Greenberg’s Starr Foundation Sues AIG, Alleging Fraud over Credit Losses

By | May 9, 2008

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 on Wednesday 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 foundation seeks to recover damages caused by defendants’ material misrepresentations and omissions concerning multibillion dollar losses in AIG’s portfolio of credit default swaps,” said the complaint.

The lawsuit is the latest in a string of legal actions between the insurer and either Greenberg or entities that were once affiliated with AIG but which Greenberg 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, which have exposure to subprime mortgage debt, 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, at the time of its fourth-quarter earnings release in late February, said it estimated, under a worst-case scenario, realized losses of up to $900 million on its credit default swaps and that it expected to see most of the unrealized losses from its write-down to “reverse” over time.

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.”

AIG stock has fallen about 38 percent from a year high of $72.97 last May.

The Starr Foundation, a charitable organization that has donated billions of dollars to various organizations in New York City, holds more than 15 million AIG shares. It was created by AIG’s founder, the late Cornelius Vander Starr, as beneficiary of his estate.

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

A credit default swap is a type of guarantee on the credit-worthiness of the underlying investment, including complex debt securities that included risky subprime mortgages.

(Additional reporting by Christian Plumb; Editing by Brian Moss and Maureen Bavdek)

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