June 18, 2009 | Read Time: 6 minutes
American International Group, the beleaguered insurance company, is suing to gain control of roughly $4-billion that is owned by a charitable organization, the Starr International Foundation, so that some or all of the money can be used to pay bonuses to AIG employees.
The company argues that it has a strong claim to the assets, which for three decades were used primarily to pay bonuses to AIG employees, but it may be a tough sell to a jury, given the bad press that AIG has endured over the past year. The company nearly went bankrupt last fall, forcing it to seek a cash infusion from the U.S. government in exchange for 80 percent of the company’s equity.
The case is scheduled to go to trial in federal court in New York this week.
Grants Total $27-Million
The roughly $4-billion in value resides in a company called Starr International Company, or SICO, which is now owned by the Starr International Foundation. The Switzerland-based foundation has made grants worth $27-million since it was created in 2006.
The foundation has made several grants in the United States in the past two months, including giving $500,000 to the Children’s Health Fund, which provides medical services nationally to homeless and disadvantaged children; $250,000 to Citymeals-on-Wheels, which provides meals to homebound elderly people in all five boroughs of New York; $1-million to the National September 11 Memorial & Museum, in New York; and $500,000 to Seedco, a New York charity that helps strengthen local development groups.
Some recipients of grants from the foundation fear they could be forced to return the money if AIG wins the lawsuit.
Liz Bowyer, a spokeswoman for SICO, says the company’s long-term plan has always been to use its assets for charity.
“The issue presented is very simple: If AIG prevails at trial, it has said that it will use this money to reward its most senior executives,” Ms. Bowyer says. “If Starr International prevails, the money will be preserved and used for charitable purposes, as Starr International’s shareholders intended.”
Current AIG officials say SICO’s leaders, including Maurice R. Greenberg, who was chief executive of AIG until he left the company in 2005 amid an accounting scandal, are simply playing up the recent philanthropy spree as a way to hold on to the company’s assets.
“Only after AIG brought this action did SICO suddenly and cynically show charitable tendencies,” says Mark Herr, an AIG spokesman. “Mr. Greenberg is dressing up SICO in a veneer of philanthropy just like a defendant who buys a new suit for the courtroom.”
Public Outrage
Starr International Company was founded in 1943 by Cornelius Vander Starr, the man who would later go on to create AIG. In 1970, SICO sold most of its assets — a collection of insurance agencies based abroad — to AIG in exchange for shares of AIG stock. SICO was technically owned by a charitable trust in Bermuda, but current AIG officials say the trust gave very little to charity — far less than 1 percent of its assets each year — until the trust was converted into the Starr International Foundation in 2006.
The foundation made its first round of grants in late 2006, including giving $4-million to Doctors Without Borders to support international humanitarian work.
Current AIG officials say that from 1970 through 2005, Mr. Greenberg and the rest of the Starr International Company board used the company almost exclusively as a source of funds to pay bonuses to AIG executives. The bonuses, which were mostly paid out when AIG executives retired, were described in a front-page story in The Wall Street Journal in 2005 as “among the richest of corporate ‘golden handcuffs.’”
“The evidence at the trial will show that during his tenure as AIG’s CEO, Greenberg personally and repeatedly promised that SICO’s AIG shares would always be used only for the purpose of compensating current and future AIG employees,” Mr. Herr says.
In 2005, the board of Starr International Company — which includes Mr. Greenberg and other longtime AIG executives who have left the company — decided to halt bonus payments under the plan, leaving hundreds of AIG executives who had been expecting to cash in on the bonus plan out of luck.
Starr International Company sold about a quarter of its 290 million AIG shares shortly after Mr. Greenberg left the company but before the financial crisis crippled AIG last fall. That leaves Starr International Company — and Starr International Foundation — holding assets worth roughly $4-billion today.
AIG endured widespread public outrage earlier this year amid reports that U.S. bailout funds would go to pay for bonuses for AIG executives.
Rep. Brad Sherman, Democrat of California and a critic of AIG in Congressional hearings, has said that any money AIG receives in the lawsuit against Starr International Company should go to taxpayers, not AIG executives.
Mr. Herr, the AIG spokesman, says that if AIG wins the case, it wants the money to be placed with a “reliable trustee who will put the shares to work for AIG and American taxpayers.”
Less than 1 percent of the foundation’s value has been awarded to charities, so it seems unlikely that charities would be forced to repay grants from the foundation even if AIG were to prevail in the case. Even so, some charity leaders are concerned. Marcia Stein, executive director of Citymeals-on-Wheels, says the charity spent the $250,000 grant it received from the Starr International Foundation almost as soon as it came in the door.
“It would be impossible for us to pay it back since the money has been used to fund the preparation and delivery of 42,000 home-delivered meals,” Ms. Stein says.
The charity projects a budget deficit of $800,000 for its next fiscal year.
Mark Herr says the company expects SICO to repay “the value of what it absconded with,” but he says AIG will not sue charities to retrieve the assets. “AIG isn’t trying to take anything from charities,” he says.
Major Philanthropy
The Starr International Foundation is separate from the better-known Starr Foundation, although both are heavily influenced by Mr. Greenberg. The Starr Foundation was worth $2.8-billion as of December 2007, putting it at No. 20 on the Foundation Center’s list of the largest foundations, but it lost much of its value last fall when AIG’s stock imploded.
The Starr Foundation, which primarily supports institutions and charities in New York City, has not announced any additional major grants since last fall.
“Both the Starr Foundation and the Starr International Foundation care deeply about the important work that our grantees are doing,” Florence A. Davis, president of the Starr Foundation and a director of the Starr International Foundation, said in a statement. “We are concerned about the possible implications of this litigation and we are watching it carefully.”
In a separate matter, Starr International Company intends to increase its holdings in AIG by buying more than 60 million shares from entities controlled by Mr. Greenberg, including 989,308 shares owned by the Maurice R. and Corinne P. Greenberg Foundation, according to filings with the Securities and Exchange Commission.
The Greenberg foundation held assets worth $25.7-million as of September 30, 2007, but its value had declined to less than $5-million a year later, due to the decline in AIG stock.
Representatives of Mr. Greenberg could not be reached. The Wall Street Journal, citing an anonymous source, said the sale of AIG stock to Starr International Company was part of a plan to give Mr. Greenberg’s assets to charity in the future.
