The Battle of the Titans over AIG
By Daniel Fisher, Carrie Coolidge and Neil Weinberg
Published April 25, 2005
David Boies is going up against Eliot Spitzer. The prize: Hank Greenberg.
The showdown was bound to happen one day--as inevitable as Godzilla squaring off against King Kong. David Boies, supreme private-sector litigator, takes on New York Attorney General Eliot Spitzer, consummate prosecutor and politician. They will slug it out over the fate of Maurice (Hank) Greenberg, the ousted chairman of American International Group. It would be tough to find two more ambitious, controversial litigators. Or a couple of opponents more alike in some ways. "We know each other, we like each other, we respect each other," says Boies. "I am a political supporter." Both men tend to try their cases in the press, to push until they overreach and to rely on questionable tactics that sometimes backfire.
On one side, 64-year-old Boies, an Illinois native with disarming manners and a boyish smile--and a talent for neutralizing very powerful adversaries. He defeated Vietnam-era General William Westmoreland in a 1982 libel suit against CBS, largely by quoting the commander's own words back at him. Acting on behalf of the U.S. government, he destroyed the credibility of Bill Gates in the 2000 antitrust case by goading the Microsoft chairman into making broad statements that were contradicted by internal e-mails. His opponent, Spitzer, 45, has used his office as a launching pad to run for governor of New York next year. Since taking over as AG in 1999, he has terrorized Wall Street, bloodying Merrill Lynch, mutual fund companies and Marsh & McLennan, and forcing reforms on the financial community.
But in going after Hank Greenberg, at 80 still no pushover himself, Spitzer may have met his match. Greenberg hasn't yet been charged with anything. Spitzer's case is focusing on a few arcane areas of accounting--including an allegedly bogus deal by AIG with General Re, a unit of Berkshire Hathaway, to bulk up AIG's balance sheet. It involves the acquisition of a $500 million loss portfolio from General Re along with $500 million in assets to pay the claims. That had the effect of boosting AIG's premiums and also its reserves to pay future claims. Was there a genuine transfer of risk from General Re to AIG? If there was no risk transfer at all, then the transaction should have been booked as a loan, not as reinsurance.
On the face of it, Spitzer appears to have the upper hand. After forcing out Greenberg in March, AIG conceded a host of accounting irregularities at offshore entities that could result in a $1.8 billion writedown. Spitzer claims there is a smoking e-mail: memos between two midlevel managers at General Re suggesting the company's former chief executive, Ronald Ferguson, and Greenberg knew it was a riskless transaction. Then there's Greenberg's pleading the Fifth Amendment under questioning by Spitzer &Co., saying he did not have access to the relevant documents. Innocent or not, Greenberg didn't win many points for credibility in a civil case. Nor did his transferring the bulk of his $2.3 billion in AIG shares to his wife.
Spitzer is relying on a strategy he has used so successfully in the recent past: Find a long-established but shady-sounding practice in an industry, expose it as a scandal, single out a villain and threaten criminal prosecution, flushing out the scapegoat and extracting a sizable settlement. He did it to hypocritical Wall Street analysts, to insurance brokers who collected fees from both insurers and their customers and to fund operators that allowed favored clients to trade their way in and out of mutual funds. Time magazine in 2002 named Spitzer "Crusader of the Year," a champion of the little guy. To businesses on the receiving end of subpoenas, he is the Infidel of the Century, a zealot way out of bounds. "The reason companies find themselves in untenable positions," counters David Brown, who has run Spitzer's mutual fund and insurance investigations, "is they've engaged in crimes that breach their fiduciary duty."
Spitzer has clearly put the fear of God, if not Armageddon, into AIG. On Friday, Mar. 11, soon after Spitzer told the company about those memos, panic set in at the Manhattan headquarters. Attorneys from at least four different law firms wandered the halls, says a source close to the company, as executives hopped from one conference room to the next. "There was no discipline and no orderly process in moving forward," says this source. "It was utter and complete chaos in the company that day." Upstairs in his office on the 18th floor, Greenberg was (remarkably) unaware of the crisis, says the source, and not invited to the meetings that would determine AIG's response to the probe.
That day, says an adviser to AIG who was present, the board considered what to do about its besieged leader. Torn between loyalty to Greenberg, who had handpicked his directors, and fear of personal liability in a shareholder or criminal suit, board members discussed bringing in a new chief executive to take the heat off the company. According to this source, a few members pushed the idea of ousting Greenberg. After a weekend of back-and-forth phone calls, the board confronted Greenberg on Sunday, Mar. 13 and forced him to resign.
Backed into a corner, Greenberg called on Boies, who had to get a waiver from AIG, previously a client. Within days a plan emerged. First, separate C.V. Starr and Starr International, the private Bermuda entities that Greenberg controlled, from AIG, the public company he was in the process of losing. The Starr companies held billions of dollars in AIG stock and the compensation of executives. They also held another valuable asset: files that explained many of the deals Spitzer was investigating. Boies wanted them.
A slight wrinkle. At that point, according to a source close to the company, AIG started collecting documents, presumably to turn them over to the government. The insurer sent its people, says this source, to its Ireland office, seized a computer belonging to an employee of Starr International, took her keys away and kicked her out. Shortly thereafter, in an attempt to protect the remaining documents situated in offices in Bermuda, Boies directed their removal and placement in a secured location, then worked out a deal with AIG to share information both ways. "We said, If you want access to these documents, we're happy to give them to you, but we want access to your documents,'" Boies recalls. Was he using the private companies and their files as a bargaining chip? "Sure," he says matter-of-factly.
Boies has a tough job on his hands. He will argue that Greenberg helped conceive the deal with General Re, including the transfer of risk, but "not necessarily [with] the written contracts." As for his subsequent role, "Was something done after the fact to limit the risk inherent in the deal? I don't have any reason to believe it happened," says Boies. "I don't have any reason to believe that is something Mr. Greenberg orchestrated."
Still, it's way too early for the prosecution to declare victory. No one's ever gotten rich by betting against Boies. In 1986, for example, he defended Westinghouse in what appeared to be a clear-cut case of bribing Ferdinand Marcos, the Philippine dictator. Boies won, despite a trail of incriminating telexes between headquarters and a consultant in Manila. "It was a bet-the-company case," says Jonathan Schiller, 57, who worked with Boies on Westinghouse and later cofounded the firm with Boies.
Moreover, Boies himself is a brilliant practitioner of Spitzer's divide-and-conquer strategy himself. In a dizzying pirouette, acting for shareholders, he played Christie's against Sotheby's in the 2001 price-fixing scandal. First he negotiated with Christie's, which was cooperating in a government investigation; then he offered to settle with Sotheby's if it incriminated its rival. Boies further split Sotheby's from Alfred Taubman, its former chairman and largest shareholder, by invoking the directors' fiduciary duty to sue Taubman for the scheme. As a result, plaintiffs collected $512 million in the settlement, including $115 million from Taubman, who later went to jail.
Boies also knows what happens when a powerful chief executive is flushed into the field by a board of directors with its own agenda. He ran an $18 million probe for the board of directors at Tyco International that dug up much of the evidence that led to the indictment of former chief executive Dennis Kozlowski and two lieutenants in 2002. One of those charged, onetime general counsel Mark Belnick, says through his lawyer that Boies had an incentive to go after management because he represented the board. "Boies didn't want the real story," says Belnick's attorney, Mark Hulkower. Belnick later was acquitted of fraud. Boies denies bias. Belnick may have hired his firm, but "when in our view Mr. Belnick was not cooperating, we said so," he explains. "You've got to let the chips fall where they may."
A passionate gambler who ranks craps as his favorite game, Boies has followed an unpredictable path. He was born in Sycamore, Ill. But his father, a high school history teacher, moved the family to southern California in 1954 on a whim. Boies inherited some of that impetuosity. According to v. Goliath ($27, Pantheon), a new biography by Karen Donovan, Boies met his first wife, Caryl, on the high school debating team and married the 16-year-old in a Mexican ceremony they kept secret from their parents for two months. He spent his time competing in bridge tournaments and working in a bank.
While he struggled mightily with dyslexia, Boies won a scholarship to the University of Redlands in California, where he majored in history. He studied law at Northwestern University, until he was forced to leave over an affair with a teacher's wife (who later became his second of three wives). He talked his way into Yale Law School, where he graduated second in his class in 1966.
Right afterward, Boies landed at Cravath, Swaine & Moore, a prestigious New York law firm that specialized in keeping corporate clients out of court. Boies received a careermaking break at the age of 32 when he was chosen to run a case on behalf of IBM in California after the firm Cravath had hired for the job was forced to back out. Boies won, and later played a big role in defending IBM against a decade-long antitrust suit brought by the government.
Boies left Cravath in 1997 after a dispute over representing Yankees baseball owner George Steinbrenner in his suit against Major League Baseball. (Time Warner, which owned the Atlanta Braves, was one of Cravath's biggest clients.) It didn't help that Boies had a history of blabbing to the press and taking on high-stakes contingency-fee cases, anathema to some partners at Cravath.
His firm started small. Using an office borrowed from his third wife, Mary, also a corporate lawyer, with a small practice in Armonk, N.Y., Boies opened his doors with six attorneys. Since then, Boies, Schiller & Flexner has become a 197-lawyer firm with offices in 11 cities and 2003 revenue of $150 million, reports the American Lawyer magazine.
If Boies has pursued wealth and prominence, Spitzer has chased high-profile cases that have political impact. The son of a real estate investor, Spitzer was raised in the upscale Riverdale section of the Bronx, attended the Horace Mann School, and collected a B.A. in public affairs from Princeton and a law degree from Harvard. Although he spent eight years in private practice, Spitzer has made his name in public service, first in the Manhattan District Attorney's office under Robert Morgenthau, later becoming head of its Labor Racketeering unit.
The hallmark of a Spitzer trophy is victory by intimidation. Relying on the Martin Act, a vaguely worded state law that enables the attorney general to file civil or criminal charges in a broad range of securities cases, he targeted various investment banks in 2001, accusing their research divisions of producing overly optimistic reports on investment banking clients. When Merrill Lynch dug in its heels, Spitzer went on the CBS Evening News and warned that if the firm continued "to maintain that what happened was inappropriate but wasn't illegal, there will be no settlement," adding that "there could be criminal charges." Merrill quickly agreed to pay a $100 million fine. All told, Spitzer squeezed $1.4 billion out of Wall Street.
Last October Spitzer called another press conference to announce he was filing a civil fraud complaint against Marsh & McLennan. It accused the giant insurance broker of bid-rigging and collecting "contingent commissions" that bilked clients out of $800 million just in 2003. He warned that Marsh "very possibly" could face criminal charges and called for the ouster of its chief executive, Jeffrey Greenberg, Hank's son. "You should think long and hard, very long and very hard, about the leadership of your company," Spitzer told the board. Marsh's stock lost $10 billion, half its market value. Within 11 days Greenberg was gone, replaced by Michael Cherkasky, Spitzer's former boss in the New York District Attorney's office and a contributor to his political campaigns.
New York ethics rules prohibit lawyers from threatening criminal liability to negotiate civil settlements. Spitzer in the past has denied any wrongdoing. But this time his strong-arm approach may have crossed a line. "The evidence is overwhelming that these were transactions created for the purpose of deceiving the market. We call that fraud," Spitzer told ABC's George Stephanopoulos. He went on to add that AIG "was a black box, run with an iron fist by a CEO who did not tell the public the truth."
Prosecution by press conference. Where are the papers? Where is the indictment or the civil enforcement action reciting Greenberg's misdeeds? There aren't any such papers. Hofstra University law professor Monroe Freedman, an ethics expert, calls Spitzer's mouthing off on ABC "reprehensible conduct." Trying Greenberg on TV "is a very serious violation of due process, in my view," says Freedman. "A prosecutor should not be meting out punishment without going to court to make his case." Greenberg, he adds, may have the makings of a defamation case. "Eliot is well within the bounds" of ethical conduct, says Michele Hirshman, Spitzer's first deputy.
Boies has had his share of over-the-top bravura--an impulse that has repeatedly landed him in scalding water. He and his clients have been sanctioned at least three times. "It's fairly unusual," says Paul Carrington, a professor at Duke University Law School and author of current rules on sanctions in federal courts. "I don't think lawyers get sanctioned very often. People get very angry first."
In one 1998 case Boies tried to get New York Supreme Court Judge Edward Greenfield removed from a lawsuit--three years after his client, New York landlord Sheldon Solow, had settled the underlying complaint. Boies cited flimsy allegations of corruption dug up by Solow's investigators involving the judge's clerk, which raised at least "the appearance of impropriety" by the jurist. But in a testy courtroom exchange Greenfield accused the litigator of ignoring "basic law that everyone knows after the first year of law school." Still another judge fined Boies and his client $46,000 for filing the "barely sensible" motion. "It was startlingly unusual," says Greenfield of the incident, which occurred as he was retiring at the mandatory age of 76. "I'd never seen anything like it in 35 years on the bench." Solow appealed the sanctions and lost. Even today Boies maintains "we had a bad judge" who should have recused himself even if there were no evidence of corruption. Attacking a judge, he says, is "always the last resort."
Boies was fined again in 2003. This was after filing a federal Racketeer Influenced & Corrupt Organizations suit against a doctor who had sold an East Hampton, N.Y. waterfront mansion to Hard Rock Cafe founder Peter Morton. Solow, who owns a house nearby, had already lost a state-court suit seeking to overturn the sale. "Boies was brought in to have more artillery," says Morton's lawyer, Errol Margolin. The Second Circuit Court of Appeals called the suit "frivolous," however, and ordered Boies, Schiller and another firm to pay double costs.
In a high-profile price-fixing case against the Click modeling agency last year, New York defense attorney Aaron Richard Golub convinced a federal judge to fine Boies, Schiller $30,000 for failing to respond to discovery requests--even though the court insisted it do so. "No attorney can expect an exemption" from court rules "simply because that attorney chooses to take on more work than he or she can handle," said U.S. District Judge Henry Pitman in a May 2004 opinion. "We nailed them left and right," Golub says. Boies explains that despite the sanctions, all the modeling agencies, including Click, settled for undisclosed amounts.
Boies narrowly escaped sanctions in a Florida lawsuit over the estate of celebrity jeweler Harry Winston. He and partner Robert Silver agreed to pay a former Winston employee a bonus of up to $1 million for help with the case. The Florida Supreme Court called it paying a witness and suspended for 90 days the license of a Florida lawyer who worked with Boies. Boies and Silver, who are licensed to practice in New York, were exonerated last year by the New York State Bar Association.
And yet, clients say they're willing to hire Boies for $875 an hour, in part, because he does play so close to the edge. "He is chaotic, but that chaos is what makes him so formidable," says Leo Hindery, a cable-TV executive who hired Boies and Schiller to force Cablevision into carrying his YES Network Yankees baseball games. (Boies won.) "If I were on the other side I would find him intimidating, because I'd never know what he is up to."
With two such wily opponents, what will become of Hank Greenberg? He's probably hoping for a quick resolution that will keep him out of court. Bet on one thing: Boies will end up a little richer, and Spitzer will be a few steps closer to the governor's mansion.