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Spitzer ditches some allegations against Greenberg

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Spitzer ditches some allegations against Greenberg

NEW YORK—The public battle between Maurice R. Greenberg and New York Attorney General Eliot Spitzer heated up last week after Mr. Spitzer filed an amended fraud complaint dropping a handful of allegations against the former American International Group Inc. chairman.

The amended complaint, filed in New York State Supreme Court, continues to charge that Mr. Greenberg and former AIG Chief Financial Officer Howard I. Smith misled investors with sham transactions that artificially boosted AIG's reserves and disguised underwriting losses.

But the suit eliminates previous allegations that the two executives guided AIG schemes to avoid state workers compensation premium taxes and to conceal AIG's control of several offshore entities, and it drops a demand for punitive damages.

The amended complaint also removes AIG itself as a defendant. The insurer agreed to pay $1.6 billion in February to settle similar charges brought by Mr. Spitzer and the U.S. Securities and Exchange Commission (BI, Feb 13).

Views on changes differ

Representatives for Mr. Greenberg issued a statement Wednesday, calling the dropped allegations "the most explosive and financially significant claims in the Attorney General's suit."

"We appreciate that the Attorney General has kept an open mind, considered the facts we have presented, and has now decided to drop these key claims from the complaint," David Boies, Mr. Greenberg's attorney, said in a statement. "We are confident that when all the facts are out, the remaining claims...will also be dismissed."

"The things dropped out of the case had a much greater (financial) impact on AIG than the things left in," a spokesman for Mr. Greenberg added.

Mr. Smith's attorneys, Vincent A. Sama and Andrew M. Lawler, echoed the hope that the case will ultimately be dismissed.

But Mr. Spitzer's office fired back immediately.

David Brown IV, chief of the attorney general's investment protection bureau, replied in a statement that "the changes are housekeeping matters that will streamline the case...(and) have no bearing on the core of our claims against Mr. Greenberg."

"The claims at the center of this case, alleging that Mr. Greenberg and Mr. Smith cooked the books to make a company appear more sound, remain," a spokesman for Mr. Spitzer said.

Regarding the dropped workers comp-related claims, the spokesman added, "from our perspective there wasn't a whole lot of upside to litigating this" because AIG had already paid penalties for the issue as part of its settlement.

While lawyers for Messrs. Greenberg and Smith tried to depict the amended complaint as a concession by Mr. Spitzer, some legal observers say the new court filing indicates that the attorney general is not backing down.

'Down to business'

"I think it actually means he's ready to get down to business here," said Anthony M. Sabino, professor of law at the Peter J. Tobin College of Business at St. John's University in New York.

Paring the case down to its strongest elements makes sense, he added. "You basically bring your 'A' game to the table."

The Greenberg legal team's public relations tactic of trumpeting the dropped allegations, meanwhile, is both "bold and foolish," Mr. Sabino said.

On the one hand, it puts Mr. Spitzer publicly on notice that "he's in for a dogfight," and in a "perverse" way could set the stage for future settlement discussions, he explained. But it could also antagonize Mr. Spitzer and draw insurance industry attention to the fraud charges that are still pending.

The lawsuit Mr. Spitzer filed against Mr. Greenberg and Mr. Smith last week amends a complaint originally filed in May 2005. The amended suit reiterates several charges against the two executives, including that they orchestrated schemes to:

  • Inflate AIG's reserves in a sham $500 million loss portfolio deal with General Re Corp. that actually transferred no risk and that was concealed with false documentation.

  • Manipulate reserves further with so-called "topside" accounting adjustments to AIG financial reports.

  • Disguise underwriting losses on auto warranty and Brazilian life insurance business by turning them into investment losses in a complex series of transactions with offshore affiliates.

Mr. Greenberg's and Mr. Smith's motive in these deals was partly to preserve the value of their huge holdings in AIG stock: the value of Mr. Greenberg's holdings at one point rose or fell $65 million for every one dollar change in the insurer's share price, the suit charges.

The complaint, however, eliminates various claims raised in the original filing. These include allegations that the two executives directed schemes to misreport workers comp premiums as general or auto liability to avoid premium taxes and assessments; mislead regulators about AIG's control of offshore entities used in some of AIG's allegedly improper transactions; and disguise income from life insurance settlement business as surety premiums.

The original complaint included four counts: three violations of New York antifraud and securities statutes and one count of common law fraud.

The amended complaint drops the common law fraud count, as well as a demand for punitive damages.

The elimination of that count represents a gain for the defendants, said James M. Burns, a lawyer with Vorys, Sater, Seymour & Pease L.L.P. in Washington.

"There has been some real advantage gained by the dismissal of the common law fraud count, because the prospect of punitive damages is no longer there," Mr. Burns said. "There is a tangible reduction in exposure there."

Mr. Sabino suggested the change may relate to the dismissal of AIG as a defendant and the refocusing of the complaint on the two executives.

"Since AIG has cleaned up its act, there's no purpose to punitives," he said. "It's really not appropriate anymore."

Rupal Parekh contributed to this report.