Compass Lexecon's Client The United States Department of Justice Prevails as Court Rejects Starr's $40 Billion Appeal

Court Tracks Analysis and Testimony of Compass Lexecon Affiliate Professor Robert M. Daines

One of AIG's largest shareholders, Starr International Company, Inc. ("Starr") sued the United States, alleging that the Government's acquisition of AIG equity in connection with its bailout of the firm and subsequent actions relating to a reverse stock split were unlawful. The U.S. Court of Federal Claims ("Claims Court") held a trial on Starr's direct claims, for which Starr sought over $40 billion in relief on behalf of itself and other shareholders. The Claims Court ultimately held that the Government's acquisition of AIG equity constituted an illegal exaction in violation of Section 13(3) of the Federal Reserve Act, 12 U.S.C. Section 343, but declined to grant relief for either that illegal exaction or for Starr's reverse stock split claims holding that Starr suffered no damages. Starr appealed the denial of direct relief for its claims. The Government cross-appealed, arguing that Starr lacked standing to pursue its equity acquisition claims directly or, alternatively, that the Government's acquisition of equity did not constitute an illegal exaction.

On May 9, 2017, a Federal Circuit panel concluded that Starr and the shareholders represented by Starr lacked standing to pursue the equity acquisition claims directly, as those claims belonged exclusively to AIG. The panel therefore vacated the Claims Court's judgment that the Government committed an illegal exaction and remanded with instructions to dismiss the equity acquisition claims that seek direct relief. The panel also concluded that the Claims Court did not err in denying relief for Starr's reverse stock split claims, and affirmed the Claims Court's judgment as to the denial of direct relief for the reverse stock split claims.

In reaching its conclusion that Starr lacked standing to pursue the equity acquisition claim directly, the Federal Circuit panel found, among other things, that the Government did not have effective control of AIG before it acquired AIG's equity. This portion of the panel's finding tracks the testimony of Compass Lexecon Affiliate Professor Robert M. Daines, who rebutted claims made by Starr's expert concerning effective economic control.

In affirming the Claims Court's decision denying relief for Starr's reverse stock split claims, the Federal Circuit panel concluded that the trial court did not err in finding that the reverse stock split was not a vehicle designed by the Government to obtain AIG stock. This finding also tracks the testimony of Professor Daines, who testified that Starr's expert's analysis of the reverse stock split was fundamentally flawed because the primary purpose of the stock split was to increase AIG's trading price, many other companies also conducted similar reverse stock splits, and common shareholders, including Plaintiff, voted for the reverse stock split.

Professor Daines was supported by a Compass Lexecon team led by Jessica Mandel and David Ross in Compass Lexecon's Chicago office. Another Compass Lexecon team led by Peter Clayburgh in our Pasadena office and Michael Kwak in our New York office provided support to another expert who testified successfully at trial that Starr suffered no damages. We worked closely during the original proceedings with attorneys at the United States Department of Justice including Kenneth Dintzer, Scott Austin, Brian Mizoguchi, John Roberson, Mariana Acevedo, Renee Gerber and Vincent Phillips; John Sturc of the U.S. Treasury Department; Kit Wheatley of the Federal Reserve Board of Governors; and outside counsel including John Kiernan and Nicholas Tompkins of Debevoise & Plimpton LLP and Lynn Earl Busath, Jonathan Martin, Matthew Kelly and Alan Tabak of Davis Polk & Wardwell LLP.