March 2 (Bloomberg) -- American International Group Inc., which reported the biggest loss by a publicly traded U.S. firm, was sued for securities fraud by former Chief Executive Officer Maurice “Hank” Greenberg.

Greenberg sued today in federal court in Manhattan, saying the company’s “material misrepresentations and omissions” caused him to acquire New York-based AIG shares in his deferred compensation profit-participation plan at an “artificially inflated price.”

The complaint comes on the same day that AIG CEO Edward Liddy told Bloomberg News that Greenberg was at the helm during the formation of AIG’s financial products unit, which sold derivatives that cost the company more than $30 billion in writedowns and prompted a government rescue. After reporting its fourth-quarter loss widened to $61.7 billion, AIG announced it reached an agreement to restructure its federal bailout.

AIG’s alleged misrepresentations caused Greenberg to pay excessive income tax on the AIG shares, according to his complaint. Greenberg seeks to recover the difference between the price he paid for the shares and a fair price had the misrepresentations not occurred, according to the suit. Greenberg also seeks to recover the extra income tax he claims to have paid.

Christina Pretto, an AIG spokeswoman, said Greenberg’s lawsuit is without merit and that AIG will defend itself.

A ‘Tragedy’

Greenberg, 83, who led AIG for almost 40 years before being forced to retire in 2005, has said Liddy isn’t equipped to run the company and called the sale of the firm’s insurance units to repay the government a “tragedy.” Greenberg told Congress last year that risk controls he put in place were weakened or eliminated after he left.

Liddy, the former CEO of home and auto insurer Allstate Corp., was appointed in September to run AIG after the insurer agreed to turn over an 80 percent stake to the government in exchange for an $85 billion loan. AIG said today it will get as much as $30 billion in new government capital and relaxed terms on its bailout after posting the worst loss by any U.S. corporation.

“I think he’s responsible” for some of the insurer’s struggles, Liddy said today in an interview, referring to Greenberg. “The formation of the AIGFP unit, which has literally brought us to our knees, that happened on his watch. The compensation systems that have gone astray, happened on his watch. I don’t think it’s as clean and simple as sometimes Hank would like to portray.”

Unit Profitable

The financial products unit was profitable until after Greenberg left, his spokeswoman, Liz Bowyer, said in a statement today.

The losses “never would have happened -- and in fact did not happen,” while Greenberg was in charge, Bowyer said. “Under Mr. Greenberg’s leadership, AIG grew from a modest enterprise into the largest and most successful insurance company in the world. Its market capitalization increased approximately 40,000 percent between 1969, when AIG went public, and 2004, Mr. Greenberg’s last full year as chairman and CEO.”

Greenberg denies any wrongdoing in a New York State civil lawsuit filed against him in May 2005, which is still pending. Then-New York Attorney General Eliot Spitzer dropped portions of the lawsuit in 2006 that included four other allegations tied to the investigation.

Greenberg still controlled the largest stake of AIG shares before the government takeover through personal holdings and investment firms C.V. Starr & Co. and Starr International Co.

AIG was unchanged at 42 cents in New York Stock Exchange composite trading. The insurer has plunged 99 percent in the past 12 months.

The case is Greenberg v. AIG, 09-cv-1885, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: David Glovin in U.S. District Court in New York at dglovin@bloomberg.net; Joel Rosenblatt in San Francisco at jrosenblatt@bloomberg.net

Last Updated: March 2, 2009 21:20 EST