A.I.G. Board Questioned 2 Affiliates, Court Papers Disclose
The New York Times
April 21, 2005
Executives and directors of American International Group discussed corporate governance questions in 2002 that had been raised about two private companies, C. V. Starr and Starr International, newly unsealed court documents show.
As part of a wide-ranging investigation into the company's possibly questionable transactions, regulators are looking at the close relationship between A.I.G. and C. V. Starr and Starr International. A.I.G. does business with both entities, which are significant A.I.G. shareholders. A.I.G. has disclosed little about the companies, whose shareholders are all A.I.G. executives and managers.
At a September 2002 meeting of the A.I.G. board, Maurice R. Greenberg, then A.I.G.'s chairman and chief executive, suggested that A.I.G. "consider engaging" its longtime auditor, PricewaterhouseCoopers, to investigate assertions that A.I.G. harmed shareholders by engaging in business with C. V. Starr and Starr International to enrich A.I.G. executives, according to meeting minutes.
Mr. Greenberg had read a report in BusinessWeek about A.I.G.'s relationship with C. V. Starr and Starr International, known as S.I.C.O.
By November 2002, Frank J. Hoenemeyer, an outside A.I.G. director who was then the chairman of the firm's audit committee, had followed up on Mr. Greenberg's suggestion and hired PricewaterhouseCoopers. The final confidential report that the auditing and accounting firm issued in February 2003 cleared A.I.G. of any wrongdoing with C. V. Starr and Starr International.
According to a July 2003 memorandum prepared by an outside lawyer, Mr. Greenberg had over the years considered changing the way C. V. Starr did business but ultimately rejected the idea, because, the memorandum quoted him as saying, "I knew that if I disturbed it I'd destroy something I built."
The board minutes and legal memorandums are among recently unsealed confidential internal documents gathered by lawyers representing a pension fund, the Teachers Retirement System of Louisiana. The pension fund filed a lawsuit against A.I.G.'s directors in December 2002 in Delaware Chancery Court, saying that through C. V. Starr and Starr International, A.I.G. had engaged in self-dealing involving hundreds of millions of dollars. The lawsuit, which is still pending, covers roughly the years 1999 to 2002, even though both companies have been doing business for decades.
The lawsuit, contending breach of fiduciary duty, among other things, seeks damages of more than $1 billion, which is about the total amount of commissions paid to the two companies by A.I.G. in recent years that should have gone to A.I.G. shareholders, said Jay W. Eisenhofer, a lawyer at Grant & Eisenhofer, a law firm representing the pension fund.
A.I.G. has historically defended C. V. Starr and Starr International as unique and necessary to the company. But Mr. Eisenhofer yesterday called the two private companies "one of the most outrageous rip-offs of shareholders that I've ever seen."
"We expect directors both inside and outside the company to repay the more than $1 billion in investor losses as a result of this scheme," he added.
In legal filings, Grant & Eisenhofer criticized the PricewaterhouseCoopers report and A.I.G.'s internal investigation of the two private companies as flawed and as a whitewash.
Chris Winans, a spokesman for A.I.G., declined to comment yesterday. The company is cooperating with the investigation.
In February 2003, A.I.G. formed a "special litigation committee" to examine the pension fund's lawsuit. A March 2003 confidential file memorandum written by Bradley R. Aronstam, an associate lawyer at Weil, Gotshal & Manges, a law firm retained by the special litigation committee, said that "in PWC's words, 'This is nothing that concerns us,' "referring to the two private holding companies.
The memorandum ended by noting that the two PricewaterhouseCoopers partners overseeing the review, Richard W. Mayock and Barry N. Winograd, "stated their sense that A.I.G. has been more conservative than it had to be in its dealings with Starr and S.I.C.O."
A spokesman for Weil, Gotshal declined to comment yesterday.
A second Weil, Gotshal file memorandum dated July 1, 2003, noted that M. Bernard Aidinoff, an A.I.G. outside director and retired partner at the law firm of Sullivan & Cromwell, was also untroubled. Referring to the private status of C. V. Starr and Starr International, Mr. Aidinoff said, " 'I don't think that maintenance of the structure is intended or used to funnel funds out' of A.I.G."
For all the secrecy over the two Starr affiliates, it is clear from the documents that executives at A.I.G. were informed of their workings.
A February 2003 file memorandum from Mr. Aronstam noted that a Sullivan & Cromwell lawyer had said that "Starr and S.I.C.O. engage in transactions with A.I.G." Michael Murphy, A.I.G.'s legal counsel in Bermuda before he was fired, and Kathleen Shannon, A.I.G.'s corporate secretary, "can provide details concerning those transactions," the Sullivan & Cromwell lawyer said, according to the memorandum.
On July 16, 2003, Mr. Aronstam met with Mr. Greenberg concerning the allegations in the pension fund lawsuit, according to a file memorandum. The document says that Mr. Greenberg, defended C. V. Starr & Starr International, calling A.I.G. "a public company with a quasi-entrepreneurial atmosphere" adding that "this is very healthy."