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11Sep16

After 11 Years, Case of A.I.G.'s Ex-Chief Is Going to Trial

It will not be the trial of the century. It may just feel as if it has taken that long to get underway.

More than 11 years after civil charges were filed, New York's case against Maurice R. Greenberg, the former chief executive of the insurance giant American International Group, goes to trial this week.

The charges date to an era when Eliot Spitzer, then the New York State attorney general, brought a barrage of cases accusing Wall Street research analysts of biased research, mutual fund operators of trading practices that shortchanged average investors, and insurance brokers of bid-rigging and kickbacks.

Mr. Greenberg and A.I.G.'s former chief financial officer, Howard I. Smith, are accused in part of engineering bogus reinsurance transactions in 2000 and 2001 to bolster reserves to make the company's numbers look better to Wall Street. They are also accused of orchestrating other transactions that allowed A.I.G. to convert insurance losses into investment losses.

Now 91, Mr. Greenberg, known as Hank, has long denied the allegations. When the charges were brought in May 2005, he accused Mr. Spitzer of seeking to retaliate against him for criticizing certain prosecutions. Mr. Spitzer had just forced the ouster of Mr. Greenberg's son Jeffrey as chief executive of Marsh & McLennan after charging the insurance broker with bid-rigging and kickbacks.

"The words 'give up' don't exist in Hank Greenberg's vocabulary. He is standing up against roughshod prosecutorial behavior," said Kenneth G. Langone, a Wall Street executive and co-founder of Home Depot. A former New York Stock Exchange director, Mr. Langone also battled Mr. Spitzer over the pay package of Richard A. Grasso, the former exchange chairman.

Mr. Greenberg has been willing to wage such a protracted fight because "this is his legacy, his reputation," said David Schiff, a former insurance analyst who followed A.I.G. in the chief executive's later years. While A.I.G. "obfuscated the truth with its accounting, he doesn't want to admit he did anything wrong," Mr. Schiff said.

In a statement, a spokesman for the current attorney general, Eric T. Schneiderman, said that "after a decade of avoiding trial, Mr. Greenberg will now face the same justice system as anyone else."

There were seven pretrial appeals by the defendants — the most recent was denied in June. That contributed significantly to the delay in a trial. Still, Mr. Greenberg's lawyer, David Boies, said the state shared responsibility for some of the delay, such as by blocking some document discovery later granted by an appeals court.

The trial in State Supreme Court in Manhattan before Justice Charles E. Ramos is expected to last three to four months or longer, under a part-time schedule of three trial days a week, with a few weeklong breaks early on to accommodate some participants' schedules. Mr. Greenberg is likely to take the stand for a few days or more in the trial's early stages.

The two defendants are not entitled to a jury trial because the state is not seeking damages beyond disgorgement of certain past bonuses, which with interest could top $50 million. The state also wants the defendants barred from serving in the securities industry or as officers or directors of any public company.

Mr. Greenberg and Mr. Smith have denied wrongdoing in the current state case, but in 2009 they paid $16.5 million to settle failure-to-supervise charges for the same transactions brought by the Securities and Exchange Commission. (A.I.G. itself settled civil accounting fraud charges brought by the S.E.C. in 2006.)

The two men were also party to a $115 million settlement in 2013 of a class-action suit over the accounting, brought by former A.I.G. shareholders.

Mr. Boies noted that the two settlements did not include any admission of wrongdoing. He said that Mr. Greenberg intended for the transactions to comply with accounting rules, and that there was no evidence that he knew or approved of their being falsified.

A lawyer for Mr. Smith, Vincent Sama, predicted his client would "be vindicated in this case."

Maria Patterson, who teaches business ethics and law at the Stern School of Business at New York University, said the state might be aided in court by the lack of a requirement to prove fraudulent intent, which is generally required in federal fraud cases. The state's anti-fraud Martin Act, she said, "is designed to deal with deceit that does not comply with standards of common honesty."

"It's so broad, and that's why I think it has been easier for New York to go after individuals," Ms. Patterson said.

The state's trial team is led by David N. Ellenhorn and David E. Nachman.

According to the attorney general's office, Mr. Greenberg in October 2000 started two sham transactions in a call with the chief executive of the General Reinsurance Corporation, a company owned by Warren E. Buffett's Berkshire Hathaway.

The move came after analysts had criticized A.I.G.'s flagging reserve growth, saying it was releasing reserves to hit earnings targets, and its stock price had tumbled 6 percent. At the time, A.I.G. was using its stock for multibillion-dollar acquisitions.

Under the two contracts, Gen Re paid A.I.G. a total of $500 million for bogus reinsurance when A.I.G. was not actually assuming any risk, the state charged. As a result, A.I.G. could add the amount to its reserves.

The two companies also created a sham paper trail, "making it appear that Gen Re had sought reinsurance when, in fact, it was Greenberg who initiated the deal," the state said.

Over the next two quarters, the extra $500 million masked a further reserve decline at A.I.G., the state charged.

In another set of transactions, A.I.G. invested in a supposedly independent offshore entity known as Capco to hide losses from an A.I.G. auto warranty insurance program begun by a son of Mr. Greenberg's, Evan, a state brief said. Capco allowed A.I.G. to convert $163 million in underwriting losses into investment losses — considered less significant by some analysts.

Two former General Reinsurance executives pleaded guilty in 2005 to federal criminal charges over the A.I.G. reinsurance. Although a Connecticut federal jury found five other executives of Gen Re and A.I.G. guilty in 2008, including the former chief executive of Gen Re, their criminal convictions were overturned in 2011. Prosecutors later dropped the charges when all five agreed to pay fines of up to $250,000 and admitted that aspects of the deals were fraudulent.

Mr. Boies said that after Mr. Greenberg made the initial call, Gen Re employees at first worked on a "legitimate" reinsurance transaction, which later changed without his client's knowledge. Mr. Boies added that dozens of lawyers and accountants had reviewed and approved the Capco transactions.

Looming large over the trial are some tarnished legacies. Mr. Spitzer, the attorney general who first brought the case, suffered a stunning downfall, resigning as New York's governor in 2008 amid a prostitution scandal.

Later that year, A.I.G. nearly collapsed in the financial crisis, prompting a $185 billion rescue by the federal government.

Mr. Greenberg lost much of his wealth in the bailout. He had long been gone from the company by then, having resigned in March 2005 amid multiple federal and state investigations.

The month before, Mr. Greenberg had criticized Mr. Spitzer, saying he was treating minor infractions, like "foot faults" in tennis, as capital crimes. At that time, however, state and federal regulators had received the results of an internal investigation by Gen Re, which detailed a possibly illegal transaction between Gen Re and A.I.G., including evidence of faked documents, according to a 2006 Spitzer biography, "Spoiling for a Fight," by Brooke A. Masters.

The book indicates that Mr. Spitzer may already have ordered subpoenas sent to A.I.G. about the transactions before learning of Mr. Greenberg's comments. Mr. Spitzer pursued A.I.G. over Gen Re because it had started and benefited from the transactions.

But Mr. Boies called the choice to pursue A.I.G. "politically motivated selective prosecution."

[Source: By Randall Smith, International New York Times, 11Sep16]
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Corruption and Organized Crime
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