Ex-AIG Chief Greenberg Faces `Devastating' Case, Judge Says

New York’s case against American International Group Inc. ex-Chief Executive Officer Maurice “Hank” Greenberg is “devastating,” State Supreme Court Justice Charles Ramos said yesterday during a court hearing.

The judge is presiding over a lawsuit filed in 2005 by then-New York Attorney General Eliot Spitzer that accused Greenberg, 84, and former AIG Chief Financial Officer Howard Smith of using sham reinsurance deals and other transactions to distort the reported financial condition of the company. The judge didn’t issue a ruling yesterday.

Assistant Attorney General David Ellenhorn yesterday told Ramos Greenberg had directed or participated in fraudulent transactions. David Boies, a lawyer for Greenberg, said the state had “failed” and was relying on hearsay and inadmissible evidence from a federal case in which Greenberg wasn’t a defendant.

“I can see big problems with establishing a defense” to the state’s claims about securities fraud, Ramos told Boies during the hearing. “Mr. Ellenhorn has put together a devastating case, a strong case, and we both know it.”

Greenberg’s lawyers and attorneys from New York Attorney General Andrew Cuomo’s office each asked the Manhattan judge to grant their motions for summary judgment, or a decision before trial. Greenberg has asked, in the alternative, for Ramos to dismiss the lawsuit.

Ellenhorn argued Greenberg should be held liable for a fraudulent transaction involving AIG and General Re Corp., the reinsurer owned by Warren Buffett’s Berkshire Hathaway Inc.

Greenberg ‘Legendary’

“Hank Greenberg is legendary for his control, for his micro-managing,” Ellenhorn said. “Mr. Greenberg is in charge of this transaction, it’s his baby, his deal. He created it.”

When Greenberg was asked about the deal in pretrial interviews with the state last month, he answered “I don’t remember” or “I don’t know” about details concerning the transaction, Ellenhorn said.

“Here is a man who drills down to deals so deep he could have gotten down to the Arctic ice and yet he would have us believe that he doesn’t know about the deal?” Ellenhorn said.

“It’s ridiculous, it’s preposterous. It’s embarrassing for him to say he didn’t know such a thing.”

Greenberg has said in court filings he relied on professional advisers for transactions that are the basis of claims in Spitzer’s lawsuit.

Greenberg, who wasn’t in court yesterday, has accused Spitzer of using the case to promote his political career, according to a court filing. Spitzer resigned as governor in March 2008 after he was identified as a client of a high-priced prostitution ring.

‘Disputed’ Evidence

Boies, of Boies, Schiller & Flexner LLP, yesterday argued that Cuomo’s office relies upon “disputed and inadmissible evidence.”

“The New York Attorney General’s Office fails to establish the essential elements of its case,” he said.

Robert Morvillo, another lawyer for Greenberg, told Ramos that if the claims against Greenberg aren’t thrown out, they should go to a jury.

“Mr. Greenberg in his depositions denied any knowledge of any riskless transaction, he’s done it under oath and in detail, page, after page, after page of deposition pages,” Morvillo said. “Any argument that Mr. Greenberg initiated a sham transaction is totally belied by the proof here.”

“There is no independent non-hearsay evidence that demonstrates Mr. Greenberg was a member of a conspiracy,” Morvillo said.

AIG Restated Earnings

AIG, once the world’s largest insurer, ousted Greenberg in March 2005, two months before Spitzer sued him and Smith, alleging they misled regulators and investors. Spitzer dropped portions of the suit in 2006 that included four allegations tied to his investigation. Greenberg seeks to dismiss the claims that are still pending without a trial.

AIG, based in New York, eventually restated its earnings, lowering them by $3.4 billion, and agreed to pay $1.64 billion to settle claims by Spitzer and other regulators, without admitting or denying wrongdoing. In court papers filed in July 2006, Greenberg argued AIG’s 2005 restatement was unnecessary and designed to force him to retire.

Gen Re Transaction

Como’s office has argued it should win a partial summary judgment because “an adverse inference” should be drawn from Mr. Greenberg’s citing of his constitutional right against self- incrimination.

Both Greenberg and Smith “knew, and certainly easily could have known, that the Gen Re deal involved no risk,” according to Cuomo’s filing. “At the very least, they had absolutely no basis for concluding that there was risk.”

Greenberg and Smith also certified financial statements for four years that reflected the $500 million in reserves, Ellenhorn said yesterday.

Lawyers for the state said in court papers that when Greenberg testified in a pretrial interview in March that he had no role in the Gen Re reinsurance transaction, his testimony was “both incredible and irrelevant.”

Greenberg in 2008 asserted his Fifth Amendment right against self-incrimination in pretrial testimony in the civil fraud suit when questioned about Gen Re, citing the threat of criminal prosecution.

He agreed to be questioned under oath by the state last month, saying in court papers that the statute of limitations had expired.

Greenberg said he told the state’s lawyers in his recent deposition that “he asked for a legitimate reinsurance transaction from Gen Re, and his testimony is corroborated by substantial independent evidence,” according to his filing.

Federal Trial

Four former Gen Re executives, including ex-CEO Ronald Ferguson, and one from AIG, Christian Milton, were convicted in 2008 at a fraud trial focusing on the transaction. The fraud cost AIG shareholders $544 million to $597 million, according to the ruling by a federal judge in Hartford, Connecticut. Two other Gen Re executives pleaded guilty.

Greenberg agreed in August to pay $15 million and Smith consented to pay $1.5 million to resolve a suit brought by the U.S. Securities and Exchange Commission.

The transaction preceded the 2008 financial crisis at AIG, which got a bailout of $182.3 billion from U.S. taxpayers.

AIG said on Oct. 26, 2000, that premiums increased in the third quarter of that year as loss reserves for claims fell. Five days later, Greenberg asked Ferguson to help with AIG’s reserves, a key measure of an insurer’s health.

Sham Transfers

AIG and Gen Re, based in Stamford, Connecticut, engaged in sham transfers of policies and premiums between them that allowed AIG to inflate its loss reserves by $500 million, the government said in that federal fraud trial. Prosecutors said the transaction was phony because it involved no transfer of risk between the two companies.

Ramos closely questioned Boies about those convictions yesterday after Boies argued that the Gen Re transaction wasn’t relevant to the state’s suit against Greenberg.

“This is what troubles me,” Ramos said. “I don’t think anyone contests that the Gen Re transaction was a fraud. Four people went to prison for it, Gen Re paid $92 million to settle claims, and we have Mr. Greenberg’s testimony that he didn’t discuss the deal with Mr. Ferguson, the CEO of Gen Re. Why can’t Mr. Ellenhorn rest on that?”

“Re the four people going to jail,” Boies said, “That’s not this case, that’s not relevant, and that case is still being appealed.”

The case is New York v. Maurice Greenberg, 401720/2005, New York Supreme Court, New York County (Manhattan).

To contact the reporter on this story: Patricia Hurtado in New York State Supreme Court at pathurtado@bloomberg.net

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