New York Attorney General Eliot Spitzer and State Insurance Superintendent Howard Mills filed a lawsuit against the nation's largest business insurer, alleging that the firm manipulated its books to deceive regulators and investors.

The lawsuit alleges that American International Group's former top management, including former chairman Maurice R. Greenberg and former chief financial officer Howard I. Smith, engaged in fraudulent transactions that exaggerated the strength of the company's core underwriting business to prop up its stock price.

Spitzer said the company's former top management "routinely and persistently resorted to deception and fraud" in an apparent effort to improve its financial results.

The lawsuit, filed late Thursday in State Supreme Court in Manhattan, attributes the misconduct directly to Greenberg, and cites e-mails and other evidence showing that he was personally involved in negotiating some of the sham transactions and directed others to implement the schemes underlying other misleading transactions.

The suit alleges that the company and top management engaged in sham transactions with a reinsurance company to create the appearance of insurance reserves where none existed -- deals it says were personally conceived and negotiated by Greenberg;

In addition, the suit also charges that AIG hid underwriting losses from an auto warranty unit by transferring the losses to an off-shore entity that it secretly controlled; papered over losses in a Brazilian subsidiary by linking the losses to a Taiwanese subsidiary; created false underwriting income derived from the purchase of life insurance policies; and repeatedly deceived state regulators about AIG's ties to off-shore entities.

The suit also cites a separate scheme in which AIG improperly booked worker's comp premiums as general liability and other coverage to reduce its taxes and other assessments.

In addition to injunctive relief, the suit seeks damages and disgorgement of profits from the illegal transactions.

While he called the charges serious, Mills said he believes AIG "is taking steps to restore the company's credibility."AIG, which has already admitted that many of the transactions were improper, fired some implicated personnel, and announced plans to restate its earnings, is cooperating with authorities. The investigation is continuing.

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