AIG Sued by Starr Foundation for Alleged Stock Fraud

New York, NYFormer Chief Executive of American International Group Inc. (AIG) and current controller of the Starr Foundation, Hank Greenberg, has sued AIG for misrepresenting financial losses.

The lawsuit was filed on May 7, 2008 in New York State Supreme Court. The lawsuit alleges stock fraud and the damages that are sought are approximately $300 million. The lawsuit names AIG CEO Martin Sullivan and CFO Steven Bensinger as defendants. The foundation is seeking to recover damages that it alleges were caused by AIG. They state that there were omissions and material representations that caused millions of dollars in losses due to credit default swaps in AIG's portfolio.

Credit default swaps are guarantees on the credit-worthiness of an investment. Complex debt securities that include the subprime mortgage market are especially affected by this type of guarantee.

This lawsuit is just one of the latest in a number of legal actions that have been taken against AIG by Greenberg or other entities that had an affiliation with AIG at one time. The other entities that have filed suits against AIG are also those that Greenburg has controlled in some way since his split with AIG three years ago.

Michael Arcaro, a spokesman for AIG, says that the company believes that the lawsuit has no merit. AIG had posted its largest loss in its fourth quarter, which was $5.3 billion. It was driven down by a write-down in the amount of $11 billion, which was the value of the portfolio held containing the credit default swaps. The loss came after AIG had already issued warnings that it would have to take a much larger write-down. These derivatives have exposure to the mortgage debt in the subprime lending market.

It was in previous months that AIG had led investors to think that the chances of experiencing losses from these high risk investments were not likely. In February, when the fourth quarter earnings figures were ready for release, they realized that their losses could be up to $900 million because of its credit default swaps. They had estimated, however, that they expected most of the unrealized losses from write-downs to reverse over time.

In the Starr Foundation complaint, they said that AIG had omitted and misrepresented the risk of loss, which caused the company to retain stock in the company that it would have sold otherwise.

The Starr Foundation has donated billions of dollars to different New York City organizations and holds over 15 million shares in AIG stock. The Starr Foundation had been created by AIG's late founder, Cornelius Vander Starr. The foundation was made to be beneficiary of his estate.