|
|
Former AIG exec Kevin Fitzpatrick sues for $822M
Apr 25, 2010 -- Crain's New York Business
Insurer faces suit from former exec for unpaid compensation.
Two years ago, insurance giant American International Group outraged the nation when it paid $165 million in bonuses to traders in the division that had run up such titanic losses that AIG would have sunk without $182 billion in bailout assistance.
The company has largely healed the wounds since then. Chief executive Robert Benmosche has returned AIG to profitability, and the U.S. Treasury is preparing to sell off its 92% stake in the insurer as soon as next month.
But just as everything seems to be going right, AIG faces another pay problem that threatens to dwarf the 2009 bonus fiasco. The difficulty centers on Kevin Fitzpatrick, the former president of the global real estate division, who is suing AIG for millions.
To be precise, $822 million—about half of AIG's cash on hand. According to his lawyers, Mr. Fitzpatrick has $275 million to $300 million coming personally, and the rest is owed the investors in various real estate vehicles that he oversaw. His demands are so enormous that AIG lists the legal dispute as a significant financial risk in its annual report.
Lisa Lindsley, director of capital strategies at the American Federation of State, County and Municipal Employees, a frequent critic of AIG's pay practices, described the demands as "breathtaking."
AIG insists that it doesn't owe Mr. Fitzpatrick a penny, because he was terminated for stealing confidential company information. He counters that he resigned. A trial in a Manhattan federal courtroom is scheduled for next month.
Michael Deutsch, a lawyer who specializes in Wall Street compensation matters, said that Mr. Fitzpatrick seems to have a strong case. "It wouldn't surprise me if AIG tried to come up with some way to avoid its obligations," Mr. Deutsch said.
THE FINAL CUT
At the heart of the dispute is Mr. Fitzpatrick's 2001 employment agreement, which granted him and his partners 10% of the profits on the sale of all AIG-owned properties, as well as his contention that he is owed that cut even if he is no longer with the company.
During Mr. Fitzpatrick's 22 years at the helm of the division, AIG made nearly 1,400 investments in properties ranging from office towers in Shanghai to Vermont ski lodges.
His lawyer said at a hearing last year that the insurer sold for $800 million a Tokyo office building that it had bought for $25 million. Additionally, the lawsuit asserts that Mr. Fitzpatrick acquired a lower Manhattan office tower that housed AIG operations by using tax credits that offset the entire purchase price.
Even as AIG hit the rocks in 2008, Mr. Fitzpatrick's personal fortunes soared. The company sold properties in order to raise desperately needed cash, generating windfalls for him. AIG's management team, which a few years earlier had replaced the regime that granted his generous contract, allegedly refused to honor the agreement. Mr. Fitzpatrick says that when he complained, the chief administrative officer of AIG Investments replied, "Contracts are made to be broken."
In March 2009, six months after taxpayers rescued AIG, Mr. Fitzpatrick submitted his resignation but promised to help with the transition. Two months later, AIG sacked him and voided his contract. The company charged that Mr. Fitzpatrick was trying to create a competitor and that since the bailout he had been sending thousands of sensitive documents to his home, including lists of his group's 500 employees, their compensation and details about hundreds of properties.
While it's impossible to say how a jury will view the matter, AIG's latest compensation controversy is already infuriating some investors.
Noting that AIG is still heavily reliant on taxpayer support, an AFSCME official hopes federal authorities prevent Mr. Fitzpatrick from collecting all his money should he prevail in court. In fact, the Congressional Oversight Panel reported last month that $59 billion of AIG's bailout is outstanding.
“Working families keep seeing huge payouts for the Wall Street executives who drove our economy into the ditch and are apparently living high on the hog with taxpayer money,” said Lee Saunders, the union's international secretary-treasurer.
No federal involvement
Federal intervention is unlikely, however. Kenneth Feinberg, the Obama administration's compensation czar, called AIG's infamous bonuses “outrageous” but said he lacked the power to nullify agreements predating the bailout. Mr. Feinberg, now disbursing funds to victims of the BP oil spill, wouldn't comment on the Fitzpatrick case; a Treasury spokesman didn't return a call.
Sean O'Shea, the plaintiff's lawyer, argued that Mr. Fitzpatrick shouldn't be penalized because colleagues in another part of AIG made bad decisions in insuring mortgage-related securities.
"AIG doesn't get a free pass to abrogate contracts because they were so foolish in the derivatives division," Mr. O'Shea said.
An AIG spokesman said Mr. Fitzpatrick's claims "have no merit."
Judge Richard Berman has implored the sides to make a deal, but both seem locked in.
"If you want to settle, you know how to do it," Mr. Berman lectured lawyers at a hearing last year. "You know, you're all big boys and girls."
A version of this article appeared in the April 25, 2011 print issue of Crain's New York Business.
