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AIG Loses Starr Advisory Verdict; Judge to Rule Next

Posted on 08 Jul 2009

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A federal jury rejected claims by American International Group Inc. (AIG) that a private company run by its former chief executive officer, Maurice "Hank" Greenberg, looted $4.3 billion in stock from the insurer.

Greenberg’s firm, Starr International Co., or SICO, didn’t breach a trust to hold AIG shares solely for an AIG deferred- compensation plan, a jury in federal court in New York ruled today. The panel also rejected AIG’s claim that SICO illegally converted $4.3 billion of those shares after Greenberg’s ouster in March 2005 amid an accounting scandal.

“SICO’s case was very strong and well documented,” jury forewoman Karen Jaroneski, 45, said in an interview. “The AIG case was weak and unsubstantiated. AIG’s burden of proof was insurmountable.”

U.S. District Judge Jed Rakoff may reverse the verdict regarding breach of trust, which he deemed advisory. He promised to make his own ruling on that issue by August. He said he wouldn’t reverse the jury’s finding that SICO didn’t illegally take AIG’s shares.

“This is not the final judgment” on breach of trust, Rakoff said after the verdict was read. “There are still the other shoes that need to drop, so to speak.”

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

‘Unequivocal Evidence’

The jury deliberated for 5 1/2 hours before deciding in SICO’s favor. Rakoff had ruled that because the case centered on an oral trust, AIG had to prove its breach of trust claim by “unequivocal evidence,” a higher legal standard than the usual preponderance of evidence.

“We are disappointed with the jury’s verdict and we await the court’s final ruling,” said Mark Herr, an AIG spokesman. “We continue to believe in the merits of our claim.”

SICO attorney David Boies said he was “very pleased” with the verdict.

“The quickness of this decision reflects the simplicity of the case,” Boies said.

AIG claimed an oral trust was created in 1970 solely for AIG’s benefit, and SICO breached it in 2005 to retaliate for Greenberg’s firing. Greenberg, 84, testified for seven days and denied the trust claimed by AIG, which he built into the world’s largest insurer before its near-collapse last year.

‘No Document’

“This was a trust that AIG was alleging no one had ever heard of, had ever seen, no document mentioned it,” Boies said after the verdict. “I think the jury recognized that. I would be hopeful that the judge would see it the same way the jury does.”

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.

The panel of seven women and one man rejected arguments by AIG attorney Ted Wells that Greenberg lied repeatedly in testimony and that SICO fabricated documents. Wells said Greenberg spoke the truth in videotaped speeches to employees, including one when he said SICO held shares in trust for their retirement for “a couple of hundred years.”

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

‘Audacity of Arrogance’

“These are not small lies, these are big lies,” Wells said in his summation. 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.”

In an interview, Boies said Greenberg was “very pleased” with the verdict. “I thin

k he was particularly pleased his testimony had been vindicated,” Boies said. “The AIG side really made this a personal attack on his character. I think he was particularly pleased that the jury had both so quickly and so completely rejected attacks.”

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 those 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. A day after the litigation began, Greenberg ordered the transfer of AIG stock certificates from New York to Bermuda, Wells said.

No Disclosure

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

In 35 years of detailed disclosures, AIG never mentioned the trust it claimed, Boies said.

“That’s got to be conclusive,” he said. “You don’t have a multibillion trust that exists for 35 years and nobody ever knows about it until lawyers decide to make a claim.”