(Reuters) - A U.S. judge has ruled that former American International Group Inc (AIG.N) Chief Executive Officer Hank Greenberg can pursue a case involving the insurer’s bailout, citing questions about the Federal Reserve Bank of New York’s authority to take equity in the company in exchange for a loan.
The U.S. Court of Federal Claims late Monday denied a government motion to reconsider a July ruling allowing Greenberg’s Starr International Co to pursue its case. The Court of Federal Claims case is separate from another Greenberg lawsuit pending in New York.
Starr once held a 12 percent stake in AIG. At one time the world’s largest insurer by market value, the company received a bailout on September 16, 2008, as losses were skyrocketing from risky bets on mortgage debt through credit default swaps.
In Monday’s ruling, Judge Thomas Wheeler said Greenberg could pursue his claim for illegal exaction, in part because there are questions about whether the New York Fed was allowed to purchase AIG preferred shares in exchange for the rescue.
The government said the transaction was not a purchase but merely additional consideration for the initial $85 billion loan, a position the judge found unconvincing.
“The Government is merely repackaging its previous arguments, based on assumptions that the Court has already rejected,” Wheeler wrote, saying there was “ample support for a reasonable inference” that the New York Fed bought the stock.
He cited, among other things, the labeling of the deal as a “Stock Purchase Agreement,” which called for the government to keep the shares even if the loan were repaid with interest.
Wheeler also saw little merit in the government’s contention that the board of the New York Fed had the “implied authority” to demand equity in AIG in exchange for the loan under the Federal Reserve Act.
Wheeler cited a prior ruling that interest rates were the only consideration for a loan allowed under the act.
“Thus, because the FRA only permits the Board to demand consideration in the form of interest rates, the Board did not have implied authority to demand the transfer of equity as consideration for the loan to AIG,” he said.
Representatives of the New York Fed were not immediately available to comment on the ruling. The U.S. Justice Department declined to comment.
The Court of Federal Claims sits in Washington, D.C., and handles lawsuits seeking money from the government. Starr sued there on behalf of itself and other AIG shareholders.
Last week, the U.S. Treasury said the government had recouped the entirety of the total $182 billion bailout of the company and generated a profit as well, with more to be realized as the government reduces its stake in the insurer.
The case is Starr International Co v. U.S., U.S. Court of Federal Claims, No. 11-00779.
Reporting by Ben Berkowitz; Editing by Lisa Von Ahn