When Greenberg returned from abroad in late March 2005, he found his office on the 18th floor of 70 Pine Street cordoned off as if it were a crime scene. Apparently under orders from Spitzer’s office, AIG guards refused to let Greenberg enter or retrieve even his personal property, which included memorabilia from world travels, letters from his mother when he was fighting in the U.S. Army, and medical files for his dog, Snowball.1 Since no one at AIG had employment contracts, not even Greenberg, his lawyers and AIG’s had been discussing a standard executive severance package, which would include office facilities. Before March was over, however, Paul Weiss abruptly ended the talks without explanation, and AIG would never provide Greenberg with any form of severance compensation.2 AIG had also isolated Greenberg’s staff, denying them access to their usual workstations in favor of banishment to remote reaches of 70 Pine on the 63rd floor, accessible only by a separate elevator, assuring they would not encounter any other AIG personnel.
A civil war had thus begun, with AIG first freezing out Greenberg and his staff and then gradually escalating into outright hostility. Battles would be fought on a dozen fronts, span five years, and consume billions of dollars. Greenberg’s first task was to find an office. He worked from temporary quarters in a townhouse near Lexington Avenue and 75th Street that C. V. Starr & Company had owned for several decades and used to host guests and store company cars. In the townhouse, he huddled with his small team—Matthews, who returned from retirement to help, and Smith and their assistants—to plan business strategy on behalf of C. V. Starr & Company and Starr International Company (SICO). To plan legal strategy, Greenberg’s top lawyer, David Boies, soon created a “war room” at his midtown Manhattan office.
A primary objective was separating AIG from C. V. Starr & Company and SICO. SICO owned about 12 percent of AIG’s outstanding shares, although it did not have any insurance operations; C. V. Starr & Company operated several subsidiaries which acted as general managing insurance agents in specialty lines such as aviation, marine and technical risks. These agency businesses were left out of the corporate group when AIG was created because they were small at the time and would not have added value to the public offering. By March 2005, almost 30 years later, the C. V. Starr & Company agencies were worth perhaps $1 billion and employed 300 people, though trivial compared to the scale of AIG, then employing 92,000 and worth some $180 billion. The three companies—AIG, C. V. Starr & Company, and SICO—had been involved in thousands of transactions with each other over several decades. They shared information systems and office space and had overlapping directors and officers and some common shareholders. Severing these relationships, which had always been disclosed in AIG’s regulatory filings, would be a significant task under the best of circumstances. Among uncooperative sparring partners, it became a battle of David versus Goliath.
Separating the directors of the two corporate sides was an initial step, one Greenberg had instructed SICO’s lawyers to begin before he left on his overseas trip. Those lawyers, working in Bermuda in late March to segregate AIG and SICO documents, did their research in the business center of a hotel in Hamilton, after AIG lawyers had ejected them from the office space SICO had shared.3 With little to go by but a thumb drive containing fragments of SICO corporate records, the lawyers determined that the swiftest and surest procedure was to convene a shareholders’ meeting. The meeting’s purpose would be to remove SICO directors who were also directors of AIG, including Kanak and Sullivan. The lawyers coordinated calling this shareholders’ meeting to occur in Bermuda, SICO’s headquarters, on March 28, 2005. All directors seemed to be cooperative, agreeing with the purpose of separating AIG from SICO.
SICO had only 12 voting shareholders, among them Greenberg, Matthews, and Smith, whom the lawyers contacted by cell phone to assure their availability. But SICO’s voting shareholders also included four long-retired members of the band of brothers, now well into their 80s and 90s, frail and residing in different time zones: Stempel, who retired in 1995 was local, still living in Hamilton; Freeman, who retired in 1993, was in Hawaii; and Manton, who retired in 1988, and Roberts, who retired in 1997, were on the East Coast of the United States. Compounded by a lack of experience with prevailing technology such as teleconferencing and e-mail, the logistics were not easy. But all were determined to help Greenberg in this circumstance. Manton, the towering Brit, was so upset over these developments that he broke down in tears occasionally and could not speak.4
The lawyers managed to get all 12 shareholders on a call to discuss and give their unanimous consent to remove the directors, as well as to elect Freeman, Roberts, and Stempel. (Manton, the eldest of the four, protested that he was too old to serve.5) The lawyers also obtained resignations from the board of C. V. Starr & Company of those directors who would be continuing to work for AIG.6
The companies mutually agreed to end the historical practice of distributing SICO’s shares of AIG as incentive compensation for AIG employees. With the directorships separated, SICO first fulfilled all compensation commitments it had outstanding and then terminated the plan. AIG thus lost one of the keys to its historical success and one that defined its culture: a huge free asset used to attract and retain a peerless employee base. AIG began to search for ways to replace those historical sources of employee compensation, which Sullivan said were essential to maintaining employee morale.7
Greenberg turned to the insurance agencies that C. V. Starr & Company owned. He was prepared to sell the agency businesses to AIG if fair terms could be agreed. Greenberg and advisers he retained estimated their value at about $1 billion. In May 2005, they initiated negotiations with Sullivan about the possibility of a deal. AIG seemed receptive, and advisers spent most of the summer and early fall working towards a pact. Discussions broke off toward year-end, however, because AIG was ultimately unwilling to offer more than $600 million for the businesses. Another bidder, Warren E. Buffett of Berkshire Hathaway, offered a higher price, but Greenberg finally decided he would prefer to retain all of the businesses and build them up rather than sell them off.
Given the decision to retain C. V. Starr & Company intact, both sides agreed that it was best for its diverse group of shareholders to part ways, too, ending share ownership by any AIG executives. To that end, in December 2005, C. V. Starr & Company offered to repurchase all its shares from AIG executives. Referred to as a “self-tender offer” in the jargon of corporate finance, all the targeted shareholders accepted the offer and C. V. Starr & Company bought all their shares. The price included a “gross-up,” meaning payments that covered the costs to recipients of income taxes on the sale. C. V. Starr & Company offered the gross-up voluntarily, not through negotiations, because it believed that the recipients, all long-time AIG employees, deserved that. The AIG executives were richly rewarded. Sullivan received $14 million in the deal, and several received payments exceeding $10 million.
Moving to build those businesses, Greenberg proposed to Sullivan extending all existing contracts between AIG and the C. V. Starr & Company agencies. Sullivan demurred on this proposal, however, which Greenberg took as a signal that AIG did not want to continue the relationships. So Greenberg began to expand the range of insurance companies with which C. V. Starr & Company’s agencies had long-term general agency agreements. Over the next several months, C. V. Starr & Company would enter into such agreements with several insurers, including both ACE and Berkshire Hathaway on February 28, 2006; Everest National Insurance on April 6; Chubb on June 19; and National Liability and Fire Insurance Company on July 21.
But Sullivan’s rebuff of Greenberg’s extension offer signaled something more. Separation anxiety had apparently been gradually growing among AIG executives during the course of severing the director relationships, negotiating over the sale of the agency businesses and the self-tender offer. AIG management began to act as if it was in AIG’s competitive interests either to control C. V. Starr & Company and SICO—and Greenberg—or to destroy them. Greenberg was not about to let any of those things happen. As a result, when the Starr companies began to generate business for other insurers rather than AIG and to sever their shared resources, AIG responded with a combination of aggressive business tactics and disruptive lawsuits and arbitrations.8
On January 6, 2006, AIG officials stormed the London office of a Starr Aviation unit called Redholm, which AIG and Redholm employees had long shared, and ousted two dozen Starr employees from the premises. The officials then commandeered all equipment and records in the office, whether belonging to AIG or Redholm. It denied employees access to e-mails and electronic documents, and tried to induce the employees to quit Redholm and go to work for AIG. On January 9, AIG terminated its managing general agency agreement with Redholm, cutting off Redholm’s principal line of business. Redholm fought back by filing an arbitration proceeding challenging AIG’s tactics and the validity of AIG’s termination of the agency agreement. It objected, in short, that AIG was illegally trying to destroy it—a case that Redholm would eventually win.
AIG also targeted Starr Tech, the company created in 1967 after the explosion at the Cities Service refinery in Louisiana, still providing insurance services for complex engineering concerns in several industries. On January 27, 2006, AIG locked Starr Tech employees out of shared offices in New York and blocked access to Starr Tech files. On January 31, AIG sent letters to 32,000 insurance brokers advising them to stop doing business with Starr Tech. Starr Tech responded to such tactics by obtaining a court order barring AIG from poaching its employees and disrupting its customer relations.
AIG would repeat such campaigns against other C. V. Starr & Company businesses at several locations around the world. The result was a series of lawsuits or arbitrations filed by the two sides in various locales, from New York to Atlanta to London. Among the numerous allegations traded in these cases, the most significant was AIG’s claim that the Starr agencies were not allowed to place insurance for other insurance companies. In the case of Starr Tech, AIG charged that it had become AIG’s exclusive agent under a 1992 contract that barred Starr Tech from placing insurance with any other company. It called Starr Tech a “rogue agent” acting against orders from AIG.
In response, Starr Tech and the other Starr companies alleged that AIG was engaged in an illegal pattern of interfering with its contracts and business relationships. Starr Tech insisted it had the right to work as agent with any underwriter it chose. The 1992 contract did not create any exclusive agency arrangement. To the contrary, Starr said in a reply suit, AIG was trying to destroy Starr’s business.9
Throughout 2006, the Starr companies won most of these legal disputes, as nothing in any of their agreements with AIG restricted their right to engage in the insurance business with other companies. Finally, in December 2006, the parties settled all of their commercial feuds, as well as trademark battles concerning use of the Starr and American International names.
With many of the commercial battles resolved, it remained for Greenberg to wrest control of his personal property from AIG, which it continued to hold, along with an art collection that belonged to SICO. The collection consisted of 80 works of fine art, including several paintings worth at least $6 million each.10 They had been displayed or stored at offices around the world that SICO and AIG shared, mostly at 70 Pine Street, but also in such remote locales as Mt. Mansfield in Stowe and the Philamlife Tower in Manila. Several were by famous artists, such as Vincent Van Gogh and Winslow Homer, while others had more idiosyncratic value, including sculptures by two of Starr’s favorites, David Aronson and Milton Hebald—the latter being the sculptor commissioned to render the tributes to Starr reposed at Morefar and at AIG’s Tokyo building.11
During this standoff, AIG’s general counsel, Ernest Patrikis, personally investigated the ownership of the disputed property and confirmed that it all belonged to Greenberg or SICO, not AIG.12 Nevertheless, at Spitzer’s direction, AIG refused to surrender the art, or Greenberg’s personal papers and memorabilia.13 Greenberg and SICO were forced to sue to recover this property, which led to their return, though at significant cost in time and legal fees.14 Once reclaimed, Greenberg placed the sculptures by Aronson and Hebald on display in the boardroom of the Starr companies, by then in a proper office in midtown Manhattan.
Never recovered was a set of dining room chairs that had belonged to Starr, located successively in his office at 102 Maiden Lane, then Greenberg’s at 70 Pine Street. AIG had agreed to deliver the chairs, and matching table, in exchange for SICO giving AIG documents to support income tax deductions worth $150 million. SICO delivered the documents to a senior AIG tax lawyer, who confirmed their veracity and custody to AIG’s general counsel’s office.15 Anastasia Kelly, an in-house AIG lawyer, said the chairs were on their way, but the next day only the table arrived. Kelly said the chairs were withheld at the behest of Roberta Kaplan, the Paul Weiss lawyer. Later, AIG lawyers claimed that the dining room chairs had vanished.
As part of the civil war, AIG’s new management and its lawyers turned a shareholder lawsuit that all had agreed should be thrown out into a competitive weapon against Greenberg and C. V. Starr & Company. The suit, filed in December 2002 against AIG directors, claimed that AIG paid C. V. Starr & Company agencies above-market commissions. It supposed that by having Starr overcharge AIG, the directors would gain more as Starr shareholders than they would lose as AIG shareholders. Following corporate practice, AIG had the claim evaluated by two independent directors who hired outside advisers, including the law firm of Weil, Gotshal & Manges. Their 146-page report, prepared over the course of eight months, concluded that the allegations were baseless.16 Most commissions the Starr agencies charged for placing insurance with AIG were more favorable to AIG—they were below-market. Those above-market were priced to reflect services Starr provided to AIG that other market participants did not. The independent directors informed the judge in 2003 that the case should be dismissed.
Ordinarily, that would have been the end of it, but the events of early 2005 led the plaintiffs to renew their suit in May 2005;17 ordinarily, a board would reply to such a renewal by referencing its report and repeat its request to dismiss the case, but the events through late 2005 led AIG’s board to change tactics. At a June 2005 board meeting, lawyers from Simpson Thacher and Paul Weiss addressed this and other pending legal battles by speaking of “different strategic considerations now involved.”18
AIG’s new “strategic considerations” now made it expedient for AIG to join in the lawsuit against Greenberg, Matthews, and Smith, rather than oppose it, throwing the merits aside. Hence, it ran a new investigation, spearheaded by two directors and using new lawyers as well as reengaging Weil Gotshal. Within two months during the holiday season—in December 2005 and January 2006—this second team produced a new report with different conclusions.19 Based on this report, the new board offered a deal plaintiffs’ lawyers usually only dream of: drop the case against current AIG directors in exchange for their endorsing the case against Greenberg, Matthews, and Smith. The directors thus turned a legal sword pointing at them into a business dagger pointed at their newfound competitors.
The evidence in the case, developed during the next two years based on one million pages of documents and testimony of 62 witnesses,20 showed that commissions were below-market, meaning AIG potentially owed Starr for those, in all but one policy class and in that class commissions were above-market because Starr did additional work on the matter. After extensive skirmishing as a result of this turnabout in “strategic considerations,” Greenberg and Starr found it expedient to settle the lawsuit, partly due to the vagaries of litigation, especially the well-known uncertainties of court battles in Delaware, where the case was filed.21 Another reason: an even bigger battle in the civil war, with stakes in billions of dollars, was coming to a head.22
The billion-dollar battle involved the SICO compensation plan, which Sullivan and the others had finally come to realize could not be replaced though it was among the most important features of the company. Rather than settling for legitimate substitutes for it, AIG decided to take a big gamble and file a lawsuit to wrest the shares of AIG that SICO owned for itself. Finding a legal theory to support such an effort was extremely difficult, as the case was frivolous at worst and a long shot at best. The minutes of a May 18, 2005, AIG board meeting state: “Mr. Beattie noted that counsel is hampered in determining what arguments are available to seek to impose a constructive trust over the AIG shares held by SICO because they have been unable to review relevant documents.”23
The review of related documents that followed would last several years in the protracted process called “discovery.” Teams of lawyers spent those years gathering and studying several millions of pages of documents covering the history of SICO and the compensation plan used for 30 years to provide billions of dollars in rewards to AIG employees. Scores of people involved with SICO for three decades answered written interrogatories or provided sworn testimony under cross examination by lawyers. AIG’s general counsel, Patrikis, said that the case had less than a 50-50 chance of success.24 He sought to settle the case early on, as part of an overall settlement of the civil war. But lawyers at Paul Weiss told AIG that it was strong so Sullivan decided to wage another losing battle.25
The dispute culminated in a three-week trial in New York federal court. Greenberg spent more than a week on the witness stand from morning to night answering questions of Paul Weiss lawyers about documents, speeches, and writings that went back 35 years. The jury concluded deliberations in less than a day, easily finding for SICO; the judge, Jed Rakoff, said Paul Weiss had “not come close to shouldering” its burden of proof in the case.26
Besides the ludicrous claim, much about this litigation was surprising. Every AIG director and senior officer had always known that SICO, an independent company controlled by a dozen people, owned a sizable block of AIG’s stock and distributed shares annually to deserving AIG employees. Sullivan testified that he had never seen any document saying the shares that SICO owned actually belonged to AIG.27 Patrikis, general counsel, whose responsibilities included preserving all documents, likewise testified that there was no document to support Paul Weiss’s theory.28 Zarb testified to the same effect, acknowledging that multibillion-dollar deals are rarely made without something in writing.29 However, the AIG directors and officers avoided stating the obvious fact that SICO owned the AIG shares and stuck with the story that AIG owned them. Some testified vaguely that they could not recall relevant information about the arrangement.
The scale of the case, and its contest between two prominent trial attorneys, Boies and Theodore V. Wells Jr. of Paul Weiss, drew the attention of many local lawyers, filling the courtroom daily. Among these, oddly enough, were lawyers from Spitzer’s office. Their actions attested, once more, to the cozy relationship between Spitzer’s lawyers and those of Paul Weiss. One Spitzer lawyer, Alisha Smith, e-mailed Paul Weiss lawyers who would be sitting at counsel’s table in the front of the courtroom. Smith wrote: “Would it look strange if I sat up there with you guys??? Kidding. . . .”30
We have no way to determine exactly what motivated lawyers at Paul Weiss or the directors and senior executives at AIG who supported this lawsuit.31 Most likely, however, it was due to the lingering effects of their defensive need to justify the extraordinary upheaval they had caused when requesting Greenberg’s resignation. With the SICO compensation plan at stake, moreover, participants lost one of the company’s most valuable resources—a key to AIG’s strength in recruiting and retaining top talent. Tellingly, after losing the trial, Paul Weiss and AIG did not appeal.
On the bright side, after the lawsuit, the environment at AIG began to change with new leadership, including a new CEO, Robert Benmosche. Benmosche was the former chairman and CEO of MetLife and exactly the kind of highly qualified, experienced executive that Greenberg wanted as a successor. Confronted at the outset with Boies’s assertion that AIG had no case against SICO, and Paul Weiss’ assertion that AIG had a strong case, Benmosche decided to trust the company’s lawyers. However, after AIG’s decisive loss at trial, Benmosche concluded that it was time to bring the whole civil war to an end. In a comprehensive settlement—reached only in December 2009—AIG agreed to reimburse legal fees that Greenberg and the Starr companies incurred up to $150 million, reflecting the overall equities of this entire saga.32
Notes
1. Cunningham interview with Ernest Patrikis, New York, January 23, 2012 (stating that AIG cordoned off Greenberg’s office and seized his property at the direction of Spitzer’s office); e-mail from Patrikis to Cunningham, August 26, 2012 (stating that Spitzer told AIG not to return any property associated with Greenberg).
2. Cunningham interview with Lee Wolosky, New York, February 6, 2011.
3. Cunningham telephone interview with Christopher Duffy and Lee Wolosky, March 7, 2012.
4. Ibid.
5. Ibid.
6. The effort was completed two weeks later when additional resignations were supplied by three other directors not removed at the shareholders’ meeting: Thomas Tizzio, Robert Sandler and R. Kendall Nottingham.
7. AIG Board Minutes (April 21, 2005), 9; AIG Board Minutes (May 18, 2005), 2; see also ibid., p. 4 (statement of Marshall Cohen); AIG Board Minutes (June 16, 2005), 14 (referencing a “discussion” without naming individuals).
8. Many phases of the protracted dispute between AIG and the Starr companies were covered by general business journalists and the insurance press. For a sampling, see Jenny Anderson, “Suit by A.I.G. Adds to the Rancor of Breaking Up Old Times,” New York Times (January 28, 2006); Jenny Anderson, “In Lawsuit, C. V. Starr Accuses A.I.G. of Hurting Its Business,” New York Times (January 30, 2006); Judy Greenwald, “Greenberg Fights AIG over Starr Business in Battle for Control,” Business Insurance (Crain’s) (February 6, 2006); Rupal Parekh, “AIG, Starr Feud over Employee Defections,” Business Insurance (Crain’s) (August 14, 2006).
9. See Parekh, “AIG, Starr Feud over Employee Defections.”
10. Joint pretrial order in Starr International Co. v. American International Group, 05-CV-6283 (BSJ) (MHD) (July 31, 2008), 4. Schedule A to this order contains an inventory of the artistic property.
11. The Van Gogh is Little Streams or Le Petite Cours d’Eaul; the Winslow Homer paintings were Taking on Wet Goods and Sloop Bermuda; the David Aronson was The Singer; and there were several sculptures by Milton Hebald, including Mother with Two Children.
12. Cunningham interview with Ernest Patrikis, New York, January 23, 2012.
13. Ibid.; e-mail from Patrikis to Cunningham, August 26, 2012.
14. SICO v. AIG, No. 05-CV-6283 (JSR) (MJD) (S.D.N.Y.) (complaint filed July 8, 2005).
15. Cunningham telephone interview with Roger Dinella, April 30, 2012.
16. See Stipulation of Settlement, Teachers’ Retirement Systems of Louisiana v. Greenberg, C.A. No. 20106-VCS (Del. Ch. September 29, 2008).
17. See Teachers’ Retirement Systems of Louisiana v. Aidinoff, 900 A.2d 654 (Del. Ch. June 21, 2006).
18. AIG Board Minutes (October 20, 2005), 5 (presentation by Stephen Radin, of Weil Gotshal). At the October 20 board meeting, a lawyer from Weil Gotshal, Stephen Radin, after referencing the earlier report’s conclusion “that the commissions paid by the agencies were fair to AIG,” suggested that “one possible avenue for settlement of the lawsuit involves the purchase of the agencies by AIG.” Sullivan echoed that possibility, saying the issues in the lawsuit could be resolved simply by AIG acquiring C. V. Starr & Company agencies.
19. See Stipulation of Settlement, Teachers’ Retirement Systems of Louisiana v. Greenberg.
20. Ibid.
21. See, for example, William M. Carney and George B. Shepherd, “The Mystery of the Success of Delaware Law,” University of Illinois Law Review vol. 2009 (2009): 1.
22. See Stipulation of Settlement, Teachers’ Retirement Systems of Louisiana v. Greenberg.
23. Minutes of AIG Board of Directors Meeting (May 18, 2005).
24. Cunningham interview with Ernest Patrikis, New York, January 23, 2012; e-mail from Patrikis to Cunningham, August 26, 2012.
25. Cunningham interview with Ernest Patrikis, New York, January 23, 2012.
26. SICO v. AIG, 648 F.Supp.2d 546 (S.D.N.Y. 2009) (Rakoff, J.).
27. SICO v. AIG, Statement of Material Uncontested Facts (February 15, 2007), 40–41.
28. Ibid.; e-mail from Patrikis to Cunningham, August 26, 2012.
29. SICO v. AIG, Statement of Material Uncontested Facts, 40–41.
30. E-mail from Alisha Smith to Mark Ciani/Andrew Goldstein of Paul Weiss (June 2009); FOIL 09777 000909-911, FOIL 09777 000904-906.
31. Cunningham asked the senior Paul Weiss partner involved in the matter to discuss it in an interview for this book, but the partner respectfully declined, citing the firm’s attorney-client relationship with AIG.
32. Memorandum of Understanding (November 25, 2009), reprinted in Russ Bleemer, “ADR Brief,” Alternatives to the High Cost of Litigation 28 (2010): 8.