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US: Report Says Ex-A.I.G. Chief Defrauded Foundation 35 Years Ago

by Gretchen MorgensonThe New York Times
December 15th, 2005

Eliot Spitzer, the New York attorney general, submitted a report yesterday as part of his lawsuit against Maurice R. Greenberg, the former chief executive of American International Group, contending that Mr. Greenberg unfairly enriched himself and other A.I.G. executives in a series of transactions that violated the will of Cornelius Vander Starr, the company's founder, and defrauded a foundation he created.

The questionable transactions took place more than 35 years ago as the far-flung insurance operations built by Mr. Starr starting in 1919 were being melded into A.I.G., the report said. After Mr. Starr died in 1968, Mr. Greenberg and his colleagues, as executors of his estate, benefited by selling assets at fire-sale prices to companies they controlled, it stated.

Almost immediately, the report said, these executives turned around and sold the assets at far higher prices to A.I.G., which then set some of them aside for use as a compensation pool for the company's executives. Because those shares ultimately amounted to 12 percent of A.I.G.'s outstanding stock, Mr. Greenberg was able to cement his control of the company.

According to the report, Mr. Greenberg and his associates cheated the Starr Foundation, set up by Mr. Starr to benefit educational and cultural institutions, by selling assets that were worth more than $30 million for just $2 million. The Starr Foundation is one of the largest charitable organizations in the nation, with $3.5 billion in assets.

"Mr. Greenberg and the other executors directed a series of transactions that advanced their own interests in controlling A.I.G. at the expense of the foundation," said Michele Hirshman, first deputy attorney general. The attorney general's office represents the beneficiaries of all foundations operating in the state.

Yesterday's report turns up the volume in an already vehement battle between Mr. Spitzer and Mr. Greenberg, who was ousted by the A.I.G. board in March, when he refused to testify to regulators about a questionable insurance transaction.

Mr. Spitzer has decided not to pursue possible criminal charges against Mr. Greenberg. But he still has a civil case against him, as well as against Howard I. Smith, the former chief financial officer of A.I.G., and A.I.G. itself, contending that they manipulated financial statements and misled regulators and investors. The company, which is in settlement talks with Mr. Spitzer's office, has restated its financial results for the last five years to reflect accounting practices it now says were improper.

Mr. Greenberg, however, maintains that he has done nothing wrong. And yesterday, he and the three former Starr executors who are still alive called Mr. Spitzer's report shameful, outrageous and insulting. (The other Starr executors are Houghton Freeman, John J. Roberts and Ernest S. Stempel.)

"The people of New York deserve an attorney general who is intent on fighting crime and solving the state's problems, not harassing its citizens and philanthropic organizations," the four men said in a statement. "Each of us fulfilled our duty to Mr. Starr and the foundation without compensation and in accordance with his wishes and the law. Our decisions were reviewed and approved nearly 30 years ago by Mr. Spitzer's own office, the Internal Revenue Service and the New York State Surrogate's Court."

Even though the transactions occurred more than three decades ago, Ms. Hirschman of the attorney general's office said that the six-year statute of limitations relating to actions taken by a fiduciary starts running only when the fiduciary resigns from a position of trust. Mr. Greenberg remains chairman of the Starr Foundation, a title he has had since 1981.

Many of the facts cited in the attorney general's report emerged in documents that Mr. Spitzer's office seized in March from A.I.G.'s offices in Bermuda. Mr. Spitzer secured the documents after receiving a tip that lawyers for Mr. Greenberg were removing boxes from A.I.G.'s offices.

The documents, in some 80 boxes, included meeting minutes and correspondence that "raised questions about whether the estate had been appropriately compensated for certain assets," the report said.

Among those documents was a memo written by a trustee of the Starr Foundation stating that just before his death in December 1968, Mr. Starr "was planning to change drastically the nature of the foundation, including its personnel, and to divorce it entirely" from C. V. Starr & Company affairs. To achieve this end, certain unidentified board members tendered their resignations in September 1968, the report said, but in February 1969, two months after Mr. Starr died, they returned to the foundation's board.

Mr. Starr left almost his entire holdings to his foundation. The executors of his estate were Mr. Greenberg and the other directors of C. V. Starr, who controlled a majority of the shares of all three Starr entities. As president of C. V. Starr, Mr. Greenberg oversaw the disposition of Mr. Starr's assets under the gaze of the Surrogate's Court. Mr. Starr had been Mr. Greenberg's mentor, giving him his first job in the insurance industry.

Most of the other Starr executors were also directors of the Starr Foundation, which by law could not own stakes in private companies. This put the executors in a position of conflict - they had a duty to sell the Starr assets for the highest price to benefit the foundation but they also had an interest in keeping the price low because they owned the entities buying the shares.

Mr. Spitzer's report contends that three asset sales victimized the Starr Foundation. In one deal, Mr. Starr's executors sold shares in a company known as Far East for $1 million in cash to the company they controlled, even though the holding was worth $7.2 million.

The second transaction involved Mr. Starr's 24 percent stake in C. V. Starr, a domestic insurer. According to the report, Mr. Greenberg said the foundation should buy the shares using a formula that the directors of C. V. Starr had decided upon without independent advice. The cash proceeds were $1.08 million, even though Morgan Stanley at the time had estimated the value of the stake at $25 million to $30 million.

Finally, the sale of shares in Starr International, a unit that owned foreign insurers, appears to have defrauded the foundation, Mr. Spitzer's report said. Those shares, which constituted a 20 percent stake in a company that in September 1970 was worth $100 million, were sold back to Starr International, controlled by Mr. Greenberg and other executors, for $3,000.

Mr. Greenberg also misled the Surrogate's Court overseeing Mr. Starr's estate, the report said. His sworn statement, filed in 1978, failed to disclose critical facts on all three transactions; there was no mention of Morgan Stanley's estimated value of the C. V. Starr stake, for example.

The former executors said the Morgan Stanley estimate was irrelevant. It showed a higher value, they said, because it reflected synergies that would result if C. V. Starr combined with A.I.G.

In addition to the report, Mr. Spitzer sent a letter yesterday to Florence A. Davis, president of the Starr Foundation. In the letter, he asked Ms. Davis to create a committee to evaluate possible remedies that the foundation could pursue to recover some of the money that he contends it should have received under Mr. Starr's will. Mr. Spitzer also asked that the foundation change its structure "to guarantee it the independence needed to advance its charitable mission into the future."

In a statement, Ms. Davis said, "While the Starr Foundation respects the authority of the attorney general to supervise charitable foundations, and to investigate alleged improprieties, the foundation is concerned that allegations concerning a judicial proceeding closed more than 25 years ago and the negative publicity attendant thereto may adversely affect the value of the assets of the foundation, without discernable purpose."



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