Maurice “Hank” Greenberg, the former chairman of American International Group Inc., lost his bid to remove a judge from a lawsuit brought in 2005 by the New York state attorney general accusing him of accounting fraud.

In the case, which Eric Schneiderman took over when he became attorney general in 2011, the state claims Greenberg and former AIG Chief Financial Officer Howard Smith bear responsibility for a sham transaction with General Reinsurance Corp. in 2000 and 2001 that inflated AIG’s loss reserves by $500 million.

Greenberg and Smith in July asked State Supreme Court Justice Charles Ramos to recuse himself from the case, saying he was argumentative with counsel and made statements that appeared to show bias against them. Ramos refused to step aside in October, and an appeals court in Manhattan affirmed his decision today, saying the judge’s comments don’t suggest he improperly reviewed the bid for his recusal or improperly exercised his discretion.

“While the judge at times may have been irritated with defense counsel and the prolonged litigation, it cannot be said that his comments, alone or in the aggregate, caused his impartiality to be reasonably questioned,” Justice Peter Tom wrote for the five-judge appellate panel.

War Veteran

Greenberg, who served in World War II and in Korea, has squared off against three attorneys general in his fight to defeat the lawsuit. Former Attorney General Eliot Spitzer’s pursuit of the case forced Greenberg to step down from AIG in 2005 after he spent four decades building the company into the world’s largest insurer. Greenberg sued Spitzer for defamation in July, accusing him of making false and defamatory statements as part of a campaign to damage his reputation.

The New York Court of Appeals, the state’s highest court, ruled in June that the attorney general can pursue the case against Greenberg and seek to ban him from the securities industry and from serving as an officer or director of a public company.

Greenberg, 88, has argued that the lawsuit was fatally flawed after a court approved the $115 million settlement of a class action that resolved claims against him and Smith. After the accord was approved, the state said it was withdrawing its claim for damages in the case.

Resource Waste

“While we disagree with the court’s decision, we continue to believe that the attorney general’s pursuit of this action is waste of judicial and state resources and that the case should be dismissed,” David Boies of Boies Schiller & Flexner LLP, an attorney for Greenberg, said in a statement.

In its decision, the appeals panel said the defendants didn’t push for recusal until Ramos ruled against them on a motion to dismiss the lawsuit years after it was filed.

“Today’s appellate court decision clears the way for us to make our case against Mr. Greenberg in court,” Damien LaVera, a spokesman for Schneiderman, said in a statement.

Spitzer sued Greenberg under the Martin Act, a 1921 law used by prosecutors to probe investment frauds, Ponzi schemes and other white-collar crime. New York’s attorney general can bring civil or criminal actions under the law, while district attorneys only use it in criminal cases.
Reinsurance Transactions

The case stems from two reinsurance transactions that the state alleges were approved by Greenberg and Smith to conceal negative financial results. One was a deal with Berkshire Hathaway Inc.’s General Reinsurance Corp. used to reverse a decline in loss reserves at AIG.

In March 2005, amid investigations by regulators, Greenberg stepped down as CEO of AIG, which he had led since 1967. That month, New York-based AIG said the transaction with Gen Re was improper. AIG restated its earnings, lowering them by $3.4 billion, and paid $1.6 billion to settle claims by regulators. Spitzer filed suit against Greenberg and Smith in May 2005.

The fraud cost AIG shareholders $544 million to $597 million, according to a federal judge who presided over a criminal fraud trial in Hartford, Connecticut.

Four former Gen Re executives and one from AIG were convicted in 2008 at that trial. In 2011, they won reversal of their convictions. In 2012, prosecutors agreed to drop charges under deferred prosecution agreements, and the executives admitted “aspects” of the deal were fraudulent.

The case is State of New York v. Greenberg, 401720-2005, New York State Supreme Court, New York County (Manhattan).

–Editors: Andrew Dunn, Stephen Farr