ALBANY – The long-lingering civil fraud case against American International Group and its former CEO, Maurice "Hank" Greenberg, took an unusual twist last week with the state attorney general and the AIG camp dueling over the impact of a federal court settlement in a parallel case, and whether it may affect an appeal slated for argument next month in the New York Court of Appeals.

Letters to the court from Solicitor General Barbara Underwood and David Boies of Boies, Schiller & Flexner on April 25 and 26, respectively, raise a question of what exactly is before the state court now that Southern District Judge Deborah Batts (See Profile) has approved a $115 million settlement in a federal class action.

Underwood contends the federal case "has no effect on the [state's] claims for equitable relief, which we intend to pursue vigorously." Boies accuses Attorney General Eric Schneiderman of attempting to "resuscitate a case that is dead" by seeking relief it abandoned long ago.

In either case, the Court of Appeals is slated to hear People v. Greenberg, 401720/2005, on May 28.

The matter is on appeal from the Appellate Division, First Department, and centers on whether the state can use the Martin Act and state Executive Law to pursue damages on behalf of the company’s shareholders.

Chief Judge Jonathan Lippman (See Profile) has recused himself from the case for undisclosed reasons and on April 26 the court vouched in Second Department Justice William Mastro (See Profile) to sit on the case.

Greenberg and the state have been at war since 2005, when then-Attorney General Eliot Spitzer accused AIG and its top officials, including Greenberg and CFO Howard Smith, of violating the Martin Act by perpetrating "fraudulent transactions designed to portray an unduly positive picture of AIG’s loss reserves and underwriting performance. "

Although criminal charges were never brought, AIG admitted to structuring sham transactions to boost its loss reserves and agreed to pay a $1.6 billion fine. Greenberg, who by that time had been removed as CEO but remained an AIG shareholder, strongly objected to the settlement.

Spitzer’s two successors as attorney general, Andrew Cuomo and Schneiderman, pursued the matter in multiple court proceedings raising various procedural and substantive issues. Many of the original charges were thrown out.

The First Department last year upheld the Martin Act claims but then granted leave to the Court of Appeals. With that appeal pending, Batts approved the federal settlement. But it is unclear whether the settlement affects the case pending in Albany.

In her letter to the court, Underwood said the state will give up its right to challenge the settlement as well as its own claim for damages to expedite the matter. Instead, she said the state will focus on non-damage remedies, such as barring Greenberg, 88, from the securities industry.

"We believe it is important to hold these defendants personally accountable for their frauds, and we will therefore continue to seek, among other remedies, several forms of injunctive relief, including but not limited to a ban on participation in the securities industry and a ban on serving as an officer or director of a public company," Underwood said in her April 25 letter to Andrew Klein, clerk of the court.

Damien LaVera, a spokesman for Schneiderman, said the attorney general is pursuing the case because he "feels strongly that individuals in the financial services industry who perpetrate fraud, no matter how wealthy or powerful, must be held publicly accountable."

On April 26, Boies sent Klein a letter on behalf of Greenberg and Smith arguing that the attorney general has changed its theory of the case now that its claim for monetary relief is precluded by the settlement. He argues that the state abandoned "any pretense of seeking injunctive relief" long ago "in the face of a parallel SEC proceeding," and its "desire to punish Appellants is an insufficient basis" to continue the state case.

Boies noted that Greenberg and Smith have not worked for AIG or in the securities industry for more than eight years and argued that there can be no claim for disgorgement because the company did not sell stock or receive funds from investors during the relevant time frame.

"As a matter of law and fact, this case is not an action for injunctive or other equitable relief," Boies said in the letter. "As a practical matter, [the attorney general's] pursuit of Appellants for equitable relief is simply a meritless waste of the State’s judicial resources."