Maurice “Hank” Greenberg, the former chief executive officer of American International Group Inc., is set to ask New York’s highest court today to clear his name and dismiss what remains of an eight-year-old lawsuit over an AIG accounting scandal.

The argument comes after New York Attorney General Eric Schneiderman said that while he wants to hold Greenberg personally liable, he no longer seeks money damages. He wants to bar Greenberg, 88, from working in the securities industry or serving as an officer or director of a public company.

Greenberg has long argued that the lawsuit, originally filed by then-Attorney General Eliot Spitzer, is groundless. Schneiderman contends that Greenberg and former AIG Chief Financial Officer Howard Smith bear responsibility for a sham transaction with General Reinsurance Corp. in 2000 and 2001 that inflated AIG’s loss reserves by $500 million.

“We believe it is important to hold these defendants personally accountable for their frauds,” Schneiderman’s office wrote on April 25 to the New York Court of Appeals in Albany, which is scheduled to hear arguments in the case.

Greenberg, who served in World War II and in Korea, has squared off against three attorneys general in his fight to defeat the lawsuit. Spitzer’s pursuit of the case forced Greenberg to step down from AIG in 2005 after he spent four decades building AIG into the world’s largest insurer.

New Ammo

Greenberg argues he got new ammunition on April 10 after a federal judge in New York approved a $115 million settlement of a class-action lawsuit, which resolved claims by AIG shareholders against Greenberg, Smith and other defendants.

Schneiderman opposed the settlement as unfair and inadequate, saying losses to shareholders were $6.6 billion. He argued that a prior appeals court ruling meant that approval of the class-action settlement would preclude the state from obtaining damages. In dropping the damages claim, the state cited the settlement and the desire to “avoid further delay.”

An attorney for Greenberg argues that by dropping its pursuit of money damages, the lawsuit is now fatally flawed. New York “long ago abandoned” any claim for an injunction, such as a bar from the securities industry, Greenberg attorney David Boies of Boies Schiller & Flexner LLP wrote in an April 26 letter to the appeals court.

Tactical Change

Schneiderman’s change in tactics is a “transparent attempt to resuscitate a case that is dead,” Boies said, calling the continued pursuit of case “simply a meritless waste of the state’s judicial resources.” Greenberg consented to a U.S. Securities and Exchange Commission injunction barring fraud or other violations of securities laws, which is broader than what the state seeks, he wrote.

Boies declined to comment, firm spokeswoman Dawn Schneider said.

The $115 million settlement approved last month is not the only recovery for AIG shareholders. In all, they have recovered about $1 billion, said Alan Kopit, an attorney at Hahn Loeser & Parks LLP, representing Ohio public pension funds.

Greenberg is getting support from high-powered allies. Former New York governors Republican George Pataki and Democrat Mario Cuomo said in a Wall Street Journal editorial this month that the case is “a waste of time and money.” Pursuing Greenberg is “morally wrong” given his military service, philanthropy and “vital role in advancing U.S. interests in global trade and national security,” they wrote.

Complete Shift

In an interview on Bloomberg Television, Pataki said the state’s case was initially brought to protect AIG shareholders and now Schneiderman has made a “complete shift” in seeking the bans against Greenberg and Smith.

“That should have been the end of this,” Pataki said about the settlement. “Clearly it was over. Then out of the blue, the attorney general completely changes the relief they’re seeking from damages to help shareholders, which was a ridiculous lawsuit in the first place.”

Schneiderman defended the decision to go forward.

“Three consecutive attorneys general have pursued this case because a commitment to equal justice demands personal accountability for people who commit fraud no matter how rich or well-connected they may be,” Schneiderman spokesman Damien LaVera said in a statement.

Spitzer sued Greenberg under the Martin Act, a 92-year-old law used by prosecutors to probe investment frauds, Ponzi schemes and other white-collar crime. New York’s attorney general can bring civil or criminal actions under the law, while district attorneys only use it in criminal cases.

Important Precedent

A court of appeals ruling could set an important precedent that would help define the attorney general’s power under the law, said Anthony Michael Sabino, a law professor at the Tobin School of Business at St. John’s University in New York.

“You need to hear from the court of appeals because you need to hear for the future what is the scope of the AG’s powers,” Sabino said. For business leaders, “it brings certainty as far as establishing whether or not the AG would be justified in going after them in years to come.”

Schneiderman may want to strengthen his office’s power under the Martin Act, said Michael Weinstein, a former Justice Department lawyer at Cole, Schotz, Meisel, Forman & Leonard P.A.

The state has to balance the payment to shareholders against its power to bring future cases and punish wrongdoers, Weinstein said.

Schneiderman “wants to stay in the fight,” he said. “When he says we want to hold them personally responsible, it’s a wink and a nod to the court saying just because they have somebody pay doesn’t mean they get off the hook, and we want to be able to pursue people personally.”

GenRe Transaction

The case stems from two reinsurance transactions that the state alleges were approved by Greenberg and Smith to conceal negative financial results. One was a deal with Berkshire Hathaway Inc.’s General Reinsurance Corp. used to reverse a decline in loss reserves at AIG.

AIG said on Oct. 26, 2000, that premiums increased in the third quarter of that year as loss reserves for claims fell. Days later, Greenberg called Ronald Ferguson, Gen Re’s CEO at the time, and proposed the reinsurance transaction with Gen Re, the attorney general said in a court filing. The two agreed on the essential terms of the agreement in a November phone call, according to the state.

In March 2005, amid investigations by regulators, Greenberg stepped down as CEO of AIG, which he had led since 1967. That month, New York-based AIG said the transaction with Gen Re was improper. AIG restated its earnings, lowering them by $3.4 billion, and paid $1.6 billion to settle claims by regulators.

The fraud cost AIG shareholders $544 million to $597 million, according to a federal judge who presided over a criminal fraud trial in Hartford, Connecticut.

Fraud Conviction

Four former Gen Re executives, including Ferguson, and one from AIG were convicted in 2008 at that trial. In 2011, they won reversal of their convictions. Last year, prosecutors agreed to drop charges under deferred prosecution agreements, and the executives admitted “aspects” of the deal were fraudulent.

Spitzer sued in May 2005. In October 2010, Justice Charles Ramos of New York State Supreme Court in Manhattan denied Greenberg’s and Smith’s bid to dismiss the case, saying there is “clearly evidence in the record that connects both defendants to the improper aspects of the Gen Re transaction, and highly suggest their knowledge or participation.”

Vincent Sama, an attorney for Smith, didn’t respond to a phone message and e-mail seeking comment about the case.

The case is State of New York v. Greenberg, 401720-2005, New York state Supreme Court (Manhattan).

Editors: John Pickering, Fred Strasser

Topics Lawsuits New York Fraud Reinsurance AIG