UPDATE 2-Judge says Bernanke should testify in AIG bailout lawsuit

Mon Jul 29, 2013 12:58pm EDT

* Judge says Bernanke was "key government decision-maker"

* AIG suit filed by Maurice Greenberg's Starr International

* Fed declines to comment

By Jonathan Stempel

July 29 (Reuters) - A U.S. judge ruled on Monday that Federal Reserve Chairman Ben Bernanke should testify in the multibillion-dollar lawsuit by the former chief of American International Group Inc, Maurice "Hank" Greenberg, against the United States over the insurer's 2008 bailout.

Judge Thomas Wheeler of the U.S. Court of Federal Claims rejected the government's effort to keep Bernanke from submitting to a deposition by Greenberg's Starr International Co, once AIG's largest shareholder with a 12 percent stake.

Wheeler called Bernanke a "central figure" in the decision to rescue AIG, making him a "key witness" who could provide "highly relevant" testimony about the government's bailout of the insurer, which eventually totaled $182.3 billion.

"Indeed, the court cannot fathom having to decide this multi-billion-dollar claim without the testimony of such a key government decision-maker," Wheeler wrote. "These facts constitute 'extraordinary circumstances' for the taking of Mr. Bernanke's deposition," which the judge said he plans to attend.

A Fed spokesman declined to comment. Alanna Rutherford, a partner at Boies, Schiller & Flexner representing Starr, said the company is pleased with the decision.

Once the world's largest insurer by market value, AIG was bailed out on Sept. 16, 2008, as losses were skyrocketing from risky bets on mortgage debt through credit default swaps. The government initially took a 79.9 percent stake in the New York-based insurer.

Starr sued in 2011, and maintains that the bailout shortchanged shareholders out of tens of billions of dollars.

The company called the government's action an illegal taking that violated the 5th Amendment of the U.S. Constitution. It is also suing over a 1-for-20 AIG reverse stock split in June 2009.

U.S. SAID BERNANKE TESTIMONY UNNECESSARY

The government had argued that details about Bernanke's role could be obtained elsewhere, such as meeting minutes from the Fed's Board of Governors, and that high-ranking U.S. officials in general should not be deposed over their official actions. It also said a deposition would distract Bernanke from overseeing the nation's economy and fiscal policy.

Wheeler, however, said it is "relatively routine" for top government officials to testify in Court of Federal Claims cases when they have personal knowledge of relevant information.

The court sits in Washington, D.C., and handles lawsuits seeking money from the government.

According to Wheeler, officials who have testified have included Dick Cheney, then secretary of defense; Andrew Cuomo, then secretary of housing and urban development; and General Colin Powell, then chairman of the Joint Chiefs of Staff.

Wheeler asked both sides to schedule a deposition. He said the Aug. 16 date proposed by Starr is acceptable to him.

The government eliminated its last AIG stake on March 1.

Greenberg, 88, led AIG for nearly four decades before his 2005 ouster. Starr is appealing another judge's dismissal of a related lawsuit against the Federal Reserve Bank of New York.

The case is Starr International Co v. U.S., U.S. Court of Federal Claims, No. 11-00779.

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