(Reuters) - A federal judge has allowed former American International Group Inc (AIG.N) Chief Executive Maurice "Hank" Greenberg to continue his multibillion dollar lawsuit against the United States over the insurer's bailout, but took away some of his claims.
Judge Thomas Wheeler of the U.S. Court of Federal Claims said Greenberg's Starr International Co may pursue claims over the government's taking of a 79.9 percent stake in AIG in September 2008 and a separate 1-for-20 reverse stock split in June 2009.
The judge rejected the government's arguments that these claims should be dismissed because the stake has already been divested, and that such claims more properly belonged to AIG itself because shareholders all suffered the same type of harm.
Wheeler nonetheless granted motions by the government and AIG to dismiss "derivative claims" that Starr had asserted on behalf of AIG, including over the insurer's refusal to help him pursue the lawsuit.
AIG's board decided unanimously in January not to join Starr's case after a public backlash, including from Congress.
Critics objected to the prospect that AIG might effectively be asking taxpayers whose money helped save it from collapse during the 2008 financial crisis to return billions of dollars.
While saying he was "troubled" that Treasury Department lawyers may have pressured AIG to stay out of the lawsuit, Wheeler said the board exercised its business judgment in an "informed, transparent, rational, and exemplary fashion."
The judge ruled one day after New York's highest state court said state Attorney General Eric Schneiderman may pursue an unrelated case against Greenberg, 88, over an alleged accounting fraud at AIG more than eight years ago.
Including the effect of the reverse stock split, AIG's share price has fallen roughly 96 percent since the middle of 2007, when credit market conditions began to tighten.
Starr once held a 12 percent stake in AIG, which had been the world's largest insurer by market value prior to the financial crisis and a $182.3 billion federal bailout.
Its lawsuit grew in March to roughly $55.5 billion in size.
This comprised $23 billion related to the 79.9 percent stake, which was later swapped for 562.9 million common shares, plus $32.5 billion of collateral that Starr said the government gave away to help rid banks that dealt with AIG of toxic debt.
Starr has alleged that the bailout and related government actions constituted an illegal taking that violated the 5th Amendment of the U.S. Constitution.
David Boies, a lawyer for Starr, in a statement said he was pleased that Wheeler let stand claims for "tens of billions of dollars that the government took without just compensation and/or illegally exacted."
AIG spokesman Jon Diat said the New York-based insurer is pleased with the decision. U.S. Department of Justice spokeswoman Allison Price declined to comment.
A trial could begin late next year.
Starr is separately appealing another judge's dismissal of its related lawsuit against the Federal Reserve Bank of New York. Wheeler, meanwhile, has previously awarded class-action status to two groups of shareholders challenging the bailout.
Greenberg led AIG for nearly four decades before his 2005 ouster. On March 1, AIG eliminated the government's last financial stake by repurchasing warrants.
AIG shares closed up 27 cents at $43.62 on Wednesday.
The case is Starr International Co. v. U.S., U.S. Court of Federal Claims, No. 11-00779.
Reporting by Jonathan Stempel in New York; Editing by Bernard Orr