NY Clears Way for Fraud Trial of AIG Execs

     MANHATTAN (CN) — Though they already settled with the Securities and Exchange Commission, former AIG executives must still face a trial on fraud charges brought by New York’s attorney general, the state’s highest court ruled Thursday.
     The six-page opinion says a lifetime ban on former AIG CEO Maurice “Hank” Greenberg and CFO Howard Smith would be warranted if prosecutors can show a “reasonable likelihood of a continuing violation.”
     Greenberg condemned the ruling in statement through his attorney, saying it “flies in the face of both the court’ own precedent and federal law.”
     New York’s attorney general brought the case more than a decade ago, accusing the AIG executives of cooking the books for the commercial insurer to inflate its reported profits by billions of dollars through no-risk reinsurance transactions.
     AIG’s board ousted Greenberg as CEO after the accounting scandal and corresponding investigation came to light in 2005. Massive losses caused by the sale of risky credit default swaps threatened to bring down AIG all together three years later, but the federal government bailed it out with $180 billion.
     The case against AIG and its former executives has been waged on both criminal and civil fronts, with the ink on multiple settlements long dry.
     In 2009, Greenberg settled with the SEC for $15 million, while Smith paid $1.5 million. The year before Greenberg and three other executives settled a shareholder lawsuit for nearly $115 million.
     Those other settlements have proven a thorn in the side for New York Attorney General Eric Schneiderman, who had taken on the case the last few years. There is case law limiting how much New York can recover in financial fraud cases where there federal class-action settlements have occurred.
     Schneiderman meanwhile seeks lifetime bans on both Greenberg and Smith, as well as disgorgement of tens of millions of dollars in bonus money.
     Attorneys for Greenberg and Smith have tried to get the case dismissed several times, arguing that previous settlements precluded a state settlement.
     The New York Court of Appeals last rejected those arguments in 2013, ruling then that AIG’s 2009 settlement with the SEC did not block New York state from also suing the former executives for disgorgement and a lifetime ban on their participation in the securities industry or on boards of public companies.
     A month after this ruling, however, the defendants again moved for summary judgment, telling the trial court that federal law pre-empted disgorgement and that such relief is also not available under the state’s Martin Act, which allows New York to file civil and criminal charges in financial fraud cases.
     Though a judge sided with the state, a panel with the Appellate Division asked the state’s highest court, the Court of Appeals, to review.
     Writing for the 6-0 court today, Judge Leslie Stein said disgorgement is an available penalty under the Martin Act and that federal law did not supersede it. Judge Michael Garcia, confirmed just this past February, took no part in the proceedings.
     Though Stein noted the court would not revisit the arguments it rejected in 2013, Greenberg complained that today’s ruling “inexplicably fails to address at all the principal argument raised on appeal” that existing settlements with the SEC and AIG barred the relief sought by Schneiderman.
     Stein is represented by David Boies with Boies, Schiller & Flexner.
     Schneiderman praised the decision.
     “Nobody — no matter how rich or powerful — is allowed to commit fraud in our state, and we are very pleased the people of New York will finally have a chance to obtain justice at trial,” the AG said.
     New York has pursued charges against Greenberg and Smith since 2005, under then-Attorney General Eliot Spitzer.

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