naked capitalism

New York State Attorney General Andrew Cuomo is out to compel AIG to recover bonuses paid to former executives.

It’s an interesting ploy. Even if the New York AG were to prevail in establishing that the former officers were overpaid (the legal theory is that the company did not receive sufficient value for services paid), I am not clear how New York or the company can force the executives to give back the money (although there could presumably be a reduction or elimination of any sums still due to be paid). Note Cuomo has only sent a demand letter to AIG, and not initiated any action directly against any current or former employee.

And in the Dick Grasso case, the former NYSE chairman prevailed against Eliot Spitzer in a philosophically similar action (but the legal grounds were different, the argument was in essence that the pay level was inconsistent with the NYSE’s not-for-profit status). Thus this case would appear to be an uphill battle.

If Cuomo were to succeed, this would put fear into boardrooms all over America, and would lead to a serious rethinking of top level compensation. However, AIG and the executives may seek some sort of settlement rather than have their conduct examined in microscopic detail. But would Cuomo negotiate, or would he prefer to go a few rounds and inflict some damage first?

From the New York Times:

New York’s attorney general demanded on Wednesday that the American International Group recover bonuses and other payments from its former executives, lest he take formal action against the insurer…

The attorney general, Andrew M. Cuomo, made his demand in a letter to A.I.G.’s board, citing “unwarranted and outrageous expenditures” by the company as contrary to New York law. The letter, which described a lavish golf outing and an overseas hunting trip that cost nearly $100,000, follows other recent disclosures of excess by corporate America.

The threat against A.I.G., which Mr. Cuomo announced at a news conference on the street just a block away from the New York Stock Exchange and his office, seeks to recover multimillion-dollar payments to Martin Sullivan, A.I.G.’s former chief executive, and Joseph J. Cassano, who ran the unit blamed for the losses that pushed the company to the brink of collapse.

“A.I.G.’s belief is that they had the party, and the taxpayers will have the hangover,” Mr. Cuomo said, addressing a sidewalk throng of reporters, camera crews and tourists. He added that his office could bring civil charges if A.I.G. did not work to recover big bonuses paid to executives.

His actions are reminiscent of the sweeping attacks on Wall Street by Eliot Spitzer, who was the attorney general before his brief term as governor, which ended in scandal…

In his letter, Mr. Cuomo pointed to payments made even as A.I.G.’s losses were mounting.

“The board awarded its chief executive officer a cash bonus of over $5 million and a golden parachute worth $15 million,” Mr. Cuomo wrote. “Similarly, in February 2008, a top-ranking executive who was largely responsible for A.I.G.’s collapse was terminated, but still permitted by the board to keep $34 million in bonuses. This same individual apparently continued to receive $1 million a month from the company until recently.”

Mr. Cuomo was apparently referring to Mr. Sullivan, the former chief executive at A.I.G., and to Mr. Cassano, who ran A.I.G. Financial Products, the company unit that was heavily involved in the complex financial transactions that led to billions of dollars in losses….

Mr. Cuomo’s demand rests on a provision of New York law that allows creditors to challenge any payment by a company if the company did not get adequate value in exchange. In this case, the argument would be that the executives took millions of dollars in compensation and severance but did not provide service worth the money.

“Obviously, it’s a question of proof,” said Jim Cohen, a law professor at Fordham University. Lawyers for the attorney general, in the name of creditors of A.I.G. — say, the people of New York to whom the company may owe taxes — would try to convince a judge of how little executives’ services were worth.

“It’s a difficult situation, because you’re going to have to get into what the market was,” Professor Klee said. He added that if Mr. Cuomo’s tactic worked, creditors might try to use it in other contexts to pursue highly paid executives, like those who worked at Lehman Brothers, now in bankruptcy proceedings.

“It’s not going to be easy litigation,” he said, “but it certainly could be brought.”