles’ heel of Starr’s case is that, if not for the Government’s intervention, AIG would have filed for bankruptcy. In a bankruptcy proceeding, AIG’s shareholders would most likely have lost 100 percent of their stock value. DX 2615 (Dr. Mordecai’s) chart showed that equity claimants typically have recovered zero in large U.S. bankruptcies).”
Dr. Mordecai worked closely with a team of attorneys at the United States Department of Justice including Kenneth Dintzer, Scott Austin, Brian Mizoguchi, John Roberson, Mariana Acevedo, Renee Gerber and Vince Phillips; John Sturc of the U.S. Treasury Department; Kit Wheatley of the Federal Reserve Board of Governors; and outside counsel including John Kiernan and Nick Tompkins of Debevoise & Plimpton LLP and Lynn Earl Busath, Jonathan Martin, Matt Kelly and Alan Tabak of Davis Polk & Wardwell LLP.
Dr. Mordecai was principally supported by a team in the Compass Lexecon New York office led by Michael Kwak, which included Tristram Worth, Mihir Gokhale, Nick Fasano and Chris Fiore, in addition to other teams in the Chicago and Pasadena offices of Compass Lexecon.
