By Hugh Son, Dakin Campbell and David Voreacos
Nov. 26 (Bloomberg) -- American International Group Inc., the insurer bailed out by the U.S., agreed to settle all legal disputes with former Chief Executive Officer Maurice “Hank” Greenberg and may reimburse as much as $150 million in fees.
A former U.S. judge will determine how much AIG must pay in legal expenses for Greenberg and former finance chief Howard Smith, the New York-based insurer said yesterday in a regulatory filing. AIG will return photographs, a Persian rug and other personal belongings to Greenberg, who also wins access to archival materials to write his memoirs as part of the deal.
“It was a long, really expensive fight, and AIG just basically said ‘Uncle,’” said former federal prosecutor Christopher Clark, a partner at Dewey & LeBoeuf LLP in New York who isn’t involved in the case. “I’m sure that AIG is not looking to trumpet the fact that having lost all of its claims against Greenberg, they now have to pay all of his legal fees.”
Greenberg, 84, ran AIG for almost four decades and built it into the world’s largest insurer until he was forced to retire in March 2005 amid state and federal probes into a reinsurance transaction. A tangle of lawsuits kept AIG and its former top executive in court since his departure.
AIG and Greenberg agreed that Layn R. Phillips will review legal expenses. Phillips is a partner at Irell & Manella LLP, a former judge and ex-U.S. attorney for Oklahoma, according to the firm’s Web site. AIG and two Greenberg-run investment firms agreed not to make disparaging statements about each other.
‘Significant Distraction’
“The resolution of these long-running disputes will remove a significant distraction and expense and allow AIG to better focus its efforts on paying back taxpayers,” CEO Robert Benmosche said in a statement.
Greenberg thanked Benmosche in the statement and said he looked “forward to assisting AIG in trying to preserve and restore as much value as possible for all of AIG’s stakeholders.”
Former New York Attorney General Eliot Spitzer sued Greenberg and Smith in 2005, alleging they misled regulators and investors. Spitzer dropped portions of the suit in 2006 and Greenberg asked a court to dismiss the rest. The New York suit is unaffected by this settlement, Greenberg’s lawyer David Boies said in an interview.
AIG eventually restated earnings and agreed to pay $1.64 billion to settle claims by Spitzer and other regulators, without admitting or denying wrongdoing. In court papers filed in July 2006, Greenberg argued AIG’s 2005 restatement was unnecessary and designed to force him to retire. He denied any wrongdoing in the New York civil suit.
‘Very Clear’
The insurer had sued Starr International Co., the investment firm Greenberg runs, claiming it improperly took $4.3 billion of AIG stock from an employee compensation plan. Earlier this year, a federal jury rejected those claims.
Greenberg and AIG said Aug. 31 they had agreed to binding arbitration to resolve the legal disputes, including those involving Starr. An arbitrator was to begin work by Oct. 15 and finish by March 31, according to a statement.
“The law is very clear that executives who need counsel to respond to an inquiry, an investigation, or a subpoena are entitled to full advancement and indemnification of legal fees,” Clark said.
SEC Settlement
In August, Greenberg agreed to pay $15 million to settle U.S. Securities and Exchange Commission allegations that he manipulated AIG’s earnings.
Greenberg took the top job at AIG in 1967, and eventually boosted AIG’s assets more than a thousand-fold, making $50 billion in acquisitions to reach 50 million customers in 130 countries. Under his tenure, AIG’s market capitalization grew to $166 billion, before its near-collapse amid the credit crisis.
“There has to be a recognition of the long-standing relationship that existed, and to ignore that is to disregard an important piece of history,” said Jacob Frenkel, a former SEC lawyer who specialized in fraud and stock manipulation cases. He is now with Shulman Rogers Gandal Pordy & Ecker in Potomac, Maryland.
Subprime Loans
AIG was rescued by the government last year after wrong-way bets on securities tied to U.S. subprime mortgages brought it to the brink of collapse, threatening to cause a financial-system meltdown. The insurer reported a $99 billion net loss last year.
The company has had four CEOs since Greenberg left. Martin Sullivan, who took over in 2005, was forced out in June of last year after saying losses tied to home loans would be “manageable.” Robert Willumstad was ousted when the government took over in September 2008. Edward Liddy ran the firm until August when he was replaced by Benmosche, who has said Greenberg could help the insurer.
“I want to get the benefit of his criticisms or his support,” Benmosche told Reuters in August. “The world may choose to vilify him. I think of him as having had some problems, but he can help us with the solutions.”
Liddy has said Greenberg was responsible for some of the insurer’s struggles, including the creation of the business that suffered losses on derivative trades tied to subprime mortgages.
The $182.3 billion bailout includes a $60 billion credit line, a Treasury Department investment of as much as $69.8 billion, and a $52.5 billion pledge to buy mortgage-linked assets owned or backed by the insurer. AIG agreed to turn over a majority stake to the U.S. in exchange for the rescue.
To contact the reporters on this story: Hugh Son in New York at hson1@bloomberg.net; Dakin Campbell in San Francisco at dcampbell27@bloomberg.net; David Voreacos in Newark, New Jersey at dvoreacos@bloomberg.net.
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