Jessica M. Karmasek Jun. 26, 2013, 2:30pm

NEW YORK (Legal Newsline) -- New York's highest court, in a ruling this week, allowed Attorney General Eric Schneiderman's lawsuit against ex-American International Group Inc. Chief Executive Officer Maurice "Hank" Greenberg to move forward.

In the suit, filed back in 2005, the state accused Greenberg and former AIG Chief Financial Officer Howard Smith of using "sham transactions" to distort AIG's financial condition.

In particular, the Attorney General's Office claims that Greenberg and Smith participated in causing AIG to enter into a sham transaction with General Reinsurance Corporation, or GenRe, in which AIG purported to reinsure GenRe on certain insurance contracts.

The attorney general asserts that the transaction transferred no real risk from GenRe to AIG, and therefore should not have been treated as an insurance transaction on AIG's books; and that the transaction's sole purpose was to increase the insurance reserves shown on AIG's financial statements, thereby creating the impression of a healthy insurance business and bolstering AIG's stock price.

The transaction also has been the subject of a federal criminal case in which Greenberg and Smith were identified as alleged co-conspirators, but were not defendants.

The New York Court of Appeals had to decide whether the evidence of Greenberg and Smith's knowledge of the fraudulent nature of the AIG-GenRe transaction is sufficient to raise an issue of fact for trial; and whether, on the present record, the attorney general is barred from obtaining any equitable relief.

In a 7-0 decision, the court answered yes to the first question and no to the second, affirming an order by the state's Appellate Division denying Greenberg and Smith summary judgment.

"We have no difficulty in concluding that, in this civil case, there is evidence sufficient for trial that both Greenberg and Smith participated in a fraud," Justice Robert S. Smith wrote for the high court. "The credibility of their denials is for a fact finder to decide."

As to the issue of equitable relief, the court rejected the contention of Greenberg and Smith that the attorney general failed to preserve this argument for its review.

The former AIG executives argued all such relief that could possibly be awarded has already been obtained in litigation brought by the Securities and Exchange Commission, which they settled in 2009.

In the settlement, without admitting or denying the allegations against them, Greenberg and Smith agreed, among other things, to permanent injunctions against violations of the antifraud provisions of the federal securities laws.

But the attorney general argues that more relief could be granted in the case including, but not limited to, a ban on their participation in the securities industry and a ban on serving as an officer or director of a public company.

"While the sufficiency of the claim for equitable relief was not a major focus of any party's attention below, the attorney general did specifically dispute, in Supreme Court, Greenberg's and Smith's assertion that that claim was barred by the SEC settlement," Smith wrote. "It is irrelevant to the preservation issue whether the argument was made in the Appellate Division."

The justice continued, "On the merits, we cannot say as a matter of law that no equitable relief may be awarded. There is no doubt room for argument about whether the lifetime bans that the attorney general proposes would be a justifiable exercise of a court's discretion; but that question, as well as the availability of any other equitable relief that the attorney general may seek, must be decided by the lower courts in the first instance."

Schneiderman's office dropped damages claims against the ex-AIG executives in April.

From Legal Newsline: Reach Jessica Karmasek by email at

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