American International Group Inc. (NYSE: AIG) last week sued five former members of its private equity investment team, alleging breach of contract, breach of fiduciary duty and computer fraud.
The complaint comes nearly nine months after AIG fired two of the defendants in a move that resulted in staff resignations and limited partner withdrawals from an already closed fund.
Peter Yu, listed as one of five defendants, remains the issue’s central figure. Yu is a former White House economic advisor who joined AIG nine years ago to help the insurance giant invest private equity into emerging markets, such as Latin America and Eastern Europe. The effort later was expanded to include third-party investors, via participation in a $1.04 billion fund called Global Emerging Markets (GEM) I.
Yu headed up GEM I, but he did not report up the usual chain of command. Instead, he used his political acumen to befriend then-AIG chief Maurice “Hank” Greenberg. Yu became a direct report to Greenberg, and in late 2004 he convinced his boss that it was in GEM’s best interest to become an independent entity via management buyout (with AIG remaining a limited partner). Not only would this apply to the existing GEM fund, but also to a GEM II vehicle in the midst of being raised.
The agreement, however, was informal.
Greenberg left AIG in early 2005 in the midst of various governmental investigations, and his successors believed that the management buyout was not in the best interest of AIG shareholders. According to the complaint, Yu and managing director Bill Jarosz threatened to leave if the buyout did not occur.
AIG responded by terminating the pair in late April. After Yu and Jarosz were let go, they were led out of AIG headquarters without being able to remove personal items from their desks.
“Given that they [Yu and Jarosz] had previously indicated they had no interest in remaining with AIG if the management buyout did not occur … we felt it was in the best interests of AIG and our investors to part ways with them swiftly,” said AIG spokeswoman Braden Bledsoe.
Bledsoe added that the terminations were “expressly without cause,” although she did not comment on why Yu and Jarosz were not given the 30-day termination notice required by their employment contracts.
Following the terminations, several members of AIG tendered their resignations, including Charles Mixon, investor relations pro; Kathleen Hegierski, client services manager; and Thomas Armstrong, senior advisor. AIG also lost about 90% of its limited partners in GEM II, due to Yu’s termination triggering a super-key-man clause.
The company pumped in a bit of extra funds from its own accounts, but saw the overall fund capitalization shrink from about $900 million to just $250 million ($100 million from outside LPs).
Several months after the terminations, Yu and Jarosz began to form a new private equity concern focused on emerging markets. It was named Cartesian Group and began raising an inaugural fund with a target capitalization of between $500 million and $750 million. It received a substantial number of verbal commitments, with a first close scheduled for late February.
AIG learned of Cartesian recently, and believes that the fund violates non-compete clauses that all five defendants signed as part of their AIG contracts. Not only does AIG view Cartesian as a possible competitor to existing AIG private equity endeavors, but also believes that some of the fund marketing material included confidential GEM information that Cartesian had not received permission to use.
Yu says that the 12-month non-compete clause he signed is inoperative because he and Jarosz were terminated without cause. He adds: “AIG has violated its agreements with us, and has not paid us any severance or incentive compensation owed. Now AIG is attempting to deny us the ability to earn a living. This is part of a continuing pattern of retaliation for our cooperation with internal and regulatory investigators. We are confident that all these allegations will be shown to be unfounded.”
The actual non-compete clause does not give an exemption for termination without cause, according to materials that AIG filed with the court.
James Kavanaugh, an attorney with Conn Kavanaugh Rosenthal Peisch & Ford, says that non-compete clause enforcement is state-dependent, and that judges often consider both the law and a person’s right to make a living.
Private equity market attorneys add that this case is rare in that the parties did not hash out confidentiality details following the terminations, which is the usual course when general partners leave to form new funds.
The suit also alleges that Yu and Jarosz provided a variety of information to the U.S. Department of Labor about AIG, and that a FOIA request for that information uncovered confidential company emails written after their dates of termination.
AIG believes that a remaining AIG employee forwarded them company emails and network access, thus resulting in the computer fraud allegation.