NEW YORK—A judge last week described New York's case against former American International Group Inc. Chairman and CEO Maurice R. Greenberg as “devastating,” but legal experts say it is far from reaching trial.

New York State Supreme Court Justice Charles E. Ramos, who is presiding over the lawsuit filed in 2005 by then-New York Attorney General Eliot Spitzer, heard oral arguments on motions in the case, which is in discovery phase.

Prosecutors have “put together a devastating case, a strong case, and we both know it,” Judge Ramos told David Boies, a partner with New York-based Boies, Schiller & Flexner L.L.P. and one of Mr. Greenberg's attorneys. “I see big problems with establishing a defense,” the judge said.

Judge Ramos, however, has yet to decide whether to grant summary judgment in favor of the attorney general's office or Mr. Greenberg, who has asked that the case be dismissed.

The suit accused Mr. Greenberg and former AIG Chief Financial Officer Howard Smith of using a sham 2001 reinsurance deal between AIG and General Re Corp. to hide losses and inflate AIG's reserves in an effort to mislead Wall Street analysts.

In 2008, federal prosecutors obtained five convictions in the transaction, including former Gen Re CEO Ronald Ferguson and former AIG Vp of Reinsurance Christian Milton. Prosecutors said the bogus deal boosted AIG's loss reserves by about $500 million without transferring any risk.

During the trial, federal prosecutors said Mr. Greenberg—who they said initiated the transaction with a phone call to Mr. Ferguson—was an unindicted co-conspirator.

In the state case, prosecutors are seeking to hold Messrs. Greenberg and Smith liable under the Martin Act, New York state's securities law.

“It is indisputable that (Messrs.) Greenberg and Smith masterminded, negotiated and implemented” the fraudulent transaction, Senior Trial Counsel David Ellenhorn said during the hearing.

The men, who both left AIG in 2005 amid investigations into AIG's accounting practices, repeatedly have denied any wrongdoing. Mr. Greenberg—who testified about the Gen Re deal last month after his attorneys determined the statute of limitations for criminal action had expired—said in court filings that he relied on professional advisers for the transactions that are the basis of the suit.

Attorneys for Mr. Greenberg, who was not at the hearing, argued that prosecutors are relying on “hearsay and inadmissible evidence” from other cases, including the federal trial, about conversations Mr. Greenberg had with Mr. Ferguson that purportedly sealed the deal.

Meanwhile, prosecutors argued that Mr. Greenberg, who is “legendary for his control, for his micromanagement,” did know about the fraud.

“This was his baby; he created it,” Mr. Ellenhorn said. For Mr. Greenberg to say he didn't know the details of the transaction is “preposterous,” he said.

Mr. Greenberg placed the call to Mr. Ferguson “to ask for a legitimate reinsurance transaction,” said Robert Morvillo, another attorney for Mr. Greenberg. The two then passed the deal to their subordinates to carry out. “There is no independent nonhearsay evidence that demonstrates Mr. Greenberg was a member of a conspiracy,” he said.

Prosecutors said the defendants “knew and certainly easily could have known that the Gen Re deal involved no risk.” The duo certified financial statements for four years that reflected the $500 million in reserves, Mr. Ellenhorn said.

Mr. Smith, as the person responsible for booking reserves, was a “point person” on the deal, prosecutors said.

Among Mr. Greenberg's written responses to the allegations, he accused Mr. Spitzer of bringing the suit to promote his political career.

Reacting to the arguments last week, legal experts say Judge Ramos' comments likely would buoy prosecutors.

“The state's not backing off yet,” said Michael Cornacchia, a New York criminal defense attorney and former assistant U.S. attorney who is not involved in the case. “They are likely to be encouraged by his remarks on the strength of their case. It should fuel their determination to go forward.”

Judge Ramos did not indicate when he would rule on the various motions, but did say he would take his time.

Experts say it could take three to four months to rule on the summary judgment requests, which then could be appealed and delay the case further.

However, depending on the ruling, “the sides could move closer to a settlement agreement,” said Peter Henning, a professor at Wayne State University Law School. “Nobody wants to go to trial; it's just too difficult to predict what a jury will do,” he said.

In 2006, AIG agreed to pay $1.64 billion to settle fraud charges related to its practices with state and federal authorities. This year, Gen Re agreed to pay $92.2 million to settle U.S. Securities and Exchange Commission charges that it entered into fraudulent reinsurance deals with AIG and Prudential Financial Inc.

Last year, Messrs. Greenberg and Smith paid $15 million and $1.5 million, respectively, to settle civil charges with SEC related to the Gen Re deal, among other accounting transactions.