AIG is heading to the London courts on Monday to fight an attempt to make the insurance group pay more than $100m in crisis-era bonuses to 23 former staff.
If it loses the high-profile lawsuit, it could face calls to pay out an additional $800m of bonuses to former employees in the US.
The company was the recipient of a huge bailout in 2008, when the US government injected $182bn at the height of the financial crisis after it had made a series of disastrous bets on credit default swaps.
The following year AIG faced an outcry in the US when it continued to pay bonuses to some staff at AIG Financial Products, the unit that was responsible for causing the big losses.
The court case in London once again centres on disputed bonuses at AIG FP, which a High Court judge last year said the company should pay to Tobias Gruber and 22 other former executives who were based at the company’s European operations in London.
The executives — who were not involved in the credit default swaps that almost brought down the company — claim they are owed more than $100m in bonuses for their work there, and that AIG should pay out.
The High Court last year ruled in favour of the former employees, who include traders, analysts and managers, because AIG had breached a legal clause in the deferred compensation plan. The judge, Mr Justice Baker, ruled that the company had “an unqualified contractual obligation to restore in full amounts deducted”.
However AIG is heading to the Court of Appeal this week to try to overturn that decision. A further hearing is also scheduled for next year to determine how much the 23 former employees should receive.
Under the deferred compensation plan, the bonuses 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 employees claim the group has a responsibility to restore the bonuses that were lost, and should lend money to AIG FP so that it can do that.
However AIG is expected to argue this week that there is no obligation for the company to restore the lost bonuses at AIG FP as the unit has not been profitable since 2008 and is not likely to make a profit in the future.
AIG said: “We believe there is no obligation to restore deferred executive bonuses that were wiped out by AIG FP’s billions of dollars in financial-crisis losses, and are hopeful that the Court of Appeal will agree.”
This is not the only case in which AIG is facing demands to pay out crisis-era bonuses. This month, it lost an appeal in France’s highest judicial court against a decision that it had to pay out €8m to Amos Benaroch, a former employee, to cover bonus schemes that were running from 2007 to 2009.
The Court of Appeal’s decision — which may not come until the first half of next year — could have wide-ranging repercussions for both AIG and former staff.
As well as paying more than $100m to the 23 ex-employees in Europe, the company could face a fresh raft of multimillion-dollar lawsuits in the US, where the same bonus plan operated.
In his judgment last year, Mr Justice Baker said: “The total of the deferred bonus amounts across all eligible employees that might in principle be affected by the issues raised at trial, again prior to interest, is c.$800m.”
That, in turn, could lead to a further outcry in the US. In 2009, when $165m of payments under AIG FP’s bonus plan were revealed, there was widespread condemnation. President Barack Obama said: “It’s hard to understand how derivative traders at AIG warranted any bonuses at all, much less $165m in extra pay . . . How do they justify this outrage to the taxpayers who are keeping the company afloat?”
He asked then Treasury secretary Timothy Geithner to try to block the payments. There were also reports of death threats against then AIG chief executive Edward Liddy and other members of staff.
Stephenson Harwood, the law firm representing the 23 claimants, said it was “confident that the Court of Appeal will uphold the High Court’s decision”.