Government Still Pursuing Greenberg Case 9 Years Later
Editors' Note: This article has been updated to reflect a Correction.
ALBANY - After nine years of litigation pursued by three different attorneys general and recent court rulings that seem to lift any remaining barriers to a trial, the end of the civil fraud case against business titan Maurice "Hank" Greenberg is still nowhere in sight.
In fact, it's barely begun.
Greenberg and his attorneys have battled a succession of attorneys general, beginning with Eliot Spitzer, who started it all in 2005, and his successors, Andrew Cuomo and now Eric Schneiderman.
Greenberg, the former chief executive officer of American International Group (AIG), has successfully knocked out seven of the original state claims against him and his co-defendant, former AIG chief financial officer Howard Smith. And by settling a parallel federal action for $115 million, they took state damages, as well as New York's far-reaching Martin Act, out of the picture.
But they've lost key battles at the trial level, in the mid-level appellate court and in the state Court of Appeals. And they recently failed in a spirited attempt to get the trial judge, Manhattan Supreme Court Justice Charles Ramos, removed for alleged bias (NYLJ, Feb. 5) on the grounds that he has been "aggressive and argumentative" toward the defense and has betrayed favoritism in his courtroom comments.
Neither side expects the case to come to trial in 2014. Rather, they assume it will spill over to 2015, a full decade since Spitzer boldly—critics say recklessly—accused the leaders of what was the world's largest insurance conglomerate of "fraudulent transactions designed to portray an unduly positive picture of AIG's loss reserves and underwriting performance." (AIG settled with the state long ago and is not a party in the case.)
It is, without question, a complicated case that once potentially put billions of dollar at stake. But complicated, high stakes cases are not uncommon, and few of them have dragged on as long as People v. Greenberg, 401720/05.
Some question if what's left of the case is worth the effort.
David Boies of Boies, Schiller & Flexner, lead counsel for Greenberg, suggests the case won't go away because the attorney general continues to fight "over the carcass of a case where all the significant items have been dismissed and all the damage claims, even for the two items that remain, have been dismissed."
With damages and Martin Act claims off the table, Schneiderman is seeking disgorgement of bonuses Greenberg and Smith received, and injunctive relief to bar the two from the securities industry and prevent them from serving as directors or officers of a public company.
A legal question remains over whether the attorney general has standing to attain disgorgement. Critics suggest that barring the defendants from the industry is pointless. Greenberg, who is 88 and now runs C.V. Starr & Co., a privately held financial services firm, has said he has no intention of taking that firm or any other public, or working in the securities industry; Smith 67, vice chairman of C.V. Starr, has also indicated that he has no plan to get involved in a public company.
"The damages case is gone, totally," Boies said in an interview. "Instead of giving the case the decent burial it deserves, an attempt has been made to keep it going on life support."
Vincent Sama of Kaye Scholer, who represents Smith, said his client has already served a three-year ban from serving as a director or officer of a public company that resulted from a federal Securities and Exchange Commission probe. He said Smith has no intention of serving as a director of a public company.
"The case has gone on for too long and should be dropped," Sama said. "There just doesn't seem to be any basis for it any longer."
Schneiderman's office, however, said that formally barring Greenberg and Smith from the securities industry is vital to protecting consumers, reforming the market and making the point that the rich and powerful cannot evade justice.
Spitzer, who is no longer in public office but continues to watch the progression of the case he initiated, agreed.
"Those who have been injured have been compensated, but the state still has an overpowering argument ... in vindicating the state's right to impose an obligation to report accurately and forthrightly," Spitzer said in an interview. "Playing the game the right way is what capitalism is all about."
From the perspective of the attorney general's office, the defendants, with their deep pockets, phalanx of high-powered attorneys and formidable public relations machine, have frustrated efforts to get to trial and pursued distracting tangents unrelated to the issue of whether Greenberg and Smith acquiesced in a fraud.
Since 2005, the defendants have filed dozens of motions in the main case, challenged the attorney general at every level of state court, repeatedly accused Ramos of partiality, filed multiple summary judgment motions, appealed virtually every adverse ruling, spent years going after Spitzer's private emails on the theory that they would reveal prosecutorial bias, sued Spitzer for libel and orchestrated the filing of a series of different ethics complaints against Schneiderman, his lead prosecutor, his executive assistant attorney general and two of his spokesmen.
The Greenberg camp has also deployed prominent former public officials to support various causes. For instance, former Attorney General Dennis Vacco, who was defeated by Spitzer in a 1998 re-election bid, submitted an affidavit suggesting his nemesis harbored extreme hostility toward Greenberg.
Further, when the case was pending before the Court of Appeals, 10 former public officials urged the high court to throw it out: former SEC Commissioner Paul Atkins; former U.S. Attorney General Richard Thornburgh; former Governors George Pataki of New York and William Weld of Massachusetts; former New York City Mayor Rudolph Giuliani; former Representative Michael Oxley, R-Ohio; and former state attorneys general Vacco, F. Chris Gorman of Kentucky, and Andrew Miller and Anthony Troy, both of Virginia (NYLJ, Feb. 5, 2013).
And most recently, the Greenberg camp retained former New York Court of Appeals Judge Joseph Bellacosa to weigh in on whether David Ellenhorn, the lead prosecutor, had misled a court by suggesting that Greenberg harbored plans to take another company public. Bellacosa slammed Ellenhorn, accusing him of violating professional ethics during an appearance before Ramos and in an affidavit to the Appellate Division, First Department (NYLJ, Dec. 11, 2013).
Disgorgement of Bonuses
The latest barrier to trial is a motion the defendants submitted to the First Department on Feb. 10, asking the court for permission to reargue the Ramos bias issue or, in the alternative, grant leave to the Court of Appeals. The odds of the First Department rehearing a matter it disposed of in a brief opinion, or clearing the way to the high court, are anybody's guess. But by seeking leave, the defendants buy another month or so while the Appellate Division considers the motion.
Meanwhile, the defendants are vigilantly monitoring an unrelated First Department case that they believe would eliminate the disgorgement issue, People v. Ernst & Young, 451586/10.
Ernst & Young centers on whether the attorney general has standing to seek disgorgement of funds that the state did not pay. Greenberg and Smith raise a similar issue, arguing that the state has no claim to bonuses that were paid by AIG and that if anyone has a claim for disgorgement, it's AIG, which signed off years ago.
Schneiderman's office has suggested that Greenberg and his allies have maneuvered to delay trial and attempted to distract attention from the only real issue in the case—whether the defendants were involved in a fraud.
"Over nine years, three separate attorneys general have worked to bring justice and accountability on behalf of the victims of this fraud," said Damien LaVera, spokesman for Schneiderman. "At every step, Mr. Greenberg and his lawyers have done everything they can to keep this case from going to court."
Boies insisted that delay is "absolutely not" a part of his legal strategy, and contended that the attorney general, by fighting the defendants on various discovery demands, is at least as responsible as the defense for any hold up.
"This is a case that both sides have litigated vigorously," Boies said. "I would not accuse the attorney general of intentionally delaying this, but I would say they have been at least as responsible, and I think more so, than the defendant. I have been practicing law a long time and I have never seen a case that has gone on this long and continues to lumber on even after everything they originally sought has been dismissed."
The case centers on two transactions from about 15 years ago.
One of them concerned Berkshire Hathaway's General Reinsurance Corp. (GenRe) and was allegedly orchestrated to conceal a decline in AIG's loss reserves. The other transaction involved the CAPCO Reinsurance Co., an offshore firm controlled by AIG. It was alleged that AIG fraudulently moved about $200 million in losses from its auto warranty business to a Barbados-based shell company.
AIG admitted to structuring sham transactions and settled with the federal government and the state for a record $1.64 billion in 2005, over the vehement objections of Greenberg, who by that time had been removed as CEO but remained an AIG shareholder. The state action launched by Spitzer, and sustained by Cuomo and Schneiderman, alleged that Greenberg and Smith were involved in a deception. It sought damages on behalf of investors.
Boies suggested the initial action brought by Spitzer was rooted in ignorance and continues only because Schneiderman won't let go of a dilapidated case.
He said the CAPCO matter is nothing more than a technical accounting dispute over how certain losses from a discontinued business should be classified in a company's books. Boies said 30 lawyers and accountants approved the accounting method used, and the defendants merely signed off on what their experts told them was the appropriate method.
The GenRe charges, according to Boies, are specious on their face. He said it simply doesn't make sense that the leaders of a company with approximately a trillion dollars in assets would "decide to do something improper" to avoid $5 million in risk.
But courts have repeatedly upheld the core allegation Spitzer levied in 2005.
Ramos, in an October 2010 summary judgment decision, found "ample proof ... which warrants the conclusion that Greenberg was a participant, and likely spearheaded, an illicit arrangement between GenRe and AIG to effectuate a transaction to artificially inflate AIG's loss reserves."
The First Department said the evidence "presents triable issues of fact as to whether defendants knew of, or participated in the fraudulent aspects of the GenRe and CAPCO schemes" (NYLJ, May 9, 2012).
And the Court of Appeals, in its decision last summer, said: "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." (NYLJ, June 26, 2013).
Spitzer said "the case against Hank Greenberg was, and is, rock solid." Boies says it's a waste of time and money.
"No matter what happens here, the relief that is sought here wouldn't change anything," Boies said. "It nevertheless is very expensive and it is very time consuming and very disruptive. It is making it more difficult for Starr to grow their business and create the jobs they are trying to create, and it costs taxpayers a lot of money to litigate it on the other side."
Greenberg's legal team also includes Nicholas Gravante Jr. and Robert Dwyer of Boies Schiller; John Gardiner of Skadden, Arps, Slate, Meagher & Flom; and David Grandeau, a solo practitioner near Albany who is handling the ethics complaints.
Catherine Schumacher of Kaye Scholer, and Andrew Lawler of Manhattan also represents Smith.