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Greenberg faces trial over fraud charges

Appeals court rules against former AIG boss

Greenberg faces trial over fraud charges

A decision by New York's highest court allowing the state to continue to pursue fraud charges against Maurice R. Greenberg and another former AIG executive is far from the last word in the decade-long case.

The state of New York alleges that Mr. Greenberg, former CEO of American International Group Inc., and former AIG Chief Financial Officer Howard Smith committed fraud in relation to a series of transactions between the insurer and General Re Corp., a unit of Berkshire Hathaway Inc.

The state claims that AIG used a sham reinsurance transaction more than a decade ago to inflate AIG's loss reserves. In a separate case related to the deals, several former Gen Re and AIG executives were found guilty of fraud but later settled the charges, while admitting that aspects of the transaction were fraudulent, after the original convictions were overturned due to an error by the trial judge.

Controversy surrounding the deals led to Mr. Greenberg's resignation from AIG in 2005. Shortly after he resigned, then-New York Attorney General Eliot Spitzer sued Mr. Greenberg for alleged fraud. Mr. Greenberg sought to have the claims dismissed, and the state dropped some of them but continued to press for the matter to go to trial.

The New York Court of Appeals ruled last week that the matter should go forward under state law, saying that “the Attorney General's claims against defendants withstand summary judgment and, therefore, should proceed to trial.”

“It's again rebuffing attempts by Hank Greenberg and Howard Smith to get the charges dropped” in their entirety, said Anthony Sabino, a practicing attorney and a professor at the St. John's University Peter J. Tobin College of Business in New York.

Mr. Sabino said that part of Mr. Greenberg's and Mr. Smith's defense is that they settled with the federal government, “but New York's entitled to pursue its own state law remedies under what's called the Martin Act,” which deals with allegations of fraud and wrongdoing in the financial industry broadly, he said.

“Now it's going back to lower court in New York,” said Mr. Sabino “This will no doubt be a long and complex trial after which, when there is verdict or judgment, it will begin yet another long uphill climb in the appellate courts.”

Greenberg's response

Shortly after the ruling was released, the law firm representing Mr. Greenberg, New York-based Boies, Schiller & Flexner L.L.P., issued an emailed statement:

“Mr. Greenberg respectfully disagrees with the court's decision, which inexplicably fails to address at all the principal argument raised on appeal — that under the court's own prior ruling in People v. Applied Card the relief sought by the attorney general is barred by settlements already entered into by Mr. Greenberg with AIG and the (U.S. Securities and Exchange Commission).”

According to the statement, “Mr. Greenberg is considering his options in light of this decision, which he believes flies in the face of both the court's own precedent and federal law.”

New York Attorney General Eric T. Schneiderman welcomed the ruling.

“Since 2005, this office has sought to hold Mr. Greenberg and Mr. Smith responsible for financial fraud and manipulation during their tenure at AIG,” he said in a statement. The decision will allow New York state to seek to recover bonuses the defendants earned while committing their alleged fraud, which caused losses for AIG shareholders, Mr. Schneiderman said.

“Nobody — no matter how rich or powerful — is allowed to commit fraud in our state, and we are very pleased the people of New York will finally have a chance to obtain justice at trial,” he said.