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A judge has refused to dismiss a securities fraud lawsuit accusing American International Group Inc. of misleading investors about its exposure to subprime mortgages, which led to a liquidity crisis and $182.3 billion of federal bailouts.

The ruling by U.S. District Judge Laura Taylor Swain allows the case to go forward and could pave the way for a trial over ÌìÃÀÍøÕ¾´«Ã½´«Ã½’s near collapse. The government rescue led taxpayers to take a nearly 80 percent stake in the New York-based insurer.

ÌìÃÀÍøÕ¾´«Ã½´«Ã½ spokesman Mark Herr declined to make an immediate comment.

Investors led by the State of Michigan Retirement Systems accused ÌìÃÀÍøÕ¾´«Ã½´«Ã½, executives and directors of failing to disclose the risks that ÌìÃÀÍøÕ¾´«Ã½´«Ã½ had taken on through its portfolio of credit default swaps (CDS) and a securities lending program.

Swain wrote that the allegations in the class-action lawsuit were sufficient to suggest there was “a strong inference of fraudulent intent” in how ÌìÃÀÍøÕ¾´«Ã½´«Ã½ communicated publicly about the risks in the portfolio of credit default swaps.

She also said that plaintiffs made sufficient arguments to claim that ÌìÃÀÍøÕ¾´«Ã½´«Ã½ “materially misled the market” in hiding its “expansive” CDS underwriting, repeatedly expressing confidence in its ability to manage risk and justifying a May 2008 capital raising.

Among the defendants are Martin Sullivan, a former ÌìÃÀÍøÕ¾´«Ã½´«Ã½ chief executive; Joseph Cassano, who ran ÌìÃÀÍøÕ¾´«Ã½´«Ã½’s Financial Products unit, which managed the CDS portfolio; current and former directors; 34 banks that underwrote ÌìÃÀÍøÕ¾´«Ã½´«Ã½ securities, and former accountant PricewaterhouseCoopers LLP.

The lawsuit covers investors who owned ÌìÃÀÍøÕ¾´«Ã½´«Ã½ securities between March 16, 2006, and Sept. 16, 2008, when ÌìÃÀÍøÕ¾´«Ã½´«Ã½ received its first bailout.

The case is In re: American International Group Inc 2008 Securities Litigation, U.S. District Court, Southern District of New York, No. 08-05072.

Topics Lawsuits Legislation Fraud ÌìÃÀÍøÕ¾´«Ã½´«Ã½