LOS ANGELES AND WASHINGTON — Even as American International Group Inc. was sliding into insolvency in recent years and negotiating a massive federal bailout last year, it was constructing a compensation package for top executives that would provide as much as $1 billion in bonuses, according to a shareholder lawsuit filed Wednesday in Los Angeles.
AIG, which has been heavily criticized for the bonuses, has contended that it was legally obligated to pay because its compensation program was put in place before the company was given access to $70 billion in direct federal bailout money and much more in loans.
But the lawsuit, which relies on previously undisclosed information and public filings, government documents and news reports, builds a portrait of a company that constructed its executive compensation program to guarantee the payouts -- even when it knew its business was deteriorating because of a variety of fraudulent activities.
The suit, among the first to hit the once-dominant insurance giant, puts together a detailed timetable for AIG's financial meltdown and outlines the company's compensation system, set against the backdrop of two criminal investigations that were being conducted into the company's practices over the last eight years.
The suit names AIG Chief Executive Edward M. Liddy, retirement services Chief Jay Wintrob and Director Stephen Bollenbach, among others, alleging that they helped put together the bonus scheme that breached the company's fiduciary duty to shareholders.
The plaintiff in the case is retired California Superior Court Judge John Bible, an AIG shareholder, who is represented by Joseph Cotchett, a Bay Area securities litigation attorney who handled suits against Lincoln Savings during the savings and loan debacle of the 1980s.
AIG corporate spokesman Joseph Norton said Wednesday that the company had no comment on the lawsuit.
Cotchett said that AIG's payment of massive executive bonuses was part of a pattern of misconduct.
The company had reaped enormous sums for bonuses in recent years. For example, its financial products division, which was trading in exotic financial instruments, had created paper profits that fueled an extraordinary compensation pool of $3.6 billion over a seven-year period for the unit's personnel, an average of $1 million per employee, the suit said.
Although AIG has not disclosed exactly how much in bonus payments it made in 2008 and 2009, the suit says the company approved $1 billion in bonus payments, including $400 million to the financial products unit.
The complaint alleges that Wintrob, who is based in Los Angeles, was one of the six top-paid executives in 2007, with a total compensation of $7.6 million. In late 2008, AIG intended to pay Wintrob a $3-million retention payment. He was one of 130 executives selected for such payments.
AIG is under investigation by the Treasury Department's inspector general, Eric Thorson, and special inspector general, Neil Barofsky; New York Atty. Gen. Andrew Cuomo; and others.
The 104-page civil complaint alleges that AIG had become involved in at least two controversial financial transactions starting in about 2002 that contributed to the company's slide into insolvency and the massive federal bailout that was set in motion lastfall.
The first matter involved transactions that AIG began with PNC Financial Services, which came under criminal investigation by the Justice Department, as well as New York authorities. The company had to disgorge profits and paid an $80-million civil penalty to settle the matter, the suit said.
The suit also cites a deal between AIG and insurer General Re Corp., which resulted in AIG having to restate its earnings covering five years and reduced shareholder equity by $2.7 billion.
"AIG five years ago was doing these phony financial transactions," Cotchett said. "We gave them $175 billion without anybody looking at the history of this company."
Last week, Los Angeles-based Freedom Watch, led by conservative gadfly Larry Klayman, filed a class-action suit on behalf of AIG shareholders to force the directors of the company to pay back millions in bonuses and dividends.
The directors include prominent business and political figures, including Martin Feldstein, who serves on an Obama administration task force on taxes, and Richard Holbrooke, the special U.S. envoy to Afghanistan and Pakistan.