The NY State Court of Appeals decided that the case against Hank Greenberg and AIG’s former chief financial officer Howard Smith should go ahead, opening up the opportunity for the state to seek to recover bonuses that Greenberg earned while committing the alleged fraud.
In a statement following the court ruling, NY attorney-general Eric Schneiderman said, “Since 2005, this office has sought to hold Mr Greenberg and Mr Smith responsible for financial fraud and manipulation during their tenure at AIG.
“Today, New York’s highest court has allowed those claims to proceed to trial, where we look forward to demonstrating that Mr Greenberg and his associates orchestrated two major frauds that caused massive losses to AIG’s shareholders.
“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.”
The irony of this case is that AIG was a well-run and profitable company that didn’t need to cheat
The law suit was initiated in 2005 by the then NYAG, Eliot Spitzer, shortly after Greenberg resigned as chairman of the insurance company he had run for nearly 40 years. It alleged that Greenberg and Smith had misled both investors and state regulators by manipulating AIG’s results to present a better picture of the company’s finances than was actually the case.
As Spitzer said at the time, “The irony of this case is that AIG was a well-run and profitable company that didn’t need to cheat,” Spitzer said. “And yet, the former top management routinely and persistently resorted to deception and fraud in an apparent effort to improve the company’s financial results.”
The lawsuit sparked of a series of suits and countersuits that, among other charges, saw Greenberg accusing Spitzer of defamation, and the regulators and federal reserve for “illegally” organising a $180bn (£123.8bn) government bailout of AIG to stop the company from collapsing.
In 2009, Greenberg and Smith reached a settlement with the US Securities & Exchange Commission over “material misstatements that enabled AIG to create the false impression that the company consistently met or exceeded key earnings and growth targets”. The SEC had also accused Greenberg of describing AIG publicly as “the leader in the insurance and financial services industry with a history of delivering consistent double-digit growth”.
“However, AIG faced numerous financial challenges under Greenberg’s leadership that were disguised through improper accounting.”
These included: sham reinsurance transactions to make it appear that AIG had legitimately increased its general loss reserves; a purported deal with an offshore shell entity to conceal multi-million dollar underwriting losses from AIG’s auto-warranty insurance business; “economically senseless” round trip transactions to report improper gains in investment income; and the purported sale of tax exempt municipal bonds owned by AIG’s subsidiaries to trusts that AIG controlled in order to improperly recognise realised capital gains”.
The SEC alleged that Greenberg was aware of the effect that certain improper transactions would have had on AIG’s reported financial results, and together with Smith, was responsible for false and misleading public statements and material omissions in quarterly reports that AIG filed in the second and third quarters of 2002.
In 2005, AIG restated its prior accounting for many transactions, the SEC added, including those that were the subject of the SEC charges.
Greenberg paid out $15m to settle the charges (covering a fine of $7.5m and disgorgement of a similar amount) without admitting or denying the SEC’s allegations.
Smith paid a fine of $750,000 and disgorgement of $750,000 on the same basis. He also agreed to a five-year suspension from appearing or practising before the SEC as an accountant.
In 2006 AIG settled securities fraud and improper accounting charges of $700m and a penalty of $100m.
In response to yesterday’s court decision, Greenberg, who is now aged 91, issued a statement through his lawyers in which he disagreed with the ruling. This, he said, failed to address the main appeal argument, “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 SEC”.
He added that he was considering his options in the light of the decision which he believed “flies in the face of both the court’s own precedent and federal law”.