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The Great Survivor Vows to Bounce Back

The past 18 months have probably been the toughest year of Hank Greenberg’s life, even tougher than landing on Omaha Beach. He has been ejected from the top job in a company, AIG, that he had built into the world’s largest insurance company. Only two weeks later he had to resign as nonexecutive chairman of …

The past 18 months have probably been the toughest year of Hank Greenberg’s life, even tougher than landing on Omaha Beach. He has been ejected from the top job in a company, AIG, that he had built into the world’s largest insurance company. Only two weeks later he had to resign as nonexecutive chairman of the company. His integrity has been questioned, with allegations of fraud levied against him. The New York attorney general called him a criminal on national television. He is no longer on speaking terms with prominent people he thought were among his best friends. And his reputation probably has been damaged beyond repair.

Now that AIG has settled civil suits against it by the attorney general’s office and the New York superintendent of insurance, there will be a chance to take a giant step toward the goal of rehabilitation when the civil suit brought by the attorney general and superintendent of insurance commences. If Greenberg can prove in court the charges therein were fallacious, especially the one involving the finite insurance arrangement with GenRe, it will be a big step forward toward vindication, unless criminal charges are brought by another agency at a later time.

Greenberg will continue to be as aggressive legally as he is in business. In late June 2006, SICO sought a court order to force AIG to hand over notes and minutes of AIG board meetings from February 9, 2005, to the present. Greenberg says he needs records of board actions that led to a $1.6 billion settlement between AIG and regulators announced in February, according to the Wall Street Journal. The suit invokes a special Delaware law that allows shareholders to see corporate records if they suspect wrongdoing. Ostensibly, this allows shareholders like SICO some redress for the settlement AIG made with the regulators. But more important, it has a direct bearing on the case Spitzer and Mills have brought against Greenberg and former CFO Howard Smith. If there is a basis for eliminating or reducing these charges, then the charges against Greenberg would have to be reduced.

The only downside is that the parade of lawsuits nettles investors and could affect the stock. And there will be a plethora of other legal actions that will go on for years. One brought in 2002, before Greenberg resigned, was by the Teachers Retirement Systems of Lousiana that sued in the name of AIG to recover millions of fees AIG paid to Starr. In late June 2006, a judge blocked a bid by Greenberg and others to block the lawsuit. According to the Associated Press, this means Greenberg may face trial on allegations he reaped excessive pay through fees AIG paid to Starr.

But the biggest risk he faces is the outcome of a case in Alexandria, Virginia, where a federal grand jury brought criminal charges against former GenRe CEO Ronald Ferguson, former finance chief Elizabeth Monrad, and former general counsel Robert D. Graham. They also charged AIG vice president of reinsurance Christian Milton with the same offenses. Together they face a total of 12 criminal charges, including conspiracy, securities fraud, wire fraud, mail fraud, and making false statements to the Securities and Exchange Commission. The legal charges refer on several occasions to unindicted co-conspirator No.1, who is widely believed to be Hank Greenberg. There is a difference of opinion in the legal progression on what this means. One is that it is a legal technique you use to make your case. You want to prove there was a conspiracy and you draw in the unindicted conspirator as part of the case. Another view is that the federal prosecutors dug through thousands of pages of documents and listened to hours of recorded conversations and didn’t find any hard evidence that Greenberg knew his company might have been committing a crime. He does not use e-mail extensively and was not captured on audiotape discussing the deal. Therefore, it is unlikely he will face criminal charges. A third view is that the indictments suggested that prosecutors are homing in on Greenberg. Jacob Frenkel, a former SEC enforcement attorney who now works as a defense lawyer, said: “There’s no question that the prosecutors’ sights are beyond those four. Whether they will be able to climb further is the open question.” If a jury acquits Chris Milton, then the likelihood of criminal charges being brought against Greenberg is minuscule. But if Milton is convicted, then he is at risk.

Very few people are as resilient as Hank Greenberg-or as fortunate. In recent years, lots of CEOs have been ousted. But to be ousted from a job you have held for 37 years, accused of fraud, and threatened with criminal charges is much rarer. Many would have called it quits in the business world, or they would have dedicated their time to defending themselves, or they would have enjoyed a much deserved retirement, especially at Greenberg’s age. But Greenberg has bounced back. He is as feisty as ever and almost acts as if nothing happened. He has built a new life, one that takes advantage of extremely unique circumstances he inherited. He has opened large, swank new offices on Park Avenue. The offices are divided by a bank of elevators. Along the left side coming out of the elevator is the Starr Foundation, which Greenberg chairs. Across the hall and along the other side is the office of Greenberg, some of the New York offices of his business ventures along with some of his key people who came with him from AIG such as Ed Matthews, former vice chairman and chief financial officer of AIG, now president of C.V. Starr & Company.

His post-AIG days have left Greenberg with a triumvirate of prestige, power, and money. He is chairman of Starr International (SICO), AIG’s largest shareholder; chairman of C.V. Starr & Company, a group of insurance agencies who place a great deal of business with AIG (or did until recently); and chairman of the Starr Foundation, one of the nation’s largest foundations. So Hank Greenberg has something no other ousted CEO ever had-three powerful jobs, all related to but independent of his former company. He is not trying to find something to do besides defend himself against a variety of charges. He has a surfeit of riches. He could not have planned it better if he had planned it.

During the period when AIG was going public, SICO acquired a large block of AIRCO stock, which owned a substantial portion of AIG, in payment for the sale of its primary asset, AIUO. The SICO shareholdersmade what Greenberg always has termed, correctly, an extraordinarily generous decision to reserve a number of those AIG shares for selected AIG employees. So the amount the AIG shares were worth above book value of the assets being traded-about $110 million-was set aside to compensate existing and future AIG employees. In other words, AIG shares worth $110 million were set aside in a special account. Greenberg and other existing SICO shareholders would keep only the book value of the AIG shares they received from selling SICO’s primary asset. Today, SICO has approximately 311 million shares worth about $20 billion (before any sales SICO might make. So it was indeed a monumentally generous decision. The fact that $110 million has grown to $20 billion within 35 years is incredible, absolutely remarkable. It is a testimony to Greenberg’s leadership of AIG. As a result of this initial decision and the subsequent growth, SICO owns about 12 percent of AIG and is by far the largest shareholder.

C.V. Starr & Co., named for the founder of the Starr companies, owns a group of insurance agencies that places considerable business with AIG. While not all of Starr’s income comes from AIG, the preponderance does, or did until recently. It started as a small business and is very lucrative today. Recently, Starr bought out the interest of existing AIG executives like CEO Martin Sullivan, so it is completely independent of AIG. It owns over $1 billion in AIG shares and provides a corporate affiliation for Greenberg.

Finally, the Starr Foundation, created in 1955, owns about 2 percent of AIG. Its assets are all AIG shares. Its directors all are former AIG executives. Because C.V. Starr & Co. owns Morefar and Lookout, Greenberg still has use of these properties. And because Starr owns Starr’s old house, Brook House, at Mt. Mansfield in Stowe,Vermont, he can continue to use it. While AIG owns the corporate jets, he can always lease a jet, and I would be surprised if he hasn’t. Flying commercial does not seem to be something Greenberg wants to do.

Greenberg has an investment vehicle, with likely investments aimed at China, where he is still highly respected and welcome and has extraordinary contacts; a company that makes an excellent cash return in the insurance business; and a charitable foundation that not only does good work but serves as a powerful tool to spread his influence by giving to certain charitable organizations. He has use of many of the comforts of his old corporate life at AIG.

SICO is clearly planning some significant investments, probably in China. He visited China in March 2006 with Edward Matthews, president of C.V. Starr, looking at potential investments, attending a governmentbacked conference, and holding meetings with finance industry officials. He breakfasted with Xu Kwangdi, the former mayor of Shanghai, the kind of meeting other Western business leaders would value. Greenberg was visibly irritated that his name had been removed by AIG from the presidential suite of the Ritz-Carlton, part of a residential and commercial block he built in the 1980s.Not only that but they removed a photo of him with Zhu Rongi, the city’s mayor and later the premier, from a check-in area for the apartments. Traveling with Greenberg in China, he is such a minor celebrity and so welcome with top officials, he can forget he has any problems back home.

If someone foresaw the eruption at AIG or cleverly planned a postcorporate life, he could not have done better than create these entities separate from but related to AIG. They were ready-made for Greenberg. Unlike other ousted CEOs who try to find something to do or just adjust to retirement, he has three meaningful organizations to run, one with $20 billion in assets to invest. It is almost as if Greenberg planned for this, but this is a scurrilous charge that carries anti-Greenberg rhetoric too far. He did not. He did not see his fall at AIG coming, and the structure and nature of these organizations evolved over time.

In early 2006, while preparing to fight out Spitzer’s civil charges in court, and assuming no criminal charges will be forthcoming, Greenberg began planning to build and expand his new empire. I asked him if the quote attributed to him was correct: “He wanted to build a larger company than AIG.”

He laughed and denied saying it. He indicated that “if they buy a company he would not be involved in the day-to-day operation of it.” He mentioned merchant banking and other transactions his company is looking at. We talked about AIG. He said: “It’s a great company. But you can’t have a company run by outside directors and lawyers,” a statement he had made to numerous others and made publicly. He obviously does not want to harm AIG, if for no other reason than he personally has several billion dollars worth of AIG stock, and Starr International is the largest shareholder. There are other reasons as well. He is rightfully proud of what he created and wants it to prosper and grow. But what began as a difficult working relationship has deteriorated into an all-out war. Lawsuits are flying from both sides-lawsuits that, depending on their outcome, dramatically affect his plans, especially for SICO.

Signaling the kind of risk takers David Boies and Hank Greenberg are, on July 8, 2005, Starr International sued AIG to return art and other items of Starr’s that are in AIG’s possession. The big risk this brings is that it puts an offshore corporation onshore for legal purposes and makes it subject to lawsuits as well. SICO is a Panamanian corporation domiciled in Bermuda with principal offices in Dublin but once it sues in U.S. courts, it opens itself to U.S. lawsuits. And it received a zinger-an AIG lawsuit alleging AIG was entitled to the SICO shares set aside for AIG employees for the purpose of providing compensation to AIG employees.

It is true that ways could be found to sue SICO even if it were not an onshore company, but it would have been more difficult. An AIG lawsuit against SICO would have likely resulted in a fight over jurisdiction. In any case, while the SICO lawsuit mentions financial instruments, stock certificates, and keys to safe deposit boxes, the most valuable item mentioned is artwork valued in excess of $15 million located in New York, Vermont, Washington,D.C., Pennsylvania, and the Philippines. A Van Gogh painting is included.

Whether David Boies anticipated what came next I do not know. AIG fired back on September 27. The counterclaim glazed over SICO’s original claim regarding the $15 million of property that AIG had refused to return; in fact, it basically did not mention it. Instead, it focused on the 311 million shares of AIG owned by SICO, which it claimed was committed to compensating AIG employees for outstanding contributions to the company’s growth.

It discussed the Deferred Compensation Profit Participation Plan (DCPPP), which was established in 1970 by SICO. This plan is in twoyear increments and gives participants (some 700 of them) an allocated number of AIG shares based on the amount of growth in AIG earnings per share for those two years compared to the previous two-year period. The plan subsequently was amended to allocate additional shares to participants if they remain at the company eight years from the beginning of participation in the two-year plans. Until the 1990s, participants received annual bonuses from SICO as well.

AIG noted that 33 million shares have been awarded, but 22 million have not yet been contributed. SICO has indicated its intention of using the remaining 270 million shares for its own benefit. The suit notes that since the beginning the SICO board has consisted almost exclusively of current AIG executives so as to administer the plan, but that in March of 2005 current AIG directors were removed by SICO, breaking a SICO-AIG relationship that has lasted for over 30 years.

AIG alleges that the intent was to give these shares away until they were depleted, which it is estimated could be hundreds of years. A Greenberg speech to all DCPPP participants in Florida in 2001 said participants were expected to stay until retirement or forfeit their accumulation of AIG shares, especially since the founders gave up ownership to benefit them. One intent was to keep them from being hired away by competing firms.

In essence, the suit said SICO has indicated it plans to use the shares for its own purposes (investments) and a contract had been broken when AIG executives were removed from the SICO board. It asked for a declaratory judgment keeping the shares for employees, a reinstatement of AIG executives to constitute the majority of the SICO board, and the creation of a constructive trust on behalf of AIG for the shares.

SICO filed its own counterclaim against AIG three weeks later. The focus had shifted fundamentally from the initial suit against AIG on September 27, when SICO asked to recover artwork and other items worth $15 million. This was mentioned only once near the end of the brief. A much more important battle had come to the fore: retaining ownership and control of the $20 billion in AIG shares. Life or death for SICO and very important for AIG.

Now, who actually owns SICO? Greenberg and other directors, 12 voting shareholders, each of whom has basically 10 percent control of the company but no equity interest. Common stock was at one point owned by a Bermuda foundation, but today all shares of nonvoting stock are owned by the Starr International Charitable Trust (Ireland), which, according to one of the lawsuits “represents virtually all of Starr International’s (SICO) residual economic value upon a liquidation of Starr International.” So it appears that if SICO were liquidated, most of its value (i.e., the AIG shares) would go to the Irish charitable trust. I talked to a SICO attorney to clarify ownership and he told me it was confidential. There are apparently some provisions whereby, if dissolved, the shares could go to the Starr Foundation.

First, this asserts that SICO is an independent company formed 25 years before AIG. Second, it argues that there is not an agreement and never has been that would require SICO to use the AIG shares for the exclusive benefit of AIG employees. Finally, it makes it clear that SICO is an independent private company that owns shares in AIG, not vice versa. This is supported by quoting Martin Sullivan, AIG chief executive, who said on a June 29 earnings call with securities analysts and investors: “The (AIG) shares owned by SICO are owned by SICO.”Greenberg, of course, has been quoted numerous times about the close relationship between AIG and SICO.

SICO argues that its real purpose in setting up a deferred compensation program was neither to benefit the employees who gain nor to benefit AIG. Its purpose was to strengthen AIG, enhance its moneymaking opportunities, and thereby to benefit SICO, its largest shareholder. In other words, there was nothing eleemosynary about the DCPPP. Its sole purpose was to enhance the value of AIG shares and thereby benefit SICO.

This argument is amplified by noting that only 4 percent of the AIG shares owned by SICO have been distributed to AIG employees, and that it has never agreed to use any portion of its AIG shares for future compensation for AIG employees. SICO does pledge that all the shares set aside for employees until now will be paid. It also argues that the bonus payments SICO used to pay to participants in the compensation plan were cancelled in about 1992, without objection from AIG. Regarding control of SICO by the board, the brief argues that on March 28, 2005, four existing AIG executives on the SICO board voted to remove nine current AIG executives from that board. Subsequently, on April 14, AIG ordered three AIG executives still on the board to resign or lose their employment with AIG. This is foolish on AIG’s part-to be removing AIG directors from the board when they claim they rightfully are entitled to the shares. A very distinguished attorney whom Greenberg had tried to recruit as general counsel told me he considered this an exceedingly imprudent move.

The brief argues that SICO has meaningful functions other than holding AIG stock and administering a DCPPP. It has substantial investment portfolios as well as ownership and management of real estate. In March 2005, the Wall Street Journal reported that the AIG board was considering abolishing the role of a private holding company, Starr International, as a payer of deferred compensation to AIG employees. Subsequently, the AIG board did abolish the participation of AIG employees in the planned 2005-2006 DCPPP of Starr International. AIG subsequently created its own plan very similar to the SICO plan. This too is contradictory-AIG claims they have a right to the shares, then forbids their executives from participating in the plan, and finally abolishes it altogether.

If AIG were right that it had certain ownership rights in SICO’s AIG stock, then it would have to consolidate Starr International into its financial statements or reflect the appropriate liabilities of the DCPPP’s on its books and records and include such shares as a contra-equity account on its consolidated balance sheet. It did not do so, even in its recent massive restatement of prior years. So, SICO argues, AIG has undermined its own position.

AIG benefited by having the compensation program in SICO, since it was nondilutive to AIG. The brief notes that “if the expenses of the SICO plan had been reflected by AIG, the pretax amounts accrued would have been $129.6 million, $49.4 million, and $55.7 million for 2003, 2002, and 2001, respectively.” It also notes that its Form 10-K filed with the SEC in May 2005 reported a reduction of $905 million in retained earnings on its 1999 consolidated balance sheet and an additional corresponding increase to be paid in capital to reflect “expense amounts attributable to deferred compensation granted to certain AIG employees by SICO.” The 2004 AIG proxy statement noted that payments under the SICO plan are not paid by AIG and will be nondilutive to AIG shareholders. In short, SICO, not an AIG affiliate, pays the deferred compensation so there is no cost to AIG or its shareholders.

The SICO countersuit has one additional purpose: It wants AIG to make it clear SICO is not an affiliate of AIG. There are probably a number of reasons, but the one named in the lawsuit is that under the Securities Laws, until AIG registers the SICO-held shares, SICO cannot pay out to those participants in the deferred compensation program the AIG shares they are due. AIG has played games in this regard again and again. It simply will not give clear clarification on this issue. One could presume this is because of the lawsuit under which they hope to gain control of the 311 million AIG shares. If they registered with the SEC that Starr is not controlled by them, it weakens their case for gaining control of the AIG shares held by SICO. But that is pure speculation. In any case, AIG announced on June 19 that it had registered with regulators for Starr Internaional to issue SICO-controlled AIG shares to AIG executives. This left clear that the great majority of shares were still in contention.To indicate AIG is still on the SEC watchdog list, it issued a statement saying one reason it had been able to do this was because it had filed amendments to the 2005 annual report, which provide increased financial disclosure.

The attorney whom Greenberg tried to recruit as general counsel said to me he thought AIG had handled the SICO lawsuit badly and that he thought Greenberg would win and be cleared on all the other charges, although he probably would have to pay a fine.

So the battle continues and will likely continue for some time. The stakes are such that AIG is closely watching what SICO does with the contested shares. In February 2006, AIG challenged SICO in court to give it details of its sales of AIG shares and its plans for future stock sales as the companies continue their messy divorce. This was in reaction to the fact that Starr had sold about 2 million of the 311 million shares it holds. Starr indicated it is willing to turn over information about its sales and the disposition of these shares. In a letter to the presiding judge, Starr International said it intends to continue selling AIG shares and will use those proceeds for general corporate purposes, including reinvestment. It apparently sold another 3 million shares in March.

Whichever company wins the court battle-AIG or SICO-there will almost certainly be an appeal. So it could go on for a long time. It is a complex issue that is shaped by the long relationship between the two companies.

Commenting on the lawsuit, several AIG directors feel the suit had to be filed yet do not expect to win it. Apparently, they feel it had to be filed because of the cost to AIG of having a separate long-term compensation program. They worry they are liable as directors if they don’t try to regain the shares.

One respected and very creative lawyer who was with the company for over 30 years said to me back in the 1980s: “How is it that an AIG executive can also work for one or two private companies (C.V. Starr and Starr International) that do business with AIG where he gets paid by both or all three and there is not a conflict of interest? And how come we report all this to the SEC in our 10K and no questions are asked?” That never changed until the crisis that led to Greenberg’s ouster.While the authorities have looked at these private companies and some lawsuits have been filed about the conflict of interest, there has not been a big issue made out of it. But the lawyer asked a very poignant question.

My opinion on this case is a nonlegal one since I am not an attorney. It is based on the merits of the case and what strikes me as fair. First, it is clear SICO legally owns the stock. It is a private company and has unquestionable ownership. The original $110 million set aside has grown to a staggering $20 billion in a little over 30 years. But on a de facto basis, AIG and SICO were treated as one entity when Greenberg was head of both. One AIG director commented: “Hank saw it all as one big pot-AIG, C.V. Starr, SICO.” In other words, star performers got the benefits of all three. He used each as he saw fit. One has to wonder if Greenberg had not been at SICO when he retired from AIG, what would have happened.Would there have been a current or former AIG executive who was a SICO director who would have organized SICO to make investments and would have broken off with AIG? Highly unlikely. More likely, the new AIG CEO would have become chair of SICO and the compensation program would have continued. AIG executives would have remained on the SICO board since, first and foremost, they are needed to determine who should be the beneficiaries of the DCPPP.

It doesn’t seem fair that SICO suddenly has $20 billion to do with as it likes when that clearly was not the original intention. Yet, on the other hand, why should AIG have $20 billion handed over after it cancelled participation by its own employees in the SICO compensation plan? Since the SICO shares would not be exhausted for several centuries if ever, an appealing compromise would be for SICO to give AIG sufficient shares to fund the compensation program and to keep the rest for itself. Clearly, my idea of a compromise will never happen. The swords are drawn in the sand and the intensity of feeling is too high.

The tangled divorce between Hank Greenberg and AIG has produced a lawyer’s paradise-a ton of litigation. Starr Wars, some call it. C.V. Starr & Co., the other company Greenberg headed when he was at AIG and still does, and AIG are involved in a second set of lawsuits. (Starr was the company with which the poorly performing agencies were placed before the public offering of AIG so as to keep the price of AIG up.) These lawsuits are not nearly as significant and involve a minuscule amount of money compared to the SICO vs. AIG suit. But they indicate the hostility that has developed between Greenberg and AIG.

Partners before are now direct competitors or trying to be. Starr was the managing general agent for about $2 billion in premiums on policies underwritten solely by AIG. These agencies often had executives who had similar functions inside AIG itself. C.V. Starr owns four specialized agencies-American International Marine Agency, American International Aviation Agency, and Starr Tech, which focus on energy and chemical industries. C.V. Starr itself handles excess casualty insurance in trucking, and so on. Greenberg was willing to sell it all to AIG, but the offer was some $600 million short, from Greenberg’s view.

AIG brought suit against Starr in January 2006 to stop it from selling insurance for other companies, including a unit of billionaire businessman Warren Buffett. Starr and its subsidiaries traditionally sell AIG policies to big manufacturers and now have deals to sell policies written by another unit of Berkshire Hathaway and Ace Ltd., an insurer run by Evan Greenberg, Hank’s son. The AIG suit accuses the Starr agencies of “flagrant misconduct and self-dealing contrary to the best interests of AIG,” by diverting one-third of the portfolio intended for AIG to National Indemnity, a Berkshire unit. The most interesting part of the suit is that one of Greenberg’s new insurers is one of the very groups of companies that got him in trouble over his accounting scandal.

So Greenberg, or C.V. Starr & Co., started the feud by lining up other insurers to do business with instead of exclusively working with AIG as had been the case in the past. Maybe he was dissatisfied with the  compensation from AIG. Or maybe he preferred to diversify. In any case, it is one more sign of the enmity.

New York State Supreme Court Justice Herman Cahn temporarily blocked C.V. Starr from selling the insurance, but a couple of days later Starr filed suit accusing the insurance giant of trying to prevent it from competing with AIG. The suit contends AIG undertook a series of acts designed solely to inflict irreparable damage upon the Starr agencies and their subsidiaries. AIG is charged with trying to take business from the Starr agencies.

Finally, on February 17, AIG terminated its relationship with Starr Tech and its subsidiaries and said AIG Global Energy will manage future business of accounts formerly written on its behalf by Starr. A few weeks later AIG announced creation of a new unit to handle several lines of business previously handled by C.V. Starr & Co. When the dust clears, the bottom line is that Greenberg walked away with the bulk of the talent that staffed these various agencies. Customers comment that until the brouhaha started they did not even know C.V. Starr was a private company but thought they were dealing with AIG.

Of the three pegs in Greenberg’s power base, the Starr Foundation should be the one that offers the least aggravation and in some ways should be the most rewarding, for it provides the opportunity to draw from a $4 billion pool and support numerous good causes, especially those in education. But it too has become a problem-only a different kind of problem. SICO and C.V. Starr were battles over business, battles that were initiated by Greenberg. The

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