Remember When AIG Screwed Over Investors & Helped Start the Financial Collapse? Under a New Trump Proposal, They’d Get Off Scot Free
President Trump’s Securities and Exchange Commission (SEC) is threatening to upend long-standing policies that could rob hardworking Americans of their retirement savings. This reversal would allow corporations to get away with fraud by adding a forced arbitration clause to their initial public offering (IPO) that would ban investors from joining together in a class action to hold them accountable. If the SEC allows corporations to ban class action lawsuits, investors will lose their most effective tool to fight back against scams and fraud that could decimate their savings. In a moment, I’ll give an example of a particularly egregious and infamous securities fraud case where investors recovered $970 million. If the SEC goes forward with the threat to let corporations ban securities fraud class actions, all those investors would have received nothing.
For decades, when a corporation misled or deceived its investors after selling securities through an IPO, those investors could band together to seek accountability for this kind of fraud. According to press reports, this could soon all change. The administration’s new SEC chairman, Jay Clayton, refused to answer questions about the issue of forced arbitration clauses in IPOs from Senator Elizabeth Warren at a recent Senate Banking hearing. Another of Trump’s SEC picks, Michael Piwowar, went so far as to publicly urge corporations to ban investors from bringing or joining class actions in a recent speech.
Over the years, these class actions have recovered billions of dollars for cheated investors, ranging from large pension funds for police officers and firefighters to regular American citizens holding IRAs and 401(k)s. Equally important, this private enforcement has been central to holding the worst corporate actors accountable. Class actions have been key to investor recovery in the aftermath of widespread fraud, including the reckless behavior that led to the 2008 financial crisis.
One of the most egregious corporate actors during that period was the American International Group (AIG). Although AIG’s main business is insurance, in the years before the 2008 crisis its financial products unit sold hundreds of billions of dollars’ worth of derivatives, the now infamous credit-default swaps that shielded investors from defaults on bonds that were often backed by faulty subprime mortgages. When the subprime mortgage market finally collapsed in 2008, AIG was deeply exposed, and faced a liquidity crisis. The government considered AIG “too big to fail,” fearing ripple effects throughout the economy, and began a series of bailouts to save the company. Eventually, U.S. taxpayers would shell out over $180 billion to assume ownership of nearly 80% of AIG.
Even after having rescued from the verge of collapse, AIG continued to act irresponsibly. In 2009, the company announced the payment of about $165 million in bonuses to executives in the same financial products unit that entangled AIG in the derivatives market. Seven executives in that unit were entitled to more than $3 million in bonuses, with some getting as much as $6.5 million. AIG’s chairman argued that bonuses were needed to keep the most skilled executives at the company. Evidently those skills included the irresponsible writing of credit-default swaps.
The government, despite virtually owning AIG, did little to respond to either the issuing of bonuses or the underlying activities that put the company at the center of the financial crisis. In 2010, the Justice Department and SEC closed their investigations into AIG. Investors who had poured money into a company that they thought was stable, and engaged in the relatively safe business of insurance were left with nothing after AIG gambled it all away on derivatives. Thankfully, these investors found recourse through a class action.
Investors led by the State of Michigan Retirement Systems — the custodian of retirement systems for public school employees, state employees, state police, and state judges — sued AIG for violating the securities laws. They alleged that the company misrepresented and concealed the full extent of its exposure to the U.S. subprime real estate market, leading investors to buy stock and debt that they otherwise would not have, eventually causing billions of dollars in losses. After years of litigation, the investors reached a settlement in 2015 for $970.5 million, which would be paid out to those who bought AIG securities from March 16, 2006 to September 16, 2008 when the company got its first bailout. From our investigation, this appear to be the largest shareholder class-action settlement in a case in which no criminal or regulatory enforcement actions were ever pursued.
The fact that AIG never faced criminal prosecution demonstrates how important private class actions are in policing the market. Although the SEC and other regulators are essential to the health of the securities market, they have relatively modest staff and are limited in what they can accomplish. Even when the federal government steps in, defrauded investors typically get more money back in private class actions. For instance, while the SEC recovered penalties and fees totaling $1.8 billion against Enron, WorldCom, Tyco, Bank of America and Global Crossing, private securities class actions returned $19.4 billion to defrauded investors — more than ten times as much.
These massive victories by investors against some of the worst of Wall Street could be rendered historical oddities if the Trump administration reverses longstanding SEC protections. Investments and pensions, and the very stability of the American securities market, depend on private enforcement of the law against bad actors. Without class actions, lawbreaking companies may face little to no consequence for widespread fraud that puts our entire financial system in real danger — which may be exactly what the Trump administration wants.