Peter Foley/Bloomberg
By David VoreacosA federal lawsuit by Maurice R. “Hank” Greenberg—the former chief executive officer of American International Group —that seeks $25 billion in damages from the U.S. government for the 2008 federal takeover of the insurer relies on a novel approach. The suit, filed with the U.S. Court of Federal Claims in Washington on Nov. 21, argues that the U.S. Treasury illegally took property from AIG shareholders when it bailed out the company. Legal scholars say this is a rare application of “takings” law, which usually involves land, to the world of finance.
David Boies, the attorney spearheading the case, has argued many landmark cases during his four-decade career. While working as a special trial counsel for the U.S. Justice Dept. in the late 1990s, Boies convinced a judge that Microsoft was a monopolist. He argued for Presidential candidate Al Gore in the Florida vote recount and represented National Basketball Assn. players in labor talks that just concluded. In 2009, Boies also successfully defended Greenberg’s Starr International, AIG’s largest shareholder at the time of the rescue, against a claim by AIG that it looted $4.3 billion in stock. “He takes cutting-edge cases in unexplored areas of law,” says Robert Thomas, a San Francisco lawyer who often represents clients whose property has been seized by the government. Boies, who has represented Bloomberg LP, the parent of Bloomberg Businessweek, was unavailable for comment.
In Starr International v. U.S., Boies is arguing that the government’s appropriation of 79.9 percent of AIG stock violated the Fifth Amendment to the Constitution, which bars the seizure of private property without just compensation. While the bailout was “ostensibly designed to protect the U.S. economy and rescue the country’s financial system,” the suit claims, “the ends could not and did not justify the unlawful means employed by the government to achieve that goal.” Starr is also suing the Federal Reserve Bank of New York, saying the bank breached its duty to shareholders of AIG by loaning the insurer $85 billion at 14.5 percent interest while offering lenders better terms.
While most takings cases involve condemnations of land by the government, some relate to the loss of property value through regulation. In 1992 the U.S. Supreme Court ruled in Lucas v. South Carolina Coastal Council that a landowner is entitled to compensation when regulators bar all development on a parcel. More than a decade later, in Kelo v. City of New London, the high court ruled that government agencies had the right to take property from a private owner and transfer it to another in order to further economic development, as long as the landowner was compensated.
The Starr lawsuit argues that AIG was caught in a liquidity crisis hastened by the Fed’s denying the insurer access to funds through its so-called discount window. The company claims the government could have lent AIG money without demanding equity, as it did with foreign banks and other lenders.
Tim Massad, Assistant Secretary for Financial Stability at the U.S. Treasury, says the allegations are without merit: “It is important to remember that the government provided assistance to AIG—and stopped it from collapsing—in order to prevent a meltdown of the entire global financial system.”
Even Boies’s admirers feel that the 70-year-old lawyer may have gone too far out on a limb this time. “As someone who represents plaintiffs in these kinds of cases, I’d say more power to him,” says Thomas. “But it’s a stretch.”
Winning a regulatory takings case is difficult, say legal experts. Starr must prove that it lost “all or substantially all use and value of the property from the imposition of a regulation,” says Robert H. Freilich, an attorney at Freilich & Popowitz in Los Angeles. To do that, Boies would have to show “that the assets were worth x before the government acted and x minus y after the government acted,” explains Vermont Law School professor John Echeverria. “The court will look with great skepticism on a claim seeking billions of dollars in taxpayer funds,” he adds.
New York University School of Law Professor Richard Epstein assesses the lawsuit’s prospects more bluntly: “It’s going to lose. The basic rule is, when you sue the Federal Reserve acting in its regulatory capacity, even for outrageous things, they win. It’s an inescapable reality that, in effect, the government holdsall the high cards in litigation.”
The bottom line: In an unusual application of takings law to finance, Hank Greenberg’s Starr International is seeking $25 billion from the U.S. government.
Voreacos is a reporter for Bloomberg News.