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Former AIG chief Maurice Greenberg plans to appeal ruling

Former AIG chief scores partial victory in Spitzer-era suit

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Former AIG chief Maurice Greenberg plans to appeal ruling

NEW YORK—Former American International Group Inc. Chairman and CEO Maurice R. Greenberg plans to appeal a ruling allowing a New York state lawsuit against him and another former AIG executive to go to trial in an alleged sham reinsurance deal.

But in its ruling issued last week, a divided five-judge panel of the New York State Supreme Court's Appellate Division 1st Department also held that a lower court acted prematurely when it granted summary judgment for the state to hold Mr. Greenberg and former AIG Chief Financial Officer Howard Smith liable for damages stemming from what the state alleged was a sham reinsurance transaction involving Capco Reinsurance Co.

The case dates back to 2005, when then-New York Attorney General Eliot Spitzer alleged that Messrs. Greenberg and Smith were involved in devising the sham reinsurance deals involving Capco and General Re Corp. to make AIG's financial results look better.

While four former Gen Re executives and one former AIG executive were found guilty in 2008 of violating federal law in the Gen Re case, they were granted a retrial—expected to begin next year—in March. Neither Mr. Greenberg nor Mr. Smith ever faced criminal charges in the matter.

In the state's civil case against Messrs. Greenberg and Smith, New York State Supreme Court Justice Charles Ramos issued a summary judgment in 2010 that Messrs. Greenberg and Smith were liable for the alleged improper use of Barbados-based Capco as a shell corporation to take on auto warranty losses that AIG generated in the mid-1990s to remove them from the insurer's books.

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However, Justice Ramos refused to grant summary judgment on allegations related to the Gen Re transaction, saying that while the facts “strongly suggest knowledgeable conduct on the part of Greenberg,” the evidence against him was “too remote” to charge him at the time when confronted with his denials.

Messrs. Greenberg and Smith appealed, arguing that federal securities law trumped the state action. However, the state appellate court disagreed last week.

“Nothing in the federal legislative scheme indicates that Congress intended to pre-empt this action,” the majority decided in an unsigned opinion that opened the way for the Capco and Gen Re allegations to go to trial.

However, New York Appellate Court Associate Justice James Catterson dissented in part, holding that federal securities law should block the state action.

Attorneys for Messrs. Greenberg and Smith issued a joint statement saying their clients will seek to appeal the decision to the New York Court of Appeals, the state's highest court.

“Mr. Greenberg and Mr. Smith are pleased that the Appellate Division agreed that the prior grant of summary judgment to the attorney general must be reversed,” David Boies, chairman of Boies Schiller & Flexner L.L.P., and John Gardiner, partner at Skadden Arps Slate Meagher & Flom L.L.P. in New York, said in a statement. Both attorneys represent Mr. Greenberg.

However, Messrs. Greenberg and Smith “believe the Appellate Division should have gone even further...and, as stated in the well-reasoned opinion of Judge Catterson, dismissed the attorney general's action in its entirety because the claims of the attorney general conflict with the federal securities laws, and the attorney general also failed to develop and present any proper, admissible evidence to support its allegations” against the men, the attorneys said.

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Messrs. Greenberg and Smith “intend to seek leave to appeal to the New York Court of Appeals with regard to these matters in order to have this misguided action...conclusively dismissed,” Vincent Sama, a partner at Kaye Scholer L.L.P. in New York who represents Mr. Smith, said in a statement.

In the meantime, both men “expect that the federal court, which has preliminarily approved a settlement of federal securities claims on behalf of a class of AIG shareholders, will approve that settlement, resulting in additional grounds for the dismissal of this wasteful action,” Mr. Sama said.

The New York attorney general's office said it was pleased with the ruling.

“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,” a spokesman for the New York attorney general's office said in an email.