A New York appeals court on Tuesday gave former American International Group Inc Chief Executive Maurice "Hank" Greenberg a partial victory in the state's fraud lawsuit against him over two suspect reinsurance transactions, but cleared the way for the case to go to trial.
The appeals panel said a lower court judge was premature to hold Greenberg and former AIG Chief Financial Officer Howard Smith liable in October 2010 for damages over an auto warranty insurance transaction with Capco Reinsurance Co, which the state called a sham that helped AIG hide more $200 million of losses.
However, the panel said New York State Supreme Court Justice Charles Ramos also correctly rejected the defendants' bid to dismiss claims over a better-known transaction with reinsurer General Re Corp. The state said this transaction helped AIG inflate loss reserves by $500 million without transferring risk.
General Re is a unit of Warren Buffett's Berkshire Hathaway Inc. Buffett was not accused of wrongdoing.
The unsigned 4-1 decision is the latest twist in a case dating from 2005, when then-New York Attorney General Eliot Spitzer accused Greenberg and Smith of helping to engineer the transactions to hide losses at AIG, which had been the largest U.S. insurer by market value.
These transactions led AIG to restate its 2001 to 2004 financial statements. Spitzer's successors Andrew Cuomo and Eric Schneiderman have also pursued the civil case, which invokes the Martin Act, a powerful state law to combat securities fraud.
Greenberg and Smith plan to ask the state's highest court, the Court of Appeals, to dismiss the entire case, according to a joint statement from Greenberg's lawyers David Boies and John Gardiner and Smith's lawyer Vincent Sama.
The attorney general "failed to develop and present any proper, admissible evidence to support its allegations against Mr. Greenberg and Mr. Smith," Boies and Gardiner said.
James Freedland, a spokesman for Schneiderman, said: "We are pleased that the court has paved the way for a trial to hold the defendants accountable for perpetrating a major reinsurance scheme to defraud investors."
The appeals panel said there are "triable issues of fact as to whether defendants knew of, or participated in the fraudulent aspects of the Gen Re and Capco schemes, given the nature and degree of their personal involvement in both of the challenged transactions, as well as defendants' responsibilities within the corporation."
It also said a definitive ruling on Capco was premature in light of the defendants' sworn denials that they had committed fraud, and their testimony that an AIG senior vice president had assured them that the transaction was proper.
Justice James Catterson dissented. He said that federal law preempted the state's case, and that even if it did not the General Re claims should be thrown out.
Greenberg left AIG in March 2005 after nearly four decades at the helm. AIG in 2006 paid $1.64 billion to settle federal and state probes into its business practices, and in July 2010 agreed to pay $725 million to settle a shareholder lawsuit accusing it of accounting fraud and stock price manipulation.
AIG's transaction with General Re led to five convictions and two guilty pleas of former officials of those companies. A federal appeals court threw out those convictions last August, and a new trial has been scheduled for January 2013.
The U.S. government still owns 61 percent of AIG following $182.3 billion of taxpayer-funded bailouts in 2008 and 2009.
Greenberg's company Starr International Co, once AIG's largest shareholder, is suing the government for $25 billion, calling the bailouts unconstitutional.