A federal judge in Manhattan yesterday approved a $115 million settlement reached by former American International Group Inc. CEO Maurice "Hank" Greenberg and other former AIG executives to resolve a shareholder class action.

Southern District Judge Deborah Batts (See Profile) ruled from the bench in In re American International Group Securities Litigation, 1:04-cv-08141, that the settlement was "fair, reasonable and adequate," overruling the sole objection by an investor, which did not appear in court.

The ruling also rejected an argument made by New York Attorney General Eric Schneiderman in an amicus brief that the parties must renegotiate the settlement because of a math error. The attorney general originally tried to object to the settlement, but Batts ruled he lacked standing to do so and treated the objection as an amicus brief.

Up to 13.5 percent of the settlement will go to attorney fees, and the rest will be distributed to investors, either in the full amount of their losses if there is enough money, or on a pro rata basis if there is not.

The class action lawsuit, brought by three Ohio public employee retirement funds, alleged that AIG misled investors with sham accounting. When the company eventually had to restate several years of finances in 2005, investors lost money. Greenberg left shortly thereafter.

The New York attorney general is pursuing a case based on the same allegations against Greenberg and former CFO Howard Smith, who is also a defendant in the class action. The case, People v. Greenberg, 401720/2005, was originally filed by Eliot Spitzer under New York’s Martin Act, which gives the attorney general broad authority to investigate securities fraud.

Greenberg and Smith have argued that the law is preempted by federal securities law, and have won the support of prominent figures, including former U.S. Attorney General Richard Thornburgh, former Governor George Pataki, former Mayor Rudolph Giuliani and others who filed an amicus brief (NYLJ, Feb. 5).

The Martin Act case is on appeal to the New York State Court of Appeals, which is set to hear arguments on April 29. Greenberg and Smith are appealing an Appellate Division, First Department, ruling allowing the case to go forward (NYLJ, May 9. 2012).

The settlement approved yesterday may knock out much of that case, however.

Greenberg and Smith have argued that the settlement renders the attorney general’s case moot. Their argument rests on the Court of Appeals’ 2008 decision in People v. Applied Card Systems, 11 NY3d 105, which held that a nationwide class action settlement in a credit card marketing fraud case precluded the attorney general from seeking recovery on the same claims under the principle of res judicata.

As in Applied Card, the settlement of the shareholder case against Greenberg and the other defendants "effectively extinguishes all damages claims against Messrs. Greenberg and Smith in the Martin Act case brought by the attorney general’s office," said Robert Dwyer, a partner at Boies Schiller & Flexner, who represents Greenberg.

The attorney general’s office does not agree. In a brief filed with the Court of Appeals in November, it said that even if the settlement was approved—as it was yesterday—it "would not preclude the Attorney General from obtaining other remedies, including an injunction, disgorgement, attorney’s fees, and costs, as well as damages for injuries to any class members who opt out of the settlement."

Greenberg and Smith countered in a reply brief filed in December that there could be no disgorgement because the defendants had not sold any stock during the relevant time period. They also said that legal fees are limited by law to $2,000 per defendant, rendering that claim trivial.

Still, the attorney general plans to continue with the case.

"The consequences of the settlement remain to be determined, but no matter the outcome our office intends to continue to pursue this case," said Damien LaVera, a spokesman for the attorney general’s office.

Vincent Sama at Kaye Scholer represents Smith.

Thomas Dubbs, a partner at Labaton Sucharow, who represents the plaintiffs, could not be reached for comment.