Greenberg’s Starr Foundation Sues AIG Over Credit Losses

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The Starr Foundation, controlled by former American International Group Inc. Chief Executive Maurice “Hank” Greenberg, has sued the insurer, claiming it misrepresented its exposure to credit default swaps.

The lawsuit, filed in New York State Supreme Court in Manhattan, alleges fraud and seeks at least $300 million in damages. It was filed against AIG, its Chief Executive Martin Sullivan and Chief Financial Officer Steven Bensinger.

The lawsuit is the latest in a string of legal actions between the insurer and Greenberg or entities he has controlled since parting ways with AIG three years ago.

“We believe that the suit is without merit,” said AIG spokesman Michael Arcaro.

AIG in the fourth quarter posted a $5.3 billion loss, its largest ever, driven by an $11 billion write-down in the value of a credit default swap portfolio held by a unit, AIG Financial Products. The loss was reported several weeks after AIG warned that it would have to take a much larger write-down on the derivatives than earlier expected. The development earned it a rebuke from its auditor.

In previous months, AIG had led investors to believe that the chance of losses from these risky investments was remote. The company in late February said it estimated, under a worst-case scenario, losses of up to $900 million.

The Starr Foundation, in its complaint, said “misrepresentations and omissions” about the risk of loss from the credit default swap portfolio caused it to “retain stock in AIG, which it would otherwise have sold.”

In its first-quarter 2008 earnings, AIG posted a second consecutive quarterly loss, largely as a result of a decline in the value of its credit default swaps.

The Starr Foundation holds more than 15 million AIG shares.