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WILMINGTON, Del.American International Group Inc. last week sued its former Chairman and Chief Executive Officer Maurice R. Greenberg and former Chief Financial Officer Howard I. Smith for more than $1 billion for losses to the insurer stemming from their alleged wrongdoing.
The suit, which AIG took over from company shareholders, stems from a series of shareholder derivative actions that began in October 2004, following then-New York Attorney General Eliot Spitzer's bid-rigging lawsuit against Marsh & McLennan Cos. Inc., which cited AIG and other insurers as participating in the alleged wrongdoing. MMC and AIG have both settled related charges.
The shareholder suit was later amended to include other alleged wrongdoing on the former executives' watch, including flawed accounting practices and problematic finite reinsurance deals.
AIG decided to take over the case following a review by a special litigation committee, which "determined that it would be in the best interests of AIG and its shareholders for AIG to pursue these claims...rather than have them controlled by the plaintiffs bar," the company said.
The insurer last week filed an amended complaint in Delaware Chancery Court to become the sole plaintiff.
According to the suit, "Greenberg's and Smith's misconduct and wrongdoing...have had, and will continue to have, a series of deleterious effects on AIG."
The duo--who parted with New York-based AIG in March 2005 and are now top executives at former AIG affiliate company C.V. Starr & Co.--failed to fulfill their fiduciary obligations to AIG, the suit says.
As a result, the suit says, the company incurred hundreds of millions of dollars in expenses related to: an internal investigation into the company's accounting, restatement of financial statements for several years, and legal fees for regulatory investigations and class action lawsuits against the company (see box).
AIG seeks indemnification from Messrs. Greenberg and Smith in connection with claims "asserted against AIG by virtue of Greenberg's and Smith's misconduct and wrongdoing," and an award of damages "in excess of $1 billion," according to the suit.
Lawyers for Messrs. Greenberg and Smith say AIG's suit is without merit.
"These are old recycled allegations which were dismissed from other lawsuits," said Lee S. Wolosky, Mr. Greenberg's attorney and a partner at Boies Schiller & Flexner L.L.P. in New York.
"The allegations in the amended complaint really arise out of the Spitzer complaint in New York in 2005, many of which have been withdrawn from that case," said Vincent A. Sama, an attorney for Mr. Smith with the law firm Winston & Strawn L.L.P. in New York. It "seems a little inconsistent," Mr. Sama said.
Mr. Spitzer last year amended his May 2005 civil fraud suit against AIG and Messrs. Greenberg and Smith to drop a handful of allegations (BI, Sept. 11, 2006).
Mr. Spitzer's suit continues to charge that Messrs. Greenberg and Smith misled investors with sham transactions that artificially boosted AIG's reserves and disguised underwriting losses.
But the suit eliminated previous allegations that the two executives guided 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.
In addition, Mr. Spitzer's amended complaint removed AIG as a defendant; the insurer paid more than $1.6 billion to settle similar charges brought by Mr. Spitzer and the Securities and Exchange Commission (BI, Feb. 13, 2006).
"AIG's special litigation committee investigated these matters for months, if not years, and could find no new allegations to advance. The largest restatement items affecting net income are not even the subject of this lawsuit," said Mr. Wolosky.
In a separate legal action in Delaware Chancery Court last week (see related story), a judge ruled that American International Group Inc. CEO Martin J. Sullivan currently cannot be sued by Mr. Greenberg, in a complex dispute surrounding the insurer's longtime relationship with C.V. Starr & Co. However, the judge, Vice Chancellor Leo E. Strine, granted Starr permission to file a cross-claim and seek possible contributions from AIG in the event that the plaintiffs prevail.