Former AIG CEO Files Lawsuit Against US for Alleged Unconstitutional Takeover

First appeared in CNBC

A company run by former American International Group Chief Executive Maurice "Hank" Greenberg Monday filed a $25 billion lawsuit against the United States, claiming that the government takeover of the insurer was unconstitutional.

In its complaint, Greenberg's Starr International said that in bailing out AIG [AIG  29.45 ] and taking a nearly 80 percent stake, the government failed to compensate existing shareholders. It said this violated the Fifth Amendment, which bars the taking of private property for public use without just compensation.

"The government's actions were ostensibly designed to protect the United States economy and rescue the country's financial system," Starr said. "Although this might be a laudable goal, as a matter of basic law, the ends could not and did not justify the unlawful means employed."

The United States, it went on, "is not empowered to trample shareholder and property rights even in the midst of a financial emergency."

Monday's lawsuit was filed with the U.S. Court of Federal Claims in Washington, D.C., which handles lawsuits seeking money from the government.

The $25 billion estimate reflects what Starr called the value of the government's stake on Jan. 14, 2011, when it swapped AIG preferred stock for 562.9 million common shares.

The Treasury Department did not immediately respond to a request for comment. AIG spokesman Mark Herr declined to comment. AIG was named as a nominal defendant in the lawsuit.

Once the world's largest insurer by market value, AIG accepted $182.3 billion of federal bailouts beginning on Sept. 16, 2008, amid a liquidity crisis spurred by its exposure to risky debt through credit default swaps.

The government's stake in AIG has fallen to about 77 percent. AIG itself has sued Bank of America [BAC  8.12 ] for $10 billion over alleged losses on mortgage securities.

Greenberg left AIG in March 2005, after nearly four decades at the helm, amid questions by regulators over its accounting practices.

AIG in 2006 paid $1.64 billion to settle federal and state probes into its business practices, and in July 2010 agreed to pay $725 million to settle a shareholder lawsuit accusing it of accounting fraud and stock price manipulation.

The case is Starr International Co et al v. U.S., U.S. Court of Federal Claims, No. 11-00779.