June 18 (Bloomberg) -- Maurice “Hank” Greenberg’s Starr International Co. invested in China, Russia and Eastern Europe with sale proceeds of $4.3 billion from American International Group Inc. shares that once funded a retirement plan, he said.

Greenberg, 84, testified today at a civil trial where AIG claims he and Starr International, known as SICO, looted shares after his ouster as AIG’s chief executive officer in March 2005 amid an accounting scandal. SICO, a private company, held the stock for three decades to back a deferred compensation fund that paid top AIG workers at retirement.

AIG attorney Ted Wells asked Greenberg about how SICO invested the proceeds of 96.9 million AIG shares sold from February 2006 to June 2009. Greenberg, who built AIG into the world’s largest insurer before its near collapse last year, said he drew on that experience in deciding what private investments SICO should make around the globe to diversify its portfolio.

“I managed a company in 130 countries, so I had a great deal of experience,” Greenberg said in a third day of testimony in federal court in New York. “Many people we’d done business with in years past were showing us these opportunities.”

Greenberg said SICO invested in private equity funds and made direct investments, while hiring experts to advise it on health care, energy and real estate. SICO also created two insurers that competed with AIG, including one previously owned by a subsidiary of one of billionaire Warren Buffett’s companies.

‘Expanding Our Business’

“We were expanding our business,” Greenberg said. “We were no longer a controlling shareholder of AIG.” SICO acted “essentially as a merchant bank,” he said.

After leaving AIG, Greenberg testified, SICO’s directors gave him a salary for the first time, in the amount of $1.5 million. Two of SICO’s directors also had been ousted from AIG. Former AIG Vice Chairman Edward Matthews got a salary of $750,000 at SICO and former AIG Chief Financial Officer Howard Smith got $500,000.

Wells asked Greenberg if he got a SICO salary before March 2005.

“I received considerable compensation from SICO,” he said. “It was not in the form of salary, but it was much greater than the numbers you’re referring to.”

Conversion Claim

Jurors will weigh whether SICO improperly converted, or took, AIG shares after Greenberg’s ouster. U.S. District Judge Jed Rakoff will decide if SICO breached its fiduciary duty. New York-based AIG has said it will use proceeds of any judgment to help repay the $182.5 billion bailout package it received from the federal government.

AIG claims the retirement plan was solely for the benefit of its employees to supplement options and bonuses by rewarding top-performing employees. As a closely held company and AIG’s largest shareholder, SICO said it wanted to keep control, and it could invest the AIG shares in the plan in any manner it chose.

SICO lawyer David Boies asked Greenberg about incorporation documents in 1970 that outlined the company’s objectives after it was set up with a $110 million stake. Wells claims that an oral agreement created a trust in which AIG was the beneficial owner of the shares held by SICO. Boies asked Greenberg if SICO would set up such a trust without putting the terms in writing.

‘Irresponsible’

“Of course not,” Greenberg said. “Never. These were valuable assets. Who they were destined for, and when, had to be in writing. Not having a trust of that size in writing would be irresponsible.”

Boies asked if the documents outlined that the funds were intended to be used for AIG employees.

“No, not a word,” Greenberg said.

Boies asked if the documents detailed using the funds for “incentive compensation for AIG employees.”

“No, sir,” Greenberg said.

Boies asked if the articles of incorporation provided “any protection at all for AIG.”

“None,” Greenberg said.

Greenberg said AIG never included the SICO deferred- compensation plan in its financial statements, even though auditors said the company should consider it as early as 1987.

“I felt that if they did that, the voting shareholders would discontinue the plan because it would be misleading to AIG shareholders,” he said. “To the voting shareholders, it would have been confusing and difficult to explain.”

Such a disclosure on AIG’s books would have had “a negative effect on the stock” and “confuse analysts,” he said.

Separation Advised

When jurors were out of the courtroom, Greenberg said an attorney hired by AIG’s independent directors advised him in January 2005 to separate SICO from AIG. The attorney, Richard Beattie of Simpson Thatcher & Bartlett LLP, spoke to him during a dinner at the St. Regis Hotel in New York, Greenberg said.

Beattie, Greenberg testified, said the SICO-AIG arrangement raised corporate governance questions.

“Mr. Beattie was sitting close to me and said it would be intolerable to continue a compensation program that was controlled by a company not owned by or affiliated with AIG,” Greenberg said. “I was stunned, quite frankly, by his opinion. He seemed very determined on that topic.”

In a telephone conference call today outside the jury’s presence, Beattie denied that such a conversation took place. The judge asked Beattie if he discussed corporate governance with Greenberg.

“No, it was solely about convincing Hank to set a schedule and date for announcing his succession,” Beattie said.

Beattie said Greenberg began describing SICO to him at the dinner.

“I was just puzzled by what he was telling me,” Beattie said. “I didn’t know much about it. It wasn’t a substantive discussion about the plan.”

The case is Starr International Co. v. American International Group Inc., 05-cv-06283, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Patricia Hurtado in U.S. District Court in New York at pathurtado@bloomberg.net; David Voreacos in U.S. District Court in New York at dvoreacos@bloomberg.net.

Last Updated: June 18, 2009 17:35 EDT