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: For Maurice R. Greenberg by DAVID BOIES BOIES, SCHILLER & FLEXNER LLP (Time Requested: 30 Minutes) For Howard I. Smith by VINCENT A. SAMA KAYE SCHOLER LLP (Time Requested: 30 Minutes) New York County Clerk’s Index No. 401720/05 Court of Appeals of the State of New York THE PEOPLE OF THE STATE OF NEW YORK by ANDREW M. CUOMO, Attorney General of the State of New York, Plaintiff-Respondent, – against – MAURICE R. GREENBERG and HOWARD I. SMITH, Defendants-Appellants. JOINT REPLY BRIEF FOR DEFENDANTS-APPELLANTS BOIES, SCHILLER & FLEXNER LLP 333 Main Street Armonk, New York 10504 Tel.: (914) 749-8200 Fax: (914) 749-8300 – and – 575 Lexington Avenue, 7th Floor New York, New York 10022 Tel.: (212) 446-2300 Fax: (212) 446-2350 CHARLES FRIED, ESQ. 1545 Massachusetts Avenue Cambridge, Massachusetts 02138 Tel.: (617) 495-4636 Fax: (617) 496-4865 SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP Four Times Square New York, New York 10036 Tel.: (212) 735-3000 Fax: (212) 735-2000 Attorneys for Defendant-Appellant Maurice R. Greenberg (For Continuation of Appearances See Inside Cover) Date Completed: December 20, 2012 ANDREW M. LAWLER, P.C. 641 Lexington Avenue, 27th Floor New York, New York 10022 Tel.: (212) 832-3160 Fax: (212) 832-3158 KAYE SCHOLER LLP 425 Park Avenue New York, New York 10022 Tel.: (212) 836-8000 Fax: (212) 836-7154 Attorneys for Defendant-Appellant Howard I. Smith i TABLE OF CONTENTS PRELIMINARY STATEMENT ............................................................................... 1 ARGUMENT ............................................................................................................. 4 I. THE NYAG LACKS STANDING TO PURSUE A CLAIM FOR DAMAGES FOR AN IDENTIFIED CLASS OF PRIVATE INVESTORS. .................................................................................................. 4 A. Statutory Capacity to Sue Does Not Confer Standing. ......................... 5 B. The NYAG’s Pursuit of Money Damages For an Identifiable Class of Private Individuals Is Not a Legally Cognizable Sovereign Interest. ............................................................................... 12 II. FEDERAL LAW PREEMPTS THIS ACTION BECAUSE THE REAL PARTIES IN INTEREST ARE THE PRIVATE SHAREHOLDERS FOR WHOM DAMAGES ARE SOUGHT. ................ 18 A. Under Governing Federal Law, the Private Shareholders on Whose Behalf the NYAG Seeks to Recover Damages Are the Real Parties In Interest: SLUSA, Therefore, Precludes This Action. ................................................................................................. 18 B. This Action Conflicts With the Uniform National Securities Litigation Standards Intended By Federal Law. ................................. 27 III. THE ADMISSIBLE EVIDENCE DOES NOT CREATE A MATERIAL ISSUE OF DISPUTED FACT CONCERNING THE GEN RE TRANSACTION. ........................................................................... 29 A. The NYAG is Required to Show Appellants’ Knowledge of or Participation in the Alleged Fraud. ..................................................... 30 B. The Admissible Evidence Proffered By the NYAG Is Insufficient to Defeat Summary Judgment. ........................................ 32 1. The Core Evidence Proffered By the NYAG Is Not Admissible Against Appellants. ............................................... 33 ii 2. None of the Admissible Evidence Shows That Mr. Greenberg Knew of or Participated in the Alleged Fraudulent Aspects of the Gen Re Transaction. ....................... 40 3. None of the Admissible Evidence Shows That Mr. Smith Knew of or Participated in the Alleged Fraud. ......................... 45 CONCLUSION ........................................................................................................ 50 iii TABLE OF AUTHORITIES Cases Alaska v. U.S. Dep’t of Transp., 868 F.2d 441 (D.C. Cir. 1989) .............................................................................. 9 Alfred L. Snapp & Son, Inc. v. Puerto Rico ex. rel. Barez, 458 U.S. 592 (1982) ..................................................................................... 19, 20 Allstate Ins. Co. v. Keil, 268 A.D.2d 545 (2d Dep’t 2000) ........................................................................33 Alverez v. Prospect Hosp., 68 N.Y.2d 320 (1986) .........................................................................................41 Beuerlien v. O’Leary, 149 N.Y. 33 (1896) .............................................................................................41 Capital Research & Mgmt. Co. v. Brown, 147 Cal. App. 4th 58 (2007) ...............................................................................26 Carey v. Piphus, 435 U.S. 247 (1978) ............................................................................................15 Community Bd. 7 of the Borough of Manhattan v. Schaffer, 84 N.Y.2d 148 (1994) ........................................................................................... 5 Dalbury v. Rezinas, 183 A.D. 456 (1st Dep’t 1918) ...........................................................................39 Edmonds v. N.Y. City Hous. Auth., 224 A.D.2d 191 (1st Dep’t 1996) .......................................................................36 EEOC v. Waffle House, Inc., 534 U.S. 279 (2002) ............................................................................................16 Finkelstain v. Seidel, 857 F.2d 893 (2d Cir. 1988) ...............................................................................19 Franchise Tax Bd. of Cal. v. Const. Laborers Vacation Trust for S. Cal., 463 U.S. 1 (1983) .................................................................................................. 3 iv Friedman v. Sills, 112 A.D.2d 343 (2d Dep’t 1985) ........................................................................35 Friends of Animals v. Associated Fur Mfrs., 46 N.Y.2d 1065 (1979) .......................................................................................33 Gateway State Bank v. Shangri-La Private Club for Women, Inc., 113 A.D.2d 791 (2d Dep’t 1985) ........................................................................43 Globus v. Law Research Serv., Inc., 418 F.2d 1276 (2d Cir. 1969) .............................................................................15 Hawaii v. Standard Oil Co., 405 U.S. 251 (1972) ............................................................................................14 Hecht v. New York, 60 N.Y.2d 57 (1983) ...........................................................................................49 Hyman v. Queens Cnty. Bancorp, Inc., 3 N.Y.3d 743 (2004) ...........................................................................................32 IDX Capital, LLC v. Phoenix Partners Grp. LLC, 19 N.Y.3d 850 (2012) .................................................................................. 32, 40 In re Baldwin- United Corp., 770 F.2d 328 (2d Cir. 1985) ...................................................... 21, 24, 25, 26, 27 In re Hearst Corp. v. Clyne, 50 N.Y.2d 707 (1980) .........................................................................................10 In re Marsh & Mclennan Cos., Inc. Sec. Litig., 501 F. Supp. 2d 452 (S.D.N.Y. 2006) ................................................................47 In re Save the Pine Bush, Inc. v. Common Council of Albany, 13 N.Y.3d 297 (2009) .........................................................................................13 In re Scholastic Corp. Sec. Litig., 252 F.3d 63 (2d Cir. 2000) .................................................................................41 In re State of New York, 256 U.S. 490 (1921) ............................................................................................19 v Kircher v. Putnam Funds Trust, 547 U.S. 633 (2006) ............................................................................................19 Kuo Feng Corp. v. Ma, 248 A.D.2d 168 (1st Dep’t 1998) .......................................................................41 Lander v. Hartford Life & Annuity Ins. Co., 251 F.3d 101 (2d Cir. 2001) ...............................................................................27 Lent v. Shear, 100 N.Y. 462 (1899) ...........................................................................................35 Lewis v. Cont’l Bank Corp., 494 U.S. 472 (1990) ............................................................................................13 Lynn G. v. Hugo, 96 N.Y.2d 306 (2001) .........................................................................................40 Marine Midland Bank v. Russo Produce Co., 50 N.Y.2d 31 (1980) .............................................................................. 29, 30, 31 Matter of Brandon, 55 N.Y.2d 206 (1982) .........................................................................................41 Matter of Graziano v. County of Albany, 3 N.Y.3d 475 (2004) ............................................................................................. 5 Memphis Cmty. Sch. Dist. v. Stachura, 477 U.S. 299 (1986) ............................................................................................15 Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Cavicchia, 311 F. Supp. 149 (S.D.N.Y. 1970) ........................................................ 22, 24, 25 Missouri, Kansas & Texas Ry. v. Missouri R.R. & Warehouse Comm’rs, 183 U.S. 53 (1901) ..............................................................................................24 New York v. 11 Cornwell Company, 695 F.2d 34 (2d Cir. 1982) .................................................................................17 New York v. Holiday Inns, Inc., 656 F. Supp. 675 (W.D.N.Y. 1984) ................................................................8, 14 vi Novak v. Kasaks, 216 F.3d 300 (2d Cir. 1999) ...............................................................................41 Official Comm. of Unsecured Creditors of WorldCom, Inc. v. SEC, 467 F.3d 73 (2d Cir. 2006) .................................................................................23 Oklahoma ex rel. Johnson v. Cook, 304 U.S. 387 (1938) ................................................................................. 3, 19, 22 Papic v. Burke, 113 Conn. App. 198 (2009) ................................................................................26 Pennsylvania v. Mid-Atlantic Toyota Distribs., Inc., 704 F.2d 125 (4th Cir. 1983) ..........................................................................9, 16 Pennsylvania v. New Jersey, 426 U.S. 660 (1976) ............................................................................................19 People v. Abbott Maint. Corp., 22 Misc. 2d 1019 (Sup. Ct. N.Y. Cnty. 1960) ................................................7, 15 People v. Apple Health & Sports Clubs, 80 N.Y.2d 803 (1992) .................................................................................. 29, 30 People v. Bac Tran, 80 N.Y.2d 170 (1992) .................................................................................. 39, 40 People v. Borukhova, 89 A.D.3d 194 (2d Dep’t 2011) ..........................................................................37 People v. Brensic, 70 N.Y.2d 9 (1987) .............................................................................................34 People v. Caban, 5 N.Y.3d 143 (2005) .............................................................................. 36, 37, 39 People v. Coventry First LLC, 13 N.Y.3d 108 (2009) ............................................................................ 10, 11, 16 People v. Edward D. Jones & Co., 154 Cal. App. 4th 627 (2007) ...................................................................... 26, 28 vii People v. Federated Radio Corp., 244 N.Y. 33 (1926) ...................................................................................... 31, 41 People v. First American Corp., 18 N.Y.3d 173 (2011) ........................................................................................... 9 People v. First. Am. Corp., 76 A.D.3d 68 (1st Dep’t 2010) ............................................................................. 9 People v. Grasso, 11 N.Y.3d 64 (2008) .............................................................................................8 People v. Grasso, 54 A.D.3d 180 (1st Dep't 2008) .................................................................. passim People v. Ingersoll, 58 N.Y. 1 (1874) .................................................................................................15 People v. Lowe, 117 N.Y. 175 (N.Y. 1889) ..................................................................... 6, 7, 8, 17 People v. Merkin, 2010 WL 936208 (Sup. Ct. N.Y. Cnty. 2010) ...................................................17 People v. Nieves, 67 N.Y.2d 125 (1986) .........................................................................................34 People v. Sala, 258 A.D.2d 182 (3d Dep’t 1991) ........................................................................31 People v. Sanders, 56 N.Y.2d 51 (1982) ...........................................................................................39 People v. Singer, 193 Misc. 976 (Sup. Ct. N.Y. Cnty. 1949) ........................................................... 7 Pludeman v. N. Leasing Sys. Inc., 10 N.Y.3d 486 (2008) .........................................................................................41 Polonetsky v. Better Homes Depot, Inc., 97 N.Y.2d 46 (2001) .............................................................................. 30, 31, 32 viii Ramada Inns, Inc. v. Rosemont Memorial Park Ass’n., 598 F.2d 1303 (3d Cir. 1979) .............................................................................24 Rotuba Extruders, Inc. v. Ceppos, 46 N.Y.2d 223 (1978) .........................................................................................40 Schaal v. City of Utica, 3 N.Y.3d 727 (2004) ...........................................................................................41 SEC v. Rind, 991 F.2d 1486 (9th Cir. 1993) ............................................................................23 Siegel v. Waldbaum, 59 A.D.2d 555 (2d Dep’t 1977) ..........................................................................35 Silver v. Pataki, 96 N.Y.2d 532 (2001) ........................................................................................... 5 State v. Cortelle Corp., 38 N.Y.2d 83 (1975) ............................................................................................. 9 State v. Justin, 3 Misc. 3d 973 (Sup. Ct. Erie Cnty. 2003) .........................................................26 State v. McLeod, 12 Misc. 3d 1157(A), 2006 WL 1374014 (Sup. Ct. N.Y. Cnty. Feb. 9, 2006) .............................................................. 10, 26 State v. Metz, 241 A.D.2d 192 (1st Dep’t 1998) .......................................................................36 State v. New York City Conciliation and Appeals Bd., 123 Misc. 2d 47 (Sup. Ct. N.Y. Cnty. 1984) ............................................... 10, 17 Stephenson v. Pricewaterhousecoopers, LLP, 768 F. Supp. 2d 562 (S.D.N.Y. 2011) ................................................................47 Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, 552 U.S. 148, 166 (2008) ....................................................................................26 Tishman Const. Corp. v. Great Am. Ins. Co., 96 A.D.3d 494 (1st Dep’t 2012) .........................................................................35 ix United States v. Ferguson, 676 F.3d 260 (2d Cir. 2011) ....................................................................... 33, 34 Vasquez v. Christian Herald Ass’n Inc., 186 A.D.2d 467 (1st Dep’t 1992) .......................................................................33 Zuckerman v. City of N.Y., 49 N.Y.2d 557 (1980) .................................................................................. 32, 33 Rules and Statutes Article VII, § 8 (1) ...................................................................................................11 Business Corporation Law § 1101 ............................................................................. 9 CPLR 4517(a) ................................................................................................... 35, 36 Executive Law § 63(12) ............................................................................ 8, 9, 10, 21 General Business Law § 349 ...................................................................................... 9 U.S.C. § 78bb(f)(1) ........................................................................................... 18, 25 Other Authorities Petition for Injunction and Other Relief, Missouri v. Stifel, Nicolaus & Co., Inc., No. 09-CV-00560, 2009 WL 1889881 (E. D. Mo. Feb. 8, 2006) ............. 26 Reply Brief for the State of New York by Eliot Spitzer, Attorney General of the State of New York, People v. Frink Am., Inc., Nos. 1543, 03-91435, 2003 WL 25671595 (4th Dep't Oct. 6, 2003) .................30 Defendant E. McLeod's Memorandum of Law in Support of His Motion for Summary Judgment, State v. McLeod, 12 Misc. 3d 1019(A), 2006 WL 6554196, (Sup. Ct. N.Y. Cnty. Feb. 9, 2006) .............................. 10, 26 1 PRELIMINARY STATEMENT The NYAG attempts to portray this appeal as a sweeping attack on its authority under the Martin Act and Executive Law, an effort to “curtail sharply” its ability “to protect the public by deterring and remedying frauds.” Brief for Respondent (“Res. Br.”) at 3. It is not. This civil action, commenced on May 26, 2005, originally sought undefined relief against AIG and Appellants, based on allegations of nine accounting irregularities at AIG. R. 1410-47. Since initiating this action, the NYAG has settled with AIG and abandoned all but two of its original claims and all forms of relief other than money damages, see, e.g., Joint Brief for Defendants-Appellants (“App. Br.”) at 7-10, which the NYAG now seeks to recover on behalf of a worldwide class of AIG shareholders personally from Appellants. In the NYAG’s own words, this is an action to “obtain damages on behalf of all AIG stockholders, no matter where they reside,” R. 15173 (emphasis added). This appeal addresses the specific, discrete intersection of state and federal law where, as here, the NYAG seeks to use the Martin Act and Executive Law to pursue civil money damages on behalf of an identified class of shareholders in a nationally-traded security. Indeed, the NYAG has vigorously objected to a settlement of the pending Federal Securities Class Action currently being pursued by AIG’s shareholders precisely because such a settlement would prevent it from 2 continuing its own action on behalf of those same stockholders. Plainly, settled principles of law preclude the NYAG from advancing an action in which the essential nature and effect of the proceeding is to recover damages for the private shareholders of a nationally-traded security whose rights of recovery are otherwise governed by federal securities laws. First, the NYAG’s assertion that it has standing to pursue such a claim whenever a “statute expressly authorizes the Attorney General to sue,” Res. Br. at 41, conflates the distinct issues of capacity and standing and is contrary to an unequivocal line of authority. So too, the NYAG’s claim that the pursuit of money damages on behalf of a class of private shareholders reflects a cognizable sovereign interest simply because it serves purposes of deterrence and victim compensation is contrary to settled precedent. Far from unduly curtailing the NYAG’s powers under the Martin Act and Executive Law, the recognized limitation on the NYAG sought to be enforced here is fully consistent with long- standing principles of law. Allowing the NYAG to continue this action for the recovery of damages pursued on behalf of private shareholders would alter those established principles and greatly expand the powers of the NYAG. Second, such an unwarranted expansion of law would run afoul of federal preemption given the federal securities law regime governing damage claims of 3 shareholders in nationally traded securities.1 The controlling principle of federal law bearing on this appeal has long been established: “[T]he State must show a direct interest of its own and not merely seek recovery for the benefit of individuals who are the real parties in interest.” Oklahoma ex rel. Johnson v. Cook, 304 U.S. 387, 396 (1938). Where a State seeks damages for identifiable individuals, the action must be construed under federal law to have been brought by those individuals as the “real parties in interest,” even if, as here, the State nonetheless generically “asserts an economic interest in the claims and declares their enforcement to be a matter of state policy,” id. at 394; a contention that if accepted would erase the distinction between the sovereign interest of the State and the interests of private parties. In accordance with this settled principle of federal law, this action must be construed as if brought by the “AIG stockholders, no matter where they reside,” on whose behalf damages are admittedly being sought. They are thereby the real parties in interest. So construed, the action is one in which “damages are sought on behalf of more than 50 persons” and is preempted by the federal securities laws that govern the claims of those private shareholders. Indeed, the claims of those very AIG stockholders have in fact properly been advanced by them in federal 1 Federal preemption is a question governed by federal law. See Marmet Health Care Ctr., Inc. v. Brown, 132 S. Ct. 1201, 1202 (2012); accord Franchise Tax Bd. of Cal. v. Const. Laborers Vacation Trust for S. Cal., 463 U.S. 1, 12, n. 12 (1983). 4 court in accordance with that governing federal law. The NYAG has sought to object to the settlement of that federal action, contending that the resulting application of Applied Card “would terminate the NYAG’s assiduous, seven-year pursuit of compensation for the injured AIG shareholders.” Objection of NYAG at 3. That Federal Securities Class Action, not the NYAG’s damages action under diluted state law standards of proof, is the avenue of national shareholder damages recovery dictated by federal law. Finally, independent of the above, the Court should dismiss all claims related to the Gen Re transaction because the NYAG fails to identify any admissible evidence establishing Appellants’ knowledge of or participation in allegedly fraudulent aspects of the transaction and has no excuse for its failure to do so. Thus, this action should be dismissed in its entirety, or at the very least remitted for consideration of the Gen Re evidentiary issue under the correct legal standard. ARGUMENT I. THE NYAG LACKS STANDING TO PURSUE A CLAIM FOR DAMAGES FOR AN IDENTIFIED CLASS OF PRIVATE INVESTORS. The NYAG claims standing to pursue money damages on behalf of an identified class of private shareholders on two theories: (1) that standing is met as 5 a matter of law when a statute “authorizes the Attorney General to sue . . . ,” Res. Br. at 41; and (2) that an action for civil damages on behalf of private shareholders serves sovereign interests of deterrence and compensation, id. at 50-52. Both theories are incorrect and contrary to settled law. The existence of a statute vesting the NYAG with capacity to sue does not confer standing to sue. Additionally, precedent is unequivocal that whatever deterrence and compensatory functions private damages may serve do not vest a State with standing to pursue an action in which the essential nature of the proceeding is one for damages on behalf of an identifiable class of private interests. Because the NYAG has no independent sovereign interest at issue, it lacks standing to pursue this action. A. Statutory Capacity to Sue Does Not Confer Standing. “Capacity to sue is . . . distinct from, the question of standing.” Matter of Graziano v. County of Albany, 3 N.Y.3d 475, 478 (2004) (quoting Silver v. Pataki, 96 N.Y.2d 532, 537 (2001)). Capacity concerns a litigant’s “authority to sue.” Silver, 96 N.Y.2d at 537. The authority of “governmental entities” to sue derives from a “statutory predicate.” Cmty. Bd. 7 of the Borough of Manhattan v. Schaffer, 84 N.Y.2d 148, 155-56 (1994). Standing, “in contrast,” requires that “the party seeking relief has a sufficiently cognizable stake in the outcome.” Id. at 155. A “governmental entity” must have “both the standing and the capacity” to sue. Id. at 156 6 Although capacity and standing are “distinct” and “not interchangeable,” id. at 154, the NYAG conflates the two, advancing the incorrect proposition that statutory authorization to sue in itself confers standing. This position cannot be reconciled with uniform precedent holding that, even when the NYAG is conferred statutory authority to sue, it lacks standing to pursue an action “on behalf of the People” unless it also demonstrates a legally cognizable interest separate from individual private interests. For more than 100 years, New York courts have dismissed actions by the NYAG, regardless of statutes authorizing the NYAG to sue, where, as here, the State establishes no legally cognizable interest separate from those of identifiable private parties. This Court definitively addressed the issue in People v. Lowe, 117 N.Y. 175 (1889), authority which Appellants cited several times, see App. Br. at 18-19, but which the NYAG does not mention in its lengthy Response Brief. In Lowe, a statute authorized the NYAG to sue for misconduct by the trustees of an organization. Yet, this Court held “the People of the state, like all other parties to actions, must show an interest in the subject-matter of the litigation to entitle them to prosecute a suit and demand relief.” 117 N.Y. at 191. “The attorney-general, in an action brought by him, represents the whole People and a public interest, and not merely individuals and private rights.” Id. at 192. Thus, it “is not sufficient for the People to show that wrong has been done to some one; the 7 wrong must appear to be done to the People in order to support an action by the People for its redress.” Id. New York courts have consistently followed Lowe. See, e.g., People v. Singer, 193 Misc. 976, 981 (Sup. Ct. N.Y. Cnty. 1949) (applying Lowe to dismiss NYAG claims authorized under the General Corporation Law because the claims “neither involve any public right or interest or affect the safety, health or welfare of the people in the true and proper sense, but concern individual and private rights and interests, or involve private wrongs.”); People v. Abbott Maint. Corp., 22 Misc. 2d 1019, 1023 (Sup. Ct. N.Y. Cnty. 1960) (“[T]he state does not concern itself with the quarrels of private litigants. It furnishes for them sufficient courts and remedies, but intervenes as a party only where some public interest requires its action.” (citation omitted)). More recently, the Appellate Division reiterated these principles in People v. Grasso, 54 A.D.3d 180 (1st Dep’t 2008) (“Grasso III”). Although, as the NYAG states, Grasso III was based in part on the inapplicability of the Not-for-Profit Corporation Law, the holding was also based on “the critical issue of standing.” Id. at 205. As the court restated, “[c]apacity to sue is . . . distinct from, the question of standing,” and standing “involves a determination of whether the party seeking relief has a sufficiently cognizable stake in the outcome.” Id. at 190 n. 4 (citation omitted; alteration in original). Thus, “where, as here, the Attorney General seeks 8 only monetary relief that would inure to the benefit of the owners of a for-profit entity,” id. at 194, the State does not have “a sufficiently cognizable stake in the outcome” and the NYAG lacks standing. Id at 190 n. 4.2 Against this uniform body of authority, the NYAG does not cite any case holding that statutory authorization to sue in itself confers standing. Instead, the NYAG asserts: “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.” Res. Br. at 44. However, Lowe and its progeny are squarely to the contrary and the cases referenced by the NYAG are inapposite. In People v. Grasso, 11 N.Y.3d 64 (2008) (“Grasso II”), this Court noted that the issue of standing was the subject of a separate appeal then pending at the Appellate Division. Id. at 68, n. 3. In that separate appeal, the Appellate Division held the NYAG lacked standing because it did not “articulate an interest apart from the interests of particular private parties.” Grasso III, 54 A.D.3d at 198. 2 Although standing in New York courts is a matter of state law, federal law is in accord. See, e.g., New York v. Seneci, 817 F.2d 1015, 1017 (2d Cir. 1987) (dismissing NYAG suit advancing racketeering claims under Executive Law § 63(12) on grounds that the NYAG “must seek to redress an injury to an interest that is separate from the interests of particular individuals . . . The state cannot merely litigate as a volunteer the personal claims of its competent citizens.”); New York v. Holiday Inns, Inc., 656 F. Supp. 675, 677-78 (W.D.N.Y. 1984) (dismissing NYAG suit under § 63(12) because the State lacked an interest separate from those of “an identifiable group of individuals,” and noting that “the individuals involved” were seeking the same relief “through their private suit.”). Where, as here, the action is “to recover money damages for injuries suffered by individuals, the award of money damages will not compensate the state for any harm done to its quasi-sovereign interests” and the NYAG lacks standing. Seneci, 817 F.2d at 1017. 9 In People v. First American Corp., 18 N.Y.3d 173 (2011), this Court expressed agreement with the Appellate Division that General Business Law § 349 provided the NYAG with standing. Id. at 178-79. But in the referenced Appellate Division decision, the “standing” question was merely whether “the Attorney General [could] rely upon a substantive violation of a federal law to support a claim under General Business Law § 349.” People v. First. Am. Corp., 76 A.D.3d 68, 82 (1st Dep’t 2010). Thus, the question was one concerning the scope of the statute, and does not concern whether the NYAG must demonstrate a legally cognizable interest separate from individual private parties. State v. Cortelle Corp., 38 N.Y.2d 83 (1975) concerned the statutes of limitations applicable to claims under Executive Law § 63(12) and Business Corporation Law § 1101, and did not concern whether the NYAG must have a legally cognizable interest separate from private parties for standing. Id. at 85-88. Alaska v. U.S. Dep’t of Transp., 868 F.2d 441, 443 & n. 1 (D.C. Cir. 1989), involved a direct sovereign interest arising from federal Department of Transportation rules allegedly threatening the States’ ability to “create and enforce a legal code.” Id. Finally, Pennsylvania v. Mid-Atlantic Toyota Distribs., Inc., 704 F.2d 125, 129-31 (4th Cir. 1983) involved claims for injunctive relief under the federal antitrust laws and addressed “authority” to sue under the applicable laws. Id. at 10 127. With respect to standing, the Court specified that “[t]he question of whether a state possesses a ‘quasi-sovereign’ interest in an action [is] vitally important in challenges to a state’s standing to sue under the antitrust laws.” Id. at 131 n. 13 (citation omitted).3 In sum, no case cited by the NYAG contradicts the uniform doctrine that where a statute grants the NYAG capacity to sue, the NYAG nonetheless must demonstrate a cognizable State interest, separate from the interests of private parties, in order to establish standing. This is unsurprising. The fundamental precept that the Legislature may not confer standing is well established and grounded in elemental principles of the separation of powers. “It is a fundamental principle of our jurisprudence that the power of a court to declare the law only arises out of, and is limited to, determining the right of persons which are actually controverted in a particular case pending before the tribunal.” In re Hearst Corp. v. Clyne, 50 N.Y.2d 707, 713 (1980). “This principle . . . is founded both in 3 In a footnote, the NYAG cites People v. Coventry First LLC, 52 A.D.3d 345, 346 (1st Dep’t 2008), aff’d, 13 N.Y.3d 108 (2009). That two-page opinion does not contain the word “standing” or otherwise address the concept. The NYAG also cites State v. McLeod, 12 Misc. 3d 1157(A), 2006 WL 1374014, at *8 (Sup. Ct. N.Y. Cnty. Feb. 9, 2006). McLeod addressed “authority” to sue for damages, not standing, and involved injunctive relief for which it was conceded the NYAG had standing. 2006 WL 1374014, at *7 & *8; Defendant E. McLeod’s Memorandum of Law in Support of His Motion for Summary Judgment, 2006 WL 6554916, at *23-26 (Feb. 8, 2006). The NYAG also quotes part of a footnote from State v. N.Y. City Conciliation & Appeals Bd., the full text of which states “The Attorney-General has not alleged any fraudulent practice which would justify an assertion o[f] jurisdiction pursuant to subdivision 12 of section 63 of the Executive Law.” 123 Misc. 2d 47, 48, n. 3 (Sup. Ct. N.Y. Cnty. 1984). Contrary to the NYAG’s assertion, the footnote does not indicate that Executive Law 63(12) confers standing on the NYAG independent of any recognized State interest. 11 constitutional separation-of-powers doctrine, and in methodological strictures which inhere in the decisional process of a common-law judiciary.” Id. at 713-14. Thus, under the New York Constitution, the “Legislature, consistent with the principles of separation of powers . . . underlying the requirement of standing, cannot grant the right to sue to a plaintiff who does not have standing.” Grasso III, 54 A.D.3d at 197. The NYAG also does not distinguish the “serious constitutional concerns” regarding Article VII, § 8 (1) of the New York Constitution (barring the State from making gifts or loans for private undertakings) that its pursuit of “only a money judgment that would benefit” private parties raises. See id. at 195, 197. Instead, the NYAG incorrectly asserts that the discussion of this issue in Grasso III is dictum, Res. Br. at 53, n. 24, even though the matter was central to the court’s analysis of the “critical issue of standing.” 54 A.D.3d at 205. Nothing in People v. Coventry First LLC, 13 N.Y.3d 108, 114 (2009) supports the NYAG’s citation to that decision for the proposition that these constitutional concerns are “simply incorrect.” Res. Br. at 53, n. 24. In resolving the arbitrability question posed in Coventry, involving injunctive and monetary remedies, this Court did not have occasion to address and did not address whether 12 any proper public purpose would be served by the NYAG seeking monetary damages on behalf of an identifiable group of private individuals.4 B. The NYAG’s Pursuit of Money Damages For an Identifiable Class of Private Individuals Is Not a Legally Cognizable Sovereign Interest. The NYAG alternatively argues it has standing because money damages “serve public purposes that go well beyond victims’ financial interests.” Res. Br. at 56. This alternative argument is also contrary to settled law. The NYAG cites no case in which a State entity’s pursuit of an action in which the essential nature and effect of the proceeding was the recovery of money damages for an identifiable group of private individuals conferred standing. Indeed, courts have uniformly rejected such suits. In response to Appellants’ argument in their opening brief that the pursuit of damages on behalf of AIG shareholders raises both standing and preemption principles, the NYAG suggests that “the Attorney General does not sue on behalf of specific victims; [it] sues on behalf of the People of the State of New York.” Res. Br. at 77 (internal quotation marks omitted). But in the courts below, the NYAG acknowledged that this action against Appellants seeks to recover money 4 The NYAG notes that it is seeking an award of attorneys’ fees and costs, see Res. Br. at 52, n. 23, but CPLR § 8303(6) limits the recovery of attorneys’ fees to $2,000 per defendant. Such attorneys’ fees surely do not constitute the sovereign interest that is the purported purpose of the NYAG’s lawsuit. 13 damages on behalf of a worldwide class of AIG shareholders. See R. 15173.5 In addition, the NYAG has stated its concern that the Federal Securities Class Action settlement and the application of Applied Card will “terminate” the NYAG’s “seven-year pursuit of compensation for the injured AIG shareholders.” Objection of NYAG at 3. The NYAG’s prior positions reflect its understanding that the essential nature of this action is the NYAG’s pursuit of money damages on behalf of those same shareholders. Although the NYAG alludes to the possibility of other remedies, Res. Br. at 57, n. 26, “[s]tanding requirements are not mere pleading requirements” and therefore “must be supported in the same way as any other matter on which the plaintiff bears the burden of proof.” In re Save the Pine Bush, Inc. v. Common Council of Albany, 13 N.Y.3d 297, 306 (2009) (internal quotation marks omitted). The essential nature of this action, as it is now being pursued by the NYAG, 6 is one to recover money damages for alleged securities fraud on behalf of an identifiable class of private shareholders. The NYAG does not deny that the 5 See also R. 14870 (“the Attorney General brings these cases to recover damages suffered by many, sometimes tens of thousands or more, investors”); R. 14867 (“In this case, the parties who suffered damages are the hundreds of thousands of persons who were defrauded by purchasing AIG stock at levels propped up by the dissemination of false financial statements.”). 6 Standing must be demonstrated throughout the litigation. Lewis v. Cont’l Bank Corp., 494 U.S. 472, 477-78 (1990) (“[I]t is not enough that a dispute was very much alive when the suit was filed . . . The parties must continue to have a personal stake in the outcome of the lawsuit.”); Grasso III, 54 A.D. 3d at 192, n. 7 (“the Attorney General no longer has a legitimate interest in these causes of action”). 14 consent judgment Appellants entered into with the SEC imposes broader injunctive relief than that described in the NYAG’s original complaint; does not identify any additional injunctive relief it could possibly seek;7 and did not contest below that “[n]o meaningful injunctive measures remain at issue.”8 Nor does the NYAG assert restitution or disgorgement claims. The NYAG does not dispute that Appellants did not sell any AIG stock during the relevant period and have not received any funds from investors. Nor is there any evidence that Appellants’ compensation was tied to AIG’s stock performance or was causally connected in any way to the Gen Re or CAPCO transactions.9 Fact discovery has been closed for more than three years, and the NYAG’s damages expert’s only estimate of alleged damages related to losses allegedly suffered by a worldwide class of AIG shareholders. R. 10990. The NYAG’s argument that damages sought on behalf of private shareholders nonetheless serve a sovereign interest of deterrence and compensation sufficient to trigger parens patriae standing, Res. Br. at 49, is not supported by 7 Holiday Inns held the NYAG had no cognizable interest in seeking an injunction where private litigants sought an injunction covering the same subject matter. 656 F. Supp. at 678; accord Hawaii v. Standard Oil Co., 405 U.S. 251, 261 (1972) (“[O]ne injunction is as effective as 100, and concomitantly, . . . 100 injunctions are no more effective than one.”). 8 Brief for Defendant-Appellant Maurice R. Greenberg Appealing the Grant, in part, of Plaintiff- Respondent’s Motion for Partial Summary Judgment, at 4. 9 See, e.g., SEC v. Jones, 476 F. Supp. 2d 374, 386 (S.D.N.Y. 2007) (dismissing request for disgorgement of compensation where the SEC was “unable to set forth any evidence of specific profits . . . causally connected to the alleged violations”). 15 precedent. Each of the cases the NYAG cites for that proposition involves a suit brought solely by a private party. See Memphis Cmty. Sch. Dist. v. Stachura, 477 U.S. 299 (1986) (suit brought by elementary school teacher); see also Carey v. Piphus, 435 U.S. 247 (1978) (suit brought by elementary and secondary students); Globus v. Law Research Serv., Inc., 418 F.2d 1276 (2d Cir. 1969) (suit brought by private shareholders). These private party actions only underscore the NYAG’s inability to define a valid, cognizable State interest in this action separate from those being pursued by the private litigants in the Federal Securities Class Action. The cases cited by the NYAG to support its claim that damages on behalf of private shareholders serve a sovereign interest of securing an “honest marketplace” are also inapposite. All such cases involved the pursuit of injunctive relief. See Res. Br. at 55. This Court, among several others, has dismissed fraud actions brought by the NYAG where no wide-ranging injunctive relief was being sought, finding that, in such circumstances, the NYAG did not have a cognizable interest separate from individual private parties. See People v. Ingersoll, 58 N.Y. 1, 13 (1874) (“[I]f the money did not belong to the State, but did belong to some other body having capacity to sue, this action cannot be maintained.”); see also Abbott, 22 Misc. 2d at 1026 (the “frauds, as may have been shown, are those to be redressed in litigation, in lawsuits between the affected parties”). 16 Indeed, the NYAG’s argument that the State’s pursuit of money damages for private shareholders serves a sovereign interest in an honest marketplace and is sufficient to confer standing has been specifically rejected. See, e.g., Seneci, 817 F.2d at 1017 (“[T]he Attorney General alleges that the defendants’ conduct has caused substantial injury to the integrity of the state’s marketplace . . . [s]ince, however, the monetary relief sought by the complaint is not designed to compensate the state for those damages,” the NYAG had no standing to sue); Grasso III, 54 A.D.3d at 199 (same) (quoting Seneci); Pennsylvania, 704 F.2d at 129, n. 8. (“[n]o state has a legitimate quasi-sovereign interest in seeing that consumers or any other group of persons receive a given sum or money.”).10 Finally, the NYAG argues that “[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.” Res. Br. at 60 (emphasis in original). No such argument has been advanced by Appellants. The standing principles at issue are not based on Applied Card. Although the NYAG’s repeated concerns regarding Applied Card serve to reinforce that this action is simply a competing representative action for money damages on behalf of 10 Moreover, People v. Coventry First LLC, 13 N.Y.3d 108 (2009) and EEOC v. Waffle House, Inc., 534 U.S. 279 (2002) (both of which decided questions of arbitrability) do not address whether public interests are served by private damage recoveries alone. Coventry, which stated that enforcement actions “serve the public interest by seeking both injunctive and victim-specific relief,” involved claims for both injunctive relief and restitution. 13 N.Y.3d at 113-14. The “victim-specific relief” referred to in Waffle House included damages, backpay (i.e., restitution), reinstatement (i.e., an injunction) and punitive damages (i.e., a penalty). 534 U.S. at 284-85. 17 those same AIG shareholders, the matter of law regarding standing at issue is well- recognized—namely, that “[p]arens patriae standing also requires a finding that individuals could not obtain complete relief through a private suit.” New York v. 11 Cornwell Company, 695 F.2d 34, 40 (2d Cir. 1982), vacated, in part, on other grounds, 718 F.2d 22 (2d Cir. 1983); see State v. New York City Conciliation and Appeals Bd., 123 Misc. 2d 47, 49 (Sup. Ct. N.Y. Cnty. 1984) (“If the aggrieved individual has an adequate remedy at law, then the State is merely a nominal party with no real interest of its own. As a nominal party the state would not have the capacity to sue as parens patriae.”). This standing principle in no way conflicts with the res judicata doctrine set forth in Applied Card. Nor does this standing principle operate to bar proper enforcement actions by the NYAG when a securities class action settlement is pending.11 In the words of this Court, reiterated by the Appellate Division in Grasso III: “The private parties who feel aggrieved . . . have ample remedies to redress their wrongs by proceedings in their own names; and why should not the complaining members of this corporation redress them in that way at their own expense and risk?” Grasso III, 54 A.D.3d at 193-94 (quoting Lowe, 117 N.Y. at 195). By this principle, the NYAG lacks standing to pursue this action, the essential nature of 11 For instance, in People v. Merkin the NYAG sought wide-ranging injunctive relief designed to benefit “all consumers” that was not available to private litigants. No. 450879/09, 2010 WL 936208, at **9-10 (Sup. Ct. N.Y. Cnty. Feb. 8, 2010). 18 which, as the NYAG has acknowledged, is solely the pursuit of money damages for AIG’s shareholders whose interests are fully represented in the Federal Securities Class Action. II. FEDERAL LAW PREEMPTS THIS ACTION BECAUSE THE REAL PARTIES IN INTEREST ARE THE PRIVATE SHAREHOLDERS FOR WHOM DAMAGES ARE SOUGHT. A. Under Governing Federal Law, the Private Shareholders on Whose Behalf the NYAG Seeks to Recover Damages Are the Real Parties In Interest: SLUSA, Therefore, Precludes This Action. The NYAG does not dispute that under SLUSA no action in which “damages are sought on behalf of more than 50 persons” “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 misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security . . . .” 15 U.S.C. § 78bb(f)(1); 78bb(f)(5)(B)(i)(I). Rather, the NYAG attempts to avoid the application of SLUSA by characterizing this action as an “enforcement action,” exempt from preemption under SLUSA’s savings clause. See Res. Br. at 65-66. The NYAG’s argument disregards fundamental, settled principles of federal law. Whether a federal statutory regime, such as SLUSA, preempts a state law action is a question governed by federal law that must be addressed in accordance with federal law principles. See Marmet Health, 132 S. Ct. at 1202 (“When this 19 Court has fulfilled its duty to interpret federal law, a state court may not contradict or fail to implement the rule so established. See U.S. Const., Art. VI, cl. 2.”); Kircher v. Putnam Funds Trust, 547 U.S. 633, 646-48 (2006). Under federal law, the mere fact that a state attorney general is a plaintiff does not render the State the “real party in interest.” Oklahoma ex rel. Johnson v. Cook, 304 U.S. 387, 392 (1938). Instead, federal law requires that a court look past the nominal role of the attorney general to determine the “real party in interest” based upon the “essential nature and effect of the proceeding.” In re State of New York, 256 U.S. 490, 500 (1921) (“[T]he question is to be determined not by the mere names of the titular parties but by the essential nature and effect of the proceeding, as it appears from the entire record”); see also Finkelstain v. Seidel, 857 F.2d 893, 895 (2d Cir. 1988). Thus, “the State must show a direct interest of its own and not merely seek recovery for the benefit of individuals who are the real parties in interest.” Oklahoma ex rel. Johnson, 304 U.S. at 396. When a State acts to “pursue the interests of a private party . . . the State is no more than a nominal party” and the “real party in interest” is the “private party.” Alfred L. Snapp & Son, Inc. v. Puerto Rico ex. rel. Barez, 458 U.S. 592, 601-02 (1982); accord Pennsylvania v. New Jersey, 426 U.S. 660, 665-66 (1976).12 12 The NYAG’s discussion of Louisiana ex. rel. Caldwell v. Allstate Ins. Co., 536 F.3d 418 (5th Cir. 2008), one of many of the cases cited by Appellants on the “real party in interest” issue, as an “outlier,” is misplaced. Res. Br. at 100. Although the Fifth Circuit is in a minority because it 20 The NYAG attempts to invoke generalized principles of Martin Act and Executive Law precedent inapposite to the narrow issue before this Court: namely, the specific intersection of federal “real party in interest” jurisprudence and federal preemption law where, as here, a state attorney general seeks to pursue an action for money damages for alleged securities fraud “on behalf of a worldwide class” of shareholders. Properly framed, the question before this Court, applying governing federal law, is whether this action as it is presently being pursued constitutes a “representative action” on “behalf of 50 or more persons,” or a sovereign “enforcement action” under State police powers. To address this question, the Court must define the action based on the governing, federal “real parties in interest” test: Interests of private parties are obviously not in themselves sovereign interests, and they do not become such simply by virtue of the State’s aiding in their achievement. In such situations, the State is no more than a nominal party. Snapp, 458 U.S. at 602. Although “[s]tate criminal or regulatory actions . . . are brought in a state’s capacity as sovereign,” where, as here, the state seeks to recover money damages on behalf of private parties, “it is not the real party in applies a “claim-by-claim,” rather than “wholesale” analysis, Appellants made clear in their Opening Brief that it “does not matter whether the ‘wholesale,’ or ‘claim-by-claim’ analysis is used here” because under “either approach” it is the “private parties” on whose behalf the NYAG is seeking damages that are the real parties in interest. App. Br. at 30, n. 20. 21 interest.” In re Baldwin-United Corp., 770 F.2d 328, 341 2d Cir. 1985); Seneci, 817 F.2d at 1017. In re Baldwin is particularly instructive regarding this application of federal law in the securities context. There the court recognized the fundamental distinction between actions brought by a state official seeking to enforce criminal laws or to enjoin fraudulent business practices and actions brought by a state official seeking to recover monetary damages on behalf of private investors. 770 F.2d at 333-34, 339-341. While the former constitutes a valid exercise of “state law enforcement and regulatory powers,” the latter constitutes an action in which a “state official [is] bringing [the] action[] in a de facto or de jure representative capacity on behalf of” the private investors “who are the real parties in interest.” Id. at 334, 341-42. This is so even though the Martin Act does not authorize private actions. Federal law squarely rejects the NYAG’s assertion that this suit is “necessarily and intrinsically public,” simply because “the Martin Act and Executive Law § 63(12) may be enforced only by the Attorney General.” See Res. Br. at 99. In re Baldwin is directly on point: It is true . . . that there may be some laws not available to private plaintiffs that enable a given state to bring proceedings seeking restitutionary damages for the benefit of certain of its citizens. . . . However, the invocation of such a restitutionary remedial provision does not cause the claim to lose its representative character. Although only the state can act under the state statute, its claim is essentially 22 derivative. Any recovery would not go to the state but ultimately to the plaintiffs-investors in the federal action, who are the real parties in interest. 770 F.2d at 341-342; see also Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Cavicchia, 311 F. Supp. 149, 156-58 (S.D.N.Y. 1970) (rejecting the NYAG’s argument that the State was the real party in interest because of the “powers conferred by the Martin Act” and holding that the “residents who have been defrauded are the parties with real interests in the sequestered property, and it is these people whom the Attorney General represents”). Similarly, under the federal test, the mere fact that the NYAG contends “that the defendants’ conduct has caused substantial injury to the integrity of the state’s marketplace and the economic well-being of all its citizens” is insufficient to render the State the real party in interest when, as here, “the monetary relief sought . . . is not designed to compensate the state for those damages.” Seneci, 817 F.2d at 1017; accord Oklahoma ex rel. Johnson, 304 U.S. at 394 (holding that where damages are sought on behalf of private individuals, those private individuals are the “real part[ies] in interest,” even if the State “asserts an economic interest in the claims and declares their enforcement to be a matter of state policy”). Were the NYAG’s generalized claim of an interest in the integrity of the New York securities marketplace sufficient to make this an “enforcement action” under federal law, the distinction required by federal law between an action 23 on behalf of private parties and an enforcement action could be defined away by artful drafting. The NYAG disregards these settled principles of federal law and contends that attorney general actions “seeking damages and similar monetary recovery serve public interests independent of any recovery that might flow to private parties.” Res. Br. at 79. None of the cases cited by NYAG supports the assertion. All but two involve actions by private parties and do not address the real party in interest standard applicable to state entities under federal law. See Res. Br. at 80. The remaining two cases are equally inapposite. Official Comm. of Unsecured Creditors of WorldCom, Inc. v. SEC, 467 F.3d 73 (2d Cir. 2006) concerned only disgorgement and civil penalties, not damages, and did not hold that damages sought on behalf of a class of private plaintiffs would render the State a real party in interest. Id. at 80-81. SEC v. Rind, 991 F.2d 1486 (9th Cir. 1993) is contrary to the NYAG’s position, and “contrast[s]” “damages actions” with actual “enforcement actions.” 991 F.2d at 1490. The generic assertion that the NYAG seeks “to enforce state law,” Res. Br. at 76, is similarly not a basis for standing under federal law. It has been long- established that although “the state has a governmental interest in . . . securing compliance with all its laws . . . such general governmental interest is not that which makes the State . . . a party in interest in the litigation, for if that were so the 24 State would be a party in interest in all litigation.” Ramada Inns, Inc. v. Rosemont Memorial Park Ass’n., 598 F.2d 1303, 1308 (3d Cir. 1979) (quoting Missouri, Kansas & Texas Ry. v. Missouri R.R. & Warehouse Comm’rs, 183 U.S. 53, 60 (1901)). In the NYAG’s own words, “the Attorney General brings these cases to recover damages suffered by many, sometimes tens of thousands or more, investors.” R. 14870. To that end, the NYAG submitted an expert report seeking billions of dollars in damages for a worldwide class of AIG’s shareholders. The NYAG cannot alter the “essential nature and effect” of this proceeding by now asserting that it “does not sue ‘on behalf of’ specific victims; the Attorney General sues on behalf of the People of the State of New York.” Res. Br. at 77. This characterization is inconsistent with the NYAG’s repeated representations that it is pursuing this action for damages “on behalf of all AIG stockholders,” R. 15173, and is irrelevant under federal law, where the determining factor is that the monetary recovery is for the particular identifiable investors, not the State. See In re Baldwin, 770 F.2d at 341.13 The NYAG cannot support its suggestion that, despite this governing federal “real party in interest” jurisprudence, this action is an “enforcement action,” and 13 Baldwin and Cavicchia, among other cases, also rebut the NYAG’s argument that what matters is “who controls the litigation,” Res. Br. at 80. In both of those cases the NYAG was not the real party in interest when seeking monetary relief, even though it undeniably controlled the litigation. 25 thus subject to the savings clause of SLUSA. Res. Br. at 68-70. First, the “real party in interest” inquiry addresses the fundamental issue of whether a lawsuit is even “brought in a state’s capacity as sovereign.” Baldwin, 770 F.2d at 341. If a case is not brought in the State’s sovereign capacity, a fortiori, it does not qualify as an exercise of the State’s valid police powers under federal law. As stated by the court in Cavicchia: “Whatever may be the ultimate question before the court . . . the preliminary determination as to whether or not a state is the real party in interest should be founded on consistent principles of construction.” 311 F. Supp. at 156. Second, an action to recover damages on behalf of an identifiable class of private shareholders has never been a recognized form of “enforcement action.” The NYAG does not contend that the “savings clause” of SLUSA was intended to expand accepted federal understandings of state police powers and “enforcement” authority; the NYAG concedes Congress meant only to “preserve state authority,” Res. Br. at 69 (emphasis added); see also 15 U.S.C. § 78a note (Congressional Findings noting that Congress meant only to “preserv[e] the appropriate enforcement powers of State securities regulators”). The NYAG’s argument that “for the last century, States have exercised their police powers to address securities fraud through their blue-sky laws,” Res. Br. at 68, is not supported by any cases in which any State enforcement body was 26 allowed to pursue a securities enforcement action under a state statute to seek solely money damages on behalf of private parties.14 The only case of which Appellants are aware in any jurisdiction in which a State attempted to do so resulted in dismissal of the claims on the specific grounds that such a damages action does not implicate a State’s “quasi-sovereign interests.” Seneci, 817 F.2d at 1017. The State’s police powers with respect to “enforcement actions” have never been understood under federal law to encompass actions solely seeking to recover damages on behalf of private parties. See, e.g., In re Baldwin, 770 F.2d at 334; Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, 552 U.S. 148, 166 (2008); Aaron v. SEC, 446 U.S. 680, 685-86 & n. 3 (1980).15 14 The only case the NYAG cites in which an enforcement action was not preempted by SLUSA involved a petition by the State for a wide-ranging injunction. See Petition for Injunction and Other Relief, Missouri v. Stifel, Nicolaus & Co., Inc., No. 09-CV-00560, 2009 WL 1889881, at *10 (E.D. Mo. April 13, 2009). Likewise, all of the cases the NYAG cites in which an enforcement action was not preempted by NSMIA also involved the State’s pursuit of an injunction. See Defendant Clark E. McLeod’s Memorandum of Law in Support of His Motion for Summary Judgment, 2006 WL 6554916, at *16 (Feb. 8, 2006) (defendant arguing that “Plaintiffs’ sole, available remedy is injunctive relief.”); see State v. Justin, 3 Misc. 3d 973, 976 (Sup. Ct. Erie Cnty. 2003); People v. Edward D. Jones & Co., 154 Cal. App. 4th 627, 631 (2007); Capital Research & Mgmt. Co. v. Brown, 147 Cal. App. 4th 58, 61 (2007); Papic v. Burke, 113 Conn. App. 198, 202 (2009). 15 SLUSA’s preemption of this case will not, as the NYAG asserts, lead to the results of (1) imposing “greater restrictions on public securities enforcement than on private securities litigation, even though private litigation was the statute’s actual intended target,” (2) expanding the role of private litigation, or (3) causing enforcement actions involving traditional equitable remedies to also be preempted. Res. Br. at 81-83. Because the real parties in interest here are private parties, not the State, and because this is a representative action not an enforcement action, preemption of this action (1) falls within the statute’s intended target, (2) appropriately limits private litigation by preventing the real parties in interest in this case from pursuing two 27 B. This Action Conflicts With the Uniform National Securities Litigation Standards Intended By Federal Law. Congress enacted “SLUSA, NSMIA, and PSLRA . . . to provide national, uniform standards for the securities markets and nationally marketed securities,” Lander v. Hartford Life & Annuity Ins. Co., 251 F.3d 101, 111 (2001), and to make certain that states could not “impose the risks and costs of its peculiar litigation system on all national issuers.” S. Rep. No. 105-182, at 5. Here, the NYAG raises precisely the problem Congress sought to eliminate. If the NYAG is permitted to seek monetary recoveries on behalf of a class of private shareholders applying lesser “state standards of liability,” without adherence to the constraints of true “enforcement actions” under federally recognized principles of criminal and regulatory police powers, the NYAG is “impos[ing] the risks and costs of its peculiar litigation system on all national issuers.” The NYAG contends that its action is not preempted because the savings clauses allow state “enforcement actions,” see Res. Br. at 84 & 87, and because NSMIA does not reach state fraud law. See id. at 93-94. Both grounds are unsupportable. The first contention has been addressed above. The second contention — that NSMIA does not preempt this action because “Congress did not intend to ‘restrict or limit [States’] ability’ to investigate or sue to enforce ‘alleged class proceedings simultaneously (in state and federal court), and (3) does not threaten the authority of the State to maintain appropriate enforcement actions seeking relief in which the State has an actual quasi-sovereign interest. 28 violations of State laws that prohibit fraud and deceit,’” id. at 88 n.42 (alteration in original) — fails to acknowledge that Congress was addressing recognized “enforcement action” authority. See H.R. Rep. No. 104-622, at 30-31 (1996). If States were permitted to maintain non-enforcement suits to recover private damages arising from securities disclosures, such a result would enable them “to reconstruct in a different form the regulatory regime for covered securities that Section 18 has preempted.”16 Id. at 34. Inasmuch as this suit does not qualify as an enforcement action, NSMIA prohibits the NYAG from invoking “a State law against fraud or deceit” as a justification for requiring an offering document “to include additional disclosure[s]” that the NYAG believes necessary. Id. at 30, 34. If the NYAG were permitted to pursue damages on behalf of a worldwide class of AIG shareholders under lesser standards of proof, it would undermine Congress’ stated objective to eliminate the “dangers of maintaining differing federal and state standards of liability for nationally-traded securities.” S. Rep. No. 105-182, at 3 (1998). 16 This understanding of NSMIA is confirmed by the analysis in People v. Edward D. Jones & Co., 154 Cal. App. 4th 627 (Cal. Ct. App. 2007), cited by the NYAG. In Edward D. Jones, the State brought an enforcement action seeking an injunction and other relief. Id. at 631. The State contended that the defendant, among other things, failed to disclose in offering documents “approximately $300 million in additional compensation” it had received. Id. at 630. The court held that NSMIA did not preempt the State’s claims. Id. at 639. In doing so, however, it specified that the State’s claims were saved from preemption only because its suit qualified as “an enforcement action of the type described in the savings clause.” Id. It made clear that any other “state action that would even indirectly limit the use” of the relevant offering documents would be “prohibit[ed]” by NSMIA. Id. at 638. 29 III. THE ADMISSIBLE EVIDENCE DOES NOT CREATE A MATERIAL ISSUE OF DISPUTED FACT CONCERNING THE GEN RE TRANSACTION. The NYAG has not identified any admissible evidence precluding a grant of summary judgment to Appellants with respect to the Gen Re transaction.17 Although the NYAG concedes that settled precedent holds corporate officers and directors personally liable for alleged corporate fraud only if they participated in or had actual knowledge of the fraud,18 the NYAG misapplies the standard to assert that it can hold a corporate officer personally liable for billions of dollars in damages merely by showing that the officer “could” have known of a fraud or knew of or participated in a transaction later alleged to have had fraudulent characteristics. Res. Br. at 104-06. The NYAG fails to satisfy the applicable standard that a party opposing summary judgment must either establish a triable issue of fact through admissible evidence or offer an acceptable excuse for its failure to do so. The admissible evidence does not establish that Appellants knew of or participated in an alleged fraud. At most, Appellants had some knowledge of and involvement in a transaction they understood to be legitimate. 17 Although Appellants’ appeal on the preemption issue concerns both the Gen Re and CAPCO transactions, the evidentiary issues raised pertain only to the Gen Re transaction. 18 Res. Br. at 104 (citing People v. Apple Health & Sports Clubs, 80 N.Y.2d 803, 807 (1992); Marine Midland Bank v. Russo Produce Co., 50 N.Y.2d 31, 44 (1980)). 30 The NYAG cannot resist summary judgment by relying on inadmissible evidence that does not qualify for the co-conspirator exception to the hearsay rule. The inferences and speculation proffered by the NYAG are also insufficient to create a material issue of disputed fact. A. The NYAG is Required to Show Appellants’ Knowledge of or Participation in the Alleged Fraud. To hold corporate officers personally liable for the alleged frauds of a corporation, the NYAG must demonstrate the officer participated in or had knowledge of the fraud. See, e.g., Polonetsky v. Better Homes Depot, Inc., 97 N.Y.2d 46, 55 (2001); Apple Health & Sports Clubs, 80 N.Y.2d at 807; Marine Midland Bank, 50 N.Y.2d at 44 (“[C]orporate officers and directors are not liable for fraud unless they personally participate in the misrepresentation or have actual knowledge of it.”). The NYAG acknowledges this controlling standard of law. Res. Br. at 104.19 The NYAG attempts to blur the distinction between knowledge of the transaction and knowledge of its allegedly fraudulent aspects: “An executive is thus personally liable for a company’s fraud if either (1) the executive acts to 19 See also NYAG’s App. Div. CAPCO Br. at 31 (“an executive is personally liable if he either (1) participates in an actionable misrepresentation, or has actual knowledge of the misrepresentation and acquiesces in it”); accord People v. Frink Am., Inc., 2003 WL 25671595, at *8 (Oct. 6, 2003) (NYAG brief stating “[a]t a minimum, the Attorney General must show that the corporate officer participated in the illegality or was aware of the illegality as it was occurring.”). 31 further the fraudulent transaction, or (2) the executive actually knows about the transaction and acquiesces in it.” Res. Br. at 104 (emphasis added) (citing People v. Sala, 258 A.D.2d 182, 192-93 (3d Dep’t 1999)). The NYAG’s formulation is incorrect; actionable claims for personal corporate officer liability for fraud exist only when a defendant knew of or participated in the allegedly fraudulent aspect of the transaction. Marine Midland, 50 N.Y.2d at 44; Polonetsky, 97 N.Y.2d at 55. In People v. Sala, 258 A.D.2d 182 (3d Dep’t 1999), the court did not hold a corporate officer personally liable merely because the officer was aware of or participated in a transaction. To the contrary, the court found that there was “legally sufficient evidence . . . that defendants were knowing participants in the fraudulent activities of First Meridian and intended to defraud the investors.” Id. at 192-93 (emphasis added). Moreover, liability cannot be imposed under a “could have or should have known” standard. Res. Br. at 105-06, 123.20 As this Court pronounced in Marine Midland: “Mere negligent failure to acquire knowledge of the falsehood is insufficient” to establish liability of a corporate executive. 50 N.Y.2d at 44.21 20 The NYAG relies on People v. Federated Radio Corp., 244 N.Y. 33 (1926) to support its “could have known” standard. Res. Br. at 105. Federated Radio did not contain such a standard, and is inapposite because, unlike this case, it involves statements by a securities promoter: “Promoters are under a duty to make a reasonable investigation before issuing a prospectus.” 244 N.Y. at 41. 21 Even if Appellants could be held liable for a “negligent failure to acquire knowledge of the falsehood,” the NYAG’s brief does not point to admissible evidence demonstrating a triable 32 There is no admissible evidence that Appellants participated in or knew of the allegedly fraudulent aspects of the Gen Re transaction,22 and thus Appellants are entitled to summary judgment on the Gen Re transaction under controlling principles of law. See App. Br. at 58-67. B. The Admissible Evidence Proffered By the NYAG Is Insufficient to Defeat Summary Judgment. Under this Court’s cases, a “party opposing a motion for summary judgment must produce admissible evidence sufficient to require a trial on material questions of fact upon which the claim rests.” Hyman v. Queens Cnty. Bancorp, Inc., 3 N.Y.3d 743, 744 (2004); see also IDX Capital, LLC v. Phoenix Partners Grp. LLC, 19 N.Y.3d 850, 851 (2012). Summary judgment can be defeated with evidence that is not presently in admissible form only if the party can “demonstrate acceptable excuse for [its] failure to meet the strict requirement of tender in admissible form.” Zuckerman v. issue of material fact on that issue. To the contrary, the admissible evidence demonstrates that Appellants acted reasonably and appropriately: (1) the transaction Mr. Greenberg requested was understood by everyone involved to be a legitimate transaction; (2) Gen Re unilaterally and for its own reasons converted it into what is alleged by the NYAG to be an improper transaction; (3) Appellants were never informed of Gen Re’s unilateral actions; (4) the transaction was handled within AIG in the regular course of business by numerous AIG accountants and actuaries with responsibility for handling such transactions, and (5) none of those accountants and actuaries were hindered in performing their duties, believed the transaction was improper, or gave Appellants any reason to believe it was improper. See App. Br. at 44-52. 22 The United States Department of Justice conceded at the Second Circuit oral argument in United States v. Ferguson that no such evidence exists against Appellant Greenberg. App. Br. at 12. The official transcript of the oral argument is now listed in that court’s docket. See id., No. 08-6211. 33 City of N.Y., 49 N.Y.2d 557, 562 (1980); Friends of Animals v. Associated Fur Mfrs., 46 N.Y.2d 1065, 1068 (1979); see also App. Br. at 38-41. The NYAG has not provided an acceptable excuse for its failure to proffer admissible evidence. The NYAG’s assertion on appeal that it “may” be able to obtain further testimony from witnesses it did not pursue during discovery, Res. Br. at 128, n. 64,23 does not meet this standard. The absence of inculpatory admissible evidence is not an acceptable excuse. Failure to meet the “acceptable excuse” requirement is fatal. See Grasso v. Angerami, 79 N.Y.2d 813, 814-15 (1991); see also Allstate Ins. Co. v. Keil, 268 A.D.2d 545, 545-46 (2d Dep’t 2000); Vasquez v. Christian Herald Ass’n Inc., 186 A.D.2d 467, 468 (1st Dep’t 1992). The policy underlying this rule is straightforward: summary judgment is a vehicle for terminating cases that do not present a material issue of fact for trial and to present a material issue at trial the evidence must be admissible. 1. The Core Evidence Proffered By the NYAG Is Not Admissible Against Appellants. The NYAG relies on the following inadmissible evidence: • Judicial findings and trial testimony from United States v. Ferguson, 676 F.3d 260 (2d Cir. 2011), a proceeding to which Appellants were 23 The NYAG offers no support for its apparent assumption that testimony from two of the former defendants in United States v. Ferguson, neither of whom has testified in any proceeding related to the Gen Re transaction, would support the NYAG’s position in this action. 34 not parties and were not represented by counsel (see Res. Br. at 108, 110-11); • Statements by Gen Re executive Richard Napier asserting that AIG executive Christian Milton made culpable statements, from which the NYAG argues that the Court should infer knowledge of wrongdoing by Appellants (see Res. Br. at 108-09); • Hearsay declarations by Mr. Napier about conversations he allegedly had with other Gen Re executives that led Mr. Napier to speculate as to Appellants’ knowledge of allegedly fraudulent aspects of the Gen Re transaction (see Res. Br. at 109-10); • Hearsay e-mail communications from Mr. Napier that purport to describe the contents of discussions (in which Mr. Napier did not participate) between Mr. Greenberg and Ronald Ferguson (see Res. Br. at 112);24 and • Hearsay e-mail communications among Gen Re executives describing Gen Re’s internal plans with regard to the Gen Re transaction (see Res. Br. at 113, n. 56). As set forth below, none of that evidence is admissible against Appellants. The NYAG contends that Appellants’ argument concerning trial testimony in United States v. Ferguson is a “red herring” because Appellants’ legal authority addresses trial proceedings, not summary judgment, and because the NYAG claims 24 The NYAG relies heavily on the hearsay evidence sponsored by Mr. Napier. In addition to demonstrating that the hearsay statements “fall within one of the recognized exceptions to the hearsay rule,” the NYAG must also show that the hearsay evidence is “reliable,” see People v. Brensic, 70 N.Y.2d 9, 14 (1987) (citing People v. Nieves, 67 N.Y.2d 125, 131 (1986)). Here, Mr. Napier had every reason to be untruthful as to the matters he describes, as he sought to deflect blame from himself and to curry favor with government authorities so that he could serve no jail time in spite of his guilty plea. The Second Circuit specifically found Mr. Napier to be an unreliable witness. United States v. Ferguson, 676 F.3d at 281 (“Certain factual inconsistencies are sufficiently obvious to raise an eyebrow.”); Id. (“Compelling inconsistencies suggest that Napier may well have testified falsely.”). 35 that it no longer relies on such testimony. Res. Br. at 124-25. Each of those arguments is without merit. First, CPLR 4517(a) defines the scope of admissible evidence not only “at the trial” but also “upon the hearing of a motion or interlocutory proceeding.” Courts regularly apply CPLR 4517(a) to summary judgment motions. See Tishman Const. Corp. v. Great Am. Ins. Co., 96 A.D.3d 494, 494 (1st Dep’t 2012); see also Friedman v. Sills, 112 A.D.2d 343, 345 (2d Dep’t 1985). Neither case cited by the NYAG provides otherwise. See Lent v. Shear, 100 N.Y. 462, 470 (1899) (decided prior to promulgation of CPLR 4517, and denied introduction of prior testimony of husband against wife); Siegel v. Waldbaum, 59 A.D.2d 555, 555 (2d Dep’t 1977) (testimony admitted from prior proceeding where party against whom testimony was admitted was represented “and, in point of fact, was the examiner” who elicited testimony). Second, the NYAG repeatedly cites testimony from United States v. Ferguson in its Statement of Facts. See, e.g., Res. Br. at 19, n. 8 (Hamrah), 21, n. 11 (Napier), 27, n. 14 (Houldsworth), 28 (Morrow), 30 (Schroeder). The NYAG’s argument that testimony from United States v. Ferguson merely “confirms” deposition testimony in this case, Res. Br. at 125, ignores the requirement of CPLR 4517 that, to be admissible, testimony must have been adduced at a “prior trial involving the same parties or their representatives.” 36 Both Appellate Division cases cited by the NYAG are inapposite.25 State v. Metz, 241 A.D.2d 192 (1st Dep’t 1998) did not decide the general evidentiary question of whether testimony from a Martin Act deposition is admissible in a later proceeding, but rather rejected the defendants’ attempt to oppose summary judgment solely with in limine evidentiary objections. See id. at 195-98, 201.26 Similarly, in Edmonds v. N.Y. City Hous. Auth., 224 A.D.2d 191, 191 (1st Dep’t 1996), the only issue was whether the witness’ conviction in the prior criminal trial collaterally estopped his own trial testimony; there was no challenge to the admissibility of the proffered evidence. The NYAG further argues that out-of-court statements27 purportedly made by Mr. Milton to Mr. Napier are “verbal acts” admissible “to show that the statements were made” without regard to the existence of an exception to the hearsay rule. Res. Br. at 109, n. 53. The position misreads People v. Caban, 5 N.Y.3d 143 (2005). 25 The federal cases cited by the NYAG, see Res. Br. at 126, n. 63, are irrelevant to the analysis of these State law issues, including CPLR 4517. 26 “[R]ather than entertaining defendants’ cross motions seeking an in limine evidentiary ruling, the motion court should have required defendants to oppose the State’s motion on its merits, at which time . . . they would be able to raise, and the court determine, the validity of any evidentiary objections to the use of the deposition testimony.” 27 While unclear, the NYAG seems to make the same argument with regard to an internal Gen Re email among Gen Re executives. See Res. Br. at 113, n. 56; R. 2206. That email is inadmissible hearsay for the same reasons that Mr. Napier’s hearsay statements are inadmissible. 37 Caban involved an appeal from a conviction for conspiracy to commit murder, where the defendant had been acquitted of the underlying crime of murder. Caban, 5 N.Y.3d at 148. The defendant challenged the admission of declarations made by several associates in the context of an agreement to commit murder. Id. This Court rejected the defendant’s argument, reasoning that because the crime of conspiracy consists of an agreement to perform a criminal act and did not rest on commission of the act itself, the truth of the challenged statements was irrelevant. Id. at 149. The declarations were thus admissible in Caban, but only to prove the conspiratorial agreement, not the murder itself. Id. at 149-50. See also People v. Borukhova, 89 A.D.3d 194, 219 (2d Dep’t 2011). That rule does not apply here because the NYAG alleges that Appellants violated the Martin Act, not that they conspired to do so. The mere fact of Mr. Milton’s and Mr. Napier’s alleged utterances thus are irrelevant to an element of proof in this case; it is the truth of the contents of those utterances that the NYAG seeks to prove. This distinction was specifically addressed in Caban, which held that if the declarations at issue had been offered to prove the underlying crime of murder, the declarations would be admissible only if the prosecution were able to properly establish admissibility under the co-conspirator exception to the hearsay rule. Id. at 150. 38 However, hearsay statements of one conspirator are admissible against all members of the conspiracy only after establishing the existence of a prima facie conspiracy through independent, admissible evidence. See App. Br. at 58-59. The NYAG does not dispute that proposition, but takes the position that all the evidence it cites in Point III.A. of its brief is “admissible independent of the co- conspirator exception,” Res. Br. at 129, and thus prima facie evidence of a conspiracy sufficient to invoke the co-conspirator exception to the hearsay rule. The premise is flawed: Point III.A. of the NYAG’s brief contains multiple instances of inadmissible evidence, and the remaining admissible evidence is insufficient to establish a prima facie conspiracy. Mr. Greenberg’s October 31, 2000 telephone call to Mr. Ferguson to inquire about a loss portfolio transfer is not evidence of a conspiracy. Res. Br. at 107, 129. All of the Gen Re executives who testified anywhere—including the NYAG’s star witness Mr. Napier—uniformly admitted that for two weeks thereafter their efforts were directed at structuring a legitimate transaction, see App. Br. at 44-46, 61, and the NYAG has not proffered any admissible evidence to the contrary. Likewise, Mr. Greenberg’s November 16, 2000 telephone call with Mr. Ferguson is not evidence of a conspiracy. App. Br. at 62-66. The only “key term” relevant to the NYAG’s Gen Re allegations is the transaction’s allegedly riskless nature. No admissible evidence shows that Mr. Greenberg had any knowledge that 39 the transaction he discussed with Mr. Ferguson failed to transfer sufficient risk to qualify for the accounting treatment it received. Without resort to inadmissible hearsay, the NYAG can show only that Mr. Greenberg discussed the terms of a legitimate loss portfolio transfer, an insufficient basis to establish a prima facie conspiracy. See Dalury v. Rezinas, 183 A.D. 456, 459 (1st Dep’t 1918), aff’d, 229 N.Y. 513 (1920). The NYAG’s bootstrapping efforts here are similar to those expressly prohibited in People v. Sanders, 56 N.Y.2d 51, 62 (1982) (existence of a conspiracy must be shown “without recourse to the declarations sought to be introduced” (internal quotations omitted)). The NYAG’s attempt to use the “verbal act” exception to establish its prima facie conspiracy, Res. Br. at 109, n. 53, also fails. Because the NYAG offers Mr. Napier’s out-of-court statements for their truth, they do not qualify as non-hearsay verbal acts. See Caban, 5 N.Y.3d at 150. The NYAG’s position was rejected in People v. Tran, 80 N.Y.2d 170 (1992), which held that a verbal act, not offered for its truth, was irrelevant as to a defendant who was not present when the alleged statement was made, and “cannot be used to supply the prima facie foundation or connection to defendant as part of a conspiracy.” Id. at 173-74, 179. Finally, a prima facie conspiracy cannot be established through unsupported inferences regarding the calls or the unremarkable fact that Mr. Greenberg appointed the head of AIG’s reinsurance operations to oversee the Gen Re 40 transaction. See Tran, 80 N.Y.2d at 180 (“[w]here circumstantial evidence is weakly held together by subjective inferential links based on probabilities of low grade or insufficient degree . . . a prima facie case will not be deemed satisfied” (citation and internal quotation omitted)). 2. None of the Admissible Evidence Shows That Mr. Greenberg Knew of or Participated in the Alleged Fraudulent Aspects of the Gen Re Transaction. The NYAG claims that “clearly admissible evidence” shows Mr. Greenberg knew that the Gen Re transaction was fraudulent. Res. Br. at 107. That is not so. To the contrary, the NYAG’s case against Mr. Greenberg is based entirely on unsupported inferences and inadmissible hearsay.28 A party opposing summary judgment cannot rely on “unsubstantiated assertions or speculations” to create a triable issue of fact. Lynn G. v. Hugo, 96 N.Y.2d 306, 310 (2001) (reversing denial of summary judgment where plaintiff failed to offer competent proof). Rather, a party must raise a triable issue through “evidentiary facts and not one based on conclusory or irrelevant allegations.” Rotuba Extruders, Inc. v. Ceppos, 46 N.Y.2d 223, 231 (1978); IDX Capital, LLC v. Phoenix Partners Group LLC, 83 A.D.3d 569, 570 (1st Dep’t 2011); see also 28 The NYAG’s factual recitation, Res. Br. at 13-35, is riddled with inadmissible evidence. Indeed, the first five pages of the NYAG’s fact section are simply an essay without any factual citations. However, because the NYAG’s legal arguments are based solely on the evidence it cites in Point III of its brief, see Res. Br. at 107, Appellants will address only that evidence. But the discussion of that evidence applies with equal force to the arguments made by the NYAG in Points III.A.1, III.A.2. and III.B.2. 41 Schaal v. City of Utica, 3 N.Y.3d 727, 727 (2004) (summary judgment properly granted when “plaintiff’s speculative assertions failed to raise an issue of fact”). None of the admissible evidence, alone or in the aggregate, can raise a reasonable question of fact as to Mr. Greenberg’s culpable knowledge or participation in any wrongdoing or sustain the NYAG’s burden to create a triable issue of material fact by producing “evidentiary proof in admissible form.” Alvarez v. Prospect Hosp., 68 N.Y.2d 320, 324 (1986).29 To begin, the NYAG’s assertion that the transaction was “highly unusual,” Res. Br. at 107-08, does not support an inference of impropriety. There is nothing improper about finite reinsurance transactions, even where initiated to achieve balance sheet objectives. See App. Br. at 41, n. 26. The Gen Re personnel 29 As described herein, the NYAG does not establish a material issue of fact as to Appellants’ knowledge of fraud through admissible circumstantial evidence and the cases the NYAG relies on are inapposite. Res. Br. at 116, 117, n. 59, 120. Several address only evidentiary questions. See Matter of Brandon, 55 N.Y.2d 206, 211 (1982) (deciding the admissibility of prior similar acts to show intent); Beuerlien v. O’Leary, 149 N.Y. 33, 38-39 (1896) (deciding whether certain questions should have been permitted of a witness during trial where admissions would have borne on the witness’s intent). Most of the NYAG’s other cases were in the context of motions to dismiss, where the only question presented was the sufficiency of the allegations. See Pludeman v. N. Leasing Sys. Inc., 10 N.Y.3d 486, 493 (2008); Polenetsky, 97 N.Y.2d at 51-52; Federated Radio Corp., 244 N.Y. at 41; In re Scholastic Corp. Sec. Litig., 252 F.3d 63 (2d Cir. 2001); Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000). Those cases are irrelevant to the question here of whether the NYAG has put forth sufficient admissible proof to successfully oppose Appellants’ summary judgment motion. Finally, Kuo Feng Corp. v. Ma, 248 A.D.2d 168, 169 (1st Dep’t 1998) stands for the unremarkable proposition that “compelling” circumstantial evidence can sometimes show knowing participation in a fraud. But the admissible circumstantial evidence proffered by the NYAG is far from “compelling” and shows only knowledge of a particular transaction but not of fraud, as required to establish culpability. See supra, at Point III.A. 42 involved in the transaction during its formative stages each testified that they understood such a transaction to be legitimate. See App. Br. at 44-52. Mr. Greenberg’s appointment of Mr. Milton, a subordinate who was the head of AIG’s reinsurance operations with specific expertise in reinsurance, to oversee the Gen Re transaction was routine and appropriate. See App. Br. at 63. The NYAG cannot explain how those commonplace actions demonstrate knowledge of or participation in the allegedly fraudulent aspects of the Gen Re transaction. The NYAG’s inference that Mr. “Milton discussed the no-risk issue with Mr. Greenberg, to whom he directly reported on the deal,” Res. Br. at 109, is based solely on the inadmissible hearsay declarations of Mr. Napier. See supra, at 34, 36-38. The NYAG’s argument that Mr. Greenberg’s discussions with Mr. Ferguson support a finding of liability, Res. Br. at 107, 109, ignores that the only admissible evidence of those discussions – Mr. Greenberg’s testimony – demonstrates the transaction they discussed was legitimate.30 30 It is undisputed that a loss portfolio transfer of the type proposed by Mr. Greenberg is a legitimate transaction. R. 4179-80, 6115-17, 7953-56. NYAG’s statement that “Defendants do not seriously dispute that the Gen Re transaction was a fraud,” Res. Br. at 103, 117, is incorrect. As the Appellate Division dissent observed, the NYAG “failed to offer any admissible evidence that the [Gen Re] transaction was without risk.” R. 15218. The NYAG also argues that AIG “admitted” that the Gen Re transaction was a fraud in AIG’s 2005 Restatement, see Res. Br. at 35, but as noted in App. Br. at 53, n. 42, AIG’s Restatement is not an admissible business record because no proper foundation for its admission was made and because it is not sufficiently reliable. R. 15218-19. 43 The NYAG also argues that Mr. Napier “surely” told Mr. Ferguson what Mr. Milton allegedly said about the transaction, and that Mr. Ferguson “had every reason” to discuss those terms with Mr. Greenberg on his November 16, 2000 phone call. Res. Br. at 110. The NYAG’s speculation cannot support its opposition to Mr. Greenberg’s summary judgment motion. In any event, the NYAG’s position improperly relies on inadmissible evidence: Mr. Milton’s alleged hearsay comments to Mr. Napier, R. 1932, and hearsay conversations among various Gen Re executives, R. 1935-36, 1938-45, 1949-50, 3209. See supra at 32-40.31 That inadmissible hearsay evidence is the only basis proffered for any negative inference. See Gateway State Bank v. Shangri-La Private Club for Women, Inc., 113 A.D.2d 791, 792 (2d Dep’t 1985) (summary judgment granted on fraud counterclaim because defendant offered “no evidence in admissible form” and nothing “[a]side from mere surmise, conjecture and speculation” regarding plaintiff’s knowledge). The NYAG contends that, because Mr. Greenberg’s recollection of the call does not match some terms in Gen Re transaction documents which he never saw, his “limited recollection does not provide a complete or accurate account” of that call, Res. Br. at 112, and that he was somehow ambiguous in his related testimony, 31 The NYAG also impermissibly relies on “documentary evidence” (e-mail communications between Mr. Napier and Mr. Milton) to argue that Mr. Greenberg agreed to an improper transaction with Mr. Ferguson. Res. Br. at 112. That inference, however, requires consideration of inadmissible hearsay (the Napier e-mail). R. 2007. 44 Res. Br. at 111. While Mr. Greenberg did not recall every detail of a call almost a decade before, he testified unequivocally that he never agreed to or authorized an allegedly improper transaction in his call with Mr. Ferguson, R. 6114-15, and was not aware of and did not authorize any alleged return of premium. R. 6086-87. The NYAG has not presented any admissible evidence to refute that testimony. Finally, there is no validity to the NYAG’s assertion that Mr. Greenberg’s actions after the conclusion of the Gen Re transaction establish guilty knowledge on his part. Res. Br. at 114. • Mr. Greenberg testified that the transfer of stock to his wife was initiated for estate planning purposes, R. 4261-62, and the transfer was later reversed. R. 4315. The NYAG offers no contrary evidence. • Mr. Greenberg’s March 2005 conversation with an audit partner from PricewaterhouseCoopers LLP is not evidence that he was aware of Gen Re’s alleged impropriety. See App. Br. at 65-66. To the contrary, his request for a PwC investigation, R. 2317-18, is exculpatory, as a culpable individual would not initiate review of a known fraud. • The NYAG’s “most significant” piece of evidence to show Mr. Greenberg’s culpable knowledge (that Mr. Smith and Mr. Milton work with him at a private insurance company) would only make sense if the presumption of innocence were reversed. The NYAG’s assertion that Mr. Greenberg has not offered an exculpatory “understanding” of the evidence is incorrect. Res. Br. at 119. The admissible evidence establishes that he spoke with Mr. Ferguson about the possibility of a legitimate transaction; that Gen Re executives attempted for two weeks to satisfy that request; and that he appointed an appropriate subordinate to oversee the 45 transaction. To the extent that Gen Re executives unilaterally decided to structure an improper transaction, Mr. Greenberg did not know of or participate in those alleged efforts, and there is no admissible evidence that suggests otherwise. See App. Br. at 44-52. 3. None of the Admissible Evidence Shows That Mr. Smith Knew of or Participated in the Alleged Fraud. The NYAG devotes little of its 132-page brief to the evidence regarding Mr. Smith’s alleged personal knowledge of or participation in any allegedly fraudulent aspects of the Gen Re transaction. After years of extensive discovery in this case, the NYAG fails to demonstrate that any triable issues of fact remain as to Mr. Smith's alleged culpable participation in or knowledge of the Gen Re transaction. The NYAG makes only four allegations against Mr. Smith, none of which are sufficient to create a triable issue of material fact: • Mr. Smith “learned of key fraudulent aspects of the transaction” from a November 20, 2000 email between Mr. Napier and Mr. Milton that was delivered to Mr. Smith’s office; • Mr. Smith had general discussions about the existence of the Gen Re transaction with other senior AIG executives; • Mr. Smith made the decision to record the transaction “as legitimate insurance” and “certified inaccurate financial results reflecting this improper accounting”; and • Mr. Smith played a “central role in the surreptitious return of Gen Re’s $10 million premium.” 46 Res. Br. at 29-31, 120-22. These assertions either do not support or are irrelevant to the NYAG’s allegations that Mr. Smith participated in or had knowledge of fraud. There is no admissible record evidence showing that Appellant Smith was aware of any allegedly fraudulent aspect of the transaction and the so-called evidence to which the NYAG points does not create a material issue of fact on this point. The NYAG asserts that the draft slip and accompanying email, a paper copy of which was delivered to Mr. Smith’s office on November 20, 2000 (he was not shown as a recipient or copied party of the email), is “evidence” that he had knowledge of an allegedly fraudulent aspect of the transaction. Res. Br. at 120- 121; R. 11215-11222. First, the draft slip—notably the only document Mr. Smith ever received regarding the Gen Re transaction—shows on its face that there is a potential risk of loss of up to $100 million for AIG in the Gen Re transaction. R. 11217-11222. Far from raising a “red flag,” the information in this initial draft slip for a potential future transaction indicated to Mr. Smith that the deal contained sufficient risk to qualify for reinsurance accounting. R. 6136-6137, 6255, 6271-72, 6155-57. There is no record evidence to the contrary. Second, there is nothing in the draft slip or the accompanying email that would cause concern for Mr. Smith or 47 require follow-up32 for a transaction that was properly delegated to other accountants and actuaries in DBG, the unit within AIG that was responsible for booking the transaction.33 R. 14190, 12922-23. Mr. Smith has testified that, as CFO of AIG, he had a very general awareness of the existence of the Gen Re transaction and basic discussions with a few senior executives about the mere fact that AIG was entering into a legitimate transaction. R. 6136-6137. The evidence cited by the NYAG is consistent with his testimony, but is completely irrelevant to the NYAG’s claim, since no evidence even suggests that the cited discussions concerned any allegedly fraudulent aspect of the transaction. Res. Br. 121; R. 659, 1964, 6136-6137, 10459, 10473, 12108. In fact, no witness testified that they discussed any allegedly improper aspect of the transaction with Mr. Smith. 32 Based on the information provided to Mr. Smith, there is no basis for the NYAG’s assertion that Mr. Smith ignored “red flags.” Res. Br. at 121. The NYAG’s assertion of the existence of “red flags” does not make them so. Stephenson v. Pricewaterhousecoopers, LLP, 768 F. Supp. 2d 562, 574 (S.D.N.Y. 2011) (“flags are not red merely because the plaintiff calls them red.”); see also In re Marsh & Mclennan Cos., Inc. Sec. Litig., 501 F. Supp. 2d 452, 487 (S.D.N.Y. 2006) (“Merely labeling allegations as red flags . . . is insufficient to make those allegations relevant to a defendant's” state of mind). Rather, “red flags” are only such facts which “would place a reasonable party in defendant’s position on notice of wrongdoing.” Stephenson, 768 F. Supp. 2d at 574. Here, there were no “red flags” to be ignored. 33 Mr. Smith did not serve as a point person, in any respect, on the Gen Re transaction. This passing reference in the NYAG’s Brief, Res. Br. at 24, lacks any evidentiary support. Mr. Napier, Gen Re’s point person on the transaction, testified that he never spoke to and did not work with Mr. Smith at all on the Gen Re transaction. R. 12446-47 (Napier). At oral argument, the NYAG itself conceded that Mr. Smith was not the point person on the transaction. R. 676, 457-64; see also Res. Br. at 118 (identifying Mr. Milton as the point person). 48 Despite the fact that Mr. Smith has repeatedly demonstrated that the NYAG has misinterpreted and misapplied the evidence, the NYAG continues to erroneously allege that he was responsible for accounting for the Gen Re transaction based solely on its misinterpretation of the testimony of two AIG actuaries—Jay Morrow and Frank Douglas. See Res. Br. at 29, 122. Mr. Morrow and Mr. Douglas did not testify that Mr. Smith directed them as to how the transaction should be accounted for or that they ever spoke with him at all regarding the accounting for the Gen Re transaction. Both individuals simply stated that Mr. Smith, as CFO of AIG, signed off on AIG’s financial statements. App. Br. at 49, n. 39; R. 4905, 6865-6866, 10512. The record evidence confirms the Gen Re transaction was reviewed and booked by the accounting department at DBG—an AIG division with its own CFO, actuaries and accountants. R. 14190, 12922-23. None of the accountants involved in booking the transaction spoke with Mr. Smith or received any instructions from him regarding accounting for the transaction, R. 12740, 12599, and his approval was not necessary to book the transaction. R. 14188. Mr. Smith relied, in good faith, on the accounting determination made at DBG. See generally App. Br. at 49-50. The NYAG also alleges, based on inadmissible hearsay evidence, that Mr. Smith played a “central role in the surreptitious return of Gen Re’s $10 million premium payment.” Res. Br. at 31, 122, 130. The NYAG erroneously claims that 49 this evidence may be used against Mr. Smith under the co-conspirator exception to the hearsay rule. Id. at 130. The NYAG ignores the prior holding of the trial court that there was insufficient record evidence to find that Mr. Smith was a member of any “illicit scheme to artificially inflate AIG’s loss reserves,” R. 60, and thus hearsay evidence cannot be used against him under the co-conspirator exception. The NYAG cannot now seek to create a question of fact based on an argument that the trial court has explicitly rejected and that the NYAG did not appeal. Hecht v. New York, 60 N.Y.2d 57 (1983). Finally, the NYAG asserts that because Mr. “Smith admitted participating in discussions about the commutation of the HSB reinsurance agreements . . . ,” Res. Br. at 122, n. 60, he must have had a role in the alleged return of premium. The unrefuted record evidence establishes that AIG’s decision to commute the separate HSB/Gen Re reinsurance agreement was unrelated to the Gen Re transaction. R. 12449-52, 12392-93. No witness testified of speaking to Mr. Smith about the alleged return of premium in the Gen Re transaction, and he has testified that he did not know of that. R. 6275, 6277, 6279-80, 12446-47. Mr. Smith’s participation in discussions regarding the commutation of a different reinsurance agreement that was entered into for wholly independent reasons unrelated to any allegedly fraudulent aspect of the transaction does not create a material issue of fact. 50 CONCLUSION For all the foregoing reasons, Appellants respectfully request that the Court reverse the holding of the courts below and dismiss all claims against Appellants or, at the very least, remit the action for consideration of the Gen Re evidentiary issue under the correct legal standard. Dated: New York, NY December 20, 2012 BOIES, SCHILLER & FLEXNER LLP /s/ David Boies David Boies 333 Main Street Armonk, New York 10504 Telephone: (914) 749-8200 Nicholas A. Gravante, Jr. Robert J. Dwyer 575 Lexington Avenue New York, New York 10022 Telephone: (212) 446-2300 SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP John L. Gardiner Four Times Square New York, NY 10036 Telephone: (212) 735-3000 CHARLES FRIED (of the bar of the State of Massachusetts) By Permission of the Court 1545 Massachusetts Avenue Cambridge, MA 02138 Telephone: (617) 495-4636 Attorneys for Appellant Maurice R. Greenberg 51 KAYE SCHOLER LLP /s/ Vincent A. Sama Vincent A. Sama Catherine B. Schumacher 425 Park Avenue New York, New York 10022 Telephone: (212) 836-8000 ANDREW M. LAWLER, P.C. Andrew M. Lawler 641 Lexington Avenue, 27th Floor New York, New York, 10022 Telephone (212) 832-3160 Attorneys for Appellant Howard I. Smith