The questioning of Maurice "Hank" Greenberg grew more intense athis civil fraud trial on Wednesday, prompting the former CEO to ripoff his glasses, lean forward and raise his voice while answering astate prosecutor's questions about an internal memo he received in2000 that laid out how an alleged sham transaction could bestructured.

The memo, sent by Joseph Umansky, a then-senior vice presidentat American International Group Inc. (AIG), was the focus of theNew York Attorney General Office's nearly three hours of directexamination.

While covering multiple contracts, the memo reportedly includeda "schematic" chart of a potential reinsurance transaction at theheart of a major claim against Greenberg: That he orchestrated atransaction that wrongfully converted underwriting losses from theauto-warranty segment of AIG's insurance portfolio into capitallosses, giving investors a false picture of the company'shealth.

"I'd like to review six contracts with you because of theirunique nature," the April 2000 memo said, according to DavidNachman, a senior enforcement lawyer for the state, whoaggressively examined Greenberg for the second straight day. "Allof the contracts are beyond the conceptual stage, but aconsiderable amount of work is needed. … I would like to get yourreaction to the structures before I proceed."

Tense exchanges

Digging into Greenberg's relationship with Umansky and the memo,Nachman prompted long, often tense exchanges. Late in the courtsession, Manhattan Supreme Court Justice Charles Ramos, who ispresiding over the bench trial, chided Greenberg for givingarguably evasive answers.

"If you don't want this trial to last a year, we are going tohave to have some direct answers," the judge said.

Greenberg did not back down. He said that his normal practicewas not to review such a memo word for word, or to necessarilyreview its attached charts.

"I glanced at the memo, read the front page," he toldNachman.

Greenberg also said that he trusted Umansky, a certified publicaccountant, along with others in senior management in the company,to make sure the proposed transactions would be legally sound andin line with accepted accounting principles. He said the autowarranty transaction, which would involve using an offshorereinsurer controlled by AIG to help convert the losses, was only anotion being proposed by a single employee.

"It had to first pass muster with lawyers and accountants thatwere working on the project with him," Greenberg testified. "Hecould not do it himself."

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Greenberg's testimony on Sept. 28 concerned an internal memoallegedly laying out the fraudulent transaction. (Photo:Shutterstock)

Raised voices

Nachman, growing louder in his questioning, used questions to makeseveral points in response. He asked Greenberg, for instance, whythe company's general counsel, at some point during a series ofmemos between Umanksy and Greenberg in 1999 and 2000, was no longercopied.

He also asked Greenberg if it raised a flag to him that Umanskyhad called the accounting tied to the proposed transaction"aggressive," and if AIG had hired any outside legal counsel toreview the transaction proposed by Umansky, which was effectedmonths later.

"Isn't it the case, sir, that you never asked for a legalopinion about this structure?" Nachman said.

Greenberg shot back, "The lawyers were working on this alongwith accountants. If they wanted an outside opinion, they wouldhave come and recommended it to me."

Near the end of Wednesday's testimony, Nachman indicated thatGreenberg may have recommended that Umansky, who was interviewed bythe government for the case but is not a planned witness, talk tothe head of a Swiss bank that AIG either still controlled or had inthe past, in order to find an investor to help with thetransaction.

Greenberg answered, "I was interested generally in thisconversion of underwriting loss into investment loss, [but] untilit passed muster [with the lawyers and accountants], I wasn'tinterested in this specific transaction."

At stake: $52 million

Former state Attorney General Eliot Spitzer brought the case in2005, alleging nine different wrongful financial acts. Afterseveral appeals and narrowing by the government, the lawsuit nowfocuses on just two alleged sham transactions and seeksdisgorgement of $52 million in total from Greenberg andco-defendant, former AIG chief financial officer Howard Smith.

David Boies of Boies Schiller & Flexner is representingGreenberg; Vincent Sama, a partner at Kaye Scholer, is leadingSmith's defense.

In the second alleged transaction—which was not part ofWednesday's questioning—the government claims Greenberg and Smithhelped orchestrate a fraudulent reinsurance deal between AIG andGeneral Reinsurance Corp. The transaction allegedly pumped up AIG'sreserves by $500 million in 2000 and 2001.

Under state law, Greenberg and Smith are not afforded a jurytrial because the government is not asking for damages, but rathera forfeit of past bonuses from Greenberg and Smith.

Greenberg on Tuesday acknowledged learning from an actuary in1999 that the auto-warranty insurance line was expected tolose several hundred millions of dollars in the coming years. Healso admitted to calling the segment "a debacle" and testified thathe focused on it to "teach a lesson" to subordinates not to enterinto such a poor business choice again.

Jason Grant is a former practicing lawyer. From 2002 to2008, he handled legal matters on behalf of AIG as outside counsel.He was not involved with and had no knowledge of the transactionsunderlying the case. He can be reached via email or on Twitter @JasonBarrGrant.