Opinion ID: 2482599
Heading Depth: 1
Heading Rank: 2

Heading: Teachers' Retirement System of Louisiana and City of New Orleans Employees' Retirement System

Text: This lawsuit is a derivative action brought on behalf of American International Group, Inc. (AIG) by the Teachers' Retirement System of Louisiana and the City of New Orleans Employees' Retirement System (derivative plaintiffs). According to the complaint, senior officers of AIG set up a fraudulent scheme to misstate AIG's financial performance in order to deceive investors into believing that the company was more prosperous and secure than it really was. The complaint further accuses these officers of causing the corporation to avoid taxes by falsely claiming that workers' compensation policies were other types of insurance, and of engaging in covered calls to recognize investment gains without paying capital gains taxes. It is also claimed that AIG conspired with other companies to rig markets to subvert supposedly competitive auctions, and that the senior officers exploited their familiarity with improper financial machinations by selling the company's expertise in balance sheet manipulation. Specifically, AIG is alleged to have sold to other companies insurance policies that did not involve the actual transfer of insurable risk, with the improper purpose of helping those companies report better financial results; and to have created special purpose entities for other companies without observing the required accounting rules for the similarly improper purpose of helping those companies hide impaired assets. These financial tricks eventually came to light, resulting in serious harm to AIG. Stockholder equity was reduced by $3.5 billion, and AIG was saddled with litigation and regulatory proceedings requiring it to pay over $1.6 billion in fines and other costs. Derivative plaintiffs do not allege that defendant PricewaterhouseCoopers LLP (PwC) conspired with AIG or its agents to commit accounting fraud. Rather, they contend that, as AIG's independent auditor, PwC did not perform its auditing responsibilities in accordance with professional standards of conduct, and so failed to detect or report the fraud perpetrated by AIG's senior officers. Had it done so, derivative plaintiffs argue, the fraudulent accounting schemes at AIG would have been timely discovered and rectified. PwC moved to dismiss the action. On February 10, 2009, the Delaware Court of Chancery granted the motion, concluding that New York law applied to the claims and that, under New York law, the claims were barred ( In re American Intl. Group, Inc., 965 A2d 763 [Del Ch 2009]). Consistent with the way in which the District Court handled the same issues two months later in Kirschner, the vice-chancellor decided that, under New York's law of agency, the wrongdoing of AIG's senior officers was imputed to AIG and that, based on the allegations in the complaint, AIG's senior officers did not totally abandon AIG's interests such that the adverse interest exception to imputation would apply. Once the wrongdoing was imputed to AIG, the Court of Chancery decided that AIG's claims against PwC were barred by New York's in pari delicto doctrine and the Wagoner rule governing standing. Derivative plaintiffs appealed. Determining that the appeal's resolution depended on significant and unsettled questions of New York law, on March 3, 2010, the Delaware Supreme Court issued a decision certifying the following question to us: Would the doctrine of in pari delicto bar a derivative claim under New York law where a corporation sues its outside auditor for professional malpractice or negligence based on the auditor's failure to detect fraud committed by the corporation; and, the outside auditor did not knowingly participate in the corporation's fraud, but instead, failed to satisfy professional standards in its audits of the corporation's financial statements? ( Teachers' Retirement Sys. of La. v PricewaterhouseCoopers LLP, 998 A2d 280, 282-283 [Del 2010].)