A Manhattan federal judge dismissed a shareholder lawsuit accusing current and former American International Group Inc executives and directors of ignoring red flags, leading to the insurer's near collapse and about $180 billion of federal bailouts.

U.S. District Judge Laura Taylor Swain on Tuesday accepted AIG's argument that shareholders led by the Louisiana Municipal Police Employees' Retirement System pension fund failed to first ask its board of directors to take action or show why such a demand would have been futile.

A lawyer for the Louisiana fund did not immediately return a call seeking comment. AIG spokesman Mark Herr said the New York-based company was pleased with the 44-page ruling.

The complaint was a so-called derivative complaint seeking remedies on behalf of AIG, including restitution and extraordinary equitable relief.

It accused AIG officials of ignoring the potential for catastrophic losses stemming from exposure to credit default swaps, largely tied to subprime mortgage-related debt, through its AIG Financial Products unit.

These losses led to a series of bailouts that left the federal government with close to an 80 percent stake. AIG has been selling assets to repay the government.

The complaint also alleged that AIG overstated its health and risk management practices, only to then waste corporate assets in several ways.

These included authorizing a costly stock buyback and dividend increase shortly before a September 2008 liquidity crisis; awarding excessive pay to former Chief Executive Robert Willumstad and severance to his predecessor Martin Sullivan and former AIG Financial Products President Joseph Cassano; and awarding lavish retention bonuses to employees at Cassano's unit.

According to Tuesday's opinion, the plaintiffs thought it futile to seek board help because wrongdoers dominated the board at the time, and directors would have been disinclined to effectively sue themselves for their actions and expose themselves to potential personal liability.

But Swain said the shareholders failed to show enough facts creating a reasonable doubt that the directors were disinterested and independent, or failed to properly exercise their business judgment.

AIG shares closed Tuesday down 26 cents at $34.19 on the New York Stock Exchange. The decision was issued after U.S. markets closed.

The case is In re: American International Group Inc 2007 Derivative Litigation, U.S. District Court, Southern District of New York (Manhattan), No. 07-10464.

(Reporting by Jonathan Stempel; Editing by Richard Chang)

Aig Lawsuit