AIG: Get Ready For Starr Wars

The fight over a secretive entity that wields enormous influence over AIG is just starting

There's probably never been anything like this in U.S. corporate history: a titanic legal struggle pitting the interests of corporate governance and public shareholders against those of a private company and the rights of its owners. At the pinnacle of his power, Maurice "Hank" Greenberg didn't just control American International Group Inc., the insurance and financial services giant. He also sat atop Starr International Co. (SICO), the tightly controlled private company that, in a complex link to AIG, doled out compensation to top AIG execs. It controls 12% of AIG shares, worth some $17 billion.

Now, as the Securities & Exchange Commission and New York Attorney General Eliot Spitzer probe deeper into AIG's accounting practices, a bizarre power struggle is emerging. Spitzer wants broad access to the records of SICO, arguing that its operations were so intertwined with those of AIG that they were all but indistinguishable. And although Greenberg moved to negotiate some access to disputed SICO documents on Apr. 6, according to a source close to the company, an intense fight could still loom over investigators' jurisdiction -- and, ultimately, over control of the assets in SICO. Spitzer is marching into battle under the banner of protecting public shareholders; Greenberg is likely to defend his interests on the grounds that SICO is a private company.


Greenberg, who was forced out of AIG as CEO and chairman on Mar. 14 and Mar. 28, respectively, set the stage for a showdown with regulators on Mar. 25 when his lawyers removed 80 boxes of SICO documents in the middle of the night from Bermuda offices shared by AIG and SICO. Greenberg's lawyer, David Boies, later defended the move as an attempt to "protect" the documents from destruction. But the housecleaning prompted a furious Spitzer to threaten AIG with obstruction of justice charges -- a threat Greenberg's resignation as chairman and a pledge of company cooperation have stopped for now. Yet days later, Greenberg led a move to oust current AIG executives from the SICO board without notifying regulators, further enraging Spitzer. "I guess he figures, 'What do I have left at this point? I'm going to fight,"' a source close to the probe says of Greenberg.

Overnight what had functioned as a sort of public-private hybrid was now openly split. Already chairman of SICO, Greenberg appears to be trying to consolidate his control over the privately held entity. On the other side, AIG's board is striving to modernize and transform the insurer into an upstanding member of its industry. One source close to the company says the AIG board will challenge any efforts by Greenberg to walk away with control of SICO assets. Ultimately board members believe the arrangement between SICO and AIG was designed to benefit AIG over the long term, not a select group of owners. Boies did not return repeated calls for comment.

As the dust settles, a legal minefield is coming into view. Here's a look at the wrangling ahead:

Though Greenberg is now negotiating with investigators and AIG over access to the 80 boxes under dispute, questions still remain. The most pressing: How much jurisdiction does Spitzer's office or the SEC have over privately held SICO? A source in Spitzer's office argues that under the state's tough securities law, "we have to prove that they were doing business in New York and that their actions could represent a fraud." Spitzer could up the ante by again threatening obstruction of justice charges or targeting AIG's senior management, some of whom also served as SICO directors.

Will the strategy work? Most legal experts believe Spitzer can claim oversight, because of the many links between the companies and because SICO has a New York presence. But former federal prosecutor Philip H. Hilder, for one, argues that jurisdiction is open to debate. Says Hilder: "The company is going to claim there's an independent relationship and hide behind that."

As the tangle of interlocking companies gets sorted out, the stakes are enormous for Greenberg. Retaining control of SICO would give him incredible power. He could influence decisions simply by threatening to sell AIG shares or get an ally appointed to the board. But like the board, some AIG shareholders are irked that Greenberg might walk away with control of the 12% AIG stake. Says one institutional investor: "It doesn't seem right that it would revert to Greenberg and the privileged few." Ultimately, resolution of the dispute will depend on unwinding the complex, decades-old document trail linking SICO to AIG.

If Greenberg continues to play it tough, his strategy could backfire. At the moment, nobody is quite sure how the drama surrounding SICO will unfold. As Greenberg contemplates his next move, it's clear that the 79-year-old insurance icon isn't going away anytime soon. Just as troubling for Greenberg, neither is Eliot Spitzer.

By Diane Brady and Nanette Byrnes, with Marcia Vickers in New York

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