Former AIG head Hank Greenberg testifying on Capitol Hill, April 2009. (AP Photo/Gerald Herbert)
An appellate court in New York has cleared the way for a trial on allegations that Maurice “Hank” Greenberg and Howard Smith, respectively the former CEO and CFO of American International Group, committed fraud in connection with two reinsurance transactions.
The litigation has been underway since 2005, and was prompted by an investigation by formerNew Yorkattorney general Elliot Spitzer.
The decision partially reverses a decision by state Supreme Court Justice Charles Ramos.
In the part of the case cleared for trial, current New York Attorney General Eric Schneiderman is accusing Greenberg and Smith of a transaction with reinsurer General Re Corp. that helped AIG inflate loss reserves by $500 million without transferring risk.
James Freedland, a spokesman for Schneiderman in the AG’sNew York Cityoffice, says, “We are pleased that the court has paved the way for a trial to hold the defendants accountable for perpetrating a major reinsurance scheme to defraud investors.”
After the decision was handed down by a five-judge panel of the Appellate Division, First Department, of the Supreme Court of New York, lawyers for Greenberg and Smith said they would appeal the decision to the Court of Appeals, the state’s highest court.
The appellate panel did rule, however, that a trial-court judge was premature to hold Greenberg and Smith liable in October 2010 for damages without a trial over an auto-warranty-insurance transaction with Capco Reinsurance Co, which the state called a sham that helped AIG hide more $200 million of losses.
Greenberg’s lawyers, David Boies of Boies Schiller and Skadden Arps partner John Gardiner, say, “Greenberg and Smith are pleased that the Appellate Division agreed that the prior grant of summary judgment to the Attorney General must be reversed.
“They believe the Appellate Division should have gone even further, however, and…dismissed the Attorney General’s action in its entirety because the claims of the attorney general conflict with the federal-securities laws, and the attorney general also failed to develop and present any proper, admissible evidence to support its allegations against Greenberg and Smith.”
Vincent Sama, of Kaye Scholer, who represents Smith, called the proceedings a “misguided action” in 2005 by then-state Attorney General Elliot Spitzer, and said the entire state case should be “conclusively dismissed.”
AIG, formerly the largest insurance company in the world, entered into a settlement agreement with the Attorney General with respect to the two transactions and other claims, paying over $1billion in damages and penalties.
The issue came to a head in March 2005, when AIG issued a press release admitting that the GenRe transaction documentation was improper, stating that in light of the lack of evidence of risk transfer, the transactions should have been recorded as deposits.
Greenberg and Smith subsequently resigned their positions as CEO and CFO of the company. In May 2005, AIG restated its results for 2000 through 2004.
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