Editors’ Note: This article has been updated to reflect a Correction.

Attorney General Eric Schneiderman is not entitled to summary judgment in a six-year-old lawsuit accusing former American International Group CEO Maurice “Hank” Greenberg of defrauding investors, an Appellate Division, First Department, panel has ruled, reversing a Manhattan Supreme Court judge.

A 4-1 panel ruled yesterday in People v. Greenberg, 401720/05, that Supreme Court Justice Charles Ramos (See Profile) was right to deny motions filed by Greenberg and former AIG CFO Howard Smith for summary judgment, but should not have granted partial summary judgment to the attorney general. The ruling means that all of the claims in the case may go to trial.

The panel majority consisted of Presiding Justice Luis Gonzalez (See Profile) and Justices Peter Tom (See Profile), David Saxe (See Profile) and Rosalyn Richter (See Profile). Justice James Catterson (See Profile) dissented.

Notably, the panel was divided on the issue of whether claims brought under New York’s Martin Act and Executive Law by the state’s attorney general on behalf of investors are preempted by federal securities law.

The lawsuit involves two transactions. In one, AIG allegedly set up a sham reinsurance transaction with General Re Corp., a unit of Berkshire Hathaway Inc., that allowed AIG to overstate its loss reserves by $500 million. The transaction was allegedly set up so that AIG did not actually take on any risk, and money apparently paid by GenRe to AIG was actually returned to GenRe through other channels. The attorney general’s suit alleges that Greenberg was instrumental in arranging the deal.

In 2005, the Securities and Exchange Commission launched an investigation of the transaction, which eventually led AIG to issue a press release and financial restatement admitting that the transaction was improper. AIG settled with the SEC, and Greenberg and Smith resigned.

In the second transaction, AIG is alleged to have fraudulently moved close to $200 million in losses associated with its auto warranty business off its books in the 1990s to a Barbados-based shell corporation, the CAPCO Reinsurance Company.

The attorney general began investigating AIG and Greenberg in 2005, but ultimately did not press criminal charges. However, then Attorney General Eliot Spitzer did file a civil suit against Greenberg and Smith seeking to recover losses on behalf of New York shareholders under the state’s Martin Act and Executive Law.

In October 2010, Ramos denied the defendants’ motion for summary judgment. He granted the attorney general’s motion for summary judgment as to the CAPCO transaction, but not the GenRe transaction. Both sides appealed.

The majority in yesterday’s decision began by addressing the question of whether the entire lawsuit was preempted by federal securities law, as the defendants had argued. The panel conceded that, under well-settled law, state law could not create a private right of action for shareholders beyond federal law.

“However, this is not a shareholder derivative lawsuit, and in fact, there is such an action presently pending in federal court against defendants,” the majority said in its unsigned opinion. “Rather, after years of joint federal and state investigation, the Attorney General exercised the discretion of his office to bring this enforcement action pursuant to the Executive Law and the Martin Act, to protect the citizens of this State and the integrity of the securities marketplace in New York, to enjoin allegedly fraudulent practices, and to direct restitution and damages to deter future similar misconduct.”

The majority further said that the evidence before the court “presents triable issues of fact as to whether defendants knew of, or participated in the fraudulent aspects of the GenRe and CAPCO schemes, given the nature and degree of their personal involvement in both of the challenged transactions, as well as defendants’ responsibilities within the corporation.”

The majority therefore affirmed Ramos’ denial of summary judgment to the defendants, but reversed his grant of summary judgment to the attorney general on the CAPCO claim.

Preemption Claimed

In his dissent, Catterson argued that the entire action was preempted by federal securities law.

“It is patent that the Congress has determined that efficient securities markets require a uniform national standard governing liability for private class actions,” Catterson wrote. “Thus, any effort to circumvent that uniform federal scheme is barred by these federal statutes.”

He noted that there is a direct conflict between state and federal law, since federal law requires a plaintiff to allege scienter in a securities claim, and New York law does not.

Furthermore, he said, “private shareholders who have cause to complain have no need” for the state attorney general “to protect their rights.”

Catterson said that, even conceding the preemption issue, the defendants should win summary judgment on the GenRe claims “due to the utter failure” of the attorney general “to oppose the defendants’ motion with evidence in admissible form or to put forward an excuse for the failure to do so after five years of investigation and discovery.”

He said that much of the evidence offered by the attorney general—for example, AIG’s 2005 press release and restatement and its settlement with the SEC—was inadmissible hearsay.

He also said the evidence linking Smith to the GenRe transaction was weak.

“No witness testified that Smith was responsible for accounting for the GenRe Transaction,” he said. “Indeed, no witness testified that they even spoke with Smith about the transaction.”

Catterson agreed that there were issues of fact concerning the CAPCO transaction.

“We are pleased that the court has paved the way for a trial to hold the defendants accountable for perpetrating a major reinsurance scheme to defraud investors,” said James Freedland, a spokesman for the attorney general’s office, which was represented by Deputy Solicitor General Richard Dearing.

“Mr. Greenberg and Mr. Smith are pleased that the Appellate Division agreed that the prior grant of summary judgment to the attorney general must be reversed,” David Boies of Boies Schiller and John Gardiner of Skadden, Arps, Slate, Meagher & Flom, co-counsel for Greenberg, said in a joint statement. “They believe the Appellate Division should have gone even further, however, and, as stated in the well reasoned opinion of Judge Catterson, dismissed the attorney general’s action in its entirety because the claims of the attorney general conflict with the federal securities laws and the attorney general also failed to develop and present any proper, admissible evidence to support its allegations against Mr. Greenberg and Mr. Smith.

Vincent Sama of Kaye Scholer, counsel for Smith, said the defendants would seek leave to appeal from the Court of Appeals.