AIG American International Group Inc

By Leslie Scism 

The year was 2005. The iPhone didn't exist yet. New York's attorney general was Eliot Spitzer. And he filed a financial-fraud lawsuit against Maurice "Hank" Greenberg, chief executive of American International Group Inc., then one of the most powerful financial firms in the world.

Next week, the case -- spanning three attorneys general, the resignation of Mr. Greenberg from AIG and a nearly $185 billion government bailout of the firm under his successors -- is finally set to go to trial.

In the civil lawsuit, the government seeks to prove Mr. Greenberg, now 91 years old, approved two financial maneuvers between 2000 and 2003 aimed at duping shareholders into believing AIG's core operating results were better than they were. If found liable, he may be ordered to hand over millions of dollars from past bonuses and barred from becoming an officer of a publicly traded company.

In nearly 40 years of running AIG, Mr. Greenberg rose to prominence by transforming the company from an obscure insurer into a global behemoth.

But in the past decade, much of his time has been spent trying to defend his reputation in the wake of Mr. Spitzer's challenge.

The trial is to kick off Tuesday with opening statements. The case is a vestige of the early-2000s when Enron Corp. and other once-prominent companies were embroiled in accounting controversies, prompting a wave of crackdowns as authorities looked at the minutiae of complex financial filings.

The lawsuit details two alleged sham transactions.

In one, authorities allege that Mr. Greenberg initiated a transaction with Berkshire Hathaway Inc.'s General Re unit to help AIG improperly boost its claims reserves in 2000 and 2001 by about $500 million, misleading investors about the amount of losses that AIG could absorb. Berkshire isn't named as a defendant in the lawsuit.

The other deal allegedly was designed to mischaracterize underwriting losses in an auto-warranty business as capital losses. Insurance investors closely watch underwriting results as core to a company's operations.

Former AIG Chief Financial Officer Howard Smith, 71 years old, also is named as a defendant.

Mr. Greenberg and Mr. Smith could be forced to pay back about $25 million in total bonuses, plus interest, in the case. Mr. Greenberg's legal bills are expected to top $25 million by the trial's conclusion, according to his attorney.

In 2013, a federal court approved a settlement of class-action litigation against Mr. Greenberg brought by AIG shareholders, and, in 2009, Mr. Greenberg resolved a Securities and Exchange Commission complaint related to the same matters, neither admitting nor denying wrongdoing.

Mr. Greenberg was amenable to settling this case, too, but attempts to reach a resolution, including two mediations, weren't successful, a person familiar with the matter said, in part because the initial claim was so high.

In the initial years of the case, the state had sought $6 billion in damages.

"Mr. Greenberg has always been prepared to discuss a reasonable resolution of this case," said David Boies, the lawyer who heads Mr. Greenberg's defense.

Mr. Greenberg has maintained the lawsuit was wrongly brought by Mr. Spitzer as a steppingstone for his successful run for governor.

Two successors to Mr. Spitzer continued the case, however, which is being argued under the Martin Act -- a 95-year-old statute that has been a popular tool in civil and criminal cases.

Its popularity stems from the fact it doesn't require the showing of a suspect's intent to defraud, which has been criticized by some for being too low a standard. Other critics have railed against the statute for its relatively lenient penalties.

Despite the criticism, the law has been used to combat fraud on Wall Street.

The case involving Mr. Greenberg became controversial quickly.

Within days of the suit's filing in 2005, former Goldman Sachs Group Inc. Chairman John Whitehead defended Mr. Greenberg in the editorial pages of The Wall Street Journal. Mr. Whitehead later claimed Mr. Spitzer threatened him following the op-ed, which Mr. Spitzer has denied.

In the years following the case, Mr. Spitzer, a Democrat, was felled by a sex scandal.

He stepped down in March 2008 as the state's 54th governor, less than two years after taking office.

Mr. Greenberg is prepared to take the stand in his own defense, say his attorneys.

"For years, Mr. Greenberg has financed a relentless campaign to dodge accountability" in the case, said current New York Attorney General Eric Schneiderman Thursday. "But after a decade of avoiding trial, Mr. Greenberg will now face the same justice system as anyone else. We look forward to proving our claims in open court...No one, no matter how rich or powerful, can evade responsibility for misconduct."

Mr. Boies said his team has used legitimate legal options to seek to get the state's case thrown out.

The trial will feature a large volume of testimony introduced through depositions given many of the witnesses have retired or left the state. Under court rules, witnesses who live outside the state can't be compelled to appear in person.

In one instance, the two sides have jointly compiled about 14 hours of videotaped testimony by a former executive of the General Re unit.

"It's going to be difficult to go back and try to recount exactly what happened" some 15 years ago, Mr. Boies said. "These were two out of thousands of transactions [for Mr. Greenberg as CEO]. His memory at 91 is a lot better than mine at 75, but nobody's memory can really remember all of the details."

Write to Leslie Scism at leslie.scism@wsj.com

(END) Dow Jones Newswires

September 09, 2016 02:47 ET (06:47 GMT)

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