New York’s top court has cleared the way for a civil trial of former AIG CEO Maurice “Hank” Greenberg and the company’s chief financial officer over allegations that they engineered a sham transaction more than a decade ago in order to make its financial statement look better.
The fraudulent reinsurance transactions date to 1999 and 2000 and involved GenRe, a Buffet company.
Greenberg argued in court papers that there was no admissible evidence that he orchestrated a $500 million transaction with reinsurer General Re Corp that misled AIG shareholders, and that the case should have ended in April when the state dropped a claim for as much as $6 billion in damages.
That was when a federal judge approved a $115 million settlement between AIG shareholders and Greenberg, Smith and other defendants over the alleged improper accounting.
New York Attorney General Eric Schneiderman, who pursued the case even though two state governors asked him in May to drop it, withdrew the damage claims because of an unrelated 2008 Court of Appeals ruling.
That decision barred his office from seeking restitution on behalf of victims who settled a federal class-action, even if they were not made whole. The original suit, filed in 2005 by former New York attorney general and governor Eliot Spitzer sought more than $6 billion in damages.
The earlier agreements leave the fact that, even if Greenberg and Howard Smith, the former AIG CFO are found guilty, the most likely practical outcome would be barring them from participating in the securities industry and from serving as officers and directors of public companies.
That was stated specifically in a 7-0 decision by the New York Court of Appeals, the state’s highest court.
“There is no doubt room for argument about whether the lifetime bans that the attorney general proposes would be a justifiable exercise of a court’s discretion; but that question, as well as the availability of any other equitable relief that the attorney general may seek, must be decided by lower courts, in the first instance,” the decision said. “We have no difficulty in concluding that, in this civil case, there is evidence sufficient for trial that both Greenberg and Smith participated in a fraud. The credibility of their denials is for a fact-finder to decide.”
Greenberg is now 88 and heads Starr International, which he regained control over in a settlement several years ago with AIG. (Starr International was the company founded in the early 1920s that Greenberg used as the vehicle to create AIG. It owned approximately 13 percent of AIG at the time of the deal.)
David Boies, a partner in Boies, Schiller & Flexner, which represents Greenberg in this case and also in a suit seeking damages from the government stemming its takeover of AIG in 2008, issued a statement following release of the court decision.
“We are pleased that the Attorney General’s claim for damages, which throughout the eight years of this litigation has been the focus of the case, has now been dismissed,” Boies said. “We are disappointed that the Court of Appeals did not dismiss the Attorney General’s recently raised claims for injunctive relief, but we are confident that the action will be dismissed by the lower courts because the State cannot demonstrate that it is entitled to injunctive or disgorgement remedies against Greenberg and Smith."
Eric Schneiderman, the third New York Attorney General to press the case, had not issued a statement in response to the verdict at press time.
Andrew Cuomo, who succeeded Spitzer as attorney general and is now governor, recently asked that the state drop the charges against Greenberg.
In an opinion piece in the Wall Street Journal May 13, Mario Cuomo and George Pataki, both former governors of New York, voiced concerns that misuse of the Martin Act, the 1921 law under which Greenberg and Smith are being charged, "sends the wrong message to the business community, putting New York at risk of losing jobs and damaging its economy.”
Cuomo and Pataki assert that the litigation against Greenberg concerns the accounting “for two entirely proper transactions that took place well over a decade ago,” and also state that neither transaction ”had any impact on the net income or shareholder equity of AIG.”
They wrote that, while they don’t always agree, they now “share is a keen interest in making sure that justice is fairly administered in the state of New York.”