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Spitzer Trains Biggest Guns on Greenberg

His suit against AIG leaves little doubt about whom the New York attorney general blames.

Hank Greenberg's a bad man. A very bad man.

That's the takeaway from New York Attorney General Eliot Spitzer's much-anticipated civil suit filed Thursday against Greenberg, the insurance industry titan and longtime chief executive and patriarch of

American International Group

(AIG) - Get Report

.

Sure, AIG is named as the lead defendant in the 38-page lawsuit. But make no mistake about it: Spitzer's lawsuit is all about Greenberg and his loyal deputy, former CFO Howard Smith.

The way Spitzer sees it, the two executives were the architects of a series of "fraudulent schemes" that "misled the investing public as to the true state of AIG's business."

Spitzer never quantifies the cost to shareholders. Instead, he contends AIG "routinely engaged" in misleading accounting from the 1980s until Greenberg's forced departure this year, even though most of the allegations go back no further than 1999.

In fact, Spitzer, in a press release announcing the filing of the lawsuit, suggests that much of alleged wrongdoing was merely cheating on the margins by Greenberg in order to prop up AIG stock.

"The irony of this case is that AIG was a well-run and profitable company that didn't need to cheat," Spitzer says. "And yet, the former top management routinely and persistently resorted to deception and fraud in an apparent effort to improve the company's financial results."

In the complaint, Spitzer describes Greenberg's obsession with AIG's stock price and his history of barking orders at AIG traders, demanding they buy up the company's shares in order to support the share price. The complaint quotes Greenberg telling one trader earlier this year: "I don't want the stock below $66, so keep buying.''

When it comes to the actual accounting, there's few new allegations. Most of what Spitzer trots out was already known and has been belatedly disclosed by AIG the past several weeks. The company is expected to reveal more details on its flawed financials next Tuesday when it files its long overdue 2005 annual report.

Indeed, AIG officials breathed a sigh of relief after the complaint was made public.

"There are no new claims raised in the complaint,'' said AIG spokesman Chris Winans. "We are pleased that Attorney General Spitzer has recognized our cooperation and has previously indicated his expectations of reaching a civil settlement with AIG.''

What the complaint does do is spend considerable time dealing with the behind-the-scene machinations at AIG that led to the its now famous reinsurance deal with

General Re

, a subsidiary of

Berkshire Hathaway

(BRKA)

, as well as a series of transactions with three offshore reinsurers that AIG secretly-controlled.

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What comes through loud in clear is that Greenberg and Smith allegedly were at the center of all these deals.

In the Gen Re deal, for instance, the complaint describes how Greenberg called a former Gen Re executive in November 2000, seeking to arrange an insurance transaction that would bolster AIG's reserves without AIG risking a potential payout. It outlines a series of steps, allegedly coordinated by Greenberg, to make it appear that Gen Re had approached AIG about entering into a reinsurance deal -- and not the other way around.

"The entire AIG-GenRe transaction was a fraud,'' the complaint says. "It was explicitly designed by Greenberg from the beginning to create no risk for either party.''

Spitzer contends it was Greenberg who gave the marching orders to underlings, telling them to "find individuals who would mask AIG's control of Capco,'' one of the offshore reinsurers AIG secretly controlled. The complaint alleges AIG secretly used Capco to hide $210 million in underwriting losses in its auto insurance division by transferring them to "an off-balance sheet entity where AIG investors could not see them.''

All the while, Spitzer contends, Greenberg and Smith were kept apprised of the Capco scheme. "The transaction was designed from the beginning to lose money for Capco, a fact known to both Greenberg and Smith,'' the complaint says.

Other AIG executives also appear in the complaint as supporting players in the frauds engineered by Greenberg and Smith, such as Vincent Cantwell, a vice president and employee in the company's comptroller's office, who is on leave from the insurer. Cantwell, under orders from Smith, allegedly bolstered AIG's reserves by $100 million in late 2000 and early 2001 by making "fictitious'' end-of-quarter adjustments

The most notable supporting player is Joseph Umansky, a top AIG executive with whom Spitzer has cut a deal with in return for his testimony. The complaint refers on a number of occasions to potentially incriminating testimony from Umansky.

One passage in the complaint notes that Umansky has testified that Greenberg and Smith "were aware'' that AIG had given insurance regulators misleading information about its interest in

Union Excess Reinsurance

, one of the offshore entities at the heart of the accounting scandal.

Spitzer repeatedly suggests Greenberg and Smith, who reportedly are the subject of a criminal grand jury probe, have a lot to hide. When questioned by regulators earlier this year, they "refused to answer, on the grounds that their answers would tend to incriminate them.''

But the complaint fails to allege any over-arching or sweeping fraud the likes of

Enron

or

WorldCom

.

Several defense lawyers suggest the filing of the civil complaint may be the opening salvo in the battle for a settlement with Greenberg. The former AIG executive might agrees to pay a hefty multi-million dollar fine and apologize for his conduct in return for avoiding criminal charges.

It's a strategy Spitzer has employed before in the mutual fund trading scandal, most notably with Richard Strong, the former mutual fund executive. Strong, the founder of the

Strong Funds

, paid a $60 million fine to settle charges he market timed his own funds, thereby avoiding criminal charges. Strong agreed to pay the fine, even as a grand jury began hearing testimony in a potential criminal case against him.

Spitzer's critics call the strategy "dollar justice.'' But for Spitzer, it's the way he likes to do business and it's a strategy that hasn't hurt him yet in the public's eye.