NEW YORK (Reuters) – American International Group Inc has agreed to settle a $274 million lawsuit by a former executive who said the insurer refused to pay him during the financial crisis in 2008.

The settlement came as a trial was due to have begun Tuesday in a federal court in New York, which was expected to reopen the issue of executive pay at AIG. The group was bailed out by the U.S. government in the crisis.

The executive, Kevin Fitzpatrick, was president of an AIG real estate unit until he left the New York-based insurer in 2009.

The terms of the settlement are confidential, Sean O'Shea, a lawyer for Fitpatrick, said on Wednesday. “We're very happy.”

Jon Diat, a spokesman for AIG, confirmed the settlement but declined further comment.

In his lawsuit, which was filed in 2009, Fitzpatrick said AIG breached agreements with him and entities he controlled that entitled him to a share of profits earned on AIG real estate investments.

The 22-year AIG veteran said the company, in October 2008, refused to make profit distributions to him and other employees of his unit, AIG Global Real Estate Investment Corp.

AIG's refusal to pay came a month after the U.S. government agreed to the first part of what became a $182-billion bailout of the insurance giant, which had insured financial products linked to mortgages that failed in the financial crisis.

After AIG stopped making the profit payments, Fitzpatrick said he resigned.

The company denied wrongdoing and said Fitzpatrick had been paid everything he was owed. AIG also called Fitzpatrick's departure a termination, saying he stole “vast quantities” of confidential, proprietary information in document, computer drive and email form.

In a sign of the case's significance, the company had regularly disclosed the lawsuit as a material piece of litigation in its quarterly reports.

In its most recent one, filed Thursday, AIG said Fitzpatrick had said he was owed at least $274 million, although it noted he was also seeking additional unspecified amounts of carried interest and punitive damages.

Bailout

The lawsuit, filed in December 2009, came as AIG was attempting to move past a fire storm of public outrage over $165 million in bonuses to employees in the unit whose complex financial products had caused the company's massive losses.

The bonus fiasco continues to plague AIG even after the U.S. sold off its remaining stake in the company last year.

In September, Chief Executive Bob Benmosche was forced to apologize for a “poor choice of words” after equating the bonus criticism with the lynching of African-Americans in the Deep South.

Fitzpatrick didn't work in AIG Financial Products, the unit that was at the heart of the bonus flap and the company's near collapse. But the trial, which would have begun Tuesday, was expected to revisit some of the events at the time of the bailout.

In a decision last week, U.S. Magistrate Judge Michael Dolinger said Fitzpatrick could introduce, at trial, a March 2009 letter by AIG's CEO at the time, Edward Liddy, to the Treasury secretary, Timothy Geithner, describing the insurer's intent to slash costs, including through voluntary departures and for-cause terminations.

The judge said the letter could be viewed as evidence of “the severe financial constraints under which AIG was operating at the very time when the company undertook an investigation to determine whether it had a basis to terminate plaintiff for cause.”

The case is Fitzpatrick et al v. American International Group Inc et al, U.S. District Court, Southern District of New York, No. 10-00142.

Special Reports /

AIG Settles with Former Executive Before $274M Pay Trial

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