Former American International Group (AIG.N) Chief Executive Maurice "Hank" Greenberg failed to persuade New York state's highest court to dismiss a lawsuit seeking to hold him accountable for sham transactions at the insurer.
The decision by the state's Court of Appeals is a victory for New York Attorney General Eric Schneiderman, who has been pursuing a case first brought in 2005.
Greenberg, 88, has argued that there was no admissible evidence that he orchestrated a $500 million transaction with reinsurer General Re Corp that misled AIG shareholders, and that the case should have ended in April when the state dropped a claim for as much as $6 billion in damages.
But in a 7-0 decision on Tuesday, the Court of Appeals said there was easily enough evidence that Greenberg and co-defendant Howard Smith, AIG's former chief financial officer, knew the AIG-Gen Re transaction was fraudulent for the case to go forward.
"We have no difficulty in concluding that ... there is evidence sufficient for trial that both Greenberg and Smith participated in a fraud," Judge Robert Smith wrote for the state's top court.
The ruling also said that the attorney general could seek to ban Greenberg and Smith, 68, from participating in the securities industry and from serving as officers and directors of public companies.
Greenberg led AIG for nearly four decades before he was ousted in 2005. The following year, AIG paid $1.64 billion to settle federal and state probes into its business practices.
The Greenberg case was brought by former state Attorney General Eliot Spitzer, and was later pursued by his successors Andrew Cuomo, now New York's governor, and Schneiderman.
The long-running state case against Greenberg and Smith hit a roadblock in April when a federal judge approved a $115 million settlement between AIG shareholders and Greenberg, Smith and other defendants over the alleged improper accounting.
Schneiderman withdrew the damage claims because of an unrelated 2008 Court of Appeals ruling that barred his office from seeking restitution on behalf of victims who settled a federal class-action, even if they were not made whole.
But the attorney general said the state still wanted a trial of Greenberg and Smith over the transaction with General Re, a unit of Warren Buffett's Berkshire Hathaway Inc (BRKa.N) (BRKb.N), which allegedly boosted loss reserves without transferring risk.
The state case also includes a transaction with Capco Reinsurance Co that hid a $210 million underwriting loss in an auto-warranty program.
The AIG-Gen Re transaction was the subject of a federal criminal case in which Greenberg and Smith were named as alleged co-conspirators, but not defendants.
In the criminal case, four former Gen Re executives and a former AIG executive were found guilty in 2008 of engineering the reinsurance deal. In 2011, however, a federal appeals court threw out the convictions and ordered a new trial, citing errors by the judge. Last year, the former executives admitted to conducting the fraudulent transaction and cut deals to end the criminal case against them.
Smith cited the federal appeals court decision in his opinion on Tuesday, saying the court held there was enough evidence to support the jury's finding that the fraudulent conspiracy started with a telephone call from Greenberg.
David Boies, a lawyer for Greenberg, and Vincent Sama, a lawyer for Smith, said they were disappointed with the Court of Appeals ruling. But they said they would seek to dismiss the remaining case in the lower courts because the state isn't entitled to the remedies it is seeking.
Boies may argue the state can't go for the bans because there's no risk of continuing violations by his client.
The state also claims it is entitled to go after performance based compensation affected by the fraud. But Boies may argue it can't seek the compensation, because AIG paid it, not the state. AIG and Greenberg and Smith released all claims that existed against each other in November 2009.
There is room for argument about whether the proposed bans "would be a justifiable exercise of a court's discretion," Smith wrote in his opinion. But that question and the availability of other relief Schneiderman may seek must be decided by the lower courts, the court said.
The appeal originally included a much-anticipated challenge to New York's Martin Act, a powerful 1921 securities fraud statute that Spitzer used aggressively to fight Wall Street. That issue become moot after Schneiderman withdrew the damages claim.
The case is New York v. Greenberg et al, New York State Court of Appeals, No. 63.
(Reporting by Karen Freifeld, additional reporting by Jonathan Stempel in New York; Editing by Maureen Bavdek and Phil Berlowitz)