So what does Leo Strine think of Maurice "Hank" Greenberg and his henchmen at American International Group Inc.? "The complaint fairly supports the assertion that AIG's inner circle led a -- and I use this term with knowledge of its strength -- criminal organization," the Delaware Court of Chancery vice chancellor wrote in the middle of a 105-page opinion issued Feb. 10, in which he declined to dismiss a suit by AIG shareholders against the company, Greenberg and several of the senior managers who served under him.

The case involves the alleged misconduct by Greenberg and others that led to his ouster from the company in 2005. The shareholders claim Greenberg and an "inner circle" that included CFO Howard Smith, AIG directors and executives Edward Matthews and Thomas Tizzio "misstated AIG's financial performance to deceive investors into believing that AIG was more prosperous and secure than it really was."

Strine spends much of the opinion chronicling the ways in which the inner circle did this, a discussion that he sarcastically summarizes early in his ruling: "A cosmic wrong may have been done to the inner circle defendants, whose members were victimized by a large number of lower-level employees who, despite good faith efforts at oversight and the use of internal controls by the inner circle defendants, were able to avoid detection and engage in widespread financial fraud. For example, it may have been that Greenberg's longtime subordinate Matthews, who was in charge of AIG's investments, was kept in the dark by Greenberg or lower-level employees when AIG invested hundreds of millions in off-shore subsidiaries and then entered into substanceless reinsurance contracts with them, or when AIG decided to invest in buying up elderly people's existing insurance policies while telling the public it was issuing new policies."

Beyond offering a primer on alleged insurance fraud, Strine provided guidance on special litigation committees and in a long footnote considered the issue of auditor liability. After the AIG shareholders sued the insurer and its directors, the company's board formed an SLC to determine which claims against Greenberg and other AIG directors and executives it would pursue. This was a tricky exercise, Strine acknowledges, since "the SLC had to weigh the advantage of affirmatively accusing AIG officials of wrongful acts that third-party plaintiffs would impute to AIG itself. In the end, the SLC chose to have AIG sue Greenberg and Smith itself, to seek dismissal of certain defendants, and to otherwise take no position on the stockholders' claims."

Following Delaware precedent, Strine held that once the SLC had assessed the claims, even its profession of neutrality excused shareholders from asking the board to bring claims against individuals on behalf of the company and allowed the plaintiffs to pursue those claims themselves.

And pursue them they did; the list of law firms and lead lawyers on the case at the start of the opinion runs to four pages.

The judge spent the last quarter of the opinion dismissing the shareholders' malpractice claims against PricewaterhouseCoopers LLP, AIG's auditor. Strine held that New York law applied to the claim and that New York law "immunizes an auditor if its client had top-level managers who knew of or participated in the financial wrongdoing that gave rise to the errors in the financial statements that the auditor certified as GAAP-compliant."

The immunity applies "even if the auditor's fulfillment of its professional duty of care would have resulted in the detection of the underlying fraud and the avoidance of the harm to its client," Strine wrote.

He thoroughly reviewed the New York law on the subject but, in a four-page footnote at the end of his ruling, says he "would be chary about following the New York approach" were he applying Delaware law.

Not only does the New York rule "conflate, in a simplistic way, related but separate questions of agency," Strine wrote, but the underlying policy question of auditor liability is a difficult one, since auditors are hired in large part to detect management fraud and may be better able to do so than boards of directors, factors that led the New Jersey Supreme Court to adopt a rule opposite to New York's on the point.

And yet Strine ends by acknowledging the "public policy utility of exposing audit firms to uncapped liability for their negligent failure to detect financial fraud by corporate managers. Although audit fees are lucrative, they arguably pale in comparison to the potential liability the auditors face."

David Marcus is senior writer at Corporate Control Alert.