Greenberg Suit Against U.S. Over AIG to Proceed in Court

Maurice “Hank” Greenberg, the former chief executive officer at American International Group Inc., won a judge’s approval to proceed with a $25 billion lawsuit against the U.S. in the Court of Federal Claims.

Greenberg’s Starr International Co. sued the government on Nov. 21, calling the public assumption of 80 percent of AIG stock in September 2008 a violation of the constitutional rights of shareholders to due process and equal protection of the law.

U.S. Claims Judge Thomas Wheeler yesterday rejected a U.S. request to dismiss the lawsuit, saying in a 49-page opinion that he needed more information on the terms of the company’s 2008 bailout in order to determine whether the U.S. took property from AIG shareholders without just compensation.

“Whether AIG or the government caused or contributed to the dire financial situation of AIG in September 2008, and whether AIG was the particular intended beneficiary of the loan agreement, are factual issues to be considered at a later stage,” Wheeler said. “Given the existing factual disputes on these issues, the court denies the government’s request to dismiss Starr’s takings claim on the basis that the loan agreement was a rescue of AIG from the consequences of its own business risks.”

Fairness Opinions

Starr International, AIG’s largest shareholder at the time of the bailout, claimed that while the U.S. got so-called fairness opinions from banks on exchanging two groups of preferred stock, it failed to get such an opinion on exchanging a block of preferred stock for 562.9 million shares “for virtually nothing,” according to the complaint.

AIG was added as a “nominal” defendant in the case, meaning the company would be bound by any judgment. AIG’s lawyer, Joseph Allerhand of Weil Gotshal & Manges LLP in New York, told Wheeler at a June 1 hearing that the insurer would “weigh in” once the judge decides whether the case will move forward.

Charles Miller, a Justice Department spokesman, declined to comment on the ruling. Alison Preece, a spokeswoman for the law firm representing Starr International, didn’t immediately respond to an e-mail message seeking comment on the ruling after normal business hours.

Starr International alleges the government paid $500,000 for a stake in the company that was worth $25 billion.

Lehman Brothers

According to the complaint, the day Lehman Brothers Holdings Inc. filed for bankruptcy on Sept. 15, 2008, the government brokered talks among several banks. The meeting was aimed at arranging private financing for a loan to address AIG’s liquidity problems.

Starr International officials asked to attend the meeting and were denied, according to the complaint.

The claims court handles cases against the federal government for money, including allegations that the U.S. took private property for public use without just compensation in violation of the Fifth Amendment to the U.S. Constitution.

Once the government gained control of the insurer, it used about $32.5 billion of AIG’s assets to offer so-called “backdoor bailouts” to financial institutions, according to Starr International’s lawsuit.

The Justice Department said in court papers that AIG agreed to the bailout and Starr International shouldn’t be allowed in a court case to “rewrite” the insurer’s rescue agreement and make American taxpayers pay $25 billion more.

The case is Starr International Co. v. U.S., 1:11-cv-00779, U.S. Court of Federal Claims (Washington).

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