* Lawsuit seeks $25 bln for AIG shareholders
* Starr Int'l says AIG takeover violated Constitution
* Federal Reserve Bank of New York also sued
* Treasury Department calls AIG bailout necessary, legal
By Jonathan Stempel
Nov 21 (Reuters) - A company run by former American International Group Inc Chief Executive Maurice "Hank" Greenberg sued the United States government for $25 billion, calling the 2008 U.S. takeover of the insurer unconstitutional.
The lawsuit marks an unusual effort to force the government to pay shareholders, who have seen AIG's stock price tumble 98 percent since the middle of 2007, when the insurer's risky bets on mortgage debt through credit default swaps began to falter.
Greenberg's company filed a separate, related lawsuit against the Federal Reserve Bank of New York.
Starr International Co, which once had a 12 percent stake in AIG and was its largest shareholder, said the government illegally took a nearly 80 percent AIG stake without seeking a shareholder vote, hoping to provide a "backdoor bailout" for AIG trading partners such as Goldman Sachs Group Inc .
It said the bailouts that began on Sept. 16, 2008 violated shareholders' rights to due process and equal protection, and a Fifth Amendment ban against taking private property for public use without just compensation, known as the "takings clause."
Greenberg, 86, runs Starr, and had led AIG for nearly four decades prior to his 2005 ouster.
"The government's actions were ostensibly designed to protect the United States economy and rescue the country's financial system," David Boies, a lawyer for Starr, said in the complaint.
"Although this might be a laudable goal, as a matter of basic law, the ends could not and did not justify the unlawful means employed," he continued. "The government is not empowered to trample shareholder and property rights even in the midst of a financial emergency."
Shareholders of other companies, including mortgage financiers Fannie Mae and Freddie Mac and the bank Citigroup Inc , also saw their holdings diluted in the fallout from the 2008 financial crisis. It is unclear whether Starr's constitutional arguments might apply to them.
Starr sued the government in the U.S. Court of Federal Claims in Washington, D.C., which handles lawsuits seeking money from the government.
It sued the New York Fed, which gave AIG an initial $85 billion credit line, in the U.S. District Court in Manhattan. The bailouts eventually totaled $182.3 billion.
Despite broad public anger at how bailouts were conducted, it is "hard to imagine Hank winning," Adam Levitin, a professor at Georgetown Law School, said in emailed comments.
Levitin noted that the AIG bailout had been approved by the insurer's board, and that the terms "arguably" were fair.
The U.S. Treasury Department said it is reviewing the matter and expects to defend its actions vigorously.
"The government provided assistance to AIG -- and stopped it from collapsing -- in order to prevent a meltdown of the entire global financial system," Tim Massad, assistant secretary for financial stability, said in a statement. "Our actions were necessary, legal, and constitutional."
A New York Fed spokesman and AIG spokesman Mark Herr declined to comment. AIG was named as a nominal defendant in both lawsuits.
The $25 billion estimate reflects what Starr called the value of the government's stake on Jan. 14, 2011, when it swapped AIG preferred stock for 562.9 million common shares. AIG was once the world's largest insurer by market value.
"Courts have recognized that the takings clause can apply to intangible property such as shareholder rights," said Ilya Somin, a George Mason University law professor who has written about the takings clause. "It is not clear how valuable these rights are, especially given all of AIG's liabilities."
The bailouts began one day after Lehman Brothers Holdings Inc went bankrupt and Bank of America Corp agreed to buy Merrill Lynch & Co.
But according to Starr, the AIG bailout was done as "a vehicle to covertly funnel billions of dollars to other preferred financial institutions" such as Goldman.
Goldman spokesman Michael DuVally declined to comment.
Starr also called the 14.5 percent interest rate on the $85 billion credit line "punitive," and out of line with aid provided to comparable companies at the time.
The government's AIG stake has fallen to about 77 percent.
AIG itself in August sued Bank of America for $10 billion over alleged losses on mortgage securities.
Greenberg stepped down from AIG amid questions by regulators over its accounting practices. AIG in 2006 paid $1.64 billion to settle federal and state probes into its business practices, and in July 2010 agreed to pay $725 million to settle a shareholder lawsuit accusing it of accounting fraud and stock price manipulation.
Starr's counsel Boies is a partner at Boies, Schiller & Flexner. One of the best-known U.S. lawyers, he represented Vice President Al Gore after the 2000 presidential election, and now represents players locked out by the National Basketball Association. He was not immediately available for further comment on Monday.
In afternoon trading, AIG shares were down 82 cents, or 3.7 percent, at $21.06 on the New York Stock Exchange, amid broad declines in U.S. stock prices.
The cases are Starr International Co v. U.S., U.S. Court of Federal Claims, No. 11-00779; and Starr International Co v. Federal Reserve Bank of New York, U.S. District Court, Southern District of New York, No. 11-08422.