AIG, the US insurer that received a huge bailout in 2008, will not have to pay $100m in controversial crisis-era bonuses after winning an appeal.
A court in London on Friday overturned an earlier ruling that AIG Financial Products — the unit behind the losses that led to the group’s multibillion dollar rescue — should pay the bonuses to 23 former London-based staff. The ruling means former US employees of AIG are less likely to be able to argue they are owed $800m in bonuses.
AIG, which made a series of disastrous bets on credit default swaps, faced an outcry in the US when it continued to pay bonuses to some staff at AIG FP after the government had injected $182bn at the height of the financial crisis.
The Court of Appeal ruled on Friday that AIG’s case should succeed after finding that an earlier judge’s interpretation of the wording contained in a deferred-compensation plan for staff “cannot be justified”.
Its decision will have wide-ranging repercussions for AIG and its former staff. It makes it less likely that AIG will face a fresh raft of multimillion dollar lawsuits in the US, where the same bonus plan operated. In 2009, when $165m of payments under AIG FP’s bonus plan were revealed, there was widespread condemnation in the US.
The legal case centred around whether the compensation plan required AIG FP to restore deferred account balances that were wiped out by losses suffered by the business during the financial crisis. The bonuses under this plan were kept within AIG FP, and were designed to share risk and rewards. The money was supposed to be paid out over time with interest, unless reduced by AIG FP’s losses.
The 23 ex-employees had argued that the provisions in the deferred compensation plans required AIG FP to restore their account balances to pre-financial crisis levels and pay them in full.
However AIG FP argued that the plans did not require this and that the balances were wiped out unless it stopped being lossmaking and had distributable income from which to restore the bonuses. It said the unit had not been profitable since 2008 and was not likely to make a profit in the future.
A High Court judge ruled in 2018 that under US law — which governed the plans — AIG FP was required to repay the bonuses to the 23 former staff. However the company appealed against this decision last year.
On Friday the Court of Appeal rejected arguments from the 23 former employees that AIG FP “was cherry picking which obligations to perform.”
Lord Justice Flaux, giving the main ruling, concluded: “There will only be an obligation to restore balances deducted because of losses if and when the company is once again profitmaking so that there is distributable income from which to restore balances.”
A spokesperson for AIG said: “We are pleased with this unanimous and definitive decision rejecting the claims by former FP executives that they are entitled to recover over $100m in bonuses wiped out by FP’s financial crisis losses.”
It is not known whether the former employees will appeal to the Supreme Court. Stephenson Harwood, the law firm representing the 23 former employees said it had no immediate comment on the ruling.