Legal News

AIG?s Bonus Bonanza: Will the Government Get Its Money Back?

By Ashby Jones

It’s fair to say that the folks at AIG have rattled some pretty large chains in the last few days over the news that the company would follow through with a promise to pay $165 million in retention bonuses that were due Sunday to employees in the Financial Products division — the one largely responsible for the company’s massive woes. Over the weekend, it was Larry Summers and Ben Bernanke venting their frustration. Today, it’s President Obama and New York Attorney General Andrew Cuomo.

Earlier today, Obama said he wanted the bonuses rescinded, and encouraged Treasury Secretary Tim Geithner to “pursue every legal avenue” to block the bonuses. “Under these circumstances, it’s hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay,” Obama said. “How do they justify this outrage to the taxpayers who are keeping the company afloat?” Click here for the WSJ story.

Later, it was Cuomo’s turn. He sent a letter to AIG chairman and CEO Edward Liddy demanding that the company turn over the names of the bonus recipients.

Wrote Cuomo:

We need this information immediately in order to investigate and determine: (l) whether any of the individuals receiving such payments were involved in the conduct that led to AIG’s demise and subsequent bailout; (2) whether, as you claim, such individuals are truly required to unwind AIG Financial Product’s positions; (3) whether such contracts may be unenforceable for fraud or other reasons; and (4) whether any of the retention payments may be considered fraudulent conveyances under New York law.

(Cuomo imposed a 4 p.m. deadline. That deadline has come and gone, and Cuomo’s office will reportedly soon issue subpoenas to get the information.)

AIG has said that it’s contractually obligated to make the payments, pursuant to an employee retention plan hammered out early last year. In a memorandum attached to a letter sent to Geithner, the company also stated that “outside counsel has advised that AIG is legally obligated to pay and, under applicable law, risks a doubling of the amount owed as a penalty.”

The possible doubling is reportedly scaring off Geithner et al. from doing anything, for fear that the government could ultimately end up paying a lot more than it stood to get.

But how likely is a “double the damages” scenario? Apparently it has something to do with Connecticut law. We wanted to find out ourselves, so we called the good folks up at Wiggin and Dana in Connecticut and chatted wtih Lawrence Peikes, an employment lawyer in the firm’s Stamford office.

Peikes who is not involved in the matter, confirmed AIG’s assessment of the legal landscape, saying that a Connecticut statute — the Connecticut Wage Act — generally speaking allows an employee to recover double damages and attorneys fees where an employer withholds wages and the employee can show bad faith or unreasonableness. Peikes says retention bonuses may well be considered “wages” under the statute, and a situation in which “a company knows it is contractually bound to make a payment, but fails to do so” might well constitute bad faith.

We also did a little poking around on the fraudulent conveyance issue that Cuomo raised. We checked in with a bankruptcy lawyer, who was unable to give his name as his firm represents AIG in other matters. The lawyer explained that, generally speaking, a fraudulent conveyance occurs when an an entity, prior to filing for bankruptcy, moves assets to avoid having them become part of the bankrupt estate.

According to the lawyer, courts generally look at two things when determining whether a payment constitutes a fraudulent conveyance: whether the transfer was made as the company was going downhill and whether the company received reasonably equivalent value for the payment.

In this situation, the government could likely make the case that the payment was made when the company was in bad shape (the company is evaluated at the time the payment is made, not at the time when the agreement to make they payment was made). Furthermore, the government could likely argue that AIG did not receive “reasonably equivalent value” for its the payment.

“If I’m the government, here’s what I say,” said the lawyer, “I say you, AIG, paid all this money to retain these executives who drove the company into the ground. Doesn’t sound like much value to me.”

Full post as published by Law Blog - WSJ.com on March 16, 2009 (boomark / email).