The People of the State of New York by Andrew M. Cuomo,, Respondent,v.Maurice R. Greenberg, et al., Appellants.BriefN.Y.May 28, 2013To be argued by: BARBARA D. UNDERWOOD 30 minutes requested Supreme Court, New York County, Index No. 401720/2005 State of New York Court of Appeals PEOPLE OF THE STATE OF NEW YORK BY ANDREW M. CUOMO, ATTORNEY GENERAL OF THE STATE OF NEW YORK , Plaintiff-Respondent, v. MAURICE R. GREENBERG and HOWARD I. SMITH, Defendants-Appellants. BRIEF FOR RESPONDENT BARBARA D. UNDERWOOD Solicitor General RICHARD DEARING Deputy Solicitor General WON S. SHIN Assistant Solicitor General David Ellenhorn Senior Trial Counsel, Investor Protection Bureau of Counsel ERIC T. SCHNEIDERMAN Attorney General of the State of New York Attorney pro se 120 Broadway New York, New York 10271 (212) 416-8808 (212) 416-8962 (facsimile) Dated: November 16, 2012 STATUS OF RELATED LITIGATION 1. United States v. Ferguson, No. 06-cr-137 (D. Conn.): In 2006, the United States Department of Justice obtained an indictment of several senior executives at American International Group (AIG) and General Reinsurance Corporation (Gen Re), including Christian Milton, former head of AIG’s reinsurance business, and Ronald Ferguson, former chief executive officer of Gen Re, on charges of conspiracy, securities fraud, and other offenses, for their roles in a fraudulent reinsurance transaction between the two companies. (That transaction, the “Gen Re” fraud, is also the subject of the present appeal in this Court.) Following a jury trial, each defendant was convicted on all counts; and the federal district court (Droney, J.) denied defendants’ motions for a judgment of acquittal and a new trial. United States v. Ferguson, 553 F. Supp. 2d 145 (D. Conn. 2008). The U.S. Court of Appeals for the Second Circuit subsequently vacated the convictions on narrow grounds, finding error in the trial court’s ruling that admitted into evidence certain charts reflecting AIG’s stock price and in a jury instruction on ii causation. The court remanded the case for further proceedings. United States v. Ferguson, 676 F.3d 260, 273-77 (2d Cir. 2011). On remand, the United States entered into deferred prosecution agreements with defendants, in which each defendant acknowledged that “aspects of the [Gen Re] transaction were fraudulent,” that they “disregarded . . . red flags suggest[ing] that the transaction would be improperly accounted for,” and that they should have “attempted to stop [the transaction] from going forward, but instead continued to participate in it.” See Consent Mot. for Deferred Prosecution Continuance, United States v. Ferguson, No. 06-cr-137 (D. Conn. June 22, 2012) (Dkt. No. 1379 Exhs. A-E); Deferred Prosecution Order, United States v. Ferguson, No. 06-cr-137 (D. Conn. June 25, 2012) (Dkt. No. 1382). 2. In re Am. Int’l Group, Inc. Secs. Litig., No. 04-cv-8141 (S.D.N.Y.): In 2004, following the announcement of an enforcement action brought by the New York Attorney General alleging bid- rigging in the insurance industry, AIG shareholders brought a private securities class action in federal court against AIG, iii Maurice Greenberg, and other defendants, for covering up AIG’s complicity in that illegal bid-rigging. See Class Action Compl., Feder v. Am. Int’l Group, Inc., No. 04-cv-8141 (S.D.N.Y. Oct. 15, 2004) (Dkt. No. 1). In 2005, following the public disclosure of investigations into the fraudulent Gen Re transaction by the Attorney General and the Securities and Exchange Commission, the named class plaintiffs amended their complaint to add claims of securities fraud relating to the Gen Re fraud and other transactions, naming Howard Smith and others as additional defendants. See Consol. Am. Class Action Compl., In re Am. Int’l Group, Inc. Secs. Litig., No. 04-cv-8141 (S.D.N.Y. Apr. 19, 2005) (Dkt. No. 61). The parties to this private class action have proposed a settlement of all claims, including claims based on the Gen Re fraud, to which the Attorney General has objected. The federal district court (Batts, J.) has not scheduled a hearing to consider whether it should approve the settlement as “fair, reasonable, and adequate.” See Fed. R. Civ. P. 23(e). iv TABLE OF CONTENTS Page TABLE OF AUTHORITIES.............................................................ix PRELIMINARY STATEMENT.........................................................1 QUESTIONS PRESENTED..............................................................8 STATEMENT OF THE CASE ........................................................10 A. The Martin Act and Executive Law § 63(12) ...............10 B. This Enforcement Action ..............................................13 1. Greenberg Proposes a Highly Unusual Deal to Gen Re’s CEO To Quell Stock Market Concerns About AIG’s Declining Loss Reserves .................................................................17 2. Greenberg Receives Status Updates From His Point Man, Christian Milton, As Terms Coalesce Around a Sham Deal ..............................21 3. Greenberg Finalizes the Key Terms of the Deal With Gen Re’s CEO.......................................23 4. The Parties Create and Execute Sham Reinsurance Documents........................................25 5. Smith Approves AIG’s Accounting For the Transaction as Real Insurance, and Greenberg Touts AIG’s Increased Loss Reserves .................................................................29 6. Smith Participates in Arrangements To Conceal the Return of Gen Re’s Premium and the Payment of Gen Re’s Net Fee .........................30 v TABLE OF CONTENTS (cont'd) Page 7. After the Attorney General and SEC Serve Subpoenas, Greenberg Transfers Nearly All His AIG Stock and Discourages an Auditor’s Investigation .......................................................... 32 8. Greenberg Brings Smith and Milton With Him To a Different Company After All Three Are Forced Out of AIG........................................... 34 9. AIG Admits the Fraud .......................................... 35 C. Proceedings Below ........................................................ 36 1. The Trial Court’s Ruling ....................................... 36 2. The Interlocutory Appeal ...................................... 38 ARGUMENT .................................................................................. 41 POINT I - THE MARTIN ACT AND EXECUTIVE LAW § 63(12) EXPRESSLY GRANT THE ATTORNEY GENERAL AUTHORITY TO MAINTAIN CIVIL ENFORCEMENT ACTIONS TO PREVENT, REMEDY, AND DETER FRAUD ....................................................... 41 A. The Martin Act and Executive Law § 63(12) Expressly Authorize the Attorney General To Prosecute Civil Enforcement Actions. .......... 42 B. Defendants Are Incorrect In Contending That Money Damages Serve No Public Purpose. ............................................................... 49 vi TABLE OF CONTENTS (cont'd) Page C. The Attorney General Would Satisfy the Requirements of Parens Patriae Standing If They Applied. ......................................................54 POINT II - FEDERAL SECURITIES LAW DOES NOT PREEMPT THIS ACTION UNDER THE MARTIN ACT AND EXECUTIVE LAW § 63(12) .....................................................................64 A. Federal Securities Law Has Consistently Recognized the States’ Important Antifraud Enforcement Role. ...............................................67 B. SLUSA Does Not Expressly Preempt State Securities Fraud Enforcement Because Its Preclusion Clause Applies Only to Private Securities Fraud Litigation. ...............................70 1. Congress enacted SLUSA to prevent private parties from circumventing a different federal statute that never applied to actions brought by state antifraud enforcers.........................................71 2. SLUSA’s text precludes certain private class actions alleging securities fraud, but expressly preserves state enforcement authority. ..................................75 3. Defendants’ reading of SLUSA would lead to absurd results.....................................81 vii TABLE OF CONTENTS (cont'd) Page C. Federal Securities Laws Do Not Impliedly Preempt State Securities Fraud Enforcement. ....................................................... 84 1. NSMIA preempts state securities registration and review regimes for nationwide securities offerings, but expressly does not affect state antifraud enforcement.................................................... 85 2. NSMIA did not impose a uniform federal standard for all state antifraud actions involving securities. ....................................... 92 D. The Cases Relied on by Defendants Have Nothing To Do With SLUSA or NSMIA. ........... 98 POINT III - OVERWHELMING EVIDENCE PRECLUDES THE GRANT OF SUMMARY JUDGMENT TO DEFENDANTS ON THE GEN RE FRAUD ..103 A. Defendants Are Not Entitled To Summary Judgment........................................................... 105 1. The evidence establishes that Greenberg knew the Gen Re deal was a sham. ............ 105 2. An admission by the defendant is not needed for the government to survive summary judgment...................................... 115 3. The evidence shows Smith’s personal involvement in the fraud. ............................ 120 viii TABLE OF CONTENTS (cont'd) Page B. Defendants’ Evidentiary Objections Are Irrelevant and Meritless. ..................................123 1. Testimony from the Gen Re criminal trial may be considered on summary judgment.......................................................124 2. The co-conspirator statements are admissible. ....................................................127 CONCLUSION ..............................................................................132 ix TABLE OF AUTHORITIES Cases Page A.S. Goldmen & Co. v. N.J. Bureau of Secs., 163 F.3d 780 (3d Cir. 1999) ...................................................70, 90 Aaron v. SEC, 446 U.S. 680 (1980)......................................................................96 Alaska v. U.S. Dep’t of Transp., 868 F.2d 441 (D.C. Cir. 1989)......................................................46 Alfred L. Snapp & Son, Inc. v. Puerto Rico, 458 U.S. 592 (1982).............................................................. passim Am. Feeds & Livestock Co. v. Kalfco, Inc., 149 A.D.2d 836 (3d Dep’t 1989).................................................123 Assured Guar. (UK) Ltd. v. J.P. Morgan Inv. Mgmt. Inc., 18 N.Y.3d 341 (2011) .............................................................10, 46 Atherton v. FDIC, 519 U.S. 213 (1997)......................................................................97 AU Optronics Corp. v. South Carolina, No. 11-254, __ F.3d __, 2012 WL 5265799 (4th Cir. Oct. 25, 2012) ..............................................................100 Baker v. City of Elmira, 271 A.D.2d 906 (3d Dep’t 2000).................................................128 Beuerlien v. O’Leary, 149 N.Y. 33 (1896) .....................................................................117 Biggs v. Hess, 85 A.D.3d 1675 (4th Dep’t 2011) ...............................................124 Bluebird Partners, L.P. v. First Fidelity Bank, N.A., 297 A.D.2d 223 (1st Dep’t 2002)..................................................69 x Bond v. Giebel, 14 A.D.3d 849 (3d Dep’t 2005)...................................................124 Bozeman v. Orum, 422 F.3d 1265 (11th Cir. 2005) (per curiam) ............................126 Bryant v. Avado Brands, Inc., 187 F.3d 1271 (11th Cir. 1999)....................................................73 Burbank v. Davis, 227 F. Supp. 2d 176 (D. Me. 2002) ............................................126 Buxton Mfg. Co. v. Valiant Moving & Storage, Inc., 239 A.D.2d 452 (2d Dep’t 1997).................................................123 Capital Research & Mgmt. Co. v. Brown, 147 Cal. App. 4th 58 (2007) .......................................89, 90, 91, 94 Carey v. Piphus, 435 U.S. 247 (1978) ......................................................................50 Central States Southeast and Southwest Areas Health and Welfare Fund v. Merck-Medco Managed Care, 433 F.3d 181 (2d Cir. 2005) .........................................................48 Chamberlin v. Advanced Equities, Inc., No. C01-502, 2002 WL 34419450 (W.D. Wash. Jan. 17, 2002) .......................................................................................91, 94 Cipollone v. Liggett Group, Inc., 505 U.S. 504 (1992) ......................................................................68 City of Phila. v. Fleming Cos., 264 F.3d 1245 (10th Cir. 2001)....................................................73 CPC Int’l, Inc. v. McKesson Corp., 70 N.Y.2d 268 (1987)..............................................................10, 11 Crosland v. N.Y. City Transit Auth., 68 N.Y.2d 165 (1986)....................................................................13 xi Cuomo v. Clearing House Association, L.L.C., 557 U.S. 519 (2009)......................................................................89 Davis v. John Hancock Viable Life Ins. Co., 295 F. App’x 245 (9th Cir. 2008) .................................................83 Demings v. Nationwide Life Ins. Co., 593 F.3d 486 (6th Cir. 2010)........................................................81 Edmonds v. N.Y. City Hous. Auth., 224 A.D.2d 191 (1st Dep’t 1996)................................................126 EEOC v. Waffle House, Inc., 534 U.S. 279 (2002)..........................................................49, 52, 53 Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976)................................................................96, 97 Feitelberg v. Merrill Lynch & Co., 234 F. Supp. 2d 1043 (N.D. Cal. 2002), aff’d, 353 F.3d 765 (9th Cir. 2003) (per curiam) ..................................83 Ferrante v. Am. Lung Ass’n, 90 N.Y.2d 623 (1997) .................................................................108 Forrest v. Jewish Guild For the Blind, 3 N.Y.3d 295 (2004) ...................................................................108 Foster v. Alex, 213 Ill. App. 3d 1001 (1991) ........................................................95 Fox v. Vice, 131 S. Ct. 2205 (2011)..................................................................99 Gaidon v. Guardian Life Ins. Co. of Am., 94 N.Y.2d 330 (1999) .................................................................105 Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281 (2d Cir. 1973) .......................................................96 Globus v. Law Research Serv., Inc., 418 F.2d 1276 (2d Cir. 1969) .......................................................51 xii Greebel v. FTP Software, Inc., 194 F.3d 185 (1st Cir. 1999) ........................................................73 Gulf USA Corp. v. Fed. Ins. Co., 259 F.3d 1049 (9th Cir. 2001)....................................................126 Hall v. Geiger-Jones Co., 242 U.S. 539 (1917) ......................................................................68 Hawaii v. Standard Oil Co. of Cal., 405 U.S. 251 (1972) ......................................................................99 Herman & MacLean v. Huddleston, 459 U.S. 375 (1983) ......................................................................96 Hoover v. Switlik Parachute Co., 663 F. 2d 964 (9th Cir. 1981).....................................................126 Houston v. Seward & Kissel, LLP, No. 07-cv-6305, 2008 WL 818745 (S.D.N.Y. Mar. 27, 2008)..................................................89, 91, 92 Howard v. Everex Sys., Inc., 228 F.3d 1057 (9th Cir. 2000)......................................................73 IDS Bond Fund, Inc. v. Gleacher NatWest Inc., No. 99-cv-116, 2002 WL 373455 (D. Minn. Mar. 6, 2002) ....91, 92 In re Advanta Corp. Secs. Litig., 180 F.3d 525 (3d Cir. 1999) .........................................................73 In re Baldwin-United Corp., 770 F.2d 328 (2d Cir. 1985) .........................................................98 In re Comshare, Inc. Secs. Litig., 183 F.3d 542 (6th Cir. 1999)........................................................73 In re Morgan Stanley Information Fund Secs. Litig., 592 F.3d 347 (2d Cir. 2010) .........................................................96 In re Scholastic Corp., 252 F.3d ..............................................................................106, 120 xiii Jacqueline S. v. City of N.Y., 81 N.Y.2d 288 (1993) .................................................................103 Jo Ann Homes at Bellmore v. Dworetz, 25 N.Y.2d 112 (1969) .................................................................106 Kerusa Co. v. W10Z/515 Real Estate Ltd. P’ship, 12 N.Y.3d 236 (2009) .............................................................46, 86 Kircher v. Putnam Funds Trust, 547 U.S. 633 (2006)................................................................71, 82 Kralik v. 239 E. 79th St. Owners Corp., 5 N.Y.3d 54 (2005) .................................................................11, 78 Kuo Feng Corp. v. Ma, 248 A.D.2d 168 (1st Dep’t 1998)................................................117 Kushner v. Beverly Enters., Inc., 317 F.3d 820 (8th Cir. 2003)........................................................73 Lamdin v. Broadway Surface Adver. Corp., 272 N.Y. 133 (1936) .....................................................................57 Lander v. Hartford Life & Annuity Ins. Co., 251 F.3d 101 (2d Cir. 2001) .......................................71, 74, 78, 89 Lee v. Astoria Generating Co., 13 N.Y.3d 382 (2009) ...................................................................67 Lent v. Shear, 160 N.Y. 462 (1899) ...................................................................125 Leroy v. Great W. United Corp., 443 U.S. 173 (1979)......................................................................69 LG Display Co. v. Madigan, 665 F.3d 768 (7th Cir. 2011)......................................................100 Louisiana v. Allstate Ins. Co., 536 F.3d 418 (5th Cir. 2008)................................................99, 100 xiv Makor Issues & Rights, Ltd. v. Tellabs, Inc., 437 F.3d 588 (7th Cir. 2006), vacated & remanded on other grounds sub nom. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) ................................................73 Mastroianni v. County of Suffolk, 91 N.Y.2d 198 (1997)............................................................13, 103 Matter of Brandon, 55 N.Y.2d 206 (1982)..................................................................116 Matter of Disney Enters., Inc. v. Tax Appeals Tribunal, 10 N.Y.3d 392 (2008)....................................................................67 Matter of Schulz v. State, 86 N.Y.2d 225 (1995)....................................................................53 Matter of State v. N.Y. City Conciliation & Appeals Bd., 123 Misc. 2d 47 (Sup. Ct. N.Y. County 1984) .............................47 McGovern v. Deutsche Post Global Mail, Ltd., No. 04-0060, 2004 WL 1764088 (D. Md. Aug. 4, 2004) ............127 Medtronic, Inc. v. Lohr, 518 U.S. 470 (1996) ................................................................64, 68 Memphis Cmty. Sch. Dist. v. Stachura, 477 U.S. 299 (1986) ......................................................................50 Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71 (2006)......................................................72, 74, 78, 82 Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Ware, 414 U.S. 117 (1973) ......................................................................90 Missouri v. Stifel, Nicolaus & Co., 648 F. Supp. 2d 1095 (E.D. Mo. 2009)...................................78, 79 Myers v. Merrill Lynch & Co., 1999 WL 696082 (N.D. Cal. Aug. 23, 1999), aff’d, 249 F.3d 1087 (9th Cir. 2001) ............................................92 xv Nathenson v. Zonagen Inc., 267 F.3d 400 (5th Cir. 2001)........................................................73 Nevada v. Bank of Am. Corp., 672 F.3d 661 (9th Cir. 2012)......................................................100 New York v. 11 Cornwell Co., 695 F.2d 34 (2d Cir. 1982) ...........................................................58 New York v. Citibank, N.A., 537 F. Supp. 1192 (S.D.N.Y. 1982) .............................................55 New York v. Holiday Inns, Inc., 656 F. Supp. 675 (W.D.N.Y. 1984) ..............................................48 New York v. Operation Rescue Nat’l, 80 F.3d 64 (2d Cir. 1996) .............................................................99 New York v. Seneci, 817 F.2d 1015 (2d Cir. 1987) ...........................................48, 57, 99 Noth v. Scheurer, 285 F. Supp. 81 (E.D.N.Y. 1968) ...............................................127 Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000) .......................................106, 120, 121 O’Halloran v. City of N.Y., 78 A.D.3d 536 (1st Dep’t 2010)..................................................124 Official Comm. of Unsecured Creditors of WorldCom, Inc. v. SEC, 467 F.3d 73 (2d Cir. 2006) ...........................................................80 Ottmann v. Hanger Orthopedic Group, Inc., 353 F.3d 338 (4th Cir. 2003)........................................................73 Papic v. Burke, 113 Conn. App. 198 (2009) ..........................................................91 Pennsylvania v. Mid-Atlantic Toyota Distribs., Inc., 704 F.2d 125 (4th Cir. 1983)........................................................45 xvi Pennsylvania v. New Jersey, 426 U.S. 660 (1976) (per curiam) ................................................98 People v. Amorosi, 96 N.Y.2d 180 (2001)....................................................................51 People v. Apple Health & Sports Clubs, Ltd., 80 N.Y.2d 803 (1992)..............................................13, 47, 104, 122 People v. Applied Card Sys., Inc., 11 N.Y.3d 105 (2008)..................................................50, 59, 61, 67 People v. Bell, 48 N.Y.2d 913 (1979)..................................................................128 People v. Bunge Corp., 25 N.Y.2d 91 (1969)................................................................47, 78 People v. Caban, 5 N.Y.3d 143 (2005)............................................................109, 114 People v. Coventry First LLC, 13 N.Y.3d 108 (2009)........................................................13, 47, 49 People v. Coventry First LLC, 52 A.D.3d 345 (1st Dep’t 2008), aff’d, 13 N.Y.3d 108 (2009) ..........................................................45 People v. Edward D. Jones & Co., 154 Cal. App. 4th 627 (2007) .................................................91, 94 People v. Federated Radio Corp., 244 N.Y. 33 (1926)........................................................11, 106, 120 People v. First American Corp., 18 N.Y.3d 173 (2011)..............................................................45, 90 People v. Gilmour, 98 N.Y.2d 126 (2002)....................................................................47 People v. Grasso, 11 N.Y.3d 64 (2008)..............................................................passim xvii People v. Grasso, 54 A.D.3d 180 (1st Dep’t 2008)..............................................45, 53 People v. Greenberg, 2011 N.Y. Slip Op. 65423(U) (1st Dep’t Mar. 1, 2011)...............38 People v. H & R Block, Inc., 58 A.D.3d 415 (1st Dep’t 2009)....................................................55 People v. Johnson, 79 A.D.3d 1264 (3d Dep’t 2010), lv. denied, 16 N.Y.3d 832 (2011) ...............................................110 People v. Landes, 84 N.Y.2d 655 (1994) .............................................................10, 86 People v. Lexington Sixty-First Assocs., 38 N.Y.2d 588 (1976) ...................................................................12 People v. Liberty Mut. Holding Co., 2007 N.Y. Slip Op. 50574(U), 2007 WL 900997 (Sup. Ct. N.Y. County Mar. 27, 2007), aff’d, 52 A.D.3d 378 (1st Dep’t 2008)...................................................56 People v. Liberty Mut. Ins. Co., 52 A.D.3d 378 (1st Dep’t 2008)....................................................55 People v. Merkin, 2010 N.Y. Slip Op. 50430(U), 2010 WL 936208 (Sup. Ct. N.Y. County Feb. 8, 2010)................................55, 58, 59 People v. Mixon, 292 A.D.2d 177 (1st Dep’t 2002)................................................110 People v. Reynolds, 192 A.D.2d 320 (1st Dep’t 1993)................................................129 People v. Rodriguez, 17 N.Y.3d 486 (2011) .................................................................116 xviii People v. Sala, 258 A.D.2d 182 (3d Dep’t 1999), aff’d, 95 N.Y.2d 254 (2000)..................................................................104 People v. Samuels, 99 N.Y.2d 20 (2002)....................................................................116 People v. Simon, 9 Cal. 4th 493 (1995)....................................................................95 People v. Wolf, 98 N.Y.2d 105 (2002)..................................................................128 Phillips v. Kantor & Co., 31 N.Y.2d 307 (1972)..................................................................124 Planned Consumer Mktg., Inc. v. Coats & Clark, Inc., 71 N.Y.2d 442 (1988)....................................................................67 Pludeman v. N. Leasing Sys., Inc., 10 N.Y.3d 486 (2008)..........................................................116, 117 Polonetsky v. Better Homes Depot, Inc., 97 N.Y.2d 46 (2001)............................................................117, 123 Reed v. McCord, 160 N.Y. 330 (1899)....................................................................114 Robbins MBW Corp. v. Ashkenazy, 228 A.D.2d 357 (1st Dep’t 1996)................................................128 Rodriguez v. Sixth President, Inc., 4 A.D.3d 406 (2d Dep’t 2004).....................................................124 Rotella v. Wood, 528 U.S. 549 (2000) ......................................................................99 RSBI Aerospace, Inc. v. Affiliated FM Ins. Co., 49 F.3d 399 (8th Cir. 1995)........................................................126 S. Cherry St., LLC v. Hennessee Group LLC, 573 F.3d 98 (2d Cir. 2009) ...........................................................73 xix Sanders v. John Nuveen & Co., 554 F.2d 790 (7th Cir. 1977)..................................................96, 97 SEC v. Antar, 120 F. Supp. 2d 431 (D.N.J. 2000) ............................................127 SEC v. Carnicle, 216 F.3d 1088, 2000 WL 796090 (10th Cir. June 21, 2000).....126 SEC v. Fischbach Corp., 133 F.3d 170 (2d Cir. 1997) .........................................................50 SEC v. Posner, 16 F.3d 520 (2d Cir. 1994) ...........................................................57 SEC v. Rind, 991 F.2d 1486 (9th Cir. 1993)......................................................80 Semtek Int’l Inc. v. Lockheed Martin Corp., 531 U.S. 497 (2001)......................................................................60 Siegel v. Waldbaum, 59 A.D.2d 555 (2d Dep’t 1977)...................................................125 Spielman v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 332 F.3d 116 (2d Cir. 2003) .........................................................74 St. James’ Episcopal Church v. F.O.C.U.S. Found., 47 A.D.3d 1058 (3d Dep’t 2008).................................................128 State v. Cortelle Corp., 38 N.Y.2d 83 (1975) .........................................................13, 45, 47 State v. Justin, 3 Misc. 3d 973 (Sup. Ct. Erie County 2003) ...............................91 State v. McLeod, 2006 N.Y. Slip Op. 50942(U), 2006 WL 1374014 (Sup. Ct. N.Y. County Feb. 9, 2006)......................................45, 90 State v. Metz, 241 A.D.2d 192 (1st Dep’t 1998)................................................126 xx State v. Rachmani Corp., 71 N.Y.2d 718 (1988)..............................................................12, 47 Tellabs v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) ........................................................72, 73, 105 Tingey v. Radionics, 193 F. App’x 747 (10th Cir. 2006) .............................................126 Trivectra v. Ushijima, 112 Hawai’i 90 (2006) ..................................................................95 United States v. Atlas Lederer Co., 282 F. Supp. 2d 687 (S.D. Ohio 2001) .......................................127 United States v. Ferguson, 553 F. Supp. 2d 145 (D. Conn. 2008).........................................108 United States v. Ferguson, 676 F.3d 260 (2d Cir. 2011) .........................................18, 108, 110 United States v. U.S. Gypsum Co., 333 U.S. 364 (1948) ....................................................................129 Wyeth v. Levine, 555 U.S. 555 (2009) ................................................................64, 67 Zoren v. Genesis Energy, L.P., 195 F. Supp. 2d 598 (D. Del. 2002)..............................................83 Zuri-Invest AG v. Natwest Finance Inc., 177 F. Supp. 2d 189 (S.D.N.Y. 2001).........................90, 91, 92, 94 Constitutional Provisions N.Y. Const. art. VII, § 8....................................................................52 xxi State Statutes 815 Ill. Comp. Stat. § 5/11................................................................95 C.P.L.R. 4517(a)........................................................................................125 4518 ............................................................................................113 Cal. Gov’t Code § 12658 ...................................................................95 Ch. 649, 1921 N.Y. Laws 1989.........................................................68 Executive Law § 63(12) ................................................................................. passim § 620 et seq...................................................................................52 General Business Law § 352 et seq. ........................................ passim Penal Law § 60.27 ............................................................................51 Federal Statutes 15 U.S.C. § 77f ..............................................................................................85 § 77g .............................................................................................85 § 77j ..............................................................................................85 § 77k .............................................................................................96 § 77l ..............................................................................................96 § 77p .............................................................................................69 § 77q .............................................................................................96 § 77r...................................................................................... passim § 77aa ...........................................................................................85 § 78a .......................................................................................74, 79 § 78bb ................................................................................... passim 28 U.S.C. § 1711 n. .......................................................................................62 § 1715(b) .......................................................................................62 Pub. L. No. 104-67, 109 Stat. 737 (1995).........................................72 xxii Pub. L. No. 104-290, 110 Stat. 3416 (1996).....................................65 Pub. L. No. 105-353, 112 Stat. 3227 (1998).....................................65 Regulations 9 N.Y.C.R.R. pt. 525 .........................................................................52 17 C.F.R. § 240.14a-9........................................................................96 Miscellaneous Authorities Bromberg, Alan R., & Lewis D. Lowenfels, Securities Fraud & Commodities Fraud, vol. 4 (2d ed. 2003) ................................95 Cohen, Rick, Public-Policy Funding Raises Questions, Philanthropy J. (Apr. 30, 2007), available at http://www.philanthropyjournal.org/archive/131262.................66 Dobbs, Dan B., Law of Remedies, vol. 1 (2d ed. 1993) ....................50 Federal Securities Act: Hearings on H.R. 4314 before the H. Comm. on Interstate and Foreign Commerce, 73d Cong. (1933).....................................................................10, 68 H.R. Conf. Rep. No. 104-864 (1996) .................................................93 H.R. Conf. Rep. No. 105-803 (1998) ...........................................73, 77 H.R. Rep. No. 104-622 (1996).....................................................88, 94 Hazen, Thomas Lee, Law of Securities Regulation (6th ed. 2009) .............................................................................................68 Lane, Christopher R., Halting the March Toward Preemption: Resolving Conflicts Between State and Federal Securities Regulators, 38 New Eng. L. Rev. 317 (2005) ............................................................................................66 Long, Joseph C., Blue Sky Law, vol. 1 (2012) .................................68 S. Rep. No. 104-98 (1995) .................................................................62 xxiii S. Rep. No. 104-293 (1996)...................................................87, 88, 90 S. Rep. No. 105-182 (1998)...............................................................77 S. Rep. No. 109-14 (2005)...........................................................61, 62 Securities Act: Hearings on S. 875 before the S. Comm. on Banking and Currency, 73d Cong. 71 (1933)........................10, 68 Securities Fraud Deterrence and Investor Restitution Act, H.R. 2179, 108th Cong. (2003) ....................................................66 Securities Litigation Uniform Standards Act of 1997—S. 1260: Hearing Before the Subcomm. on Securities, Comm. on Banking, Housing and Urban Affairs, 105th Cong. (1997)......................................................................................69, 70 Uniform Securities Act (2002) § 304 .............................................................................................85 § 306 .............................................................................................85 § 501 .............................................................................................95 § 509 .............................................................................................95 § 603 .............................................................................................95 PRELIMINARY STATEMENT This appeal concerns the State’s ability to enforce the Martin Act (General Business Law § 352 et seq.) and Executive Law § 63(12) in order to maintain the integrity of the marketplace and protect the public from securities and business frauds. The Legislature has vested the Attorney General with broad and exclusive authority to enforce these important antifraud statutes, including the power to bring civil enforcement actions to prevent and redress such fraud. Defendants ask this Court to weaken dramatically the protections of the Martin Act and Executive Law § 63(12) by eliminating the State’s ability to recover damages for harm to defrauded individuals—on the theory that the Attorney General lacks standing under state law to seek, and that federal securities law preempts, such relief. But far from constraining state antifraud authority in this way, New York law empowers the Attorney General to obtain such damages, and federal securities law preserves state authority to enforce state antifraud laws. 2 This case exemplifies the benefits of maintaining parallel federal and state enforcement authority as to securities fraud. The New York Attorney General and the Securities and Exchange Commission (SEC) initiated investigations into a fraudulent reinsurance transaction between American International Group (AIG), a large insurance company headquartered in New York, and General Reinsurance Corporation (Gen Re), a reinsurance company based in Connecticut. These investigations prompted AIG to conduct an internal review that uncovered numerous additional improper transactions and eventually to significantly restate several years’ financial statements. The Attorney General and the SEC later commenced parallel enforcement actions under New York and federal law, respectively, which resulted in a settlement under which AIG paid over $1.6 billion in fines, disgorgement, and other monetary relief—much of it ultimately distributed to investors and other harmed individuals—and agreed to various injunctive remedies. After the settlement with AIG, the Attorney General proceeded with its case against defendants Maurice R. Greenberg, 3 the former chief executive officer and chairman of AIG, and Howard I. Smith, the former chief financial officer of AIG, both of whom played central roles in the fraudulent reinsurance transactions at issue in this enforcement action. Both Supreme Court and the Appellate Division denied defendants’ motions for summary judgment and directed that the case proceed to trial. Now, with the case poised for trial, defendants seek a ruling from this Court that would not only result in dismissal of this case in its entirety but would also curtail sharply the Attorney General’s ability in countless other cases to protect the public by deterring and remedying frauds. First, defendants argue that the Attorney General lacks “standing and authority” to maintain an enforcement action under the Executive Law and the Martin Act seeking damages for harms suffered by private victims. But the Executive Law and the Martin Act expressly authorize the Attorney General—and only the Attorney General—to bring civil enforcement actions for violations of these statutes. And these laws authorize the Attorney General to seek a variety of remedies, including damages as well as 4 injunctive relief, restitution, and other remedies. Contrary to defendants’ claim, where a state statute expressly vests the Attorney General with standing, no further inquiry into standing is needed. Thus, the common-law requirements for parens patriae standing cited by defendants are not relevant here: those requirements determine whether the common law confers standing on the Attorney General to protect the public interest— they do not limit or in any way govern the power of the Legislature to confer enforcement authority upon the Attorney General by statute. In any event, the common-law test for parens patriae standing would be satisfied here if it applied, because this enforcement action promotes the State’s recognized interest in maintaining the integrity of the securities markets. Furthermore, this Court has recognized that the State’s recovery of monetary relief, including damages, from fraud defen- dants serves important public purposes, because such recoveries deter fraud as well as compensate victims. Damages awards in enforcement actions demonstrate that persons committing fraud will be called to account for the harms their conduct causes to 5 members of the public, thereby forcing potential fraudsters to consider those harms before they act. Damages are thus an essential tool in the enforcement of New York’s antifraud statutes. Nor is the Attorney General’s statutory standing in this action nullified, as defendants claim, by the pendency of a private federal securities class action that includes allegations about, inter alia, the Gen Re fraud, or by a proposed settlement of that federal class action. The Attorney General has uncovered many major financial frauds pursuant to its authority under the Martin Act and Executive Law § 63(12). These investigations and enforcement actions may lead to private actions addressing the same subject matter, but such private filings do not eliminate the Attorney General’s enforcement authority, any more than public enforcement actions eliminate private claims. Although a final judgment in a private class action may bar, as a matter of res judicata, the public recovery of damages or restitution (but not other remedies) for precisely the same victims’ injuries, the mere pendency of a private class action—or mere pendency of a proposed settlement—has no such preclusive effect. 6 Second, defendants advance the radical and unsupported contention that two federal securities statutes enacted in the 1990s preempt any Attorney General action under the Martin Act and Executive Law seeking damages for victims of securities fraud. The Appellate Division correctly rejected this argument, as has every court that has previously addressed it. Defendants rely on federal statutes that (1) curb abuses in private securities class- action litigation, and (2) preempt certain state securities registra- tion requirements. Nothing in the text or legislative history of either federal statute supports defendants’ claim that Congress took the extraordinarily serious step of preempting or limiting state enforcement of state antifraud laws. To the contrary, Congress expressly preserved public antifraud actions under state law and disavowed any intent to alter state securities fraud law. Finally, defendants argue that they are entitled to summary judgment as to their personal liability for AIG’s fraudulent reinsurance transaction with Gen Re. (They do not challenge the evidence supporting their personal liability as to a second fraudulent reinsurance transaction involved in this case.) 7 Defendants’ summary-judgment argument raises evidentiary objections that are not only meritless but also irrelevant. Defendants’ own deposition testimony and other clearly admissible evidence is easily sufficient to require a trial. Both AIG and Gen Re have admitted that their reinsurance transaction was a sham. The transaction was undertaken solely to achieve a financial reporting result for AIG to boost the company’s stock price. And Greenberg admits that he personally proposed the transaction to Gen Re’s CEO, and negotiated its key terms with Gen Re’s CEO about two weeks after he proposed it. Any claim that Greenberg was unaware of the central terms of a transaction he negotiated is implausible on its face, and abundant admissible evidence strongly undercuts the claim. Evidence further shows that Smith approved the company’s improper accounting for the transaction, with knowledge that it was a fraud. Defendants are not entitled to summary judgment merely by virtue of their self- serving denials claiming that they were unaware of the fraudulent terms at the core of the Gen Re transaction. 8 QUESTIONS PRESENTED 1. Whether the Attorney General has standing to prosecute this civil action seeking damages and other remedies under the Martin Act and Executive Law § 63(12), by virtue of the Legislature’s express statutory grant to the Attorney General of exclusive authority to enforce these statutes. Both lower courts found that the Attorney General has standing. 2. Whether the Attorney General’s authority to obtain damages in this enforcement action under the Martin Act and Executive Law § 63(12) is preserved rather than preempted by two federal statutes that (a) preclude certain private securities class actions under state law and (b) preempt certain state-law securities registration requirements, but expressly preserve state officials’ longstanding authority to enforce state securities fraud statutes. Both lower courts found that the Attorney General’s claim is not preempted. 9 3. Whether there is a triable issue of fact as to defendants’ personal liability for the sham Gen Re reinsurance transaction, where defendants’ own testimony and substantial other admissible evidence shows that (a) Greenberg personally initiated, negotiated, and approved the transaction with knowledge of its fraudulent terms, and (b) Smith helped implement the transaction and made the decision to account for the transaction as legitimate insurance, also with knowledge of the transaction’s fraudulent terms. Both lower courts held that there was a fact issue as to defendants’ personal liability for the Gen Re fraud, and accordingly denied defendants’ motions for summary judgment. 10 STATEMENT OF THE CASE A. The Martin Act and Executive Law § 63(12) The New York Legislature enacted the Martin Act in 1921, and has amended the statute many times since. The Act served as a model for the federal securities laws enacted in the 1930s.1 Unlike federal law, and many state securities fraud or “blue- sky” laws, the Martin Act does not generally require issuers to register securities in New York in advance of their sale. People v. Landes, 84 N.Y.2d 655, 660 (1994). Also unlike federal law, and nearly every state blue-sky law, the Martin Act does not create any private right of action for securities fraud. Assured Guar. (UK) Ltd. v. J.P. Morgan Inv. Mgmt. Inc., 18 N.Y.3d 341, 351 (2011); CPC Int’l, Inc. v. McKesson Corp., 70 N.Y.2d 268, 276-77 (1987). 1 See, e.g., Federal Securities Act: Hearings on H.R. 4314 before the H. Comm. on Interstate and Foreign Commerce, 73d Cong. 11, 95, 109, 112 (1933); Securities Act: Hearings on S. 875 before the S. Comm. on Banking and Currency, 73d Cong. 71, 146- 47, 156, 170, 245-46, 253 (1933). 11 Rather, the Martin Act creates a public enforcement scheme, granting exclusive authority to the Attorney General to act to prevent and redress “deceptions, misrepresentations, conceal- ments, suppressions, frauds, false pretenses, false promises,” and other “fraudulent practices” in the sale and purchase of securities. General Business Law (GBL) §§ 352(1), 353; Kralik v. 239 E. 79th St. Owners Corp., 5 N.Y.3d 54, 59 (2005). Thus, the statute gives the Attorney General “regulatory and remedial powers to prevent fraudulent securities practices by investigating and intervening at the first indication of possible securities fraud on the public and, thereafter, if appropriate, to commence civil or criminal prosecution.” CPC Int’l, 70 N.Y.2d at 277. See GBL § 352 (authorizing the Attorney General to issue investigatory subpoenas); id. § 352-c (authorizing the Attorney General to prosecute criminal securities fraud); id. § 353 (authorizing the Attorney General to prosecute civil enforcement actions). In People v. Federated Radio Corp., this Court recognized that the purpose of the Martin Act is “to prevent all kinds of fraud in connection with the sale of securities and commodities and to 12 defeat all unsubstantial and visionary schemes in relation thereto whereby the public is fraudulently exploited,” and that scienter, or intent to defraud, is not required in a civil action for securities fraud under the Martin Act. 244 N.Y. 33, 38-39 (1926) (Pound, J.). These principles have been consistently reaffirmed by this Court. See People v. Lexington Sixty-First Assocs., 38 N.Y.2d 588, 595 (1976); State v. Rachmani Corp., 71 N.Y.2d 718, 725 n.6 (1988).2 The Legislature enacted Executive Law § 63(12) in 1956 to combat fraud in commercial dealings in or from New York. The statute prohibits “repeated” or “persistent fraud . . . in the carrying on, conducting or transaction of business,” Executive Law § 63(12),3 defining fraud in terms “virtually identical” to that of 2 Many federal securities laws and state securities fraud statutes—both publicly and privately enforced statutes—also do not require a showing of scienter in actions challenging fraud or misrepresentations in securities transactions. See infra Point II.C.2. 3 Executive Law § 63(12) defines “repeated” fraud to include “repetition of any separate and distinct fraudulent . . . act” and fraudulent “conduct which affects more than one person.” The statute defines “persistent” fraud to include “continuance or carrying on of any fraudulent . . . act or conduct.” 13 the Martin Act. Rachmani, 71 N.Y.2d at 721 n.1.4 Like the Martin Act, Executive Law § 63(12) is enforceable solely by the Attorney General, who is empowered to conduct investigations and prose- cute civil enforcement actions. People v. Coventry First LLC, 13 N.Y.3d 108, 114 (2009); People v. Apple Health & Sports Clubs, Ltd., 80 N.Y.2d 803, 807 (1992); State v. Cortelle Corp., 38 N.Y.2d 83, 85 (1975). B. This Enforcement Action5 This enforcement action involves two fraudulent reinsurance transactions—known as the “Gen Re transaction” and the “CAPCO transaction”—that were spearheaded and approved in 4 Executive Law § 63(12) also authorizes the Attorney General to investigate and sue to redress repeated or persistent “illegality” in commercial transactions—meaning violations of federal, state, or local statutes and regulations, not necessarily involving fraud. This aspect of § 63(12) is not implicated here. 5 Because defendants appeal the denial of their motions for summary judgment as to their personal liability for the Gen Re fraud, this Court must view the record in the light most favorable to the Attorney General, the nonmovant. See, e.g., Mastroianni v. County of Suffolk, 91 N.Y.2d 198, 205 (1997); Crosland v. N.Y. City Transit Auth., 68 N.Y.2d 165, 168 n.2 (1986). Accordingly, the facts summarized here are drawn from the summary judgment record so viewed. 14 1999 and 2000 by defendants Greenberg and Smith, when they were (a) the chief executive officer and chairman, and (b) chief financial officer, respectively, of AIG, a giant global insurance company headquartered in Manhattan’s Financial District. Defendants undertook the transactions to conceal negative financial results at AIG and to mislead the public about AIG’s financial condition. Investigations by the Attorney General and the SEC uncovered the Gen Re fraud and led to the public disclosure of additional frauds, including the CAPCO transaction, in early 2005. AIG’s disclosure of the investigations caused a significant drop in the company’s stock price. Soon after, Greenberg and Smith were ousted from the company, and AIG publicly acknowledged that both transactions (and others) were illegit- imate and restated its financials for a period of several years. The CAPCO transaction was a sham reinsurance transaction personally initiated, overseen, and approved by Greenberg and Smith in 2000. The transaction used an offshore shell company that AIG secretly controlled and entirely funded to conceal the fact 15 that AIG had suffered a disastrous $210 million underwriting loss in an auto-warranty program. The shell company was used to falsely present the loss as an investment loss, which investors would regard as less important than an underwriting loss. The fraud continued until AIG, in response to investigations by the Attorney General and SEC, acknowledged that the transaction was improper and reversed its reporting in AIG’s restated financials. Defendants do not challenge here the sufficiency of the evidence showing their personal liability for the CAPCO fraud. The Gen Re transaction was another sham reinsurance transaction undertaken by AIG in late 2000 and early 2001. Greenberg initiated the transaction to reverse a decline in loss reserves at AIG that had concerned investors and caused AIG’s stock price to decline six percent in a single day. Just days after this drop in AIG’s stock price, Greenberg personally proposed the transaction to the CEO of Gen Re, a large reinsurance company with which AIG had a close business relationship. Greenberg personally finalized the key fraudulent terms of the deal in a conversation with Gen Re’s CEO about two weeks later. Smith, as 16 CFO of AIG, approved the booking of the transaction as legitimate insurance after receiving information showing the purported reinsurance deal to be a sham. As AIG and Gen Re have both admitted, the reinsurance transaction was not legitimate. The companies signed documents purporting to be reinsurance agreements which stated, on their face, that AIG was reinsuring up to $600 million in potential losses for Gen Re, in exchange for $500 million in premiums from Gen Re, only $10 million of which was to be paid by Gen Re in cash. AIG booked the nominal $500 million premium amount as loss reserves. But there was no real reinsurance. The companies had a side deal negotiated and agreed to by Greenberg and Gen Re’s CEO, which was not referenced in the formal agreements. The side deal provided that (1) AIG would bear no risk of actual loss, and Gen Re would never make any claims under the reinsurance agreements; and (2) AIG would return a $10 million cash premium payment that Gen Re ostensibly would pay AIG for the reinsurance, and, in addition, AIG would pay Gen Re a net 1% fee, 17 equaling $5 million, for colluding in the sham transaction. AIG disguised both of these payments to Gen Re to prevent AIG’s auditors from discovering that AIG was paying a net fee to Gen Re, when Gen Re was supposedly buying reinsurance coverage from AIG. After the Attorney General and SEC began their investigations, and after a thorough internal investigation, AIG acknowledged that the Gen Re transaction was not legitimate and reversed its reporting of the transaction. 1. Greenberg Proposes a Highly Unusual Deal to Gen Re’s CEO To Quell Stock Market Concerns About AIG’s Declining Loss Reserves On October 26, 2000, AIG issued a quarterly earnings press release reporting (1) positive revenue and income results, and (2) increases in premiums written, but also (3) a $59 million 18 decline in its loss reserves (4:1755-1756, 17616). AIG’s stock price dropped six percent on the day (4:1763). Analysts attributed the fall in stock price to the reported decline in loss reserves, which “un-nerved” and “disturbed” the market for AIG stock (4:1787, 1790, 1800, 1803). Investors consider a decline in loss reserves during a period of premium growth to be a “red flag,” because it suggests an insurer may be manipulating earnings numbers by reserving too little against premium revenues to cover likely future claims payments (4:1803, 2131, 2136 [Schroeder7]). See United States v. Ferguson, 676 F.3d 260, 267 (2d Cir. 2011) (observing that an insurer who under- reserves in this way “inflates present income at the expense of future income”). 6 Numbers in parentheses reference a volume and page of the record. 7 Unless otherwise specified, a name parenthetically noted after a citation to the record indicates deposition testimony. 19 AIG’s head of investor relations received “a lot” of analyst questions about the decline in loss reserves (13:7754 [Hamrah]).8 On October 31, she forwarded several analyst reports to Greenberg (4:1785; see also 13:7752-7756 [Hamrah]). The same day, Greenberg made a phone call to Ronald Ferguson, CEO of Gen Re, in which he proposed a deal whereby AIG could book substantial loss reserves by executing a large reinsurance transaction with Gen Re (2:635, 643-644, 10:6055- 6058 [Greenberg]). Greenberg proposed a transaction to boost AIG’s loss reserves by $200 to $400 million (10:6055-6056, 6058 [Greenberg])—which would have made it one of the largest reinsurance transactions in AIG’s history.9 Greenberg admitted he 8 She and Greenberg had anticipated that the loss reserves numbers would pose a “problem” (4:1700 [Hamrah trial test.]). And Greenberg called her on the day of the October 26 press release to discuss analyst reaction (4:1704-1705 [Hamrah trial test.]). One securities analyst described Greenberg as, “more than most CEOs,” “very anxious about his stock price” (2:574 [Schroeder]). 9 Neither Greenberg nor another AIG executive could recall a larger AIG reinsurance transaction (2:641-642 [Greenberg]; 4:1833, 1846 [Morrow]). 20 “may have” requested that the transaction be in place for only six to nine months (2:639 [Greenberg]; see also 4:1865 [Napier notes]; 4:1866 [Napier email]; 4:1906-1909 [Napier]).10 The arrangement proposed by Greenberg was highly unusual not only for its enormous size, but also in several other respects: (a) Gen Re typically reinsured AIG, not the other way around (2:635-637 [Greenberg]; 4:1914 [Napier]); (b) there was no indication Gen Re needed or wanted to buy reinsurance from AIG (see 2:635-637 [Greenberg]); (c) the deal was proposed by Greenberg to achieve a financial reporting result, not a business result (2:635, 643-644, 10:6055-6058 [Greenberg]); (d) Greenberg personally proposed the deal without consulting his reinsurance department (10:6064 [Greenberg]); and (e) Greenberg asked Ferguson to let AIG borrow a specific dollar range of loss reserves 10 Greenberg also requested that the portfolio consist of “longer tailed lines” (4:1866 [Napier email]; 6:3214 [Napier]). As Greenberg acknowledged, that would mean that any claims arising from the portfolio would likely come later rather than sooner (10:6072 [Greenberg]). 21 for a limited duration (2:639, 10:6055-6056, 6058 [Greenberg]; 4:1919-1920 [Napier: “AIG wanted to borrow reserves”]). 2. Greenberg Receives Status Updates From His Point Man, Christian Milton, As Terms Coalesce Around a Sham Deal After his October 31 call to Ferguson, Greenberg personally tapped Christian Milton, the head of AIG’s reinsurance business, to be his “point person” on the transaction (2:639-640, 649 [Greenberg]). He thereafter received status updates from Milton about the transaction (2:649-650, 653-654, 10:6075-6076 [Greenberg]; see also 4:1964 [Greenberg interrogatory response]).11 Richard Napier, Ferguson’s point person for Gen Re, phoned Milton for more information soon after learning about Greenberg’s call to Ferguson (4:1907, 1919 [Napier]). Napier and other Gen Re executives worked over the next two weeks to satisfy Greenberg’s 11 Greenberg began calling Milton for status reports almost immediately after designating him as point person for the transaction (4:1867 [Napier email]; 4:1957 [Napier trial test.]). Greenberg “was following up with Chris [Milton] on [the] status” of the transaction on a nearly daily basis and wanted an answer quickly (4:1923, 1952-1953 [Napier]). 22 request for a large deal to boost AIG’s loss reserves. Meanwhile, Napier and Milton remained in contact, and Napier and his colleagues kept Ferguson up to date on their work (4:1919, 1921- 1922, 1923, 1928-1929, 1949-1950 [Napier]). Napier and his colleagues felt pressure to move quickly to satisfy Greenberg’s objectives, so that Ferguson could get back to Greenberg on the deal (4:1923, 1949-1950 [Napier]). At Ferguson’s direction, Napier called Milton to ask if AIG would consider a deal where no risk would actually be transferred from Gen Re to AIG (4:1925-1929, 1931 [Napier]). Milton replied that he “would have to get back” to Napier, and called Napier again the same day to say that a no-risk transaction “was something they would like to take a look at” (4:1932 [Napier]). After hearing from Milton, Napier and his colleagues worked to move forward on a sham deal with no transfer of risk, under which AIG would also return any premium paid by Gen Re and pay Gen Re a net fee for agreeing to accommodate AIG (4:1932- 1936, 1938-1945 [Napier]). Napier briefed Ferguson on the team’s 23 progress so that Ferguson could respond to Greenberg’s October 31 proposal (4:1949-1950, 6:3209 [Napier]). 3. Greenberg Finalizes the Key Terms of the Deal With Gen Re’s CEO On November 16, 2000,12 Ferguson called Greenberg back to discuss “what the terms [of the deal] would be” (2:656 [Greenberg]). In this November 16 call, Greenberg and Ferguson discussed and agreed upon the essential terms of the transaction (2:656-658 [Greenberg]). As Greenberg testified, on this major transaction, Ferguson “would only deal with [him]”—one CEO to another (2:657 [Greenberg]). Following the call, Ferguson briefed Napier on the CEOs’ agreement so that the deal could be implemented properly. Napier’s contemporaneous notes show that Greenberg (“MRG”) and Ferguson (“REF”) agreed, among other things, that (a) the 12 There is some ambiguity in the record as to whether this second call between Greenberg and Ferguson took place on November 16 or early on November 17. For the sake of simplicity, we use the November 16 date in this brief. None of the points made in this brief would be affected in any way if the call occurred on November 17. 24 deal would be in “two tranches” of $250 million each; (b) “AIG [would] not bear real risk”; (c) AIG would pay Gen Re a 1% fee, equaling $5 million; and (d) the parties would need to “perfect” a way for Gen Re “to get [its] fee back” (4:1882 [Napier notes]; see also 2:607-613 [Napier testimony regarding notes]; 4:2007 [Napier email]).13 Napier’s notes also show Greenberg told Ferguson that Smith (“Howie”) and Milton (“Chris”) would be AIG’s point men on the deal (4:1882; see also 2:658-659 [Greenberg]; 2:608-611 [Napier]). When Napier and Milton discussed the agreement made between Greenberg and Ferguson, Milton said that they did not need to discuss further the no-risk nature of the deal because “the chairman had made the decision and there is nothing else to talk about” (6:3228-3230 [Napier]). 13 Napier’s notes also show that Greenberg tried to propose a different accommodation, besides the 1% fee (referred to in the notes as “2 1/2% of CCA”), but Gen Re insisted on the cash fee (4:1882; see also 2:608-609, 612 [Napier]). 25 4. The Parties Create and Execute Sham Reinsurance Documents On November 17, the day after Greenberg and Ferguson’s phone call, Napier sent Milton a cover email attaching a draft reinsurance agreement (18:11215-11222). Smith received a paper copy of the same email three days later (18:11215; see also 23:14186-14187 [Smith]). Napier’s cover email stated that Ferguson’s “discussion with MRG [Greenberg] established the following points” (18:11215). The email then detailed a number of terms, including several key terms of the parties’ side deal. These side-deal terms, which were not reflected in the draft formal agreement attached to the email, included that (1) the parties “need[ed] to work out a mechanism” for Gen Re to recover its $10 million cash premium payment (“the 2% fee advanced”); and (2) AIG would pay Gen Re a net 1% fee, equaling $5 million (18:11215). The email also said the plan was to commute (or unwind) the transaction after twenty-four months (18:11215), which was consistent with Greenberg’s original goal of “borrowing” reserves only temporarily. 26 On December 7, 2000, Milton told Napier that AIG wanted to proceed with the transaction “in accordance with REF’s [Ferguson’s] conversation with MRG [Greenberg]” (4:2036 [Napier email]; 6:3212-3213 [Napier]). Later in December, the parties created a fake paper trail to disguise the transaction’s origins, making it appear that Gen Re had sought reinsurance from AIG, when in fact Greenberg had initiated the deal (4:2038-2039, 2040- 2042, 6:3198-3199). Napier wrote to the Gen Re team that the arrangement was “a very unique solution to a special need for an important client” (6:3198). In the spring and fall of 2001, AIG and Gen Re formally executed two reinsurance agreements between Cologne Re Dublin (CRD), a subsidiary of Gen Re, and National Union, an AIG subsidiary (4:2047-2058, 2059-2069). They backdated both contracts so that AIG could reflect the reporting impact in its financial statements for the fourth quarter 2000 and first quarter 2001, respectively (see 4:2048, 2057, 2060, 2068). Together, the formal contract documents stated that AIG was reinsuring Gen Re for $600 million in liabilities in exchange 27 for a $500 million premium (4:2048, 2051-2052, 2060, 2063). According to the agreements, the premium was charged on a 98% funds-withheld basis, which meant that Cologne Re was to pay National Union $10 million in cash premium (i.e., 2% of $500 million) (4:2051-2052, 2063). On the face of the agreements, the difference between the $600 million limit of liability and the $500 million premium theoretically exposed AIG to $100 million in potential losses (10:6136-6137 [Smith]). As with the draft agreement, however, the final contract documents did not disclose the side-deal term guaranteeing that AIG would not assume any risk of loss (see 4:1947-1949 [Napier]).14 Nor did the formal agreements reflect the side deal’s terms that AIG would repay the $10 million cash premium 14 Consistent with the parties’ side deal, Gen Re did not maintain a loss-experience account for the transaction, and no claims were ever presented to or paid by AIG (4:2072-2073, 6:3050 [Houldsworth trial test.]; see also 4:1637 [defining an experience account as an account into which premiums are deposited and out of which losses are paid]). In fact, about half of the $600 million had already been reinsured by Gen Re in other transactions, making it virtually impossible for AIG to have assumed any risk in any event (6:3241-3243, 3245-3248 [Houldsworth trial test.]). 28 advanced by Gen Re and also pay Gen Re a net 1% fee of $5 million, or the plan to commute the transaction after only twenty- four months (see 4:2047-2058, 2059-2069). There is no evidence that anyone at AIG analyzed the risk profile of the portfolio AIG was ostensibly reinsuring in the Gen Re transaction. Greenberg did not discuss with Ferguson the types of insurance or the nature of the risk in the portfolio, or ask to see any risk analysis or underlying contracts, purportedly because he expected others at AIG to assess the risk (2:649, 20:12109-12110 [Greenberg]). Although AIG typically conducted actuarial reviews of significant proposed insurance agreements, including information on the underlying portfolios, no underwriting analysis was done in connection with the Gen Re transaction (4:1842-1854 [Morrow]; 6:3213-3215 [Napier]; 10:5979-5981 [Smith]; see also 4:1809-1810, 1833-1834, 6:3236-3238 [Morrow trial test.]). Greenberg could not recall any other transaction of comparable size in which AIG had failed to analyze the underlying risks (10:6079 [Greenberg]). 29 5. Smith Approves AIG’s Accounting For the Transaction as Real Insurance, and Greenberg Touts AIG’s Increased Loss Reserves Smith, AIG’s CFO and senior authority on GAAP accounting, made the decision to book the Gen Re transaction as if it were legitimate insurance (9:4905, 12:6865-6866 [Douglas]; 12:6959-6960, 17:10512 [Morrow]; see also 4:1820-1821, 1838-1839 [Morrow trial test.]; 4:2074-2075 [Morrow and Douglas emails]).15 This accounting treatment allowed AIG to book an additional $250 million in loss reserves during the fourth quarter of 2000 and again during the first quarter of 2001. Without these “reserves,” AIG would have reported large declines in loss reserves in both quarters (see 4:2091, 2174)—which would have revealed a trend of three straight quarters with declining reserves. Instead, AIG’s 15 To be booked as a legitimate reinsurance transaction under Financial Accounting Standard 113, a transaction must create a reasonable possibility of a significant loss to the putative reinsurer (4:1646; see also 10:5973 [Smith testimony that FAS 113 requires that “the reinsurer had a significant risk of losing money”]). In its own financial statement, Gen Re did not treat the transaction as an insurance transaction, but rather treated it as a deposit of the $10 million cash premium payment (see 4:2232 [Napier trial test.]). 30 financial statements, certified by Greenberg and Smith, showed increases in the company’s loss reserves in the fourth quarter of 2000 and first quarter of 2001. Greenberg touted these increases in loss reserves in AIG’s earnings releases (4:2085, 2170). In response to AIG’s fourth- quarter 2000 release showing an increase in loss reserves, a Morgan Stanley analyst upgraded AIG stock (R. 4:2076; see also 4:2142 [Schroeder]; 4:2110 [Schroeder trial test.]). She would not have upgraded the stock had she “known the real results in the fourth quarter as opposed to the reported results” (4:2146-2147 [Schroeder]; see also 4:2157-2158 [Schroeder]; 4:2119-2120 [Schroeder trial test.]). 6. Smith Participates in Arrangements To Conceal the Return of Gen Re’s Premium and the Payment of Gen Re’s Net Fee While Greenberg was touting AIG’s increased loss reserves to analysts and the public, Milton and Smith were planning the secret payments to Gen Re called for by the parties’ side deal. In January 2001, Napier contacted Milton to “discuss the structure for recouping” Gen Re’s $10 million “premium” in connection with 31 the transaction and for receiving the $5 million “fee” that AIG owed Gen Re (4:2181 [Napier email]). Soon thereafter, Milton discussed with Smith “the most efficient way to transfer the funds” to Gen Re (4:2182 [Napier email]; see also 4:2192 [Napier memo]). To conceal the arrangement, the payback was executed as follows. An AIG subsidiary, HSB, was entitled to receive $31.8 million from Gen Re after the commutation of unrelated reinsur- ance agreements (4:2206 [Garand email]; see also 23:14195-14196 [Smith testimony regarding participation in discussions about the HSB commutations]). Milton and Smith agreed that, rather than receive the full amount, AIG would “use a part of the balance” to fulfill its side deal with Gen Re (4:2183 [Napier email].) Thus, instead of returning the full $31.8 million owed to AIG following the commutation of the HSB agreements, Gen Re would return only $16.6 million, in installments of $9.1 million and $7.5 million (4:2206-2207 [Garand emails]). Gen Re would therefore retain $15.2 million, equaling the $10 million premium payback and Gen Re’s $5 million fee, plus interest. 32 In December 2001, Gen Re executed transfers of $9.1 million and $7.5 million to AIG affiliates in accordance with the plan (4:2197-2203 [contracts]; 4:2204-2205 [$7.5 million Gen Re payment to HSB]; 4:2213-2216 [$9.1 million Gen Re payment to National Union]). 7. After the Attorney General and SEC Serve Subpoenas, Greenberg Transfers Nearly All His AIG Stock and Discourages an Auditor’s Investigation In February 2005, AIG received subpoenas from the Attorney General and the SEC concerning the Gen Re transaction (5:2329). AIG’s public disclosure of the investigations caused a drop in the company’s stock price that defendants’ own expert (among others) deems statistically significant (4:1784; 18:10993, 11012). AIG responded to the investigations by retaining outside counsel to conduct an internal investigation and asking its auditor, PricewaterhouseCoopers (PwC), to perform a review (5:2303). Greenberg reacted by trying to convince PwC that the transaction was not important and by transferring vast assets to his wife. 33 Greenberg called PwC’s lead audit partner multiple times during PwC’s review of the Gen Re transaction (5:2322-2323 [Winograd]). Greenberg was “argumentative” in these calls, telling the PwC partner that the transaction was “much ado about nothing” and that government investigators were “chasing things that shouldn’t be chased” (5:2320, 2323-2324 [Winograd]). It was clear to the PwC partner that Greenberg was “very knowledgeable about [the Gen Re transaction] at a detailed level” (5:2317 [Winograd]). Around the same time, in early March 2005, Greenberg transferred to his wife over 41 million shares of AIG common stock, then valued at over $2 billion, which represented the vast majority of his AIG holdings (10:6219-6220 [Greenberg]; 5:2333- 2336, 2337-2339). Greenberg admitted that the transfer was motivated partly by his desire to shield his assets from judgment in potential civil litigation concerning the Gen Re transaction (5:2521-2523 [Greenberg]). While he claimed that estate planning was the main motivation (10:6227 [Greenberg]), he could not identify any specific estate-planning benefit (8:4261-4262 34 [Greenberg]). Greenberg subsequently rescinded the stock transfer because it “raised such a fuss” (5:2521, 2523 [Greenberg]). 8. Greenberg Brings Smith and Milton With Him To a Different Company After All Three Are Forced Out of AIG Three days after he transferred the AIG stock to his wife, Greenberg was forced to step down as AIG’s CEO, and he later stepped down as chairman (5:2337-2339). After Greenberg left AIG, he approved the hiring of Milton and Smith, the point men who had implemented the fraudulent Gen Re transaction, by C.V. Starr & Co., a private company Greenberg controlled. Milton was employed as a consultant, and Smith as CFO and director, and they remained at C.V. Starr at least through the time of Greenberg’s and Smith’s depositions in 2010 (10:5957-5961 [Greenberg]; 5965-5966 [Smith]). Greenberg claims he brought Milton with him to C.V. Starr without discussing the Gen Re transaction with Milton (10:5959- 5960, 6113 [Greenberg]), even though Greenberg testified that it would have been “improper” and unauthorized for Milton to have 35 approved a fraudulent transaction with Gen Re while at AIG (10:6117 [Greenberg]). 9. AIG Admits the Fraud On March 30, 2005, AIG issued a press release acknowledging that the Gen Re transaction was not legitimate. The company admitted that because there was no risk transfer, the transaction “should not have been recorded as insurance,” and conceded that the transaction documentation was “improper” (5:2330). On May 31, 2005, AIG restated its financials and reversed the accounting treatment of the Gen Re transaction (and many others): the company admitted that the Gen Re transaction “was done to accomplish a desired accounting result and did not entail sufficient qualifying risk transfer” to be recorded as insurance (5:2304).16 16 In a settlement with the federal government, Gen Re also admitted that the transaction was a fraud (1:520-533). Gen Re admitted, among other things, that it “participated and assisted in a sham reinsurance transaction with AIG” as “an accommodation to AIG,” and that Gen Re’s management “knew and understood (continued on next page) 36 C. Proceedings Below 1. The Trial Court’s Ruling The Attorney General filed this lawsuit in May 2005 against AIG, Greenberg, and Smith (3:1411-1447). The Attorney General settled the claims against AIG in early 2006 under agreements requiring AIG to pay over $1.6 billion and adhere to certain practices going forward (1:517-519, 3:1515-1570). After several years of motion practice and discovery, including over forty depo- sitions taken by defendants, in 2009 the parties filed summary judgment motions (3:1350-1351; 11:6441-6442; 20:12204-12206). Following briefing on the summary judgment motions (and after the running of applicable criminal statutes of limitations), Greenberg and Smith decided to reverse their prior invocations of the Fifth Amendment regarding the Gen Re transaction (see 23:14184, 14217; 24:14597, 14629, 14662). Defendants were then deposed as to the Gen Re transactions, and the parties thereafter that AIG’s management did not wish to bear any real risk under” the transaction (1:521-523). 37 submitted supplemental briefs (24:14593-14677, 25:15080-15091, 15152-15161). On October 20, 2010, Supreme Court denied defendants’ motion in its entirety and granted the Attorney General’s motion in part. The trial court rejected defendants’ argument that the Attorney General lacks authority to bring the action under the Martin Act and Executive Law § 63(12), and held that that federal law does not preempt the Attorney General’s claims (1:38-46). The court further held that the evidence established (1) the fraudulent nature of both the CAPCO and Gen Re transactions as a matter of law, (2) the materiality of both transactions as a matter of law, and (3) defendants’ personal liability as a matter of law with respect to the CAPCO transaction but not as to the Gen Re transaction (1:61-93). As to Gen Re, Supreme Court found that “there is clearly evidence in the record that connects both defendants to the improper aspects of the Gen Re Transaction, and highly suggest[s] their knowledge or participation” in the transaction (1:81; see 1:80- 38 85). But the court held that defendants’ blanket denials presented questions of credibility that only a jury could resolve (1:85, 87, 95). 2. The Interlocutory Appeal Defendants took interlocutory appeals (1:9, 105, 117, 129). The Appellate Division stayed trial of the Gen Re claims pending the appeals. People v. Greenberg, 2011 N.Y. Slip Op. 65423(U) (1st Dep’t Mar. 1, 2011). By decision dated May 8, 2012, the Appellate Division affirmed in part and reversed in part the ruling of Supreme Court (25:15181-15182). The Appellate Division held that federal law did not preempt the Attorney General’s claims seeking damages. The Court concluded that “nothing in the federal legislative scheme indicates that Congress intended to preempt this action, and in fact, the cited statutes express the importance of the state’s role in policing fraud” (25:15194-15195). The Appellate Division also observed that there was no “indication that Congress intended to preclude the Attorney General from seeking monetary recovery in order to deter alleged fraudulent conduct” (25:15195). 39 The Appellate Division also rejected defendants’ argument that this enforcement action exceeds the Attorney General’s authority under state law, upholding the Attorney General’s “discretion . . . to bring this enforcement action pursuant to the Executive Law and the Martin Act, to protect the citizens of this State and the integrity of the securities marketplace in New York, to enjoin allegedly fraudulent practices, and to direct restitution and damages to deter future similar misconduct” (25:15194; see also 25:15195 [the OAG has the authority to “seek[] monetary recovery in order to deter alleged fraudulent conduct”]). The Appellate Division then addressed whether summary judgment was warranted on the voluminous evidentiary record. The Appellate Division found triable issues of fact as to whether Greenberg and Smith personally participated in or had actual knowledge of the Gen Re fraud (25:15200-15201). As to the CAPCO transaction, the Appellate Division found that the evidence showed that defendants “actively participated in the CAPCO transaction with knowledge of the deceptive purpose it was intended to achieve” (25:15201). Nonetheless, the court held 40 that summary judgment should be denied because defendants denied knowing about certain details of the transaction structure (25:15201-15202). The court also found a fact issue as to whether the CAPCO transaction was material (25:15202). Justice Catterson dissented in part. He would have held that federal law preempted the Attorney General’s damages claims, and that the Attorney General lacked authority to bring the claims under state law as well. He also opposed the majority’s reliance on certain evidence and would have granted summary judgment to defendants on the Gen Re fraud (25:15203-15227.) By order dated July 17, 2012, the Appellate Division granted defendants leave to appeal to this Court (25:15179-15180). 41 ARGUMENT POINT I THE MARTIN ACT AND EXECUTIVE LAW § 63(12) EXPRESSLY GRANT THE ATTORNEY GENERAL AUTHORITY TO MAINTAIN CIVIL ENFORCEMENT ACTIONS TO PREVENT, REMEDY, AND DETER FRAUD Defendants argue that the Attorney General lacks authority to obtain damages in this action because he cannot satisfy the requirements of parens patriae standing. This argument fails for two reasons. First, the Martin Act and the Executive Law § 63(12) expressly vest the Attorney General with statutory authority to bring civil enforcement actions, in the name of the People, to obtain injunctive and monetary remedies for fraud. No further showing as to standing is needed when a state statute expressly authorizes the Attorney General to sue to enforce state law. Second, even if the Attorney General were required to meet the test for parens patriae standing here (and the Attorney General is not), the test is readily satisfied in this case. This action advances the State’s interest in ensuring the economic well- 42 being of its residents by securing an honest marketplace and protecting the public from fraud. A. The Martin Act and Executive Law § 63(12) Expressly Authorize the Attorney General To Prosecute Civil Enforcement Actions. Defendants argue that the Attorney General lacks standing, insofar as he seeks damages, because he cannot show a quasi- sovereign interest sufficient to meet the test for parens patriae standing. But the test for parens patriae standing does not apply here. “Parens patriae” refers to a common-law doctrine of standing on the part of the State to protect certain interests; the scope of this doctrine has evolved over time, as explained in Alfred L. Snapp & Son, Inc. v. Puerto Rico, 458 U.S. 592 (1982).17 But there 17 As Snapp explains, the doctrine of parens patriae standing is rooted in a common-law concept of royal prerogative to protect those unable to protect themselves. 458 U.S. at 600. The doctrine has, however, developed into a principle that the State has standing to enforce not merely the interest of a protected class but rather its own quasi-sovereign interest in, for example, the health or economic well-being of its citizens, and Snapp provides a two- part test for the existence of parens patriae standing. Id. at 607. 43 is no reason to resort to this common law doctrine of standing here, because the State has by statute conferred express authority on the Attorney General to enforce the Martin Act and Executive Law § 63(12). The State possesses “sovereign power” to “create and enforce a legal code, both civil and criminal.” Snapp, 458 U.S. at 601. This sovereign interest establishes the Attorney General’s standing to sue based on express statutory authority, and makes unnecessary any showing of quasi-sovereign interests under the parens patriae doctrine. These principles are fundamental. No standing inquiry is needed when a government official pursues a prosecution in the name of the People for criminal remedies, such as imprisonment, fines, asset forfeiture, or restitution and reparation. And no standing inquiry is needed when a government official prosecutes a statutory enforcement action in the name of the People for civil remedies, including an injunction, fines, disgorgement, restitution, or damages. See Snapp, 458 U.S. at 601-02 (distinguishing “quasi- 44 sovereign” interests implicated by parens patriae standing from the “sovereign” interest in enforcing civil and criminal statutes). The common-law test for parens patriae standing does not limit the Legislature’s power to grant the Attorney General the authority to enforce a state statute. This Court has many times recognized the Attorney General’s standing to bring civil actions expressly authorized by New York statute, without ever suggesting that any further standing inquiry is necessary. In People v. Grasso, for example, the Court sharply contrasted (1) statutory causes of action to redress monetary harms that the Attorney General was “expressly authorize[d] . . . to bring” under the Not-For-Profit Corporation Law, with (2) “nonstatutory claims” for the same relief that “rest[ed] on an assertion of parens patriae authority.” 11 N.Y.3d 64, 68, 70 (2008).18 In State v. 18 This Court held in Grasso that the Attorney General lacked authority to bring the common-law claims because they were inconsistent with, and therefore were displaced by, the enactment in 1969 of the Not-for-Profit Corporation Law, a comprehensive statutory scheme expressly identifying claims the Attorney General was authorized to bring. Grasso, 11 N.Y.3d at 71-72. The Appellate Division later held that the Attorney General (continued on next page) 45 Cortelle Corp., the Court held that Executive Law § 63(12) “provide[s] standing in the Attorney-General to seek redress and additional remedies” for fraud. 38 N.Y.2d at 85. And in People v. First American Corp., the Court held that GBL § 349, another New York antifraud statute, “provides [the Attorney General] with standing.” 18 N.Y.3d 173, 184 (2011).19 See also Pennsylvania v. Mid-Atlantic Toyota Distribs., Inc., 704 F.2d 125, 129-31 (4th Cir. 1983) (cited by defendants, Br. at 20, 30) (concluding that statutory and constitutional provisions “fully authorize prosecution of the statutory right[s] of action” by state attorneys lost authority to bring the statutory claims when the relevant nonprofit organization converted to a for-profit company, rendering the Not-for-Profit Corporation Law no longer applicable. People v. Grasso, 54 A.D.3d 180 (1st Dep’t 2008). Nothing comparable has occurred here. 19 For additional New York cases, see, for example, People v. Coventry First LLC, 52 A.D.3d 345, 346 (1st Dep’t 2008) (recognizing the Attorney General’s statutory standing under the Martin Act and Executive Law § 63(12)), aff’d, 13 N.Y.3d 108 (2009); and State v. McLeod, 2006 N.Y. Slip Op. 50942(U), at *10, 2006 WL 1374014, at *8 (Sup. Ct. N.Y. County Feb. 9, 2006) (holding that because the Martin Act and Executive Law § 63(12) “both afford the State independent bases for asserting its claims,” the parens patriae doctrine “is not implicated”). 46 general and that no further standing inquiry was necessary because the attorneys general were “suing to enforce their jurisdictions’ causes of action”); Alaska v. U.S. Dep’t of Transp., 868 F.2d 441, 443 n.1 (D.C. Cir. 1989) (court “need not delve into the issue of parens patriae standing” because States’ “sovereign interest in law enforcement is sufficient to support standing”).20 The Attorney General has express—indeed, exclusive— statutory standing to prosecute civil fraud actions enforcing the Martin Act and Executive Law § 63(12). The Martin Act gives Attorney General exclusive authority to “seek restitution and damages for injured parties,” among other remedies, in a civil action. Kerusa Co. v. W10Z/515 Real Estate Ltd. P’ship, 12 N.Y.3d 236, 244 (2009); see also Assured Guar., 18 N.Y.3d at 349-50 (describing Attorney General’s authority to “commence civil or 20 The Legislature may, of course, confer statutory authority on the Attorney General to bring enforcement actions that were formerly brought as exercises of common-law parens patriae authority. The legislative decision to give the Attorney General standing to enforce a state statute makes it unnecessary to determine whether the criteria for common-law parens patriae standing are satisfied. 47 criminal prosecution”); People v. Bunge Corp., 25 N.Y.2d 91, 97-98, 100 (1969) (describing Attorney General’s “prosecutorial discre- tion” in civil Martin Act cases). Executive Law § 63(12) also vests the Attorney General with “statutory authority to serve the public interest by seeking both injunctive and victim-specific relief.” Coventry First, 13 N.Y.3d at 114; see also People v. Gilmour, 98 N.Y.2d 126, 131 n.7 (2002) (citing the Attorney General’s authority to “prosecute business frauds and other deceptive practices” under Executive Law § 63(12) in discussing the Attorney General’s “prosecutorial and other law-enforcement authority”); Apple Health & Sports Clubs, 80 N.Y.2d at 807; Cortelle, 38 N.Y.2d 85; Rachmani, 71 N.Y.2d at 721 n.1.21 21 Thus, in a case repeatedly cited by defendants (Br. at 19, 23, 24) for the holding that the Attorney General lacked parens patriae standing to bring a particular claim, the court indicated that there would be no similar issue of standing if the claim had alleged “any fraudulent practice which would justify an assertion of jurisdiction pursuant to Executive Law § 63(12).” Matter of State v. N.Y. City Conciliation & Appeals Bd., 123 Misc. 2d 47, 48 n.3 (Sup. Ct. N.Y. County 1984). 48 Defendants’ contrary argument finds no support in Central States Southeast and Southwest Areas Health and Welfare Fund v. Merck-Medco Managed Care, 433 F.3d 181, 200 (2d Cir. 2005) (cited by defendants, Br. at 17-18). Central States did not concern the standing of a state law enforcement officer to bring suit in state court to enforce a state statute. Instead, that case concerned the standing of private parties to sue in federal court under a federal statute. Thus, the private plaintiffs in Central States were not exercising sovereign authority when they sued to enforce federal law. The holding in Central States that the named private plaintiffs in that case were required to show injury-in-fact, in addition to showing statutory authorization for the action, has no application here.22 22 Some federal decisions have applied the parens patriae test to assess whether the Attorney General has standing to sue under Executive Law § 63(12), but those decisions typically involve claims brought under the “illegality” prong of § 63(12), in cases where the Attorney General was alleging violations of a statute, often a federal statute, that did not specifically authorize enforcement by the Attorney General. See, e.g., New York v. Seneci, 817 F.2d 1015, 1017 (2d Cir. 1987) (federal racketeering claims); New York v. Holiday Inns, Inc., 656 F. Supp. 675, 678 (continued on next page) 49 B. Defendants Are Incorrect In Contending That Money Damages Serve No Public Purpose. Although no further inquiry is needed to establish the Attorney General’s standing, we explain here the error in defendants’ suggestion that awards of money damages against those who have committed fraud serve no public purpose beyond the private interests of the victims. This Court squarely recognized in Coventry that antifraud “enforcement action[s]” for damages brought by the Attorney General under Executive Law § 63(12) “serve the public interest.” 13 N.Y.3d at 114. The United States Supreme Court has likewise held that an agency enforcement action “vindicate[s] a public interest, . . . even when it pursues entirely victim-specific relief.” EEOC v. Waffle House, Inc., 534 U.S. 279, 296 (2002). (W.D.N.Y. 1984) (federal as well as state law antidiscrimination claims). The question whether the parens patriae test applies in such “illegality” cases is different from whether it applies to claims brought under the “fraud” prong of § 63(12), alleging violations of the substantive standard of “fraud” set forth in that very statute, which the Attorney General alone is specifically charged to enforce. 50 Actions for monetary relief, including damages that will benefit victims of wrongdoing, vindicate the public interest in at least three important ways. First, as the Appellate Division recog- nized (25:15194), victim-specific monetary remedies, including damages, serve a critical public purpose by deterring unlawful conduct. This deterrent effect—whereby parties may be dissuaded from violating the law by the knowledge that they will be forced to surrender any ill-gotten gains and called to account for the harms their misconduct causes—is perhaps the primary purpose of monetary remedies in fraud enforcement actions. Thus, restitution and disgorgement serve both compensatory and deterrent functions. See, e.g., People v. Applied Card Sys., Inc., 11 N.Y.3d 105, 125 (2008); SEC v. Fischbach Corp., 133 F.3d 170, 175-76 (2d Cir. 1997). Damages, too, not only redress harms, but also “provide an appropriate incentive to meet the appropriate standard of behavior.” 1 Dan B. Dobbs, Law of Remedies § 3.1, at 282 (2d ed. 1993); see also Memphis Cmty. Sch. Dist. v. Stachura, 477 U.S. 299, 307 (1986); Carey v. Piphus, 435 U.S. 247, 256-57 (1978) (deterrence is “inherent in the award of compensatory 51 damages”); Globus v. Law Research Serv., Inc., 418 F.2d 1276, 1285 (2d Cir. 1969) (damages for violations of the securities laws may have “a potent deterrent effect”). Awards of damages are particularly critical in deterring frauds where defendants do not receive money or property from victims that may be subject to disgorgement or restitution. Such frauds may arise from motives that are less direct or tangible than immediate profit, but those motives are nonetheless powerful: defendants often may commit fraud to boost companies’ stock performance and enhance their personal reputations (and often thereby enhance their own future compensation also). Second, defendants are incorrect in asserting that there is no public interest in seeing that victims obtain redress for injuries caused by violations of New York statutes. This public interest is an important reason that criminal sentences mandate restitution and reparation compensating victims for “out-of-pocket loss.” See Penal Law § 60.27; see also People v. Amorosi, 96 N.Y.2d 180, 183 (2001) (noting that a goal of criminal restitution is to “insure that victims will be made whole,” as well as to deter future wrongdoing 52 and promote offenders’ rehabilitation). This interest is also the reason New York has created the Office of Victim Services, which uses state and federal funds to compensate victims of crimes. See Executive Law § 620 et seq.; 9 N.Y.C.R.R. pt. 525. Third, the availability of victim-specific monetary relief in public enforcement actions encourages victims to come forward with information and cooperate with state enforcement. See Waffle House, 534 U.S. at 295-96 & n.11. Defendants are also mistaken in suggesting (Br. at 25) that the Attorney General’s use of resources to pursue this lawsuit raises concerns regarding the state constitutional prohibition on gifts or loans of state monies to promote private enterprise. See N.Y. Const. art. VII, § 8.23 This lawsuit is not a government subsidy to private interests. The government may properly devote public resources to redressing harms to victims of wrongdoing, and victim-specific monetary relief serves important public 23 Defendants’ argument also overlooks that the Attorney General seeks here an award of attorney’s fees and costs to cover expenses incurred in bringing this lawsuit (3:1592). 53 purposes in deterring such wrongdoing and promoting cooperation with law enforcement.24 See Waffle House, 534 U.S. at 291-92 (noting that it is “the public agency’s province” both “to evaluate the strength of the public interest at stake” and “to determine whether public resources should be committed to the recovery of victim-specific relief”). 24 Defendants’ argument finds no support in the Appellate Division’s 2008 decision in Grasso, 54 A.D.3d at 196, where the court opined that allowing the Attorney General to continue to maintain an action seeking restitution of executive compensation paid by the New York Stock Exchange, following the Exchange’s conversion to a for-profit form, would raise constitutional concerns because the action “vindicate[d] no public purpose.” That statement was dictum, contained in a case very different from this one. The statement also is simply incorrect, and contrary to this Court’s later ruling in Coventry, if understood to mean generally that lawsuits to recover victim-specific monetary relief do not serve public purposes. Nor does defendants’ reliance on Matter of Schulz v. State, 86 N.Y.2d 225, 234 (1995), fare better. That case concerned the use of public money to produce political campaign materials promoting a specific political candidate and partisan cause, and has no relevance here. 54 C. The Attorney General Would Satisfy the Requirements of Parens Patriae Standing If They Applied. If the parens patriae doctrine applied here (and it does not), the Attorney General would satisfy its requirements. To have implied parens patriae standing where express statutory standing is lacking, the Attorney General must show (1) “a quasi-sovereign interest distinct from that of a particular party”; and (2) “injury to a substantial segment of the state’s population.” Grasso, 11 N.Y.3d at 69 n.4.25 Both requirements are readily met here. This enforcement action vindicates the State’s quasi- sovereign interest in the “economic well-being” of its residents, Snapp, 458 U.S. at 605, 607—an interest that is widely recognized 25 The United States Supreme Court instructed in Snapp that “[o]ne helpful indication in determining whether an alleged injury to the health and welfare of its citizens suffices to give the State standing to sue as parens patriae is whether the injury is one that the State, if it could, would likely attempt to address through its sovereign lawmaking powers.” 458 U.S. at 607 (emphasis added). This observation further confirms that the parens patriae doctrine presupposes the lack of express statutory authority. When a state legislature has already “address[ed] [a problem] through its sovereign lawmaking powers” and created statutory standing for state enforcement, the State need not rely on parens patriae standing. See supra Point I.A. 55 to include securing an honest marketplace and protecting the public from fraudulent and deceptive practices. See, e.g., Grasso, 11 N.Y.3d at 69 n.4; People v. H & R Block, Inc., 58 A.D.3d 415, 417 (1st Dep’t 2009); People v. Liberty Mut. Ins. Co., 52 A.D.3d 378, 379 (1st Dep’t 2008); New York v. Citibank, N.A., 537 F. Supp. 1192, 1197 (S.D.N.Y. 1982). Defendants threatened this quasi-sovereign interest by initiating and approving, at AIG’s New York offices, two material fraudulent insurance transactions, and certifying financial statements that failed to reflect the true nature of those transactions—all for the purpose of concealing the true financial condition of AIG from the investing public. This action also satisfies the requirement that defendants’ misconduct cause injury to a substantial segment of the popula- tion. The Attorney General has offered an expert report showing that institutional investors purchased at least 655 million shares of AIG stock during the period affected by defendants’ frauds and suffered billions in losses as a result of the frauds (18:10990 [Nettesheim Report]). See People v. Merkin, 2010 N.Y. Slip Op. 50430(U), at *10, 2010 WL 936208, at *10 (Sup. Ct. N.Y. County 56 Feb. 8, 2010) (finding parens patriae standing to seek damages on common-law claims for breach of fiduciary duty, where defen- dants’ fraud “touched many investors”); see also People v. Liberty Mut. Holding Co., 2007 N.Y. Slip Op. 50574(U), at *6, 2007 WL 900997, at *7 (Sup. Ct. N.Y. County Mar. 27, 2007), aff’d, 52 A.D.3d 378 (1st Dep’t 2008); Snapp, 458 U.S. at 607 (recognizing that courts should consider both direct and “indirect effects of the injury”). We have already demonstrated that awards of money damages for fraud serve public purposes that go well beyond victims’ financial interests. And as defendants concede (Br. at 37) and the Appellate Division found (25:15194-15195), the Attorney General’s complaint in this action seeks many forms of relief in addition to damages, including injunctive relief, disgorgement, attorney’s fees, and costs (3:1592). Defendants apparently agree that these other remedies would advance a quasi-sovereign interest, but they argue (Br. at 9-10, 20-22, 37) that some of these remedies are not available here. But no issue related to these other remedies is properly 57 before the Court. Supreme Court rejected defendants’ arguments that the Gen Re and CAPCO transactions caused no damages as a matter of law (1:93-95), but the court has not yet considered, let alone decided, the contours of other relief that may be available.26 Defendants are also mistaken in arguing (Br. at 23-25) that parens patriae standing would be inappropriate here because there is a pending private class action asserting federal securities law claims against Greenberg, Smith, and other defendants in federal court—a class action to which allegations about the Gen 26 In any event, defendants are incorrect that remedies other than damages are no longer available. Defendants’ federal consent judgments with the SEC (7:3985-3996, 23:13999-14013) do not preclude the Attorney General from obtaining an injunction under state law that the Attorney General will have standing to enforce. Seneci, 817 F.2d 1015 (cited by defendants, Br. at 21 n.16), is inapposite. The Attorney General was denied injunctive relief in federal court there because he had already obtained his own state- court injunction against the same fraudulent practices under state law. Nor does defendants’ assertion that they did not sell any AIG stock during the relevant period or directly receive funds from investors categorically preclude the Attorney General from seeking to recover compensation defendants received during these frauds, particularly if their compensation was in any way tied to AIG’s stock performance. See, e.g., Lamdin v. Broadway Surface Adver. Corp., 272 N.Y. 133, 138 (1936); SEC v. Posner, 16 F.3d 520, 522 (2d Cir. 1994). 58 Re and CAPCO frauds were added after investigations by the Attorney General and SEC led to public disclosure of the frauds. See Consol. Am. Class Action Compl., In re Am. Int’l Group, Inc. Secs. Litig., No. 04-cv-8141 (S.D.N.Y. Apr. 19, 2005) (Dkt. No. 61). Parens patriae standing does not require a showing that the victims of unlawful conduct lack the ability to bring private suits. See Grasso, 11 N.Y.3d at 69 n.4 (identifying no such requirement); Snapp, 458 U.S. at 600, 607 (stating no such requirement; distinguishing a parens patriae action founded on quasi-sovereign interests from a situation where the government “step[s] in to represent the interests of particular citizens who, for whatever reason, cannot represent themselves,” which is not an instance of modern parens patriae standing);27 see also Merkin, 2010 N.Y. Slip 27 Snapp demonstrates that defendants’ reliance (Br. at 24) on New York v. 11 Cornwell Co., 695 F.2d 34 (2d Cir. 1982), is misplaced. In 11 Cornwell, the court held that the Attorney General had standing to assert federal civil rights claims on behalf of mentally disabled persons because he established, among other things, that the individuals could not obtain complete relief through a private suit. Id. at 37, 40. Suits brought by States on behalf of the mentally disabled, mentally ill, or minors fall into a special category, harking back to the origins of the parens patriae (continued on next page) 59 Op. 50430(U), at *10, 2010 WL 936208, at *10 (holding that the Attorney General need not “show an inability of the allegedly injured individuals to obtain relief in a private suit”). There is also no relevance to defendants’ repeated observations (Br. at i-ii, 8-9, 16-17, 24-25) that a settlement has been submitted to the federal district court for approval in the federal class action. First, the settlement has not yet received court approval and may not ever receive it. In Applied Card, this Court ruled that entry of a final judgment approving a class- action settlement precluded, as a matter of res judicata, the Attorney General’s claims for restitution as to class members covered by the settlement. 11 N.Y.3d at 124-25. Thus, a final judgment in the federal class action may preclude the Attorney doctrine, and “ha[ve] relatively little to do with the concept of parens patriae standing in American law.” Snapp, 458 U.S. at 600. As Snapp and Grasso demonstrate, when a State sues to vindicate a quasi-sovereign interest under modern parens patriae law, it need not show that individuals cannot obtain relief on their own. 60 General from obtaining damages relating to injuries suffered by persons included within the class settlement.28 But it is a final judgment that may have preclusive effect, not the mere pendency of a request for settlement approval, let alone the mere pendency of a class action, as defendants suggest (see Br. at 24-25). Final court approval of a proposed class-action settlement is not a formality, as defendants seem to contend, but rather an important check against unfair or collusive settlements of absent class members’ claims. A rule that would strip the Attorney General of standing based on the mere possibility that victims could receive relief in a federal class action would distort Applied Card beyond recognition. Such a rule might also have the undesirable effect of encouraging collusive filings or settlement proposals designed to deprive the Attorney General of standing. 28 Because the class settlement at issue will, if approved, result in a federal-court judgment in a federal question case, its preclusive effect will be determined under federal law; such a judgment may receive no more and no less preclusive effect in state court than the judgment would receive in federal court. See Semtek Int’l Inc. v. Lockheed Martin Corp., 531 U.S. 497, 507 (2001). Because this Court in Applied Card did not address federal principles of preclusion, the question remains open here. 61 And even final approval of the proposed settlement in the federal class-action here, if it occurred, would not preclude the Attorney General from obtaining other remedies, including an injunction, disgorgement, attorney’s fees, and costs, as well as damages for injuries to any class members who opt out of the settlement. 11 N.Y.3d at 125-26. Second, defendants are also wrong in suggesting (Br. at i, 9, 16-17) that the Attorney General has somehow acted improperly by filing objections to the proposed class-action settlement in federal court. The Attorney General, which, along with the SEC, first uncovered the Gen Re fraud, has a legitimate interest in seeing that victims’ claims are not compromised by private class counsel on inadequate terms—a result that not only under- compensates victims but also under-deters fraudsters. See S. Rep. No. 109-14, at 33 (2005). In fact, Congress has specifically recognized the important role of state attorneys general and other officials to serve as “a layer of independent oversight” of class-action settlements and to “deter collusion between class counsel and defendants to craft 62 settlements that do not benefit the injured parties.” S. Rep. No. 109-14, supra, at 34, 35. Congress found that class-action settlements too often result in plaintiffs’ counsel being awarded disproportionately large fee awards, while class members “receive little or no benefit.” 28 U.S.C. § 1711 note; see also S. Rep. No. 109-14, supra, at 33; S. Rep. No. 104-98, at 6-7 (1995).29 As part of the Class Action Fairness Act of 2005 (CAFA), Congress mandated that a State must receive notice of every proposed federal court class-action settlement involving resident class members. 28 U.S.C. § 1715(b). This provision specifically contemplates that States will “voice concerns” about proposed settlements that are “unfair to some or all class members or inconsistent with applicable regulatory policies.” S. Rep. No. 109-14, supra, at 5, 32. The Attorney General’s objection to the proposed federal settlement serves precisely these purposes. Under the proposed 29 See also S. Rep. No. 109-14, supra, at 14-20 (considering evidence of unfair, inadequate class-action settlements); S. Rep. No. 104-98, supra, at 6, 12 (considering evidence that securities fraud victims recover only pennies on the dollar while class counsel receive disproportionate fee awards). 63 settlement, the plaintiff class would release the claims alleged in the class complaint, which include the Gen Re fraud and numerous other fraudulent transactions, in return for a payment of $115 million (none of which would be paid by Greenberg or Smith). The Attorney General informed the federal district court that as a result of serious and conceded mathematical errors, the lead plaintiff’s damages expert incorrectly deemed the decline in AIG’s stock price resulting from disclosures about the Gen Re fraud to be statistically insignificant. But when those mathematical errors are corrected, that expert’s own methodology shows that the stock drops are statistically significant. See Objection of the Attorney General of the State of New York at 10-11, In re Am. Int’l Group, Inc. Secs. Litig., No. 04-cv-8141 (S.D.N.Y. Aug. 17, 2012) (Dkt. No. 650). Thus, because of those errors, class counsel agreed to a proposed settlement that would release claims, including claims based on the Gen Re fraud, without having correctly accounted for the fraud’s harms. The Attorney General’s expert has shown that the proposed settlement does not allocate any money for the harms caused by the Gen Re fraud. Decl. of Jane D. Nettesheim 64 ¶¶ 22-24, In re Am. Int’l Group, Inc. Secs. Litig., No. 04-cv-8141 (S.D.N.Y. May 30, 2012) (Dkt. No. 651-1). Far from acting improperly, the Attorney General, by his objections, has identified important deficiencies in the proposed federal class-action settlement. In sum, the Attorney General has standing to maintain this enforcement action for damages and other remedies, both as a matter of express statutory standing under the Martin Act and Executive Law § 63(12) and under the common-law parens patriae doctrine, if it were applied here. POINT II FEDERAL SECURITIES LAW DOES NOT PREEMPT THIS ACTION UNDER THE MARTIN ACT AND EXECUTIVE LAW § 63(12) “‘[T]he purpose of Congress is the ultimate touchstone in every pre-emption case.’” Wyeth v. Levine, 555 U.S. 555, 565 (2009) (quoting Medtronic, Inc. v. Lohr, 518 U.S. 470, 485 (1996)). Preemption of state securities-fraud enforcement—and, in particular, preemption of New York’s Martin Act, our nation’s best 65 known state securities fraud law—would be an action with major federalism implications that Congress would not lightly under- take. Consequently, before a court may find federal preemption here, clear evidence of congressional purpose to preempt is required. No such clear evidence exists. Defendants attempt to find federal preemption of state law enforcement in two federal statutes directed at problems having nothing to do with state securities-fraud enforcement: the Securities Litigation Uniform Standards Act (SLUSA),30 and the National Securities Markets Improvement Act (NSMIA).31 SLUSA was enacted to address abuses in private securities class-action litigation by private parties and private class-action attorneys, and has no bearing whatever on state law enforcement activities. NSMIA was enacted to preempt state laws that imposed regulatory registration and review requirements as to national securities offerings; it preempts 30 Pub. L. No. 105-353, 112 Stat. 3227 (1998). 31 Pub. L. No. 104-290, 110 Stat. 3416 (1996). 66 state regulatory activity and not state law enforcement actions. Furthermore, both SLUSA and NSMIA contain express saving clauses confirming beyond any question that Congress did not intend to preempt state securities-fraud enforcement. Defendants and their amici are of course free to seek federal legislation curtailing the Attorney General’s ability to investigate and prosecute frauds such as those at issue here, as they have funded efforts to lobby Congress to roll back federal financial regulation and antifraud measures. See Rick Cohen, Public-Policy Funding Raises Questions, Philanthropy J. (Apr. 30, 2007), available at http://www.philanthropyjournal.org/archive/131262.32 But there is no basis to suggest that Congress preempted state 32 When a member of Congress proposed legislation in 2003 that would have expressly diminished state securities enforcement—by channeling certain state securities recoveries to the SEC and imposing other restrictions—the bill generated strong public opposition from the States and others and failed to pass. See Securities Fraud Deterrence and Investor Restitution Act, H.R. 2179, 108th Cong. (2003); Christopher R. Lane, Halting the March Toward Preemption: Resolving Conflicts Between State and Federal Securities Regulators, 38 New Eng. L. Rev. 317, 331- 35 (2005). 67 securities fraud enforcement by enacting either SLUSA or NSMIA. A. Federal Securities Law Has Consistently Recognized the States’ Important Antifraud Enforcement Role. Preemption analysis begins with the “presumption that Congress does not intend to supplant state law.” Applied Card, 11 N.Y.3d at 113 (quotation marks omitted) (rejecting federal preemption of claims under Executive Law § 63(12) and other state statutes). Under the presumption, federal preemption will be found only where it is “the clear and manifest purpose of Congress” to preempt. Lee v. Astoria Generating Co., 13 N.Y.3d 382, 391 (2009) (quotation marks omitted); see also Planned Consumer Mktg., Inc. v. Coats & Clark, Inc., 71 N.Y.2d 442, 449 (1988). The presumption against federal preemption of state law is “especially strong” if the federal law “treads on a traditional state power.” Matter of Disney Enters., Inc. v. Tax Appeals Tribunal, 10 N.Y.3d 392, 403 (2008); see also Wyeth, 555 U.S. at 565 n.3 (“The presumption . . . accounts for the historic presence of state law but does not rely on the absence of federal regulation.”) The 68 presumption means that express preemption clauses in federal statutes must be narrowly construed. Medtronic, 518 U.S. at 485; Cipollone v. Liggett Group, Inc., 505 U.S. 504, 518 (1992). Securities fraud enforcement is unquestionably a traditional state power: for the last century, States have exercised their police powers to address securities fraud through their blue-sky laws, which are in effect today in every State.33 New York enacted its own blue-sky law, the landmark Martin Act, in 1921. See Ch. 649, 1921 N.Y. Laws 1989. Congress enacted the first federal securities laws in the 1930s to supplement, not supplant, widespread state securities legislation. From the inception of federal securities laws—which were modeled on the existing state blue-sky laws, and on the Martin Act in particular34—Congress included broad saving 33 See, e.g., Hall v. Geiger-Jones Co., 242 U.S. 539 (1917); 2 Thomas Lee Hazen, Law of Securities Regulation § 8.1 (6th ed. 2009); 12 Joseph C. Long, Blue Sky Law § 1:1 (2012). 34 See, e.g., Federal Securities Act, supra, at 11, 95, 101, 109- 10, 112; Securities Act, supra, at 71, 146-147, 156, 170, 245-246, 253, 325, 334. 69 clauses “designed to save state blue-sky laws from pre-emption” and to give the States continued “leeway to regulate securities transactions.” Leroy v. Great W. United Corp., 443 U.S. 173, 182 n.13 (1979); see 15 U.S.C. §§ 77p(a), 78bb(a)(2). In the nearly eighty years since Congress made its initial choice to preserve state authority to regulate securities, federal and state securities laws have “coexisted” in a “dual system of regulation [that] has worked to the benefit of investors.” Securities Litigation Uniform Standards Act of 1997—S. 1260: Hearing Before the Subcomm. on Securities, Comm. on Banking, Housing and Urban Affairs, 105th Cong. 41 (1997) (testimony of chairman and commissioner of U.S. Securities and Exchange Commission) (“SEC SLUSA Testimony”); see also Bluebird Partners, L.P. v. First Fidelity Bank, N.A., 297 A.D.2d 223, 225 (1st Dep’t 2002) (“It is apparent from such statutes as the Martin Act . . . that the field of securities regulation has not been preempted by federal law.”). Congress enacted SLUSA and NSMIA in the 1990s against the backdrop of this dual system of federal and state securities laws. SLUSA and NSMIA each limit state law in a targeted way: 70 SLUSA curbs abusive class-action litigation by private plaintiffs and private attorneys, and NSMIA preempts States from imposing regulatory registration and review requirements as to national securities offerings. But both statutes expressly reaffirm the authority of state officials to bring antifraud enforcement actions under state law. Accordingly, to this day, the federal securities laws “presuppose an active, vital system of State securities regulation and State court enforcement” that properly “preserves actions brought by State regulatory authorities,” SEC SLUSA Testimony at 13, 40, and both federal and state law “each continue to play a vital role in eliminating securities fraud and abuse,” A.S. Goldmen & Co. v. N.J. Bureau of Secs., 163 F.3d 780, 782 (3d Cir. 1999). B. SLUSA Does Not Expressly Preempt State Securities Fraud Enforcement Because Its Preclusion Clause Applies Only to Private Securities Fraud Litigation. Defendants argue (Br. at 27-33) that SLUSA expressly preempts this enforcement action insofar as it seeks damages. But this contention is foreclosed by the plain text of SLUSA, as well as 71 an examination of the problem the statute meant to address. The statute’s text and purpose both confirm that Congress intended to “prohibit[] only class actions brought by private individuals,” while leaving state securities enforcement “entirely untouched.” Lander v. Hartford Life & Annuity Ins. Co., 251 F.3d 101, 118 (2d Cir. 2001) (emphasis added). 1. Congress enacted SLUSA to prevent private parties from circumventing a different federal statute that never applied to actions brought by state antifraud enforcers. SLUSA provides that “private state-law ‘covered’ class actions alleging untruth or manipulation in connection with the purchase or sale of a ‘covered’ security may not ‘be maintained in any State or Federal court.’” Kircher v. Putnam Funds Trust, 547 U.S. 633, 636-37 (2006) (quoting 112 Stat. 3228).35 SLUSA’s 35 In full, SLUSA’s preclusion section provides: “No covered class action based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal court by any private party alleging—(A) a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security; or (B) that the defendant used or employed (continued on next page) 72 origins derive from an earlier statute enacted by Congress, the Private Securities Litigation Reform Act (PSLRA).36 Congress expressly enacted SLUSA to prevent private litigants and private attorneys from circumventing the PSLRA. There is no basis to conclude that Congress intended the anti-circumvention rule to apply to securities-fraud enforcement actions brought by state officials, because the PSLRA itself never applied to such actions. The PSLRA was enacted by Congress in 1995 as “a check against abusive litigation by private parties.” Tellabs v. Makor Issues & Rights, Ltd., 551 U.S. 308, 313 (2007). As its name reflects, the statute was designed to reform “private securities litigation” by curbing perceived abuses, such as “rampant” strike suits and nuisance filings, vexatious discovery requests, and manipulation of clients by securities class-action lawyers. Id. at 320. See also Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security.” 15 U.S.C. § 78bb(f)(1) (emphasis added). 36 Pub. L. No. 104-67, 109 Stat. 737 (1995). 73 547 U.S. 71, 81 (2006) (quoting H.R. Conf. Rep. No. 104-369, at 31 (1995)). To address these problems, the PSLRA adopted heightened pleading standards in federal Rule 10b-5 suits; established an automatic stay of discovery until after a motion to dismiss is denied; created rules for determining lead plaintiffs and lead counsel in federal securities class actions; and imposed mandatory sanctions for frivolous securities litigation. Tellabs, 551 U.S. at 320-21.37 37 Contrary to defendants’ suggestions (see Br. at 27, 33, 37), the PSLRA did not change the substantive law of scienter under federal Rule 10b-5. See Greebel v. FTP Software, Inc., 194 F.3d 185, 198-201 (1st Cir. 1999); S. Cherry St., LLC v. Hennessee Group LLC, 573 F.3d 98, 109 (2d Cir. 2009); In re Advanta Corp. Secs. Litig., 180 F.3d 525, 534–35 & n.8 (3d Cir. 1999); Ottmann v. Hanger Orthopedic Group, Inc., 353 F.3d 338, 343-44 & n.3 (4th Cir. 2003); Nathenson v. Zonagen Inc., 267 F.3d 400, 407-09 (5th Cir. 2001); In re Comshare, Inc. Secs. Litig., 183 F.3d 542, 549-50 & n.5 (6th Cir. 1999); Makor Issues & Rights, Ltd. v. Tellabs, Inc., 437 F.3d 588, 600 (7th Cir. 2006), vacated & remanded on other grounds sub nom. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007); Kushner v. Beverly Enters., Inc., 317 F.3d 820, 827 (8th Cir. 2003); Howard v. Everex Sys., Inc., 228 F.3d 1057, 1064 (9th Cir. 2000); City of Phila. v. Fleming Cos., 264 F.3d 1245, 1259 (10th Cir. 2001); Bryant v. Avado Brands, Inc., 187 F.3d 1271, 1283-84 & n.21 (11th Cir. 1999); see also H.R. Conf. Rep. No. 105-803, at 15 (1998). 74 But Congress did not anticipate what happened after the PSLRA’s enactment: private securities class actions “migrat[ed]” from federal to state court to avoid the anti-abuse rules of the PSLRA. Lander, 251 F.3d at 110. Private securities lawyers acted to evade the statute by filing class actions in state court under state law—bringing, for example, common-law fraud claims— instead of filing securities class actions in federal court, where they had usually been brought before. 15 U.S.C. § 78a note (SLUSA § 2(5)); Dabit, 547 U.S. at 82; Spielman v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 332 F.3d 116, 122-23 (2d Cir. 2003). Congress in turn enacted SLUSA to stop this circumvention of the PSLRA’s anti-abuse provisions by precluding private class actions alleging securities fraud from being brought under state law. Congress made explicit that SLUSA was enacted “to prevent certain State private securities class action lawsuits alleging fraud from being used to frustrate the objectives of the Private Securities Litigation Reform Act.” 15 U.S.C. § 78a note (SLUSA § 2(5)) (emphases added). 75 This history demonstrates that Congress never intended SLUSA to apply to a state securities fraud enforcement action brought by state attorneys general or other state officials. The Attorney General’s Martin Act and Executive Law § 63(12) antifraud suits did not “migrate” to state court to circumvent the PSLRA; the Attorney General historically filed those suits in state court, and those suits were not subject to the PSLRA. Therefore, SLUSA, a statute designed to prevent evasion of the PSLRA, could not have been aimed at antifraud enforcement actions brought by state officials. 2. SLUSA’s text precludes certain private class actions alleging securities fraud, but expressly preserves state enforce- ment authority. The text of SLUSA confirms that the statute is aimed only at privately filed state securities litigation. SLUSA’s preclusion provision states that “[n]o covered class action based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal court by any private party,” where the action alleges fraud or misrepresentation in connection 76 with the purchase or sale of a covered security. 15 U.S.C. § 78bb(f)(1) (emphasis added). And SLUSA contains an express saving clause, titled “Preservation of State jurisdiction,” stating that “[t]he securities commission (or any agency or office performing like functions) of any State shall retain jurisdiction under the laws of such State to investigate and bring enforcement actions.” Id. § 78bb(f)(4). SLUSA’s preclusion provision does not apply here for several reasons. First, this is not a class action. Defendants suggest (Br. at 27-28) that it should be regarded as a “covered class action” because that term, as defined in SLUSA, is not limited to suits formally certified as class actions, but also includes state-law actions alleging securities fraud in which “damages are sought on behalf of more than 50 persons or prospective class members” or “one or more named parties seek to recover damages on a representative basis on behalf of themselves and other unnamed parties similarly situated.” Id. § 78bb(f)(5)(B). But this definition does not purport to reach actions brought by state law enforcement officers to enforce state law. Instead, it prescribes 77 another anti-circumvention rule, meant to ensure that private parties and private attorneys could not evade preclusion simply by bringing a state-law action joining numerous plaintiffs, without seeking class certification. See, e.g., H.R. Conf. Rep. No. 105-803, supra, at 13; S. Rep. No. 105-182, at 7-9 (1998). Because no such circumvention risk applies to the Attorney General, there is no basis to read the definition of “covered class action” to include suits brought by the Attorney General. Moreover, the Attorney General does not sue “on behalf of” specific victims; the Attorney General sues on behalf of the People of the State of New York. GBL §§ 352-353; Executive Law § 63(12). The fact that monetary recovery by the Attorney General may result in benefits to victims does not mean the Attorney General sues on their behalf. See supra Point I.B (enforcement actions vindicate public interests even when victim-specific relief is sought). Even if this suit qualified as a “covered class action,” it would not be precluded by SLUSA because it is not “maintained . . . by any private party.” 15 U.S.C. § 78bb(f)(1). Rather, this suit is maintained by the Attorney General, who has exclusive 78 authority to pursue investigations under the Martin Act and Executive Law § 63(12); to control the prosecution of enforcement actions under those statutes; and to choose the remedies sought in such actions. GBL §§ 352-353; Executive Law § 63(12); Kralik, 5 N.Y.3d at 59; Bunge, 25 N.Y.2d at 97-98, 100. SLUSA’s preclusion provision simply has no application to an action brought by a public official pursuant to his law enforcement authority. See Missouri v. Stifel, Nicolaus & Co., 648 F. Supp. 2d 1095, 1096-97 (E.D. Mo. 2009) (noting agreement of parties that state enforcement action “was not brought by a private party and therefore is not precluded”); Lander, 251 F.3d at 118 (SLUSA preclusion applies “only to class actions brought by private individuals”). SLUSA’s saving clause, moreover, “evinces [Congress’] sensitivity to state prerogatives” by “expressly preserv[ing] state jurisdiction over state agency enforcement proceedings.” Dabit, 547 U.S. at 87. In enacting SLUSA, Congress explicitly recognized that “State securities regulation is of continuing importance”; declared its intent to “preserv[e] the appropriate enforcement 79 powers of State securities regulators,” 15 U.S.C. § 78a note (SLUSA § 2(4), (5)); and included the saving clause accordingly, id. § 78bb(f)(4). Preclusion of this action would deny New York “its right under the laws of the State . . . to bring enforcement actions in state court”—in direct contravention of the saving clause. Stifel, Nicolaus, 648 F. Supp. 2d at 1097-98; see also id. at 1096, 1099 (finding no “objectively reasonable basis” for argument that SLUSA preempts suit by Attorney General seeking damages). Defendants contend that AIG investors are the real parties in interest and that this action is a “de facto class action,” not a genuine enforcement action under the saving clause, because it will serve only to compensate private parties and will not advance any public interest. But as we have shown, state enforcement actions seeking damages and similar monetary recovery serve public interests independent of any recovery that might flow to private parties. See supra Point I.B. Along similar lines, when the federal securities enforcer, the SEC, distributes monetary relief obtained in “civil enforcement actions” to “compensate injured vic- tims,” this “promote[s] economic and social policies independent of 80 the claims of individual investors” and “vindicates public rights.” SEC v. Rind, 991 F.2d 1486, 1490-91 (9th Cir. 1993). See generally Official Comm. of Unsecured Creditors of WorldCom, Inc. v. SEC, 467 F.3d 73 (2d Cir. 2006) (discussing disgorgement funds). Nothing in the text or history of SLUSA suggests any legislative intent to preempt state enforcement actions merely because they may benefit private victims of securities fraud. Congress did not aim to curb the compensation of securities-fraud victims, and Congress even more clearly did not intend to prohibit the recovery of damages by state officials in law enforcement actions to deter frauds, as well as compensate victims. Instead, Congress aimed to stop particularly troubling trends in the conduct and tactics of private securities litigation. SLUSA preclusion focuses on who controls the litigation, not who may benefit from it. That is why SLUSA preclusion does not apply to 81 public enforcement actions, even though they may result in benefits to private victims.38 3. Defendants’ reading of SLUSA would lead to absurd results. In addition to contravening SLUSA’s text and purpose, defendants’ SLUSA argument, if adopted, would lead to absurd results because it would impose greater restrictions on public securities enforcement than on private securities litigation, even though private litigation was the statute’s actual intended target. 38 Defendants have wisely abandoned their reliance on Demings v. Nationwide Life Ins. Co., 593 F.3d 486 (6th Cir. 2010), a decision they cited in reply in the Appellate Division. Demings did not involve state securities-fraud enforcement. Instead, it concerned a putative class action, brought by a county sheriff represented by private counsel, asserting state common-law claims on behalf of a nationwide class of all public employers that sponsored certain deferred-compensation plans. Id. at 488-89. The court held that the action was precluded because it did not satisfy the requirements imposed by SLUSA, under 15 U.S.C. § 78bb(f)(3)(B), on state-law class actions brought by states, political subdivisions, or state pension funds based on their own investments in a covered security. Id. at 491-94. These requirements were designed to prevent “entrepreneurial plaintiffs lawyers” from recruiting pension funds and the like to serve as named class representatives to evade SLUSA’s restriction on private state-law class actions. Id. at 494 (quotation marks omitted). 82 The United States Supreme Court has stressed that SLUSA “does not actually pre-empt any state cause of action.” Dabit, 547 U.S. at 87 (emphasis added); see also Kircher, 547 U.S. at 636 n.1 (SLUSA “does not itself displace state law with federal law”). Rather, SLUSA precludes private litigants and attorneys from using certain procedural aggregation devices, like the class action or broad joinder of numerous plaintiffs, in state-law suits alleging fraud in securities transactions. Private litigants and attorneys remain free to bring claims under state law via non-class actions joining fewer than fifty plaintiffs. See Dabit, 547 U.S. at 87 (SLUSA “does not deny any individual plaintiff, or indeed any group of fewer than 50 plaintiffs, the right to enforce any state- law cause of action that may exist.”). Private litigants and attorneys also remain free to bring securities class actions under federal law. Defendants’ suggestion that Congress intended to preempt the Attorney General’s ability to recover damages for securities fraud under the Martin Act and Executive Law § 63(12) flies in the face of the Supreme Court’s statement that SLUSA merely 83 precludes the use of certain procedural aggregation devices, and does not preempt any state-law cause of action. Defendants appear to argue that SLUSA would preclude an Attorney General action for damages as to any securities fraud that harms more than fifty persons, because such a fraud has too many victims, and that the law of standing (discussed supra Point I) bars an Attorney General action for damages as to other securities frauds for having too few victims, thereby shifting the burden of seeking such relief largely to private litigants. There is no support for that position in the text or purpose of SLUSA, a statute enacted for the purpose of limiting private litigation, not expanding its role.39 39 And although defendants present their SLUSA preemption argument in this case as limited to the Attorney General’s request for damages, a number of federal courts have held that SLUSA precludes private class actions that do not seek damages, but rather (a) request restitution or disgorgement, see, e.g., Feitelberg v. Merrill Lynch & Co., 234 F. Supp. 2d 1043, 1047- 49 (N.D. Cal. 2002), aff’d, 353 F.3d 765 (9th Cir. 2003) (per curiam); (b) seek injunctive relief, with a prayer for such “further relief as the Court deems just and proper,” Davis v. John Hancock Viable Life Ins. Co., 295 F. App’x 245 (9th Cir. 2008); or (c) merely arise from “fraudulent misconduct,” Zoren v. Genesis Energy, L.P., (continued on next page) 84 C. Federal Securities Laws Do Not Impliedly Preempt State Securities Fraud Enforcement. Defendants next argue (Br. at 33-37) that the PSLRA, SLUSA, and especially NSMIA impliedly preempt this enforcement action. As demonstrated above, the PSLRA and SLUSA do not preempt antifraud enforcement actions brought by state officials. Defendants’ reliance on NSMIA fares no better. Congress enacted NSMIA to eliminate a patchwork of state securities registration laws as they applied to nationwide securities offerings and thereby foster uniformity in registration rules for national securities offerings. The text and legislative history of NSMIA make clear that the statute did not alter, in any way, state antifraud statutes governing securities transactions. 195 F. Supp. 2d 598, 604 (D. Del. 2002). Thus, any ruling that SLUSA applied to this enforcement action—despite all the evidence of congressional intent to the contrary—would open the door to even more aggressive claims of preemption by Martin Act and § 63(12) defendants down the road. 85 1. NSMIA preempts state securities registration and review regimes for nationwide securities offerings, but expressly does not affect state antifraud enforcement. Before NSMIA, nationwide securities offerings were subject to both federal and state registration and review regimes. Federal securities laws administered by the SEC prescribe a required form and content for offering documents, including prospectuses and periodic subsequent filings, for certain securities. See, e.g., 15 U.S.C. § 77f (registration of securities); id. § 77g (registration statement); id. § 77j (prospectus); id. § 77aa (schedule of information required in registration statement). Most States’ blue- sky laws, in addition to establishing public and private causes of action for securities fraud, also create regulatory registration and review regimes that (1) prescribe the specific content and format of securities-offering documents; and (2) in many cases, also impose varying standards of “merit review” of securities offerings, whereby state regulators must approve the terms or fairness of a securities offering before it may be made. See, e.g., Uniform Securities Act §§ 304, 306(a)(7) & cmt. 12 (2002). The Martin Act, 86 however, has from its inception focused on public antifraud enforcement; the statute has never imposed registration and review requirements for securities offerings, except in narrow situations not relevant here. Landes, 84 N.Y.2d at 660-61.40 By enacting NSMIA in 1996, Congress preempted state registration and review requirements for certain national securities offerings, but at the same time expressly confirmed its intent not to affect state securities-fraud enforcement. Thus, NSMIA expressly preempts, as to offerings of “covered securities,”41 state statutes or regulations that require “registration or qualification” of securities or securities transactions. 15 U.S.C. § 77r(a)(1). The statute also preempts 40 The most notable exception is that the Martin Act establishes a detailed offering-plan disclosure regime for cooperative interests in realty, including cooperative and condominium interests. GBL § 352-e; Kerusa, 12 N.Y.3d at 243-45 (describing requirements of GBL § 352-e). 41 Under NSMIA, “covered securities” include securities traded on a national exchange, issued by a registered investment company, sold to a “qualified purchaser” as defined by the SEC, or exempted from registration by certain other provisions of the Securities Act or by SEC rule. 15 U.S.C. § 77r(b). 87 state laws or regulations that “directly or indirectly prohibit, limit, or impose any conditions” on the use of securities offering documents or disclosure documents required to be filed with the SEC. Id. § 77r(a)(2). And NSMIA further preempts state “merit review” as to covered securities offerings, displacing state laws that “directly or indirectly prohibit, limit or impose conditions” on the offer or sale of a covered security “based on the merits of such offering or issuer.” Id. § 77r(a)(3). At the same time, NSMIA also makes explicit that state securities-fraud enforcement is unaffected. A saving clause in NSMIA, titled “Preservation of authority,” provides: “[T]he securities commission (or any agency or office performing like functions) of any State shall retain jurisdiction under the laws of such State to investigate and bring enforcement actions, in connection with securities or securities transactions . . . with respect to . . . fraud or deceit.” Id. § 77r(c)(1)(A). To “facilitate [state] antifraud efforts,” S. Rep. No. 104-293, at 15 (1996), NSMIA also permits States to require issuers of covered securities 88 to execute “notice filings” of federal disclosure documents with state regulators and charge filing fees. 15 U.S.C. § 77r(c)(2).42 As the text of the preemption and saving clauses shows, Congress had “two objectives” in enacting NSMIA: (1) “the primary intent to promote national uniformity in the securities registration process”; and (2) “the secondary but equally important intent to encourage the continued participation of the states in 42 The legislative history shows that Congress intended “to prevent State regulators from circumventing” NSMIA’s preemption of state regulatory registration and review requirements for national securities offerings, by “citing a State law against fraud or deceit . . . as [a State’s] justification for” requiring a prospectus to include additional “disclosure that the State[] believes is necessary.” H.R. Rep. No. 104-622, at 30, 34 (1996). But Congress did not intend to “restrict or limit [States’] ability” to investigate or sue to enforce “alleged violations of State laws that prohibit fraud and deceit.” Id. at 30. Thus, for example, if a “prospectus contained fraudulent financial data” or “failed to disclose” a material fact, then “State laws regarding fraud and deceit could serve as the basis of a judgment or remedial order,” which could include an injunction prohibiting use of the prospectus in the State. Id. at 34. There is no concern that NSMIA is being circumvented here, because this enforcement action does not aim to prescribe any specific content for an offering document, but rather challenges defendants’ certification of financial statements containing “fraudulent financial data,” after they played central roles in approving and implementing sham transactions. 89 preventing fraud in securities transactions.”43 Capital Research & Mgmt. Co. v. Brown, 147 Cal. App. 4th 58, 70 (2007); see also Lander, 251 F.3d at 108 (“The primary purpose of NSMIA was to preempt state ‘Blue Sky’ laws which required issuers to register many securities with state authorities prior to marketing in the state.”). Defendants concede (Br. at 33, 37) that NSMIA does not expressly preempt this antifraud enforcement action; they acknowledge that their NSMIA argument is one of “implied preemption.” But the courts have recognized that “nothing in the history of the legislation” suggests that NSMIA “preempts state oversight of fraud or deceit in the securities realm.” Houston v. 43 The distinction between regulatory oversight and enforcement actions is a familiar one. In Cuomo v. Clearing House Association, L.L.C., the United States Supreme Court construed the National Banking Act to preempt state regulation and oversight of national banks, but not to preempt state attorneys general from bringing enforcement actions to enforce state fair- lending and other requirements. 557 U.S. 519, 535-36 (2009). So too here NSMIA preempts state regulation in the form of registration and review requirements, but it does not preempt state attorneys general from bringing actions to enforce state antifraud law. 90 Seward & Kissel, LLP, No. 07-cv-6305, 2008 WL 818745, at *4 (S.D.N.Y. Mar. 27, 2008); accord A.S. Goldmen, 163 F.3d at 782; Zuri-Invest AG v. Natwest Finance Inc., 177 F. Supp. 2d 189, 197 (S.D.N.Y. 2001); Capital Research & Mgmt. Co., 147 Cal. App. 4th at 70. In fact, Congress believed that compliance with federal registration rules would “adequately protect investors” only “[a]s long as states continue[d] to police fraud.” S. Rep. No. 104-293, at 15 (1996); see also Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Ware, 414 U.S. 117, 137 (1973) (no preemption by federal securities law where Congress “provided for collaboration” between federal and state authorities (quotation marks omitted)); First Am., 18 N.Y.3d at 181 (no federal preemption of claims under, inter alia, Executive Law § 63(12) where Congress envisioned “robust partnership with the states”). Thus, courts have uniformly held that NSMIA does not preempt enforcement actions brought by state authorities under state antifraud law. See, e.g., McLeod, 2006 N.Y. Slip Op. 50942(U), at *14-*15, *23, 2006 WL 1374014, at *12, *20-*21 (rejecting NSMIA preemption of Martin Act claims in Attorney 91 General enforcement action seeking restitution and damages); State v. Justin, 3 Misc. 3d 973, 976 & n.2, 1003-04 (Sup. Ct. Erie County 2003) (same, as to Martin Act and Executive Law § 63(12) claims); People v. Edward D. Jones & Co., 154 Cal. App. 4th 627, 632 & 637-39 (2007) (holding that NSMIA does not preempt securities suit by Attorney General “seek[ing] monetary relief”); Capital Research & Mgmt., 147 Cal. App. 4th at 64, 70 (same, as to state securities enforcement action seeking “disgorgement of profits, and restitution to the purchasers”); Papic v. Burke, 113 Conn. App. 198, 204, 206-10 (2009) (rejecting NSMIA preemption of state administrative decision imposing “civil penalty”). Courts have likewise held that NSMIA does not preempt private state- law securities fraud actions.44 Defendants have not identified a single case finding that NSMIA preempts a securities fraud suit brought by a public official charged with enforcing state law—or 44 See Houston, 2008 WL 818745, at *4-*5; IDS Bond Fund, Inc. v. Gleacher NatWest Inc., No. 99-cv-116, 2002 WL 373455, at *4-*7 (D. Minn. Mar. 6, 2002); Chamberlin v. Advanced Equities, Inc., No. C01-502, 2002 WL 34419450, at *2-*4 (W.D. Wash. Jan. 17, 2002); Zuri-Invest, 177 F. Supp. 2d at 192-97. 92 by a private plaintiff, for that matter—and we are not aware of any such case.45 2. NSMIA did not impose a uniform federal standard for all state antifraud actions involving securities. Defendants argue that NSMIA’s saving clause somehow limits the type of antifraud law the States may enforce. They contend (Br. at 35-36) that, by including the phrase “fraud or deceit” in NSMIA’s saving clause, Congress obliquely expressed an intent to preempt state fraud laws that do not require a showing of scienter. But that would have been a dramatic intrusion on 45 In their reply brief in the Appellate Division, defendants relied on Myers v. Merrill Lynch & Co., 1999 WL 696082, at *1 (N.D. Cal. Aug. 23, 1999), aff’d, 249 F.3d 1087 (9th Cir. 2001). But they do not cite the case in their brief to this Court, and for good reason. In Myers, a private plaintiff challenged brokerage firms’ practice of imposing penalties when purchasers in public securities offerings resold their shares shortly after buying them. The court found the claims preempted by NSMIA, where an SEC regulation explicitly permitted such penalties to be imposed. Id. at *8-*9. The holding of Myers does not apply here, since no practice specifically authorized by the SEC is being challenged. Moreover, several courts have rejected attempts to extend Myers to preempt state securities fraud claims. See Houston, 2008 WL 818745, at *5 & n.13; IDS Bond Fund, 2002 WL 373455, at *6; Zuri-Invest, 177 F. Supp. 2d at 195-96. 93 state law-enforcement authority and would not have been accomplished sub silentio. There is no basis to infer affirmative preemptive intent from NSMIA’s saving clause, especially since NSMIA’s preemption clause is directed only at regulatory registration and review requirements. Indeed, the saving clause itself shows that Congress was not imposing new federal standards of fraud or deceit upon the States, but rather intended to continue to permit States to define fraud and deceit as a matter of state law. The provision’s title refers to “Preservation of authority.” 15 U.S.C. § 77r(c) (emphasis added). And the provision’s text says that state authorities “shall retain jurisdiction under the laws of such State to investigate and bring enforcement actions” with respect to fraud or deceit in securities transactions. Id. § 77r(c)(1) (emphases added). See H.R. Conf. Rep. No. 104-864, at 40 (1996) (confirming Congress’s intent to “preserv[e] the authority of the states to protect investors through application of state antifraud laws”). The legislative history unequivocally repudiates any intent to change the standards of securities fraud established by state law: the House Report 94 stresses that the statute did not intend to “alter, limit, expand, or otherwise affect in any way any State statutory or common law with respect to fraud or deceit . . . in connection with securities or securities transactions.” H.R. Rep. No. 104-622, at 34 (emphasis added); see Zuri-Invest, 177 F. Supp. 2d at 194 (“A more clear cut statement against preemption would be hard to find.”). There is thus no indication whatsoever that Congress intended federal securities law “to interfere with states’ ability . . . to implement greater protections from fraudulent activity than the federal law provides.” Chamberlin, 2002 WL 34419450, at *3; see also Edward D. Jones, 154 Cal. App. 4th at 639; Capital Research & Mgmt., 147 Cal. App. 4th at 70 n.8 (both rejecting the argument that NSMIA’s saving clause covers only actions meeting the elements of common-law fraud). There are additional reasons why the reference to “fraud or deceit” in the saving clause cannot be read as evidence of congressional intent to federalize securities fraud and misrepresentation standards under state securities laws. First, most other States, like New York, do not impose a scienter 95 requirement for civil securities fraud claims, whether in private lawsuits or public enforcement actions.46 It is implausible to suggest that Congress meant to graft a uniform federal standard onto all such state laws, and to do so without any express state- ment of intent to preempt large numbers of state blue-sky laws. Second, it is not true, as defendants suggest, that all federal actions “with respect to fraud or deceit” require scienter. For 46 See, e.g., 4 Alan R. Bromberg & Lewis D. Lowenfels, Securities Fraud & Commodities Fraud § 7:45, at 7-126 (2d ed. 2003) (explaining that “[m]ost states have enacted some version of [the] Uniform Securities Act,” under which “[n]o intent to mislead or deceive is required” and “both intentional and negligent misrepresentations and omissions are actionable”); Trivectra v. Ushijima, 112 Hawai’i 90, 104 (2006) (collecting authorities from various states that “almost unanimous[ly]” reject a scienter requirement under the Uniform Securities Act); Uniform Securities Act §§ 501 cmt. 6, 509, 603(b) (2002) (providing for private damages action and public enforcement for injunctive and monetary relief; “no culpability is required to be pled or proven” in “civil and administrative enforcement actions”); Cal. Gov’t Code § 12658 (attorney general may bring enforcement action seeking “restitution or disgorgement or damages” among other remedies); People v. Simon, 9 Cal. 4th 493, 515-16 (1995) (for state securities enforcement, it is “irrelevant that the defendant knows that the statements or omissions are false or misleading”); 815 Ill. Comp. Stat. § 5/11(I) (secretary of state may bring enforcement action seeking “restitution, damages or disgorgement,” among other remedies); Foster v. Alex, 213 Ill. App. 3d 1001, 1002-06 (1991) (no scienter requirement for civil securities fraud claims). 96 example, it is settled that section 17(a)(3) of the Securities Act, which makes it unlawful for securities sellers “to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser,” 15 U.S.C. § 77q(a)(3) (emphasis added), contains no scienter requirement. Aaron v. SEC, 446 U.S. 680, 696-97 (1980). Other federal securities laws likewise do not require a plaintiff to prove scienter.47 “[G]eneralized pleas for uniformity” are never a 47 In addition to Section 17(a)(3), several other provisions of the Securities Act do not require a plaintiff to prove scienter: Section 11, 15 U.S.C. § 77k (materially false or misleading registration statement); Herman & MacLean v. Huddleston, 459 U.S. 375, 381-82 (1983), Section 12(a)(2), 15 U.S.C. § 77l(a)(2) (materially false or misleading prospectus or oral communication); In re Morgan Stanley Information Fund Secs. Litig., 592 F.3d 347, 359-60 (2d Cir. 2010), and Section 17(a)(2), 15 U.S.C. § 77q(a)(2) (material misstatement or omission to obtain money or property); Aaron, 446 U.S. at 696. SEC Rule 14a-9, promulgated under Section 14 of the Securities Exchange Act, likewise does not require a plaintiff to prove scienter. 17 C.F.R. § 240.14a-9 (materially false or misleading proxy statement); Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281, 1298-1301 (2d Cir. 1973) (Friendly, J.). Defendants suggest (Br. at 36) that Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976), and Sanders v. John Nuveen & Co., 554 F.2d 790 (7th Cir. 1977), support the supposedly settled proposition that federal law requires scienter, but they are (continued on next page) 97 sufficient basis to displace state law, Atherton v. FDIC, 519 U.S. 213, 220 (1997) (quotation marks omitted), and such pleas are only more unavailing when, as in this area, federal law itself does not follow any single uniform rule. Finally, defendants argue in the alternative (Br. at 35 n.23) that, if the action is not outright preempted, federal law imposes a requirement that scienter—and also reliance—be shown in this action under the Martin Act and Executive Law § 63(12). This argument fails for the same reasons that defendants’ primary preemption argument fails. In any event, the evidence shows that defendants knew, or at a minimum recklessly disregarded, the fact that the Gen Re transaction was illegitimate. Therefore, defendants would be liable even under the scienter standard of federal Rule 10b-5, which is satisfied by a showing of either actual knowledge or recklessness. mistaken. Hochfelder held only that Section 10(b) of the Securities Exchange Act requires scienter, while acknowledging that several Securities Act provisions do not. 425 U.S. at 209-10. And Sanders’ holding that Section 17(a)(2) and (3) of the Securities Act require scienter, 554 F.3d at 795, has been abrogated by Aaron. 98 See infra Point III.A. Moreover, the Attorney General submitted expert testimony below showing that investors suffered enormous losses as a result of defendants’ fraud (18:10986-11027), which would support a finding of reliance, if one were needed. D. The Cases Relied on by Defendants Have Nothing To Do With SLUSA or NSMIA. Defendants have failed to identify any decision from any court endorsing their view of SLUSA and NSMIA. On the contrary, as shown supra, courts have universally rejected preemption arguments like those advanced by defendants here. In the face of the uniform authority against them on SLUSA and NSMIA, defendants rely on a number of decisions that do not address federal preemption at all. Defendants’ cases are flatly inapposite. Decisions involving the scope of Eleventh Amendment immunity under the All Writs Act, In re Baldwin-United Corp., 770 F.2d 328, 341 (2d Cir. 1985), or the Supreme Court’s original jurisdiction, Pennsylvania v. New Jersey, 426 U.S. 660, 663-64 (1976) (per curiam), have no bearing 99 here because this enforcement action does not implicate those specialized statutes or jurisdictional rules. Nor is the Attorney General here asserting damages claims under civil racketeering, antitrust, or civil rights statutes, invoking the same statutory remedies available to private parties. See Louisiana v. Allstate Ins. Co., 536 F.3d 418 (5th Cir. 2008) (antitrust claims); New York v. Operation Rescue Nat’l, 80 F.3d 64 (2d Cir. 1996) (civil rights claims); New York v. Seneci, 817 F.2d 1015 (racketeering claims). These statutes contain treble damages or attorney’s fees provisions meant to encourage individual plaintiffs to serve as “private attorneys general.” Fox v. Vice, 131 S. Ct. 2205, 2213 (2011); Rotella v. Wood, 528 U.S. 549, 557-58 (2000); Hawaii v. Standard Oil Co. of Cal., 405 U.S. 251, 262 (1972). By contrast, the Martin Act and Executive Law § 63(12) may be enforced only by the Attorney General; their enforcement is necessarily and intrinsically public. Defendants’ reliance (Br. at 29-31) on Allstate Insurance is particularly inapt. That decision held that the state attorney general’s suit there was removable to federal court under the 100 expansive diversity-jurisdiction provisions of CAFA. Allstate Insurance did not involve the far more serious contention that federal law preempted an attorney general’s claim altogether. And there is no issue here regarding removal to federal court. Furthermore, the Fifth Circuit’s holding in Allstate Insurance—that a state attorney general’s treble damages claim in an antitrust enforcement action was removable as a “mass action” under CAFA because the individuals harmed were the real parties in interest, 536 F.3d at 429-30—is an outlier that has been emphatically rejected by other circuits. See AU Optronics Corp. v. South Carolina, No. 11-254, __ F.3d __, 2012 WL 5265799, at *5- *6 (4th Cir. Oct. 25, 2012); Nevada v. Bank of Am. Corp., 672 F.3d 661, 669-72 (9th Cir. 2012); LG Display Co. v. Madigan, 665 F.3d 768, 773-74 (7th Cir. 2011).48 And decisions under the removal provision of CAFA cannot provide a useful analogy to SLUSA or 48 On its own terms, Allstate Insurance is readily distinguishable. The state antitrust law invoked by the Louisiana attorney general there permitted any injured person to bring an action for treble damages, 536 F.3d at 429, while here the Martin Act and Executive Law § 63(12) are enforceable only by the Attorney General. 101 NSMIA in any event because the CAFA removal provision does not contain an express saving clause for public antifraud enforcement, as SLUSA and NSMIA both do. See 15 U.S.C. §§ 77r(c)(1), 78bb(f)(4). Nor does this Court’s decision in Grasso help defendants. See Br. at 25-26. In Grasso, the Court held that allowing the Attorney General to bring common-law claims not requiring a showing of fault against officers and directors of a nonprofit corporation would conflict with a “comprehensive” statutory scheme established by the Not-for-Profit Corporation Law that required the Attorney General to demonstrate fault to prevail in statutory claims for the same conduct. 11 N.Y.3d at 70-72. Contrary to defendants’ argument, Grasso does not recognize a blanket rule that a legislature’s creation of a fault-based cause of action necessarily displaces any existing cause of action that does not require an identical showing of fault. The case stands instead for the primacy of legislative intent. Here, every indication of legislative intent shows that Congress sought to preserve rather than preempt state authority to enforce state antifraud law. This 102 case, unlike Grasso, involves claimed federal preemption of longstanding state laws—an action with serious federalism consequences that Congress cannot be assumed to have taken absent specific evidence supporting the claim. And SLUSA and NSMIA did not enact any “comprehensive” federal statutory scheme, as demonstrated by, among other things, Congress’ inclusion in both statutes of express saving clauses covering state antifraud enforcement. Here, respect for “calculated legislative policy judgments,” Grasso, 11 N.Y.3d at 70, requires that preemption be rejected. In sum, the text, purpose, and judicial interpretation of SLUSA and NSMIA all point to the same conclusion: federal law recognizes, and does not preempt, state law enforcement actions like the one at issue here. 103 POINT III OVERWHELMING EVIDENCE PRECLUDES THE GRANT OF SUMMARY JUDGMENT TO DEFENDANTS ON THE GEN RE FRAUD49 Summary judgment is warranted only if there is no triable issue of fact. See Jacqueline S. v. City of N.Y., 81 N.Y.2d 288, 295 (1993). The record must be viewed in the light most favorable to the nonmoving party, here the Attorney General. See Mastroianni, 91 N.Y.2d at 205. As shown below, this is not a summary judgment case for defendants—it is not close to one. Defendants do not seriously dispute that the Gen Re transaction was a fraud. The evidence shows that the reinsurance agreements signed by AIG and Gen Re were a sham designed solely to provide paper support for AIG to book, temporarily, $500 million in loss reserves. In reality, the sole economic effect of the transaction was that AIG secretly paid Gen Re a net $5 million fee for conspiring in the fraud—i.e., AIG paid Gen Re, even though, on 49 Only the Gen Re transaction is discussed here, because defendants do not challenge the sufficiency of the evidence as to the CAPCO transaction. See Br. at 8 n.3, 13 n.9. 104 paper, Gen Re was “buying” reinsurance from AIG. AIG made the fee payment pursuant to a side deal not reflected in the formal agreements. The same side deal provided that the arrangement was “no-risk”: no claims would ever be made by Gen Re, no claims ever were made, and AIG bore no risk of loss. Defendants argue that they cannot be held personally liable for their roles in this clear fraud, but they are mistaken. This Court has held that “[o]fficers and directors of a corporation may be held liable for fraud if they participate in it or have actual knowledge of it.” Apple Health & Sports Clubs, 80 N.Y.2d at 807 (emphasis added; citing Marine Midland Bank v. John E. Russo Produce Co., 50 N.Y.2d 31, 44 (1980)). An executive is thus personally liable for a company’s fraud if either (1) the executive acts to further the fraudulent transaction, or (2) the executive actually knows about the transaction and acquiesces in it. See also People v. Sala, 258 A.D.2d 182, 192-93 (3d Dep’t 1999) (executive criminally liable under Martin Act because he “committed an intentional act constituting fraud”), aff’d, 95 N.Y.2d 254 (2000). The record contains overwhelming evidence as to defendants’ 105 personal involvement in the Gen Re fraud—evidence that is more than sufficient to require a trial. A. Defendants Are Not Entitled To Summary Judgment. 1. The evidence establishes that Greenberg knew the Gen Re deal was a sham. Contrary to Greenberg’s arguments (Br. at 44-49), his self- serving testimony that he believed he was participating in a purely lawful transaction, and was unaware of or could not recall aspects of the transaction showing it to be a sham, does not entitle him to summary judgment. First, the Martin Act and Executive Law § 63(12) do not require a showing of scienter, in the sense of intent to defraud.50 Thus, Greenberg may be held liable because, 50 The scienter requirement under Section 10(b) of the Securities Exchange Act is “‘a mental state embracing intent to deceive, manipulate, or defraud.’” Tellabs, 551 U.S. at 319 (quoting Ernst & Ernst, 425 U.S. at 193 & n.12). Scienter is defined similarly for purposes of New York common-law fraud. See Gaidon v. Guardian Life Ins. Co. of Am., 94 N.Y.2d 330, 348 (1999). Of course, the absence of a scienter requirement under the Martin Act and Executive Law § 63(12) does not mean that a false statement is actionable regardless of whether the speaker had means to know of its falsity. 106 at the least, he reasonably could and should have known that the transaction he personally negotiated with Gen Re’s CEO was a fraud. See Federated Radio, 244 N.Y. at 40-41 (the Martin Act imposes a duty of “reasonable investigation”). Second, even if the law required a showing of scienter (which is not the same as actual knowledge51), the evidence here would easily be sufficient to go to trial. Indeed, the record easily supports an even stronger finding that Greenberg actually knew that the Gen Re deal was a sham. 51 The scienter requirement under Section 10(b) of the Securities Exchange Act and Rule 10b-5 is satisfied by proof of recklessness as to a statement’s falsity, and does not require a showing of actual knowledge of falsity. See, e.g., In re Scholastic Corp., 252 F.3d at 76 (scienter established where defendants “knew or should have known they were misrepresenting material facts with respect to the corporate business,” and “knew facts or had access to non-public information contradicting their public statements”); Novak v. Kasaks, 216 F.3d 300, 308-09 (2d Cir. 2000) (scienter established if defendants “failed to review or check information that they had a duty to monitor, or ignored obvious signs of fraud”). Scienter under New York common-law fraud similarly does not require actual knowledge, but may be satisfied by recklessness. See, e.g., Jo Ann Homes at Bellmore v. Dworetz, 25 N.Y.2d 112, 119 (1969). 107 Greenberg would have the Court believe that every piece of evidence showing his knowledge is inadmissible, and thus that his self-serving denial must carry the day. But Greenberg’s own testimony, plus other clearly admissible evidence, shows that he knew the key terms of the Gen Re deal. a. Greenberg admitted that he personally proposed the deal to Ferguson, Gen Re’s CEO, in a phone call on October 31, 2000 (2:635, 643-644, 10:6055-6058 [Greenberg]). From the beginning, the transaction Greenberg proposed was highly irregu- lar: (i) it would be one of the biggest reinsurance deals in AIG history (2:641-642 [Greenberg], see also 4:1833, 1846 [Morrow]); (ii) the deal was proposed to achieve a financial reporting result for AIG (2:635, 643-644, 10:6055-6058); (iii) Gen Re typically reinsured AIG, not the other way around (2:635-637 [Greenberg]; 4:1914 [Napier]); (iv) Gen Re did not need or want to buy reinsurance from AIG (see 2:635-637 [Greenberg]); (v) Greenberg did not discuss the deal with his reinsurance department before proposing it (10:6064 [Greenberg]); and (vi) Greenberg asked to borrow a specific dollar range of loss reserves for a limited 108 duration (2:639, 10:6055-6056, 6058 [Greenberg]). As the U.S. Court of Appeals for the Second Circuit observed, although Greenberg and Ferguson did not settle the final details during this first call, they “agreed to a highly unusual deal” and “agreed to pursue specific parameters.” Ferguson, 676 F.3d at 289. b. Greenberg admitted that, after his October 31 call to Ferguson, he personally tapped Milton to be his point man on the transaction (2:639-640, 649). Greenberg also admitted that he received updates directly from Milton as Milton worked on terms with his Gen Re counterparts (2:649-650, 653-654, 10:6075-6076; see also 4:1964). Napier, the point man for Gen Re, testified that, during this period, he phoned Milton to ask if AIG would consider “the idea of a non-risk transaction” (4:1931).52 Milton said he “would have to get back” to Napier (4:1932). Milton then phoned 52 Defendants’ comments (Br. at 57 n.45) disparaging Napier’s credibility are irrelevant on summary judgment. See Forrest v. Jewish Guild For the Blind, 3 N.Y.3d 295, 315 (2004); Ferrante v. Am. Lung Ass’n, 90 N.Y.2d 623, 631 (1997). The comments also ignore the abundant evidence corroborating Napier’s testimony. The presiding judge at the Gen Re criminal trial found Napier to be a credible witness. United States v. Ferguson, 553 F. Supp. 2d 145, 157 n.18 (D. Conn. 2008). 109 Napier back later the same day to say AIG “would like to take a look at” a no-risk deal (4:1932).53 A jury clearly could infer that Milton discussed the no-risk issue with Greenberg, to whom he directly reported on the deal, before getting back to Napier. c. Greenberg admitted that he finalized the essential terms of the deal with Ferguson—CEO to CEO—in a second phone call held on November 16, 2000 (2:656-658). Indeed, Greenberg boasted that Ferguson, as “the head” of Gen Re, “would only deal with [him]” (2:657). Napier’s testimony shows that, leading up to the November 16 call, Napier and his colleagues had discussed with Ferguson the fraudulent deal terms, and their understanding that AIG was receptive to those terms. Napier testified that he and his colleagues briefed Ferguson about the proposed transaction, 53 Napier’s testimony about these statements is clearly admissible to show that the statements were made. See People v. Caban, 5 N.Y.3d 143, 149 (2005) (evidence of a verbal act indicating agreement is not hearsay). We demonstrate below that the testimony is also admissible for the truth of the factual assertions made in the statements under the co-conspirator rule. See infra Point III.B.2. 110 including the secret side deal stipulating that there would be no risk, Gen Re’s premium payment would be returned, and Gen Re would receive a 1% net fee (4:1932-1936, 1938-1945, 1949-1950, 6:3209). Napier surely also told Ferguson that Milton had said AIG was open to a no-risk deal.54 Ferguson therefore had every reason to discuss those terms with Greenberg in their CEO-to-CEO negotiation on November 16, a negotiation expressly undertaken to finalize the deal. There is thus strong evidence that the no-risk nature of the transaction, the return of the premium payment, and the net 1% fee to Gen Re were among the essential terms that Greenberg and Ferguson agreed to during that call. See Ferguson, 676 F.3d at 271 (noting that Greenberg and Ferguson “agree[d] to the rough contours of 54 Napier testified that, before his calls to Milton about the no-risk deal, it was Ferguson who directed him to “follow up with Chris Milton to see if this was something that they would entertain” (4:1931). See People v. Johnson, 79 A.D.3d 1264, 1267 (3d Dep’t 2010) (evidence disclosing a command is not hearsay), lv. denied, 16 N.Y.3d 832 (2011); People v. Mixon, 292 A.D.2d 177, 178 (1st Dep’t 2002) (same). 111 the deal, including the no-risk aspect, the repayment of the $10 million premium, and Gen Re’s $5 million net fee”). In his deposition, Greenberg did not testify that he refused to go along with a no-risk deal in the November 16 call. Rather, Greenberg claimed that “all [he] c[ould] remember” about the call was that he and Ferguson agreed that the deal would be for $200 to $500 million, would have two tranches, and would include a 1% “ceding commission” to Gen Re, which he described as a legitimate arrangement (2:656-658 [Greenberg]).55 Yet neither the draft reinsurance agreement circulated the day after the call, nor the final reinsurance agreements later executed, contained a 1% (or any) ceding commission (see 4:2047-2058, 2059-2069; 18:11216- 11222). Documents do show, however, that AIG secretly paid a 1% net fee to Gen Re—a clear sign that Gen Re’s purported purchase of reinsurance from AIG was a sham (see 4:2197-2203, 2204-2205, 2206-2207, 2213-2216). A jury could reasonably conclude that 55 A ceding commission is a payment by a reinsurer to a primary insurer to cover the primary insurer’s underwriting and other expenses. 112 Greenberg’s limited recollection does not provide a complete or accurate account of the November 16 call. d. The documentary evidence further supports the inference that the side deal’s terms were agreed to by Greenberg and Ferguson in the second CEO-to-CEO phone call on November 16. On November 17, just one day after that call, Napier of Gen Re sent Milton of AIG an email attaching a draft “reinsurance agreement,” without suggesting that he was proposing a different deal from the one Greenberg and Ferguson had agreed to (18:11215-11222). To the contrary, Napier’s email said he was outlining terms “established” in Ferguson’s “discussions with MRG [Greenberg]” (4:2007). Nor is there any evidence that Milton reacted to the email as if it proposed new key terms, different from the terms his boss had agreed to the day before. Napier’s November 17 cover email described central aspects of the parties’ fraudulent side deal, including that AIG would secretly return Gen Re’s $10 million premium payment and that AIG would pay Gen Re a net $5 million fee; the email also indicated that the parties would commute the agreement quickly 113 (18:11215). All three of those terms were omitted from the draft “reinsurance agreement” attached to the email (see 18:11216- 11222). And all three terms were also omitted from the executed final “reinsurance agreements” that went into AIG’s files for auditors to review (see 4:2047-2058, 2059-2069). Documents show that AIG, through disguised cash flows, agreed to and did in fact return Gen Re’s $10 million premium payment and pay Gen Re a $5 million net fee, with interest (4:2197-2203, 2204-2205, 2206- 2207, 2213-2216).56 e. Evidence further shows that, after the Gen Fe fraud came to public light, Greenberg acted in a manner inconsistent 56 An internal Gen Re email sent to Napier and others describes the plan for executing the premium payback and fee payment, whereby Gen Re would withhold for itself $15.2 million from a $31.8 million payment owed to AIG following the commutation of unrelated agreements. Gen Re planned to return to AIG only $16.6 million, in installments of $9.1 million and $7.5 million (4:2206 [Garand email]). The email outlining the plan is not hearsay if used to show that the statements contained therein were made. Other records prove that the repayment was implemented precisely in accordance with the plan outlined in the email (4:2197-2203 [contracts], 2204-2205 [$7.5 million Gen Re payment to HSB], 2213-2216 [$9.1 million Gen Re payment to National Union]). These documents are admissible as business records. See C.P.L.R. 4518. 114 with his present denial of knowledge of the deal’s impropriety. First, when the Attorney General and SEC served subpoenas relating to the Gen Re deal, Greenberg promptly transferred over $2 billion in AIG stock to his wife (10:6219-6220, 5:2333-2336, 2337-2339, 2521-2523). Second, a senior PricewaterhouseCoopers accounting partner, assigned to review the Gen Re deal for AIG, testified that Greenberg, showing detailed knowledge of the Gen Re transaction, sought to minimize the importance of the deal and said that the government should not be investigating it (5:2317, 2320, 2322-2324).57 Greenberg claimed that he could not recall these conversations (10:6110-6111). Third, and perhaps most significant, Greenberg brought Milton and Smith with him to a private company after he was forced out at AIG (10:5957-5961, 5965-5966, 6113, 6117)—an act that Greenberg would have been highly unlikely to take if Milton or Smith had betrayed him by 57 The statements by Greenberg disclosed in the PwC partner’s testimony are not hearsay because they are admissions of a party-opponent. Caban, 5 N.Y.3d at 151 n.*; Reed v. McCord, 160 N.Y. 330, 341 (1899). 115 committing a serious fraud, without his knowledge, in a transaction in which Greenberg had been personally involved in CEO-to-CEO level dealings. This evidence is overwhelming and more than sufficient to require a trial of the claims against Greenberg. 2. An admission by the defendant is not needed for the government to survive summary judgment. Greenberg’s response to the overwhelming evidence seems to be that he is entitled to summary judgment merely because he has not admitted knowledge of the fraud, and because the two main co-conspirators who spoke directly to him while the deal was in progress—Milton and Ferguson—did not testify in this case. See Br. at 44-49.58 But neither an admission of knowledge by the defendant nor testimony from co-conspirators who spoke directly to the defendant is needed for the Attorney General’s case to survive 58 Both Milton and Ferguson were under criminal indictment for the Gen Re transaction at the time that discovery occurred in this case. Neither testified at the criminal trial. 116 summary judgment. To the contrary, when a defendant’s knowledge is necessary or relevant, that knowledge is often shown—both at summary judgment and at trial—through circumstantial proof. This Court has recognized that “guilty knowledge,” fraudulent intent, and other states of mind “rarely can be established by direct evidence.” Matter of Brandon, 55 N.Y.2d 206, 211 (1982). A defendant’s knowledge or intent “is the product of the invisible operation of his mind,” People v. Samuels, 99 N.Y.2d 20, 24 (2002) (quotation marks omitted), and “[m]isrepresenters have not been known to keep elaborate diaries of their fraud for the use of the defrauded in court,” Pludeman v. N. Leasing Sys., Inc., 10 N.Y.3d 486, 492 (2008) (quotation marks omitted). Direct evidence of mental state is accordingly “unnecessary,” and a defendant’s culpability is frequently established through circumstantial evidence, such as the defendant’s conduct and surrounding facts. People v. Rodriguez, 117 17 N.Y.3d 486, 489 (2011).59 Greenberg’s argument cannot be squared with these well-established principles. The evidence that Greenberg knew about the fraudulent nature of the Gen Re transaction is exceptionally strong. We have shown, and defendants do not seriously dispute (see Br. at 43 n.28), that the transaction executed by AIG and Gen Re was a sham. And Greenberg admitted that this was a CEO-to-CEO deal: he personally proposed the transaction to Ferguson at Gen Re (2:635, 10:6055-6058), and he personally reached a final agreement on the key terms with Ferguson (who would finalize 59 See, e.g., Pludeman, 10 N.Y.3d at 493 (“The very nature of the scheme . . . gives rise to the reasonable inference . . . that the officers, as individuals and in the key positions they held, knew of and/or were involved in the fraud.”); Polonetsky v. Better Homes Depot, Inc., 97 N.Y.2d 46, 55 (2001) (reinstating cause of action against corporate officer because jury could infer corporate officer’s knowledge of or participation in fraudulent scheme from allegations of his personal involvement in transactions); Beuerlien v. O’Leary, 149 N.Y. 33, 38-39 (1896) (Fraudulent intent "is seldom disclosed on the face of the transaction. It is generally concealed under legal forms. It can seldom be proved by direct evidence. It must, in most cases, be established by inference from a variety of facts.”); Kuo Feng Corp. v. Ma, 248 A.D.2d 168, 169 (1st Dep’t 1998) (affirming judgment for plaintiff on fraud claim; circumstantial evidence sufficient to establish knowing participation in fraudulent scheme). 118 the deal only with Greenberg) about two weeks later (2:656-658). Greenberg also admitted that AIG’s point person, Milton, updated him on the deal as the terms coalesced (2:649-650, 653-654, 10:6075-6076). This evidence shows that Greenberg knew about the key terms of the agreement, and that he and Ferguson discussed and agreed upon the side deal in their November 16 conversation. Napier’s November 17 email to Milton, outlining key terms of the side deal and attaching a draft “reinsurance agreement” which omitted those terms, did not suggest Napier was proposing a new and different deal (see 18:11215-11222). A jury could certainly infer that Ferguson and Greenberg had agreed to the side deal in their call the day before. Even if it were assumed—contrary to the inference from the evidence discussed above—that Greenberg and Ferguson did not agree to all the terms of the side deal in that November 16 call, there is more evidence showing Greenberg’s knowledge of the side deal. Milton clearly knew about key terms of the side deal no later than November 17, when he received Napier’s email (see 18:11215- 119 11222), and almost certainly knew about them much earlier, when he and Napier discussed the no-risk proposal (4:1931-1932). A jury could reasonably infer that Milton would not have acted on his own accord in executing this major fraud, but would have checked with Greenberg before going forward. Indeed, Greenberg admitted that Milton would not have significantly modified the deal’s terms without telling him (2:660). And, again, Greenberg retained Milton as a consultant at a different, private company after the Gen Re fraud came to public light (10:5957-5961, 5965-5966, 6113, 6117). The evidence hardly supports a theory that Milton committed the major Gen Re fraud on his own, let alone conclusively establishes such a theory, as would be needed for Greenberg to win summary judgment. Greenberg has never offered any plausible understanding of the evidence that would exonerate him. He admits that he personally proposed the large Gen Re deal to Ferguson and personally negotiated the deal with Ferguson, without consulting AIG’s underwriting specialists. He admits that he personally tapped Milton to be his point man on this major deal, and received 120 updates from Milton about it. And after the major fraud was publicly exposed, forcing him to leave the company he had built over decades, Greenberg kept Milton in the fold by employing him as a consultant throughout this case and the Gen Re criminal trial. This evidence strongly supports the inference that Greenberg was aware of the fraudulent terms of the Gen Re deal, or at least that he consciously avoided the truth about it. See Federated Radio, 244 N.Y. at 40-41; cf. In re Scholastic Corp., 252 F.3d at 76; Novak, 216 F.3d at 308-09. A fortiori the evidence establishes that there is a triable question of fact, and thus that Greenberg is not entitled to summary judgment. 3. The evidence shows Smith’s personal involvement in the fraud. The record also shows that Smith participated in and had knowledge of the Gen Re fraud. On November 20, 2000, just a few days after the November 16 call between Greenberg and Ferguson, Smith received a paper copy of the email from Napier describing the key terms of the side deal and attaching a draft reinsurance agreement that reflected none of those terms (see 121 18:11215). Smith admitted that he reviewed the email (23:14186- 14187). His copy contains handwritten notations showing that he saw and particularly noted the return of the premium and the plan to commute the agreement (18:11215). This is direct evidence that Smith learned of key fraudulent aspects of the transaction. Furthermore, Greenberg’s and Smith’s deposition testimony establishes that Smith discussed the Gen Re transaction with Greenberg and Milton around the time he received a copy of Napier’s November 17 email (2:659; 4:1964, 10:6136-6137, 20:12108). Another AIG executive, Robert Jacobson, testified that Smith also discussed the transaction with him (17:10459, 10473). If Smith failed to follow up with Greenberg or Milton after receiving Napier’s email, that decision to ignore the red flags would itself establish personal liability—it would also satisfy the scienter standard in a federal Rule 10b-5 action. See, e.g., Novak, 216 F.3d at 308 (scienter established if defendants “failed to review or check information that they had a duty to monitor, or ignored obvious signs of fraud”). 122 But there is more evidence implicating Smith. Evidence also shows that, after receiving information showing the Gen Re deal to be a fraud, Smith made the decision that AIG would nonetheless record the deal as real insurance for accounting purposes. Several AIG executives testified that the decision whether to book the Gen Re transaction as legitimate insurance, rather than a deposit, was made by Smith, AIG’s CFO and senior authority on GAAP accounting (9:4905, 12:6865-6866 [Douglas]; 12:6959-6960, 17:10512 [Morrow]). Smith also certified inaccurate financial results reflecting this improper accounting in AIG’s SEC disclosures.60 This evidence is more than sufficient to defeat Smith’s motion for summary judgment. See, e.g., Apple Health & Sports 60 Smith’s knowing participation in the Gen Re fraud is further shown by evidence of his central role in the surreptitious return of Gen Re’s $10 million premium payment (4:2182-2183 [Napier emails]; 4:2192 [Napier memo]). That documentary evidence may be considered under the co-conspirator exception. See infra Point III.B.2. Smith admitted participating in discussions about the commutation of the HSB reinsurance agreements (23:14195-14196 [Smith]), which was the mechanism by which the secret payments were ultimately made. 123 Clubs, 80 N.Y.2d at 807-08; Polonetsky, 97 N.Y.2d at 55; Buxton Mfg. Co. v. Valiant Moving & Storage, Inc., 239 A.D.2d 452, 454 (2d Dep’t 1997) (officer liable because he “fail[ed] to do anything to check the accuracy of” a certification); Am. Feeds & Livestock Co. v. Kalfco, Inc., 149 A.D.2d 836, 837 (3d Dep’t 1989) (officer liable because she was “aware of” the wrong and “declined to exercise her ability to set it right”). B. Defendants’ Evidentiary Objections Are Irrelevant and Meritless. Defendants’ brief raises several objections to purported hearsay evidence. This Court need not address those objections because evidence that is indisputably admissible defeats the summary judgment motions. Moreover, although this Court has not addressed the question, all four departments of the Appellate Division have ruled that hearsay may be considered in denying, but not granting, a summary judgment motion, so long as 124 admissible evidence is offered as well.61 This approach accords with the Court’s admonition that “[r]ules of evidence should be guardedly and cautiously applied on an application for summary judgment, particularly where . . . the application of a rule of evidence or the exceptions thereto can best be determined upon evidence offered at a trial.” Phillips v. Kantor & Co., 31 N.Y.2d 307, 311-12 (1972) (quotation marks omitted). In any event, defendants’ evidentiary objections have no merit. 1. Testimony from the Gen Re criminal trial may be considered on summary judgment. Defendants wrongly suggest (Br. at 54-56) that the Attorney General’s case depends heavily on testimony given in the Gen Re criminal trial in Connecticut federal court. This is a red herring. The above discussion in this Point III does not even mention that 61 See, e.g., O’Halloran v. City of N.Y., 78 A.D.3d 536, 537 (1st Dep’t 2010); Rodriguez v. Sixth President, Inc., 4 A.D.3d 406, 407 (2d Dep’t 2004); Bond v. Giebel, 14 A.D.3d 849, 850 (3d Dep’t 2005); Biggs v. Hess, 85 A.D.3d 1675, 1676 (4th Dep’t 2011). 125 trial testimony. Nor did the Appellate Division rely on the trial testimony (25:15199 n.3). In general, the Connecticut trial testimony simply confirms deposition testimony that was given in this very case, where defendants were able to and did cross- examine the witnesses. In any event, testimony from the Connecticut trial may be considered on summary judgment. Defendants’ argument to the contrary (Br. at 54-56) relies solely on a rule governing admissibility of prior testimony at a trial. See C.P.L.R. 4517(a) (rule “at the trial”); Lent v. Shear, 160 N.Y. 462, 468, 470 (1899) (rule “upon the trial”); Siegel v. Waldbaum, 59 A.D.2d 555, 555 (2d Dep’t 1977) (same). But summary judgment is not a trial. Quite unlike a trial, summary judgment is not a proceeding centered on live testimony. That is why C.P.L.R. 3212(b) expressly permits consideration of pleadings, affidavits, depositions, written admissions, and “other available proof” at summary judgment. Although defendants had the opportunity to and did cross- examine, in depositions in this case, nearly every witness whose 126 criminal trial testimony is part of the record here,62 there is no requirement that the adverse party cross-examine a witness before the witness’ sworn testimony may be considered at summary judgment. The classic form of summary judgment evidence is the affidavit, which is sworn testimony given without cross-examination. Thus, “any item of proof as reliable as an affidavit should be considered on a summary judgment motion.” State v. Metz, 241 A.D.2d 192, 199 (1st Dep’t 1998) (considering Martin Act deposition of defendants); see also Edmonds v. N.Y. City Hous. Auth., 224 A.D.2d 191 (1st Dep’t 1996) (considering testimony of third party from criminal trial).63 The Connecticut 62 For example, defendants cross-examined Napier at his deposition for several days. 63 On summary judgment, federal courts routinely consider depositions taken in proceedings to which the non-introducing litigant was not a party, finding that such testimony effectively constitutes a declaration or affidavit. See, e.g., Tingey v. Radionics, 193 F. App’x 747, 765-66 (10th Cir. 2006); Bozeman v. Orum, 422 F.3d 1265, 1267 n.1 (11th Cir. 2005) (per curiam); Gulf USA Corp. v. Fed. Ins. Co., 259 F.3d 1049, 1056 (9th Cir. 2001); SEC v. Carnicle, 216 F.3d 1088, 2000 WL 796090, at *1 (10th Cir. June 21, 2000) (unpublished); RSBI Aerospace, Inc. v. Affiliated FM Ins. Co., 49 F.3d 399, 403-04 (8th Cir. 1995); Hoover v. Switlik Parachute Co., 663 F. 2d 964, 966-67 (9th Cir. 1981); Burbank v. (continued on next page) 127 trial testimony, given under oath in open court and subject to vigorous cross-examination by the defendants in that case, is at least as reliable as an affidavit. 2. The co-conspirator statements are admissible. Defendants also object on hearsay grounds to consideration of out-of-court statements—principally statements by Greenberg, Milton, and Ferguson—reflected in Napier’s testimony and his contemporaneous notes and like documents. As a first point, Milton and Ferguson were defendants in a pending criminal prosecution during summary judgment proceedings. Hearsay statements from declarants under indictment, and thus presumably unavailable to give sworn testimony, may be consid- Davis, 227 F. Supp. 2d 176, 178-79 (D. Me. 2002); McGovern v. Deutsche Post Global Mail, Ltd., No. 04-0060, 2004 WL 1764088, at *11 n.7 (D. Md. Aug. 4, 2004); United States v. Atlas Lederer Co., 282 F. Supp. 2d 687, 694-95 (S.D. Ohio 2001); SEC v. Antar, 120 F. Supp. 2d 431, 445 (D.N.J. 2000); Noth v. Scheurer, 285 F. Supp. 81, 83 (E.D.N.Y. 1968). 128 ered at summary judgment. See St. James’ Episcopal Church v. F.O.C.U.S. Found., 47 A.D.3d 1058, 1060 (3d Dep’t 2008).64 In any event, the statements are admissible under the co- conspirator exception. To satisfy the exception in New York, the proponent must make a prima facie case through independent evidence that defendants were members of a conspiracy. People v. Wolf, 98 N.Y.2d 105, 118 (2002). Once this minimal burden is met, see People v. Bell, 48 N.Y.2d 913, 915 (1979) (prima facie conspiracy standard lower than preponderance of the evidence standard), conspirators’ statements made in the course and furtherance of the conspiracy may be introduced against the other co-conspirators, Wolf, 98 N.Y.2d at 118. The co-conspirator rule 64 See also Baker v. City of Elmira, 271 A.D.2d 906, 909 (3d Dep’t 2000) (hearsay should be considered where declarants “would be likely unwilling to voluntarily confirm admissions of complicity”); Robbins MBW Corp. v. Ashkenazy, 228 A.D.2d 357, 358-59 (1st Dep’t 1996) (similar). This case illustrates the wisdom of exercising caution in excluding consideration of hearsay on summary judgment. Now that the criminal case has been resolved through deferred prosecution agreements, see Deferred Prosecution Order, United States v. Ferguson, No. 06-cr-137 (D. Conn. June 25, 2012) (Dkt. No. 1382), the Attorney General may be able to obtain Milton’s and Ferguson’s testimony either at trial or via deposition with defendants’ participation. 129 holds that co-conspirator statements dating back to the inception of the conspiracy are admissible against all members, no matter when they joined. See People v. Reynolds, 192 A.D.2d 320, 321 (1st Dep’t 1993); see also United States v. U.S. Gypsum Co., 333 U.S. 364, 393 (1948) (same rule under federal law). The evidence discussed in Point III.A, supra, all of which is admissible independent of the co-conspirator exception, easily meets the threshold to show that a conspiracy existed, at a minimum, among Greenberg, Smith, Milton, Ferguson, and Napier. For the purpose of the co-conspirator rule, there is sufficient evidence to conclude that the conspiracy began with Greenberg’s October 31, 2000 call to Ferguson, proposing a highly unusual transaction to achieve specific financial reporting objectives. On this basis, the Second Circuit concluded that the foundation for the co-conspirator rule was satisfied as of the October 31 call, and this Court would likely reach the same result under New York law, if the issue needed to be resolved here. Milton and Napier were brought into the conspiracy soon after the 130 October 31 call, when they were chosen as point persons by Greenberg and Ferguson, respectively. At the very latest, the conspiracy existed on November 16, 2000, when Greenberg and Ferguson had a second call to agree to the key terms of the deal. If he did not join it before, Smith joined the conspiracy no later than November 20, when he received and reviewed a copy of Napier’s email to Milton outlining the key terms of the side deal and including Smith in the small group of executives tasked to work out the details of the transaction. Therefore, Napier’s notes, testimony, and email summarizing Ferguson’s report of the November 16 call, which were made in the course and furtherance of the conspiracy, are admissible against both Greenberg and Smith under the co-conspirator exception. Napier’s notes provide potent confirmation of the abundant other evidence showing that Greenberg and Ferguson explicitly discussed and agreed to the key terms of the parties’ fraudulent side deal on November 16. The notes reflect that, according to the CEOs’ agreement, (a) “AIG would “not bear real risk”; (b) AIG would pay Gen Re a net 1% fee equaling $5 million; 131 (c) the companies would need to “perfect” a way for Gen Re “to get [its] fee back”; and (d) Smith (“Howie”) and Milton (“Chris”) would be AIG’s point men on the deal (4:1882 [Napier notes]; see also 2:607-613 [Napier testimony regarding notes]; 4:2007 [Napier email]).65 Also admissible under the co-conspirator rule is Milton’s statement to Napier, concerning the no-risk nature of the deal, that “the chairman had made the decision and there is nothing else to talk about” (6:3229 [Napier]). All this evidence further undercuts Greenberg and Smith’s self-serving testimony and makes clearer still that summary judgment was properly denied to both defendants. 65 Also admissible for all purposes, against both Greenberg and Smith, are documents describing Smith as a point man on the Gen Re transaction and describing Smith’s and Milton’s central roles in the surreptitious return of Gen Re’s $10 million premium payment and the secret payment of a $5 million net fee by AIG— two of the deal’s key fraudulent terms (4:1882, 2182, 2183, 2192). 132 CONCLUSION There is no merit to any of the claims raised in this interlocutory appeal. The State has the authority to bring this case, and the evidence is sufficient to withstand defendants’ motion for summary judgment. For the foregoing reasons, the Court should affirm the decision of the Appellate Division and remand the case for the trial it deserves. Dated: New York, NY November 16, 2012 BARBARA D. UNDERWOOD Solicitor General RICHARD DEARING Deputy Solicitor General WON S. SHIN MARK H. SHAWHAN Assistant Solicitors General DAVID N. ELLENHORN Senior Trial Counsel Investor Protection Bureau of Counsel Respectfully submitted, ERIC T. SCHNEIDERMAN Attorney General of the State of New York Attorney for Plaintiff- Respondent By: ____________________________ BARBARA D. UNDERWOOD Solicitor General 120 Broadway New York, NY 10271 (212) 416-8016 Reproduced on Recycled Paper