UPDATE 2-U.S. judge bars AIG bailout, bonuses from trial

* High-profile trial between AIG and ex-CEO opens

* Judge precludes talk of bonuses, investigations

* Ex-CEO Greenberg may testify as early as Tuesday (Adds quotes from opening statements)

By Lilla Zuill

NEW YORK, June 15 (Reuters) - The U.S. government bailout of AIG and controversial bonuses paid by the insurer cannot be brought up during the trial of the company's lawsuit involving former CEO Maurice "Hank" Greenberg, a judge ruled on Monday.

Instead, American International Group Inc's (AIG.N) case against Greenberg-controlled Starr International, will center on a large block of AIG shares held by Starr. The stock was worth $20 billion in 2005 when Greenberg was ousted from AIG, but tumbled in value as AIG shares dropped over the last year.

Starr, controlled by a group of trustees including Greenberg, and who were once AIG's senior management, 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.

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

AIG has said Starr International's share sales raised $4.3 billion, and it is seeking that amount as damages. The company also wants the remaining shares to hold in trust for future compensation.

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.

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.

NARROW FOCUS

Before the jury was selected and opening statements began on Monday, Judge Jed Rakoff set narrow parameters for what can be discussed at the trial, which is expected to last as long as a month.

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."

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

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 U.S. 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.

The case is Starr International Company Inc v American International Group Inc 05-6283 in U.S. District Court for the Southern District of New York (Manhattan)

(Reporting by Lilla Zuill; editing by John Wallace, Bernard Orr)