Judge Tosses Madoff-Linked Class-Action Claim Against AIG

A federal judge sided with American International Group Inc. in a potential class-action lawsuit brought by victims of Bernard Madoff's pyramid scheme.

AIG is not responsible for paying $30,000 to a California couple who claimed they lost millions invested with Bernard L. Madoff Investment Securities, U.S. District Court Judge Paul Crotty ruled. Robert and Harlene Horowitz claimed the AIG Fraud SafeGuard component of their homeowners policy entitled them to the maximum payout. They also sought class-action status to include all holders of similar AIG policies who lost money when Madoff "fraudulently used plaintiffs" and all other class members' investments to perpetuate the largest Ponzi scheme in history, according to an August 2009 court filing (BestWire, Aug. 20, 2009).

The Horowitz's lawsuit, filed in the U.S. District Court of the Southern District of New York, claimed an account of more than $8.5 million, as reflected in a November 2008, Madoff statement. The couple had been investing with BMIS for about 11 years, and they held a homeowners policy with AIU Holdings Inc. and American International Insurance Company of California that covered losses "directly from fraud, embezzlement, or forgery" (BestWire, Aug. 20, 2009).

Crotty cited legal precedents, including a finding by a U.S. Bankruptcy Court judge in the Madoff case, in ruling that the claimed losses never really existed. Losses should be based on clients' original investments, not phantom windfalls, he said.

"The money reflected in the final account statement was not taken from the plaintiffs by fraud; rather, it never belonged to them, or even existed, in the first place due to fraud. Therefore, they did not lose this money; they lost the mistaken belief that they owned this money," Crotty wrote.

In its response, AIG claimed the Horowitzes actually received a $225,000 net gain on their investment.

"We're pleased with the court's decision that this case had no merit and rejected the attempt to attain a windfall," AIG spokesman Mark Herr said.

Madoff, the New York investment adviser found guilty of losing $50 billion of his clients' funds in a massive fraud, is now serving a life sentence at a federal correctional facility in North Carolina.

The Horowitzes will appeal the ruling, said their attorney, Brad Friedman of Milberg LLP in New York City.

Shares of AIG (NYSE: AIG) were trading at $38.89 on Oct. 1, down 0.54% from the previous close. Most AIG insurers have current Best's Financial Strength Ratings of A (Excellent).

(By Sean P. Carr, Washington Correspondent: [email protected])