AIG vs. Greenberg Trial Opens; Judge Excludes Bailout, Bonus Talk

The government bailout of AIG and controversial bonuses paid by the insurer cannot be brought up during trial of the company’s suit involving former CEO Maurice “Hank” Greenberg, a judge ruled on Monday.

As the trial opened before a jury in U.S. District Court in Manhattan, Judge Jed Rakoff set narrow parameters for what can be discussed.

Also precluded is any talk of an investigation by then-New York Attorney General Eliot Spitzer and a parallel probe by American International Group Inc. that resulted in Greenberg’s ouster as CEO in 2005.

AIG’s suit against Greenberg-controlled Starr International centers on a large block of AIG shares held by Starr. The stock was once valued at $20 billion but is now worth far less since AIG shares have tumbled over the last year.

AIG, claiming breach of fiduciary duty, is seeking to wrest back shares held by Starr and the proceeds of any sales, at the same time as it tries to repay $85 billion in taxpayer bailout funds.

Rakoff said he would exclude any discussion of AIG’s taxpayer bailout or bonuses because its relevance to the case was “dubious in the extreme and prejudice clear.”

Bonuses paid to executives of an AIG financial products unit responsible for a significant portion of the company’s $100 billion in losses over the past year caused nationwide outrage earlier this year.

The government stepped in to save AIG from collapse under bad mortgage bets last September, and has put up to $180 billion at the company’s disposal since then.

AIG has promised to use any funds won at the trial to repay U.S. taxpayers. Before the government bailout, Starr was AIG’s biggest shareholder.

Starr’s ownership of AIG stock has been in contention since Greenberg left AIG. Starr held about 290 million shares at the time.

Starr had held a sizable stake in AIG since 1970, when Greenberg structured the firm as a vehicle to protect the insurer from hostile takeover.

AIG lawyer Ted Wells told the jury in his opening statement that the company’s right to the shares stems from Greenberg’s assertion over many decades that the block of stock was transferred to Starr International in 1970 to fund a deferred compensation program for chosen employees.

He argued before the Manhattan federal court jury that blame lays squarely with Greenberg.

“He is the one that really engaged in breaking the trust … This is the Hank Greenberg story in many respects … It is going to feature Hank Greenberg’s anger (at being fired from AIG after 38 years as CEO), and betrayal because it is Hank Greenberg that betrayed the trust,” Wells said.

Wells showed videotape of Greenberg speaking to AIG employees decades ago about the trust and its purpose of funding the long-term compensation program.

David Boies, the lawyer representing Starr of Boies, Schiller & Flexner law firm, argued in his opening statement that Starr International was formed to give Greenberg and other trustees control of AIG in the event of a hostile takeover, and could never have been directly controlled by AIG or anyone who took over AIG.

“We wanted the trust to control AIG that is the opposite of what AIG now claims — that they (AIG) had a right to control the trust,” Boies said.

Starr ceased to be a compensation vehicle for AIG executives in 2005. It is now run by Greenberg as a private investment vehicle and for charity.

Greenberg, 84, was in the courtroom on Monday morning but ducked out as proceedings got underway. He is expected to be called as a witness by AIG as early as Tuesday.

(Reporting by Lilla Zuill; editing by John Wallace)