A judge on the Federal Claims court ruled last summer that if what Greenberg argues is true, the government may really have acted illegally.
Greenberg's legal team, led by David Boies, argues that the government pushed away sovereign wealth-funds and other foreign investors who might have been willing to invest in the company before it was bailed out. This, they argue, prevented AIG from being able to raise capital and contributed to its downgrading by ratings agencies, which in turn put the company into even more dire straits. This forced AIG to accept the unfair terms the government offered in its loan agreement, the lawyers say.
Greenberg's lawyers also raise questions about the events around one of the oddest episodes of the AIG-Treasury relationship. You might recall that in the summer of 2009, the government converted its preferred shares into 79.9 percent of the common stock of AIG, something that it was entitled to do under the terms of the government's loan. This was accomplished by means of a reverse 20:1 stock split.
You might not recall precisely why the stock split occurred. At the time, then-chief executive Ed Liddy said it was necessary to prevent the stock from being delisted on the New York Stock Exchange. That might be true. But it is also true that the split was a necessary part of the conversion from preferred shares because AIG's charter didn't authorize enough common stock to allow the government to take 79.9 percent of the common stock. So when the government converted to common, it was issued unauthorized common stock.
When common shareholders were asked to authorize the additional common stock—which would have badly diluted their interest in the company—they voted no. Because the government's stake was in unauthorized shares, it didn't get a vote.
So another vote was held about the reverse split of all issued stock—including the government's unauthorized shares. This time, the government got to vote its 79.9 percent stake on this question because its unauthorized shares were also affected. And so the measure prevailed. After the split, the total number of shares outstanding no longer exceeded the number authorized in AIG's charter, so the government's shares were now officially authorized.
That's more than a little bit confusing, I'll admit. And it does sound more than a bit questionable, even to someone as jaded about shareholder rights as I am. But Greenberg's lawyers say it's even worse. They say that this procedure was engineered to circumvent a Delaware court order meant to protect the rights of the common shareholders when the government took over the company.'
If you have the stomach for gross violations of the rule of law by the federal government, go check out the rest.