| People v Greenberg |
| 2012 NY Slip Op 03546 [95 AD3d 474] |
| May 8, 2012 |
| Appellate Division, First Department |
| The People of the State of New York, by Andrew M. Cuomo,Respondent, v Maurice R. Greenberg et al., Appellants. |
—[*1] Kaye Scholer LLP, New York (Vincent A. Sama of counsel), for Howard I. Smith, appellant. Eric T. Schneiderman, Attorney General, New York (Richard Dearing of counsel), forrespondent. Mayer Brown LLP, Washington, DC (Andrew J. Pincus of counsel), for amicuscuriae.
Order, Supreme Court, New York County (Charles E. Ramos, J.), entered October 21, 2010,which, to the extent appealed from, denied defendants Maurice R. Greenberg's and Howard I.Smith's motions for summary judgment dismissing the Martin Act (General Business Law§ 352-c [1] [a], [c]) and Executive Law § 63 (12) claims as against them, andgranted the Attorney General's motion for summary judgment on the issue of liability withrespect to one of two challenged transactions, modified, on the law, to deny the AttorneyGeneral's motion, and otherwise affirmed, without costs.
IntroductionThe Attorney General brought this action against American International Group (AIG), itsformer CEO (Maurice R. Greenberg) and its former CFO (Howard I. Smith) alleging thatdefendants violated Executive Law § 63 (12) and the Martin Act based upon their role infraudulent transactions designed to portray an unduly positive picture of AIG's loss reserves andunderwriting performance. AIG, formerly the largest insurance company in the world, entered[*2]into a settlement agreement with the Attorney General withrespect to these and other claims, paying over $1 billion in damages and penalties. The details ofthe challenged transactions are as follows.
The GenRe TransactionIn the third quarter of 2000, AIG reported that its loss reserves (funds set aside to pay futureclaims on policies) had declined by $59 million from the previous quarter, while its netpremiums increased by 8.1%. In the industry, this could be viewed as an indication of acompany's deteriorating financial condition. In an effort to shore up its loss reserves, Greenbergcalled Ronald Ferguson, the CEO of General Reinsurance Corporation (GenRe), to discuss thepossibility of AIG's entering into a loss portfolio transfer (LPT) involving "finite reinsurance"with GenRe. Greenberg testified at his deposition that he made the call in October 2000, basedupon his concerns about AIG's loss reserves. He testified that he remembered inquiring aboutborrowing some of GenRe's reserves through an LPT. He did not remember the details of theconversation but testified that he told Ferguson that AIG would pay GenRe if it was willing toaccommodate the request.
After the conversation, Ferguson designated Richard Napier, a senior GenRe executive, tohandle the details from GenRe's end. Greenberg appointed Chris Milton, a senior vice presidentat AIG and the head of reinsurance, to work out the details for AIG.
Greenberg testified that he had a second telephone conversation with Ferguson in November2000 and that Ferguson told him that GenRe could provide AIG the product it had requested.Greenberg also testified that he had contemporaneous discussions with Milton and Smithconcerning the GenRe transaction, but denied any knowledge of its fraudulent nature. Smithtestified at his deposition that Milton advised him of the general terms of the GenRe deal. Theactuaries testified that Smith was responsible for recording the transaction. Moreover, Smithparticipated in the meeting regarding commuting the GenRe transaction from an LPT to profits.Although AIG's underwriting practices required internal actuarial review of any proposedinsurance agreement over $20 million, no underwriting analysis of the GenRe transaction wasdirected or performed.
The draft contract between AIG and GenRe provided, in general terms, that GenRe wouldpay AIG $10 million to assume a specified amount of risk, namely $100 million for six to ninemonths. The premium was $500 million on a 98% funds withheld basis, meaning that GenRecould charge AIG only for losses beyond the $500 million premium (up to a $600 million cap onlosses).
The Attorney General alleges that the $100 million loss exposure was illusory, that at leasthalf of the contracts covered by the GenRe transaction had already been reinsured by othercarriers and thereby carried no risk to AIG, and that AIG and GenRe had separately agreed that,for accommodating AIG in its request to structure the transaction as no risk, GenRe was paid a$5 million fee, and the $10 million premium payment was secretly returned to GenRe throughother, unrelated agreements. In his deposition in this litigation, Napier testified that the parties"involved" in the separate side deal included Greenberg, Ferguson, and Milton. Greenberg deniedknowledge of both the no-risk nature of the GenRe transaction and the side deal concerning thefee and the return of the premium.
According to generally accepted accounting principles, an LPT can only be recorded as lossreserves if the risk insured exceeds a 10% chance of a 10% loss. If, as the parties presentlyconcede, there was no risk of loss in the GenRe transaction, it should have been recorded on[*3]AIG's financials as a deposit. Instead, AIG recorded $250million in loss reserves for the fourth quarter of 2000 based upon the GenRe transaction and anadditional $250 million in loss reserves for the first quarter of 2001, consistent with Greenberg'sintent when he reached out to Ferguson, to shore up the reserves. Had these amounts not beencredited in this manner, AIG would have had a $187 million decline in its loss reserves by thefirst-quarter of 2001. In a press release regarding AIG's 2001 first-quarter financial picture,Greenberg is quoted as being pleased with a number of favorable financial indicators, includingthe reversal of the loss reserve declines.
In 2001, 2002, and 2003, Greenberg and Smith certified AIG's 10-K financial disclosurereports with the SEC, each year recording the $500 million from GenRe as loss reserves. In 2003and 2004, Greenberg participated in decisions regarding characterizing the GenRe transaction,and, in late 2004, $250 million was commuted to profits.
In early 2005, AIG received subpoenas from the Attorney General and the SEC forinformation regarding the GenRe transaction. AIG retained outside counsel to perform aninternal investigation, and PricewaterhouseCoopers (PwC), the auditor, initiated an expandedaudit to review AIG's prior financials and certain transactions. Barry Winograd, the PwC partnerin charge of the audit, testified at his deposition that he had frequent contact with Greenbergthroughout the investigation and that Greenberg was particularly interested in PwC's findingswith respect to GenRe.
In March 2005, AIG issued a press release admitting that the GenRe transactiondocumentation was improper, stating that in light of the lack of evidence of risk transfer, thetransactions should have been recorded as deposits. Defendants subsequently resigned theirpositions as CEO and CFO of the company. On May 31, 2005, following defendants' departuresfrom AIG, the company's new management filed AIG's 10-K for 2004, restating the financialssubmitted from 2000 to 2004. In the restatement, AIG explained that "[GenRe] was done toaccommodate a desired accounting result and did not entail sufficient qualifying risk transfer. Asa result, AIG has determined that the transaction (s) should not have been recorded as insurance."
In June 2005, two GenRe executives pleaded guilty to participating in a conspiracy tocommit securities fraud for their role in the GenRe transaction. In February 2008, four otherGenRe executives were convicted on federal criminal charges with respect to the GenRetransaction. Those convictions were reversed upon evidentiary errors and the case was remandedfor a new trial (see United States v Ferguson, 553 F Supp 2d 145 [D Conn 2008]).
The Capco TransactionBeginning in the early 1990s, various AIG subsidiaries were writing auto warranty insurancepolicies. In late 1999, an actuarial consultant retained by AIG concluded that the company wasfacing an underwriting loss ratio of 265% in this area. At his deposition, Greenberg admitted thatAIG's auto warranty business up until the late 1990s "was not handled properly," that he wasannoyed about the situation, and that he may have referred to the situation as a "debacle."Greenberg also admitted giving specific instructions to Charles Schader, about reforming theauto warranty business, and testified that he had regular calls with Schader, and other employees,about his concerns, including on weekends. These calls concerned "everything from. . . consultation of outstanding contracts and policies, claims handling, andmitigation of loss."
Greenberg also testified that he directed an internal audit of AIG's auto insurance business toreview the auto warranty business and to explore ways to mitigate projected losses. [*4]The parties do not dispute the details of the transaction structured tomeet these objectives between AIG and Capco Reinsurance Company, Ltd. (CAPCO), anoffshore shell company controlled by AIG. AIG, which did not treat CAPCO as a consolidatedentity on its financial statements, sold shares in the shell company over time so as to triggerrecognition of $162.7 million in capital losses (which the investing public would not deem assignificant to the company's financial well-being). The amount corresponded to AIG's payment ofover $183 million in underwriting losses.
Both Greenberg and Smith defended their approval of the CAPCO transaction, testifying thatJoseph Umansky, the Senior Vice President of AIG, had assured them that it would be structuredto properly comply with all legal, accounting, and regulatory guidelines. By contrast, theAttorney General claims that Smith directed Umansky to develop a transaction to convertunderwriting losses into capital losses, that both defendants received an April 2000 memo fromUmansky proposing the CAPCO deal, and that Greenberg personally directed Umansky tocontact the president of an AIG private bank in Switzerland to locate outside investors to buy theCAPCO common stock. After Greenberg and Smith left the company in 2005, AIG announcedthat CAPCO involved an improper structure created to characterize underwriting losses relatingto the auto warranty business as capital losses.
Procedural HistoryIn September 2009, the Attorney General, Greenberg and Smith all filed motions forsummary judgment. The motion court denied Greenberg's and Smith's motions in their entirety. Itgranted the Attorney General's motion in part, finding that Greenberg and Smith's knowledge andparticipation in the CAPCO transaction constituted a violation of the Martin Act and ExecutiveLaw § 63 (12) as a matter of law. Greenberg and Smith each appeal from the denial oftheir motions and the partial grant of the Attorney General's motion. The Attorney Generalappeals from the portion of its motion that was denied.
Appellate ContentionsThe issues before us include (1) whether the action is preempted by federal law; (2) whetherthe court properly denied defendants' motions for summary judgment regarding the GenRetransaction; and (3) whether the court properly granted the Attorney General summary judgmenton liability regarding the CAPCO transaction.
PreemptionThe Supremacy Clause of the United States Constitution provides that the laws of the UnitedStates "shall be the supreme Law of the Land; and the Judges in every State shall be boundthereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding" (USConst, art VI, cl 2). This broad language gives Congress the power to supersede state statutory,regulatory and common law (People vFirst Am. Corp., 18 NY3d 173, 179 [2011]; Guice v Charles Schwab & Co., 89NY2d 31, 39 [1996], cert denied 520 US 1118 [1997]). Preemption can arise by: (i)Congress's express preemption; (ii) Congress establishing a comprehensive regulatory scheme inan area effectively removing the field from the state's realm; or (iii) an irreconcilable conflictbetween federal and state law (Matter ofPeople v Applied Card Sys., Inc., 11 NY3d 105, 113 [2008], cert denied 555 US1136 [2009], citing Balbuena v IDRRealty LLC, 6 NY3d 338, 356 [2006]). The United States Supreme Court has instructedthat, in determining whether federal law preempts state law, a court's "sole task is to ascertain theintent of Congress" (California Fed. Sav. & Loan Assn. v Guerra, 479 US 272, 280[1987]; see also Medtronic, Inc. v Lohr, 518 US 470, 485 [1996] ["(T)he purpose ofCongress is [*5]the ultimate touchstone in every pre-emptioncase" (internal quotation marks omitted)]; Matter of People v Applied Card Sys., Inc., 11NY3d at 113).
Defendants argue that this action is precluded by the express language of title I of theSecurities Litigation Uniform Standards Act of 1998 (SLUSA) (15 USC § 78bb [f] [1],[2]). They also claim that the claims asserted by the Attorney General conflict with Congress'sintent to create a uniform federal standard for securities litigation as evidenced by governingsecurities litigation, namely, the Private Securities Litigation Reform Act of 1995 (PSLRA) (15USC § 77z-1), the National Securities Markets Improvement Act of 1996 (NSMIA) (15USC § 77r) and SLUSA, and the cases which construe these statutes. However, nothing inthe language or legislative history of the cited legislation indicates Congress intended to preemptthis civil enforcement action under the Martin Act and the Executive Law (People v AppliedCard Sys., Inc., 11 NY3d at 115). In fact, the cited statutes, their legislative histories and thecase law presuppose an important role for state Attorneys General in investigating fraud andbringing civil actions to enjoin wrongful conduct, vindicate the rights of those injured thereby,deter future fraud, and maintain the public trust.
The NSMIA, codified at 15 USC § 77r (a) (2) (B), expressly preempts any state lawthat "directly or indirectly prohibit[s], limit[s], or impose[s] any conditions upon the use of. . . any proxy statement, report to shareholders, or other disclosure documentrelating to a covered security" registered under 15 USC § 78o-3.
As the motion court stated, the purpose of NSMIA is to preempt any state Blue Sky Lawsthat would require the issuers of securities to comply with certain state registration requirementsprior to marketing in the state, in recognition of the redundancy and inefficiency of suchrequirements (see Zuri-Invest AG v Natwest Fin. Inc., 177 F Supp2d 189, 192 [2001]).Accordingly, NSMIA precludes states from imposing their own requirements for disclosure onprospectuses, traditional offering documents, and sales literature relating to covered securities(id.).
However, a savings clause in the NSMIA permits states to retain jurisdiction to policefraudulent conduct: "Consistent with this section, the securities commission (or any agency oroffice performing like functions) of any State shall retain jurisdiction under the laws ofsuch State to investigate and bring enforcement actions with respect to fraud or deceit, orunlawful conduct by a broker or dealer, in connection with securities or securitiestransactions" (15 USC § 77r [c] [1] [emphasis added]). The legislative history ofNSMIA confirms Congress's intent "not to alter, limit, expand, or otherwise affect in any wayany State statutory or common law with respect to fraud or deceit . . . in connectionwith securities or securities transactions" (Rep of House Comm on Commerce, HR Rep 104-622,104th Cong, 2d Sess, at 34, reprinted in 1996 US Code Cong & Admin News, at 3877, 3897).
The PSLRA was enacted in 1995 to set uniform federal standards for private plaintiffsseeking to bring actions against issuers of publicly traded securities. Because the PSLRA setheightened pleading standards for cases brought in federal court, the statute had the unintendedeffect of what Congress termed a "migration" of frivolous class action securities litigations to[*6]state court, undermining PSLRA's aim.[FN1]Accordingly, in 1998, Congress passed SLUSA, which provides, as relevant, that "[n]o coveredclass action based upon the statutory or common law of any State or subdivision thereof may bemaintained in any State or Federal court by any private party alleging . . . amisrepresentation or omission of a material fact in connection with the purchase or sale of acovered security" (15 USC § 78bb [f] [1] [A]).
Defendants argue that SLUSA preempts this action because the state Attorney General isseeking, in a de facto representative capacity, to litigate claims on behalf of a "covered class" ofAIG investors seeking to recover for their financial losses, in frustration of the legislation's intentto create uniform federal standards for such litigation. However, this is not a shareholderderivative lawsuit, and in fact, there is such an action presently pending in federal court againstdefendants.[FN2]Rather, after years of joint federal and state investigation, the Attorney General exercised thediscretion of his office to bring this enforcement action pursuant to the Executive Law and theMartin Act, to protect the citizens of this State and the integrity of the securities marketplace inNew York, to enjoin allegedly fraudulent practices, and to direct restitution and damages to deterfuture similar misconduct (see People v Applied Card Sys., Inc., 11 NY3d at 109;People v Bunge Corp., 25 NY2d 91, 100 [1969]; compare Merrill Lynch, Pierce, Fenner& Smith Inc. v Dabit, 547 US 71 [2006] [class action securities litigation]; Kircher vPutnam Funds Trust, 547 US 633 [2006] [same]).
Thus, nothing in the federal legislative scheme indicates that Congress intended to preemptthis action, and in fact, the cited statutes express the importance of the state's role in policingfraud (see Bunge at 100). Nor is there any indication that Congress intended to precludethe Attorney General from seeking monetary recovery in order to deter alleged fraudulentconduct (see People v Coventry FirstLLC, 13 NY3d 108, 114 [2009] [Attorney General has statutory authority to seek bothinjunctive and victim specific relief, comparable to the EEOC in the federal arena]; People vApplied Card Sys., Inc., 11 NY3d at 109).
In re Baldwin-United Corp. (Single Premium Deferred Annuities Ins. Litig.) (770F2d 328 [1985]) and Merrill Lynch, Pierce, Fenner & Smith, Inc. v Cavicchia (311 FSupp 149 [1970]) are two of a number of cases cited by defendants which are distinguishable ontheir facts. In Baldwin, 31 states were challenging an injunction precluding them fromcommencing state law actions for money damages to supplement sums received by the sameplaintiffs who had entered into settlement agreements in a number of consolidated class actionsecurities litigations. Here, unlike Baldwin, no settlement has been approved in the classaction pending in federal court. Further, as stated above, this enforcement action has aims andseeks remedies broader than the restitution sought in Baldwin.[*7]
Cavicchia involved a statutory interpleader actionbrought by securities brokers from New York and New Jersey. The plaintiffs sought the transferof sequestered funds held by the New York State Attorney General to an impartial receiver, sothat the monies could be distributed to defrauded individuals from both states (311 F Supp at158). The court granted plaintiffs the requested relief, finding no conflict between its order andthe sovereign rights of New York's Attorney General under the Eleventh Amendment to theUnited States Constitution (id.). Here, in contrast to Cavicchia, the AttorneyGeneral's enforcement action is in pretrial motion practice. No trial has been had on eitherliability or damages, and there are no issues before us regarding competing states' rights.
Accordingly, upon review of the cited federal legislation (NSMIA, PSLRA, SLUSA), therelevant legislative history, and the governing case law, we find no evidence that Congressintended to preempt the Attorney General's Martin Act and Executive Law claims in this action.
State ClaimsThe Martin Act defines fraud as "any device, scheme or artifice . . . deception,misrepresentation, concealment, suppression, fraud, false pretense or false promise" (GeneralBusiness Law § 352 [1]). Fraud under the Martin Act includes all deceitful practicescontrary to the plain rules of common honesty and all acts tending to deceive or mislead thepublic (see People v Sala, 258 AD2d 182, 193 [1999], affd 95 NY2d 254 [2000]).Executive Law § 63 (12) includes "virtually identical language" to the Martin Act(State of New York v Rachmani Corp., 71 NY2d 718, 721 n 1 [1988]). Both statuteshave been liberally construed to "defeat all unsubstantial and visionary schemes . . .whereby the public is fraudulently exploited" (People v Federated Radio Corp., 244 NY33, 38 [1926]). The Attorney General need not prove scienter or intent to defraud in a civil claimunder either statute (Rachmani, 71 NY2d at 725 n 6; see People v LexingtonSixty-First Assoc., 38 NY2d 588, 595 [1976] ["the terms 'fraud' and 'fraudulent practices'[are] to be given a wide meaning so as to embrace all deceitful practices contrary to the plainrules of common honesty, including all acts, even though not originating in any actual evil designto perpetrate fraud or injury upon others, which do tend to deceive or mislead"]; see alsoPeople v American Motor Club, 179 AD2d 277, 283 [1992], appeal dismissed 80NY2d 893 [1992]). However, an essential element of the Attorney General's Martin Act claims isthat the alleged fraudulent transactions be material, i.e., that they have more than a trivial effecton net income or shareholder equity (see TSC Industries, Inc. v Northway, Inc., 426 US438, 449 [1976]).
Officers and directors are liable for a corporation's fraud where they either personallyparticipate in the fraud or have actual notice of its existence (Marine Midland Bank v RussoProduce Co., 50 NY2d 31, 44 [1980] ["(a) principal that accepts the benefits of its agent'smisdeeds is estopped to deny knowledge of the facts of which the agent was aware"]; accordPeople v Apple Health & Sports Clubs, 80 NY2d 803, 807 [1992]).
Summary Judgment"Summary judgment permits a party to show, by [admissible evidence], that there is nomaterial issue of fact to be tried, and that judgment may be directed as a matter of law" (Brill v City of New York, 2 NY3d648, 651 [2004]). It is a "drastic remedy"—depriving the parties of a trial, and as such,should only be granted where there is no doubt as to the existence of a triable issue of fact(see Glick & Dolleck v Tri-Pac Export Corp., 22 NY2d 439, 441 [1968]). The functionof a court in reviewing such a motion is issue finding, not issue determination, and if any genuineissue of material fact is found to exist, summary judgment must be denied (Phillips v Kantor& Co., 31 NY2d 307, 311 [1972]). Further, where credibility determinations are [*8]required, summary judgment must be denied (see Glick &Dolleck, 22 NY2d at 441).
CPLR 3212 (b), which governs the type of proof admissible in support of a motion forsummary judgment, allows for consideration of affidavits, the pleadings and other availableproof, such as depositions and written admissions (Andre v Pomeroy, 35 NY2d 361[1974]).[FN3]This Court has specifically held that witness statements from a Martin Act interview conductedby the Attorney General before an action was brought are admissible in support of a motion forsummary judgment (see State of New York v Metz, 241 AD2d 192, 198-199 [1998]).Moreover, restatements of earnings have been held admissible under the Federal Rules of CivilProcedure as a business record (see In re Worldcom, Inc. Sec. Litig., 2005 WL 375313,*7, 2005 US Dist LEXIS 2215, *23 [SD NY 2005] ["company's admission of what its financialstatements should have been in prior years is highly probative of whether the previously fileddocuments were false"]).
All of the evidence submitted on a motion for summary judgment is construed in the lightmost favorable to the opponent of the motion (Branham v Loews Orpheum Cinemas, Inc., 8 NY3d 931 [2007]).Further, in opposition to such motion for summary judgment, a court can consider hearsayevidence (see DiGiantomasso v City ofNew York, 55 AD3d 502 [2008]; Matter of New York City Asbestos Litig., 7 AD3d 285, 285 [2004]["evidence otherwise excludable at trial may be considered in opposition to a motion forsummary judgment as long as it does not become the sole basis for the court's determination"]).
Applying these principles, we find that the record evidence, including the witness-deponents'hearsay testimony submitted by the Attorney General regarding the defendants' actions andstatements, presents triable issues of fact as to whether defendants knew of, or participated in thefraudulent aspects of the GenRe and CAPCO schemes, given the nature and degree of theirpersonal involvement in both of the challenged transactions, as well as defendants'responsibilities within the corporation (see Polonetsky v Better Homes Depot, 97 NY2d46, 54 [2001]).
With respect to GenRe, Greenberg admits to two relevant phone calls with Ronald Ferguson:the first, initiated by Greenberg, to specifically inquire about an LPT; the second, initiated byFerguson, to let Greenberg know that the transaction Greenberg had requested could beconsummated. Winograd's deposition testimony regarding the degree of Greenberg's interest inthe audit of GenRe and his knowledge as to the details of the transaction support the AttorneyGeneral's position that Greenberg was complicit in the illicit scheme. Further, both Smith andGreenberg signed the financial statements that falsely recorded the GenRe money as loss [*9]reserves. Greenberg admits that concern about AIG's loss reservesprompted his actions, but he and Smith vehemently deny any knowledge that GenRe wasstructured not to involve any risk, and both also deny participation in any fraudulent LPT.
With respect to CAPCO, Umansky's Martin Act interview implicates both Greenberg andSmith in the fraudulent characterization of the auto warranty losses as capital losses. Moreover,AIG's restatement of earnings is admissible as a business record (see Worldcom, 2005WL 375313, *6, 2005 US Dist LEXIS 2215, *20) and, in conjunction with the excerpts of thedepositions of Greenberg and Smith, supports the Attorney General's position that defendantsactively participated in the CAPCO transaction with knowledge of the deceptive purpose it wasintended to achieve.
However, given that defendants have submitted sworn denials of knowledge andparticipation in the CAPCO fraud, and have testified that they were assured by Umansky that theCAPCO deal was structured to comply with all of the applicable legal and regulatoryrequirements, summary resolution of their knowledge or participation in this alleged fraud cannotbe determined as a matter of law.
In addition, the record presents triable issues of fact as to the materiality of the CAPCOtransaction, given the competing evidentiary submissions concerning whether a reasonableinvestor would have found that the information about a quantitative and qualitative impact of thetransaction significantly altered the total mix of information available (see TSC Industries,Inc. v Northway, Inc., 426 US at 449, 450; Rachmani, 71 NY2d at 726).Concur—Gonzalez, P.J., Tom, Saxe and Richter, JJ.
Catterson, J., dissents in part and concurs in part in a memorandum as follows: I amcompelled to dissent in part because I believe that the Martin Act and the Executive Law arepreempted in this case by federal law. Even if this entire action was not preempted, thedefendants Greenberg and Smith are nonetheless entitled to summary judgment dismissing thecomplaint against them concerning the Gen Re Transaction due to the utter failure of the NewYork Attorney General (hereinafter referred to as NYAG) to oppose the defendants' motion withevidence in admissible form or to put forward an excuse for the failure to do so after five years ofinvestigation and discovery. Barring preemption, I concur with the majority that the motioncourt's grant of summary judgment to the NYAG with regard to the CAPCO Transaction waserror as the record contains disputed issues of material fact. We differ however, on theadmissibility of certain evidence as well as the validity of the motion court's findings.
In 2006, the NYAG filed an amended complaint charging the defendants Greenberg andSmith, AIG's former CEO and CFO, with violating Executive Law § 63 (12) and GeneralBusiness Law § 352-c (1) (a) and (c) (hereinafter referred to as the Martin Act). (See generally People v Greenberg, 50AD3d 195 [1st Dept 2008], lv dismissed 10 NY3d 894 [2008].) The complaintalleged, among other things, that Greenberg and Smith personally initiated, negotiated andstructured two sham reinsurance transactions to portray an unduly positive picture of AIG's lossreserves (hereinafter referred to as the Gen Re Transaction) and underwriting performance to theinvesting public (hereinafter referred to as the CAPCO Transaction).[*10]
The Gen Re TransactionIn the fall of 2000, facing investor concern over a large decrease in its "loss reserves" (fundsto pay claims on policies), AIG contacted General Reinsurance Corporation (Gen Re) in order toborrow $200-500 million in reserves through a "loss portfolio" transfer (LPT) transaction. Therecord discloses that LPTs are a legitimate form of reinsurance. Gen Re was a subsidiary ofBerkshire Hathaway. Ostensibly, AIG would reinsure Gen Re for $600 million in potentialliability in exchange for $10 million in premiums ceded to AIG. AIG was to pay a $5 million feeto Gen Re. Greenberg spoke directly with Gen Re's CEO, Ronald Ferguson. Greenberg thentasked Christian Milton, AIG's head of reinsurance, to work on the idea of an LPT with RichardNapier, a senior vice president of Gen Re. The NYAG claims that AIG did not bear any risk inthe transaction for which it paid Gen Re a $5 million fee; the NYAG thus asserts that the dealshould have been booked as a deposit because of its no-risk structure, but that AIG booked thetransaction as insurance, which increased AIG's loss reserves and made it appear to be financiallyhealthier than it was.
On May 31, 2005, following the defendants' departures from AIG, new management filedAIG's Form 10-K for 2004, restating financial statements for 2000 through 2004 (hereinafterreferred to as the Restatement).[FN4]
The CAPCO TransactionIn 1999, AIG faced large underwriting losses based, in part, on its auto warranty policies.AIG developed a transaction to convert the underwriting losses into capital losses. Under theCAPCO Transaction, AIG "reinsured" the auto warranty underwriting losses through an offshoreshell company, CAPCO Reinsurance, that was controlled by AIG. This allowed AIG, which didnot treat CAPCO as a consolidated entity on its financial statements, to sell shares in the shellcompany over time so as to trigger recognition of $162.7 million in capital losses thatcorresponded to its payment of more than $183 million in auto warranty underwriting losses.
After Greenberg and Smith left AIG in 2005, AIG issued a press release and announced thatthe transaction involved an improper structure created to recharacterize underwriting lossesrelating to auto warranty business as capital losses.
The Summary Judgment MotionsOn September 22, 2009, Greenberg and Smith filed motions for summary judgment seekingto dismiss the claims asserted against them. The defendants argued that they were entitled tosummary judgment because, inter alia, the claims were preempted by federal law, and any allegedmisstatements or omissions in connection with the transactions were immaterial as a matter oflaw.
The NYAG filed a motion for partial summary judgment on liability with respect to the [*11]Gen Re and CAPCO Transactions. In brief, the NYAG argued thatthe Gen Re evidence showed that Greenberg: (1) initiated the Gen Re Transaction; (2) designatedChristian Milton, the head of AIG reinsurance to work out details and report back to him; (3)agreed to the terms proposed by Gen Re, including an oral side agreement that AIG would not besubject to any risk; and (4) later boasted of the increase in loss reserves that were the result of thetransaction. The NYAG argued that Smith was briefed on the terms of the no-risk deal anddirected that it be booked as insurance.
With respect to CAPCO, the NYAG argued that the evidence showed that Greenbergdirected AIG to stop writing new auto-warranty policies, that Smith directed AIG Senior VicePresident Joseph Umansky to develop a transaction to convert the underwriting losses intocapital losses, and both defendants received and approved of Umansky's proposal which was thenimplemented. Further, the NYAG alleged that Greenberg personally directed Umansky to contactthe president of an AIG private bank in Switzerland to locate outside investors to buy theCAPCO common stock.
In opposition to the NYAG's summary judgment motion and in further support of theirmotions, the defendants first argued that the vast majority of the evidence cited by the NYAG insupport of its claims was inadmissible hearsay. This included testimony and evidence from otherproceedings, such as the Martin Act interview of Joseph Umansky conducted by the NYAGbefore the complaint was filed, and the testimony at the federal criminal prosecution in Hartford,Connecticut. The defendants also objected to the NYAG's reliance on certain handwritten notesand e-mails.
The defendants maintained that, based only on the admissible evidence, there was no supportfor the claims that they sought improper transactions or knew that they were improper. Thedefendants argued that based on the admissible record, the claims had to be dismissed becausethere was insufficient evidence to sustain a claim with respect to their participation in thetransactions or knowledge that they involved no risk. At the very least, they argued that issues offact precluded the grant of the NYAG's summary judgment motion.
With respect to the Gen Re Transaction, the defendants argued that the admissible evidenceshows that while Greenberg contacted Gen Re to inquire about an LPT, it was solely AIG andGen Re personnel, without the involvement of Greenberg or Smith, who worked on all the detailsof the transaction. This included the accounting decisions and anything else relating to theexecution of transaction.
With respect to the CAPCO Transaction, the defendants argued that the admissible evidence,at minimum, raises disputed issues of fact as to their participation in or knowledge of the allegedimproper nature of the transaction. The defendants cite the involvement of numerous legal andaccounting professionals. The professional staff were charged with addressing all of the legal,regulatory and tax issues associated with the CAPCO Transaction. The defendants also reliedupon such professionals to draft controlling documents and ensure that the transaction wasproper and accounted for accurately.
The court denied the defendants' motions for summary judgment to dismiss the claims, andgranted NYAG's motion for partial summary judgment on the issue of liability with respect to theCAPCO Transaction, but denied it with respect to the Gen Re Transaction.
PreemptionIn my view, use of the Martin Act and the Executive Law in the context of alleged securitiesviolations is, in this case, preempted by federal law. It is beyond dispute that the [*12]national market for securities requires the certainty of uniformstandards. (Guice v Charles Schwab & Co., 89 NY2d 31, 45-46 [1996], certdenied 520 US 1118 [1997].) In order to achieve this uniformity, Congress enacted a seriesof regulatory schemes that control the national securities markets.
In the Private Securities Litigation Reform Act of 1995 (hereinafter referred to as PSLRA)(15 USC § 77z-1, as added by Pub L 104-67, 109 US Stat 737), Congress specified thestandards under which private litigants may bring suits against securities issuers. Less than threeyears later, recognizing that litigants were circumventing the PSLRA by invoking state-lawcauses of action, Congress enacted the Securities Litigation Uniform Standards Act of 1998(hereinafter referred to as SLUSA) (15 USC §§ 77p, 78bb, as added by Pub L105-353, 112 US Stat 3227), which explicitly precludes state law actions premised on allegationsrelating to securities transactions. Finally, through the National Securities Markets ImprovementAct of 1996 (hereinafter referred to as NSMIA) (15 USC § 77r, as added by Pub L104-290, 110 US Stat 3416), Congress preempted the vast majority of so-called blue sky laws,which had imposed a multiplicity of state law registration standards on securities issuers.
NSMIA rests on Congress's recognition that uniformity of regulations concerning nationallytraded securities "promote[s] efficiency, competition, and capital formation in the capitalmarkets," and "advance[s] the development of national securities markets . . . by, asa general rule, designating the Federal government as the exclusive regulator" of nationalsecurities markets. (Rep of House Comm on Commerce, HR Rep 104-622, 104th Cong, 2d Sess,at 16, reprinted in 1996 US Code Cong & Admin News, at 3877, 3878.) More recently theSupreme Court succinctly explained that "[t]he magnitude of the federal interest in protecting theintegrity and efficient operation of the market for nationally traded securities cannot beoverstated." (Merrill Lynch, Pierce, Fenner & Smith Inc. v Dabit, 547 US 71, 78 [2006].)
When PSLRA, SLUSA and NSMIA are read together it is patent that the Congress hasdetermined that efficient securities markets require a uniform national standard governingliability for private class actions. (See Lander v Hartford Life & Annuity Ins. Co., 251F3d 101, 111 [2d Cir 2001].) Thus, any effort to circumvent that uniform federal scheme isbarred by these federal statutes.
In this case, and as set out infra, the NYAG has instituted a lawsuit for the benefit ofprivate parties. The NYAG has made clear in recent filings in parallel federal securities litigationregarding the exact same conduct (litigation that is unquestionably subject to the PSLRA), thatthe only relief that essentially is at issue here is an award of damages for a worldwide class ofAIG shareholders.
It is hornbook law that "state and local laws that conflict with federal law are 'without effect.'" (New York SMSA Ltd. Partnership v Town of Clarkstown, 612 F3d 97, 103 [2d Cir2010] [per curiam], quoting Altria Group Inc. v Good, 555 US 70, 76 [2008].) We haverecognized two kinds of preemption relevant to the NYAG's claims: "express preemption, whereCongress has expressly preempted local law," and "conflict preemption, where . . .local law is an obstacle to the achievement of federal objectives." (New York SMSA Ltd.Partnership, 612 F3d at 104, citing Wachovia Bank, N.A. v Burke, 414 F3d 305, 313[2d Cir 2005]; see also Guice, 89 NY2d at 39.) Express and implied preemption eachindependently require dismissal of the NYAG's claims against Greenberg and Smith.[*13]
Federal law bars this action for two reasons. First,because this action is brought by the NYAG on behalf of private shareholders, it isindistinguishable from a private class action. Thus, it is precluded by SLUSA's express textualprohibition of class actions grounded in state law; in this case the Martin Act and the ExecutiveLaw. Second, taken together, the PSLRA, SLUSA and NSMIA impliedly preempt any litigationthat seeks recovery of damages on a class basis for securities fraud under purely state law.
The U.S. Supreme Court has held that SLUSA prohibits suits, such as this one, which areadvanced under state law alleging misrepresentations in connection with nationally tradedsecurities "in which damages are sought on behalf of more than 50 people." (Kircher vPutnam Funds Trust, 547 US 633, 637 [2006].) Kircher directs that state courtsdismiss actions falling within this preclusion of SLUSA and failure to do so is subject to reviewby the United States Supreme Court. (See 547 US at 646-648.)
There is no dispute that the NYAG seeks monetary damages on behalf of a class of privateshareholders. Indeed, the NYAG advised the federal court before whom the investors'consolidated securities class action is pending that the NYAG action seeks damages on"overlapping facts" for the same "class members." The NYAG here is not invoking the MartinAct and Executive Law to seek remedies limited to sovereign interests, but is seeking to bring anaction impermissibly "in a de facto or de jure representative capacity on behalf of [the privateshareholders]." (See e.g. In re Baldwin-United Corp. [Single Premium Deferred AnnuitiesInsurance Litigation], 770 F2d 328, 341 [2d Cir 1985].) Such "de facto or de jure" actions onbehalf of private shareholders are barred by federal law and dismissal is required. (SeeKircher, 547 US at 646-648.)
NSMIA further prohibits states from "directly or indirectly" imposing different disclosurerequirements than federal law. (15 USC § 77r [a] [2] [B].) Federal law requires a showingof scienter and reliance for securities fraud claims—elements that the NYAG and the courtbelow assert are not required in this case. Accordingly the NYAG's action also conflicts with andis barred by NSMIA. (See Myers v Merrill Lynch & Co., Inc., 1999 WL 696082, *9,1999 US Dist LEXIS 22642, *30 [ND Cal 1999], affd 249 F3d 1087 [9th Cir 2001].)
The NYAG's goal of recovering damages against Greenberg and Smith on behalf of privateinvestors without having to show scienter is in direct conflict with federal law, which requiressuch proof in actions involving allegations of fraud. (See e.g. Marcus v AT&T Corp., 138F3d 46 [2d Cir 1998].) This would allow the NYAG to recover damages on behalf of privateinvestors on a quantum of proof significantly lower than under federal law. "The prospect israised, then, of parallel class actions proceeding in state and federal court, with differentstandards governing claims asserted on identical facts. That prospect, which exists to some extentin this very case, squarely conflicts with the congressional preference for 'national standards forsecurities class action lawsuits involving nationally traded securities.' " (Merrill Lynch,Pierce, Fenner & Smith Inc. v Dabit, 547 US 71, 86-87 [2006] [citation omitted]; accordGuice v Charles Schwab & Co., 89 NY2d at 48.)
The defendants contend that this direct conflict could only be obviated if requirements ofscienter and reliance were imposed with respect to claims seeking the recovery of monetarydamages on behalf of private shareholders under the Martin Act and Executive Law. I agree and[*14]would reverse on this ground.
Unfortunately, merely holding the NYAG to a higher standard of proof for the claimsasserted in this case will not render the NYAG's prosecution more viable. We have repeatedlyheld that there are limitations on the power of the NYAG to prosecute claims for money damageson behalf of private entities. Our decision in People v Grasso (54 AD3d 180 [1st Dept 2008]), is instructive inthis regard. In Grasso, we rejected the NYAG's continued prosecution of claims made onbehalf of an entity that had altered its status from a not-for-profit corporation to a for-profitentity. "The Attorney General's continued prosecution of these causes of action . . .vindicates no public purpose." (54 AD3d at 196, citing People v Ingersoll, 58 NY 1[1874]; People v Lowe, 117 NY 175 [1889].) Our reliance on Ingersoll hasparticular significance for this case. In Ingersoll, the NYAG attempted to recover moneyfor a municipal corporation from certain defendants. The Court rejected the NYAG's parenspatriae argument: "It is not in terms averred that the money, in any legal sense or in equity andgood conscience, belonged to the [State] . . . , or that the wrong was perpetrateddirectly against the State or the people of the State, that is, the whole State as a legal entity, andthe whole body of the people . . . The title to and ownership of the money sought tobe recovered must determine the right of action, and if the money did not belong to the State, butdid belong to some other body having capacity to sue, this action cannot be maintained." (58 NYat 12-13; see New York v Seneci, 817 F2d 1015 [2d Cir 1987].)
In my view, private shareholders who have cause to complain have no need of the NYAG toprotect their rights. There simply is no wrong committed "directly against the State or the peopleof the State" as required by Ingersoll, Lowe and Grasso. Indeed, a class ofshareholders has actively litigated claims against AIG in a consolidated securities class action.This action has resulted in a settlement in excess of $1 billion with a contribution of over $100million from Greenberg and Smith. (See In re American Intl. Group Sec. Litig., No. 1:04CV 08141 [SD NY 2004].) The NYAG's use of the Martin Act and the Executive Law on behalfof private shareholders should be summarily rejected for the same reasons that we rejected theNYAG's efforts under the Not-For-Profit Corporations Law in Grasso.
Even if the action is not preempted by federal law, or precluded by the State Constitution, themotion court erred in not awarding the defendants summary judgment on the Gen Re Transactionclaims. It is beyond dispute that the party moving for summary judgment must make out a primafacie showing of entitlement to judgment as a matter of law. (Alvarez v Prospect Hosp.,68 NY2d 320 [1986].) Once the movant has made out a prima facie entitlement to summaryjudgment, a party opposing the motion must submit proof in admissible form demonstrating agenuine issue of material fact or proffer a reasonable excuse for the failure to do so.(Alvarez, 68 NY2d at 324; see Grasso v Angerami, 79 NY2d 813 [1991];Zuckerman v City of New York, 49 NY2d 557, 562 [1980]; Friends of Animals vAssociated Fur Mfrs., 46 NY2d 1065, 1068 [1979]; Vasquez v Christian HeraldAssn., 186 AD2d 467, 468 [1st Dept 1992], lv dismissed 81 NY2d 783 [1993].)
Greenberg and the Gen Re TransactionIn order to hold Greenberg liable for fraud in connection with the Gen Re Transaction, theNYAG was obligated to establish that Greenberg either participated in or had knowledge of thefraud itself. In my view, New York law clearly provides that a corporate officer's knowledge ofjust the transaction itself is insufficient. (Marine Midland Bank v Russo Produce Co., 50NY2d 31, 44 [1980] [citations omitted] ["As a general proposition, corporate officers anddirectors are not liable for fraud unless they personally participate in the misrepresentation orhave actual knowledge of it . . . Mere negligent failure to acquire knowledge of thefalsehood is insufficient"]; see Polonetsky v Better Homes Depot, 97 NY2d 46 [2001];People v Apple Health & Sports Clubs, 80 NY2d 803 [1992].)
The NYAG's theory is that the Gen Re Transaction was fraudulent because it had "no transferof risk" and thus could not have been carried as insurance under generally accepted accountingprinciples. Even if that contention is correct, the NYAG simply offers no admissible evidence torebut Greenberg's prima facie showing that Greenberg did not know that at the time AIG enteredinto the Gen Re LPT, the LPT did not transfer sufficient risk to be properly accounted for as afinite reinsurance LPT. The only proof of record that is admissible establishes that Greenberg hadknowledge of the transaction, a matter that Greenberg does not dispute, but not knowledge of anyfraud. More importantly, the NYAG also failed to offer any admissible evidence that thetransaction was without risk. The only evidence put forth by the NYAG on this aspect was AIG's2005 press release and its Restatement.
Defendant Greenberg contends, and I agree, that the Restatement is nothing more thaninadmissible hearsay. There is no evidence of record as to how the Restatement was created, howthe facts that it was purportedly based on were established, or even that it was created fromevidence generally considered reliable. Most significantly, it was issued after Greenberg left AIGand at a time when then Attorney General Spitzer was threatening AIG with criminalprosecution. Similarly, the press release has absolutely no probative value, and, just as anynewspaper article based on that press release, would be inadmissible hearsay.
The only remaining evidence relied on by the NYAG and accepted by the motion court eithercontravenes CPLR 4517 (a), or is simply inadmissible hearsay. No court in New York has everallowed hearsay to be sufficient to defeat a summary judgment motion where that hearsayevidence cannot ultimately be converted to admissible evidence at trial.
In my view the reason for this is elementary. There would be no reason to deny summaryjudgment to a party where the only evidence in opposition to the motion could never be admittedat a subsequent trial. The motion court failed to elucidate how the testimony from the Hartfordcriminal trial, with its now reversed convictions, would be admissible in a trial of this action.Moreover, when pressed at oral argument on appeal, the NYAG was similarly bereft of authorityon this critical issue for the AG's case.
The record reflects that the motion court and the NYAG relied on the Hartford trial judge'sopinion on matters at issue as well as the trial testimony of AIG personnel who were either notdeposed in this case, or if deposed, no mention was made of the EBT testimony. Furthermore, asnoted above, the convictions were ultimately vacated.
The NYAG and the motion court relied on testimony that will always remain inadmissible:(1) the Hartford trial judge's rulings on issues of, inter alia, the credibility of [*15]Napier's testimony in the Hartford trial, and as to the damage toAIG investors; (2) the testimony of John Houldsworth in the Hartford trial, who was not deposedin the instant case; (3) the testimony of Charlene Hamrah (the director of AIG's investor relationsdepartment) in the Hartford trial and not her EBT testimony; and (4) three other employees ofAIG who also testified in the criminal trial.
Equally disturbing is the motion court's reliance on AIG's settlement with the Securities andExchange Commission and the NYAG as well as Gen Re's settlement with the SEC and theUnited States Department of Justice. Again, no authority exists to allow the introduction of thesesettlements, in which the defendants took no role, as evidence in opposition to the motion.Finally, and in my view, astonishingly, the motion court even considered a book written by aformer AIG employee when deciding what defendant Greenberg knew about Milton's actions.
None of the above-described "evidence" relied on by the motion court is rendered admissiblethrough invocation of the co-conspirator exception. In People v Sanders (56 NY2d 51[1982]), the Court was faced with the question of whether certain recorded conversations with aperson deceased at the time of trial were admissible against the defendant. The Court reviewedthe extent of the co-conspirator exception to the hearsay rule and concluded by holding that, "thePeople must establish, by prima facie proof, the existence of a conspiracy between the declarantand the defendant 'without recourse to the declarations sought to be introduced.' " (56 NY2d at62, quoting People v Salko, 47 NY2d 230, 238 [1979].) In my view, none of the evidencecited by the court below was nonhearsay, independent evidence of the existence of a conspiracy.
On appeal, the NYAG contends that "Greenberg's own testimony is sufficient to establish aprima facie case of conspiracy." This assertion is wholly belied by the record. Greenberg testifiedrepeatedly that his understanding of the Gen Re Transaction was that it was a valid, and thuslawful, LPT. To overcome this deficiency in proof, the motion court relied on Napier's Hartfordcriminal trial testimony that Greenberg agreed to a no risk deal. Unfortunately for this reasoning,Napier also testified that he never spoke with Greenberg, was himself a participant in thetransaction, and based his assertions on what he heard from third parties. Once again, none of thistestimony satisfies any exception to the hearsay rule. Therefore, Napier's testimony in theHartford criminal trial cannot, by definition, satisfy the Sanders requirement ofnonhearsay independent evidence. Finally, in reversing the convictions, the Second Circuitcautioned the government over the allegations that Napier perjured himself: "No doubt it isdangerous for prosecutors to ignore serious red flags that a witness is lying, and the governmentwill doubtless approach Napier's revised recollections with a more skeptical eye on remand."(United States v Ferguson, 676 F3d 260, 283 [2011].) Such testimony surely cannot serveto make the NYAG's prima facie burden.
Smith and the Gen Re TransactionThe NYAG's utter failure to submit admissible evidence in opposition to Greenberg'ssummary judgment motion is less egregious than its failure to submit such in opposing Smith'smotion. No witness testified that Smith was responsible for accounting for the Gen ReTransaction. Indeed, no witness testified that they even spoke with Smith about the transaction.While Smith, as AIG's CFO, may have had involvement in certain transactions between HartfordSteam Boiler and Gen Re, Smith unequivocally testified in his EBT that he was not aware ofeither the details of the Gen Re Transaction or that any premium was returned to Gen Re. Smith[*16]testified repeatedly that he was told that the transactioninvolved $500 million in premium and a potential exposure of $600 million. In his view, thetransaction involved $100 million in risk to AIG. The reasons set forth above for rejecting any ofthe Hartford trial testimony as evidence against Greenberg apply equally to Smith. The testimonywill always be inadmissible in this case and can never be used to defeat Smith's motion.
Greenberg, Smith, and the CAPCO TransactionThe majority contends that the evidence put forward by the NYAG shows that the"defendants actively participated in the CAPCO [T]ransaction with knowledge of the deceptivepurpose it was intended to achieve." This view of the evidence is only possible if we disregard allof the accepted principles applicable to summary judgment motions.
It is hornbook law that "issue finding and not issue resolution is a court's proper function on amotion for summary judgment." (Cruz v American Export Lines, 67 NY2d 1, 13 [1986],cert denied 476 US 1170 [1986]; Shapiro v Boulevard Hous. Corp., 70 AD3d 474, 475 [1st Dept2010].) Furthermore, the court is required to draw all inferences in favor of the nonmovant.(Id.; People v Grasso, 50AD3d 535, 544 [1st Dept 2008].) Finally, in the context of summary judgment, the court isnot to assess the credibility of the assertions of each side, but rather decide if the movant who hasthe burden has established "his entitlement to summary judgment as a matter of law."(Ferrante v American Lung Assn., 90 NY2d 623, 631 [1997]; Adam v Cutner &Rathkopf, 238 AD2d 234 [1st Dept 1997].)
In my view the motion court and the majority have ignored every precept set out above tocome to the conclusion that the defendants intended the CAPCO Transaction to be a meredeception. Initially, there is absolutely no record support for the motion court or the NYAG toconclude that the conversion of underwriting losses to capital losses is prima facie improper.
The defendants established that Greenberg repeatedly testified in his EBT that he understoodit was permissible to "convert underwriting [losses] properly into investment losses, and that [it]could only be done if [. . .] checked by the regulatory, legal, and accountingpeople." ("Umansky . . . said subject to getting approval from the regulatory side,the legal side, the accounting side . . . [t]here was nothing improper aboutconverting underwriting losses to investment losses".) The defendants also submitted unrebuttedexpert opinion evidence establishing that a "change from an underwriting loss to a capital loss isnot, in and of itself, improper pursuant to GAAP." The NYAG failed to submit anycountervailing evidence. Indeed, the NYAG failed to proffer any expert testimony at all in replyto Greenberg's opposition to the motion. Obviously, the credibility of the nonmovant defendants'expert submitted in opposition cannot be resolved adversely to Greenberg, nor his opinionscompletely ignored, by the motion court. This is especially true when the NYAG submitted nocontravening proof. (Cf. Bradley vSoundview Healthcenter, 4 AD3d 194 [1st Dept 2004] ["Conflicting expert affidavitsraise issues of fact and credibility that cannot be resolved on a motion for summary judgment"].)
Greenberg's understanding of the merits of the transaction in theory was corroborated by thenumerous professionals, both lawyers and accountants, who ultimately structured the CAPCOTransaction for AIG. None of these professionals raised any concerns regarding the propriety ofexiting the auto-warranty business through a transaction that also converted the underwritinglosses to capital losses. Indeed, the record is unequivocal that at least eight AIG attorneys, [*17]including Ernest Patrikis, AIG's General Counsel, and KenHarkins, the General Counsel of AIG's Domestic Brokerage Group, which was responsible forNational Union, understood that the CAPCO Transaction converted underwriting losses tocapital losses. Numerous AIG accountants, including reinsurance accounting experts, alsounderstood that the CAPCO Transaction converted underwriting losses to investment losses.Last, but not least, AIG's independent auditors, PricewaterhouseCoopers, also were aware of theCAPCO Transaction.
Greenberg accurately points out that none of these professionals raised any concerns thatsuch a transaction would be per se improper because it resulted in the conversion of underwritinglosses to capital losses. Several attorneys involved testified they were familiar with similartransactions. At the very least, where the conduct is consistent with industry practice, summaryjudgment is "particularly" inappropriate. (State of New York v General Motors Corp., 48NY2d 836, 838 [1979].)
In sum, the record is directly contrary to the majority's and the motion court's inference thatconverting an underwriting loss to a capital loss is, per se, a deceptive or wrongful act. Thefurther inference that Greenberg must, therefore, have known that the CAPCO Transaction wasdeceptive is also in direct conflict with the record. Finally, even if I were to agree that suchinferences were arguably "reasonable," it would nonetheless be impermissible to grant summaryjudgment to the moving party upon reasonable but not "inescapable" inferences. (Liberty Ins. Underwriters Inc. v CorpinaPiergrossi Overzat & Klar LLP, 78 AD3d 602, 605 [1st Dept 2010].)
I concur with the majority that if the claims are not preempted by federal law, the motioncourt erred nonetheless because issues of fact exist solely on the question of the materiality of theCAPCO Transaction. [Prior Case History: 2010 NY Slip Op 33216(U).]
Footnote 1: Summary of Testimony ofUnited State Securities and Exchange Commission, available athttp://www.sec.gov/news/testimony/testarchive/1997/tsty1997.txt.
Footnote 2: The Attorney General hasapprised the federal court of the status of this litigation. Defendants have represented to thisCourt that a hearing date has been set (June 28, 2012) for approval of class action claims againstthem.
Footnote 3: It bears noting that evidencegiven at a related criminal trial resulting in a conviction may properly be considered on a motionfor summary judgment (Edmonds v New York City Hous. Auth., 224 AD2d 191 [1996]).Here, at the time the motion court issued its decision, a judgment had been rendered in federaldistrict court in Connecticut, convicting a number of individuals from GenRe, and one from AIG,of various felonies. Thus, there was no error in the motion court's consideration of the criminaltrial testimony in its ruling. However, as the convictions have been reversed and the criminalmatter remanded for a new trial, we confine our review to facts submitted independent of theConnecticut criminal litigation.
Footnote 4: In June 2005, two Gen Reexecutives pleaded guilty to participating in a conspiracy to commit securities fraud for their rolein effectuating the Gen Re Transaction. In February 2008, Milton and three Gen Re executiveswere convicted on Federal charges with respect to the Gen Re Transaction. Those convictionswere subsequently reversed and the matter was remanded for a new trial. (See United States vFerguson, 553 F Supp 2d 145 [D Conn 2008].)