Greenberg’s Starr Sues U.S. for $25 Billion on AIG Bailout

Starr International Co. accused the U.S. government of using the bailout of American International Group Inc. (AIG) to channel funds to AIG’s trading partners, calling the move a seizure that violated the Constitution.

Starr, which was a major AIG shareholder and is headed by Hank Greenberg, the insurer’s founder, claims the government destroyed the value of the company’s stock and took AIG’s property without due process or fair compensation, according to a lawsuit filed today in the U.S. Court of Federal Claims in Washington. Starr seeks $25 billion in damages.

“After obtaining control of AIG, the government used AIG as a vehicle to funnel funds to other institutions and to provide ‘back-door bailouts’ on disparate terms far more favorable to those institutions, including foreign companies,” Starr alleges in its complaint.

Starr filed a related shareholder lawsuit today in U.S. District Court in Manhattan, claiming the Federal Reserve Bank of New York and AIG forced or induced AIG directors and officers to violate their duties to Starr International and AIG.

Tim Massad, assistant secretary for financial stability at the Treasury Department, said in an e-mailed statement that the department is reviewing the lawsuit and expects to defend its actions.

‘Prevent a Meltdown’

“It is important to remember that the government provided assistance to AIG -- and stopped it from collapsing -- in order to prevent a meltdown of the entire global financial system,” Massad said. “Our actions were necessary, legal and constitutional.”

Leilani Brown, a spokeswoman for the Starr Cos. didn’t respond to telephone messages seeking comment on the lawsuit. Mark Herr, a spokesman for AIG, declined to comment.

Jack Gutt, a spokesman for the Federal Reserve Bank of New York, didn’t immediately respond to an e-mail seeking comment.

AIG has sold more than $50 billion in assets, including non-U.S. life insurers, a consumer lender and an asset manager, to repay the government for the 2008 bailout. Treasury sold 200 million shares of AIG at $29 a share in May, cutting its stake in the company from 92 percent.

AIG will be part-owned by the U.S. Treasury Department for “a very long time,” Greenberg, who led the firm for about four decades though 2005, said Nov. 10 in an interview. Greenberg is chairman and chief executive officer of C.V. Starr & Co.

Transactions

Beginning in 2008 and continuing until at least January 2011, the federal government imposed a series of transactions that resulted in depriving AIG and its shareholders of tens of billions of dollars, the lawsuits claim.

Starr International said the September 2008 transaction, in which the Federal Reserve provided AIG with an $85 billion line of credit in exchange for the company giving up 80 percent of its equity, was “discriminatory, unprecedented, and inconsistent” with assistance offered to other firms at the time.

“The government’s actions were ostensibly designed to protect the Unites States economy and rescue the country’s financial system,” Starr said in the federal claims lawsuit. “Although this might be a laudable goal, as a matter of basic law, the ends could not and did not justify the unlawful means employed by the government to achieve that goal.”

David Boies, a partner at Boies, Schiller & Flexner LLP in New York, represents Starr in both cases.

Delaware Law

The Washington lawsuit claims the government violated Delaware law, a consent order of the Delaware court, representations made in securities filings, and provisions of the issuance of preferred stock to the government.

Thomas Merrill, a professor at Columbia Law School who specializes in property and constitutional law, said if the court finds for Starr, the case could resemble the U.S. Supreme Court decision on President Harry Truman’s seizure of steel mills during the Korean War. The high court in 1952 found the taking to be unconstitutional.

The federal claims case is Starr International Co. v. U.S., 11-779, U.S. Court of Federal Claims (Washington). The Federal Reserve case is Starr International Co. v. Federal Reserve Bank of New York, 11-8422, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Tom Schoenberg in Washington at tschoenberg@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.

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