Sept. 1 (Bloomberg) -- A judge rejected claims by American International Group Inc. that a company run by its former chief executive officer, Maurice “Hank” Greenberg, breached its duty to the insurer by selling $4.3 billion of AIG stock.

U.S. District Judge Jed Rakoff in New York ruled that Greenberg’s closely held firm, Starr International Co., or SICO, didn’t violate a duty to hold AIG shares after 2005. Rakoff upheld a jury’s July 7 verdict finding no such breach. In his ruling, Rakoff didn’t address the jury’s rejection of AIG’s claims that SICO looted $4.3 billion in stock from the insurer.

During a three-week trial, AIG claimed an oral trust was created in 1970 solely for the benefit of AIG and its deferred- compensation program, and SICO breached that trust in 2005 to retaliate for Greenberg’s resignation amid an accounting scandal.

“The law will not recognize such an oral trust unless the evidence of its creation is unequivocal,” Rakoff wrote in a 59- page ruling. “This is a burden that AIG has not come close to shouldering.”

Rakoff previously ruled that jurors’ finding on the breach- of-trust claim was advisory. In yesterday’s ruling, Rakoff said because the panel deliberated less than a day to reach a verdict, “it appears the case was not, in the jury’s eyes, a close one.”

‘Just Too Slippery’

“‘Put it in writing’ is the law’s way of saying ‘get serious,’” Rakoff wrote in his decision. “In many circumstances, oral commitments are just too slippery to be enforced.”

Mark Herr, an AIG spokesman, declined to comment.

After Rakoff’s ruling, Greenberg, AIG and former AIG Chief Financial Officer Howard Smith jointly announced that they had agreed to binding arbitration to resolve some other legal disputes. Such resolutions in a private setting would be “more expeditious and cost-effective,” they said yesterday in a statement.

The cases immediately subject to arbitration are in Delaware Chancery Court and federal court in Manhattan. An arbitrator will begin hearing the cases by Oct. 15 and finish by March 31, according to the statement.

At the trial before Rakoff, Greenberg testified that SICO donated AIG shares through its generosity during a 1970 corporate reorganization, that it could use them as it saw fit and that they ultimately benefited charity, not AIG.

No AIG employee testified about the existence of the alleged trust, SICO attorney David Boies argued at trial. AIG never disclosed the existence of the trust to shareholders, auditors, attorneys or regulators. The alleged trust, he said, was a creation of AIG lawyers after SICO sued the company in 2005 and AIG filed a countersuit.

Arguments Rejected

Rakoff joined the panel of seven women and one man in rejecting arguments by AIG attorney Ted Wells that Greenberg lied repeatedly in testimony and that SICO fabricated documents.

“It was the court’s distinct impression, based on the jurors’ ‘body language,’ that they did not credit certain portions of Greenberg’s testimony; but the jury found in SICO’s favor nonetheless,” Rakoff wrote.

While Greenberg’s “testimony and the truth did not always converge,” his inaccuracies weren’t as important as AIG argued, Rakoff wrote. Greenberg’s inaccuracies came from confusion at times and prevarication at other times, the judge said.

‘Found Persuasive’

“At still other times, his testimony was, in the court’s view, entirely truthful,” Rakoff wrote. “In the end, however, it was the other evidence, and not Greenberg’s testimony, that this court found persuasive in reaching its verdict.”

The ruling “dismisses AIG’s only remaining claim against Starr International,” Boies said in a statement. “Another federal judge had already dismissed AIG’s other claims in June 2008.”

AIG had said it would use proceeds of any judgment it recovered to help repay a $182.5 billion bailout package it received from the federal government.

At the trial, Wells said Greenberg spoke the truth in videotaped speeches to employees, including one in which he said SICO held enough shares in trust to fund their retirement for “a couple of hundred years.”

On the witness stand, Greenberg said he was exaggerating, was trying to build morale and wasn’t speaking in a legal sense. Wells said Greenberg lied on that and many other points.

‘Big Lies’

“These are not small lies, these are big lies,” Wells told jurors. Greenberg, he said, displayed “a certain arrogance, almost, and I can just say anything. I can walk through the raindrops and not be touched. A certain arrogance, almost an audacity of arrogance.”

SICO got shares initially valued at $110 million that later grew to more than $20 billion in value. Over time, SICO used 7 percent of its assets to fund a series of two-year deferred- compensation plans. AIG claims SICO sold $4.3 billion in shares after 2005 and used the proceeds to fund investments in China, Russia and elsewhere.

Wells argued that Greenberg retaliated against AIG after his termination by ousting AIG employees on the SICO board, revoking the deferred-compensation plan and rescinding previous written commitments. Greenberg testified that, a day after the litigation began, he ordered that AIG stock certificates be taken from New York to Bermuda.

Boies said Greenberg and Starr plan “to continue to invest in Russia, China, the U.S. and Europe,” putting money “wherever there are investment opportunities open.”

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: David Voreacos in U.S. District Court in New York at dvoreacos@bloomberg.net; Patricia Hurtado in U.S. District Court in New York at pathurtado@bloomberg.net.

Last Updated: September 1, 2009 00:01 EDT