A lawyer for former AIG Bermuda executive Michael Murphy last night fired back at damaging allegations from New York regulators that his client ordered corporate records destroyed.

The allegations came to light in a stinging civil suit filed against AIG and former executives in Manhattan Supreme Court yesterday by New York Attorney General Eliot Spitzer and Insurance Superintendent Howard Mills.

In the complaint it is alleged that Mr. Murphy, a longtime confidante of ousted AIG head Maurice ‘Hank' Greenberg, ordered records at the company's Bermuda-based operations to be deleted - allegations refuted by his legal counsel.

Mr. Murphy, a well-known AIG Bermuda executive, was fired in March for “failure to cooperate with governmental and regulatory enquiries”, a company spokesperson said at the time.

The suit, against AIG and Mr. Greenberg and former AIG chief financial officer Howard Smith as defendants, details AIG transactions it claims amounted to “fraudulent and deceptive acts” to paint a rosier picture of AIG's core business than actually existed, ultimately misleading investors.

The suit is the first formal action to be taken against AIG after months of intense regulatory scrutiny of AIG, the world's largest commercial insurance company with $11 billion in net income reported last year.

Mr. Greenberg, 80, ran the company with an iron fist for 38 years - and likely would have carried on longer. His unexpected departure earlier this year was forced after the company's board caved from regulatory pressures that may have been eased through his resignation. In the interim, a battle for control of a lucrative private company holding some 12 percent of AIG's stock, Starr International Company (SICo) has taken shape.

Mr. Greenberg and 12 shareholders of the controversial firm that Mr. Greenberg has so far retained rule over, reportedly met in Bermuda on Tuesday before flying to Dublin for a further round of meetings.

Third defendant Mr. Smith was also deposed from AIG earlier this year for refusing to cooperate with regulatory requests related to the investigation. It is believed that both he and Mr. Murphy continue to have ties to SICo.

Although Mr. Murphy is not named as a defendant in the civil suit from New York regulators, he is cited numerous times in the 38-page complaint that came to light yesterday. In the suit's preliminary statement Mr. Murphy emerges as someone who allegedly ordered documents related to regulator's probe of AIG's ties to offshore entities destroyed.

“In the wake of this office's investigation, Greenberg's Assistant to the Chairman, Director: Foreign Companies, L. Michael Murphy ordered the destruction of documents relating to one of those offshore affiliates.”

Further on the suit alleges that Mr. Murphy ordered the documents destroyed after calling a board meeting to discuss the investigation by New York regulators as well as the desire of an investor (believed to be Munich Re) in one of the offshore entities in question - Richmond Insurance - to sell its stake.

“Over the weekend of March 19, Murphy removed the recordings (which have not yet been recovered) and issued a directive that electronic files of any draft transcripts of the recordings be deleted.

“Unbeknownst to Murphy, a hard copy draft transcript of the meetings exists and was subsequently turned over to AIG management, who provided it to law enforcement and regulatory authorities.”

Mr. Murphy's New York-based legal counsel Sean O'Shea took the New York Attorney General to task for the document destruction allegation, which he said was false. “We are disappointed that the offices of the Attorney General would file a knowingly false pleading,” Mr. O'Shea said.

“To dispel any concern whatsoever on the issue of the discarding of the transcript of an uneventful board meeting, as counsel for Mr. Murphy, I produced the transcript in question to the Attorney General on April 8, almost eight weeks ago.

“As such, the allegations that Mr. Murphy ordered the transcript destroyed and does not know of its existence is a knowingly false statement,” Mr. O'Shea told The Royal Gazette.

It is known that a security detail from AIG's New York headquarters was dispatched to the company's Bermuda offices in March because of concerns that documents may be removed or destroyed.

The head of AIG's Bermuda operations, George Cubbon, did not yesterday return a call from The Royal Gazette seeking comment on the allegations against Mr. Murphy or subsequent details in the suit alleging that AIG's Bermuda office played a role in the parent company's attempts to disguise losses.

In specific, the suit charges that AIG moved to hide an underwriting loss as a less embarrassing investment loss when some of the auto warranty policies it sold performed poorly.

To do so, AIG allegedly took over a Barbados-based shell company - CAPCO - that had been owned by Western General Insurance Ltd.

Because Western General had moved all but $200,000 out of the company, AIG had to drum up investors, according to the complaint.

It found three investors in Switzerland to take on $6.33 million in voting shares (although no money was actually required) and also authorised its Bermuda subsidiary, American International Reinsurance Company, (AIRCo) to purchase $170 million in non-voting CAPCO shares.

The Swiss investors played no active role in CAPCO but were compensated with $33,000 in compensation each year, according to the suit.

The Bermuda AIG unit did not fare so well having to over time, and under Mr. Smith's direction, “write off the balance of its interest in CAPCO as a loss”.

Any remaining assets in CAPCO were then distributed to AIRCo after the shell company's 2002 liquidation.

“The final result of this complex series of transactions was that AIG had moved its underwriting losses to an off-balance sheet entity where AIG investors could not see them. Instead AIG reported a far less noticeable investment loss.”

Another complex “swap” transaction similarly turned losses - this time the result of a foreign exchange loss from its Brazilian life insurance business - into less embarrassing investment losses, that were ultimately carried as a $28 million disguised ‘investment loss' by AIRCo.

The suit also raised questions about offshore entities that AIG secretly controlled and bought reinsurance from.

In the early 1990s AIG came under fire for its relationship to a Barbados-based reinsurer that it controlled, Coral Re.

“By !991, AIG had purchased from Coral Re approximately $1 billion in reinsurance although Coral Re had capitalisation of only $15 million,” the complaint reads.

Regulatory scrutiny from Delaware, New York and Pennsylvania eventually led to AIG closing down Coral Re with a promise to stop using the company and to “report any reinsurer that has characteristics similar to Coral Re as an affiliate reinsurer with state insurance regulators”.

However, AIG allegedly never disclosed that two other affiliate reinsurers offshore - Bermuda-based Richmond Insurance and Barbados-based Union Excess - already existed, and were being used by AIG in a similar manner to Coral Re, according to the suit.

It wasn't until after Mr. Greenberg's ouster and heightened regulatory scrutiny of these transactions that AIG admitted to controlling Richmond and Union Excess.

But the suit filed yesterday by Mr. Spitzer and Mr. Mills charged that not only were the relationships not disclosed, it says efforts were made to hide the “true nature of AIG's relationships to these offshore entities” - even as the “AIG internal investigations and those of law enforcement and regulators were uncovering facts”.

New York authorities are seeking “disgorgement, restitution, damages, including punitive damages, and costs and equitable relief with respect to the defendants' fraudulent and otherwise unlawful conduct”, according to the suit.

It appears the suit could seek “restitution” from both AIG and the defendants Mr. Greenberg and Mr. Smith personally, who were said in the complaint to both own sizable holdings of AIG shares.

A civil suit from Mr. Spitzer against leading broker Marsh & McLennan last October resulted in that company promising to pay $850 million into a special fund for US victims of alleged illegal bid rigging and unfair compensation practices.

But the settlement deal was only hatched after Marsh's CEO quit - Mr. Greenberg's eldest son, Jeffrey Greenberg.

Another son, Evan Greenberg, is CEO of Bermuda-based insurance giant ACE Limited.

ACE has been subpoenaed or contacted more than 40 times as part of the wide industry probe by Mr. Spitzer and numerous other regulatory authorities, but has not been named as a defendant in any suits or had any charges laid against it.

Several ACE staff have been fired in connection with allegations that an ACE unit in the US participated in Marsh's illegal bid rigging process. One former staff member pleaded guilty to a misdemeanour charge in the Spitzer matter against Marsh.

On the web: The full text of the 38-page complaint from Eliot Spitzer, New York Attorney General and Howard Mills, Superintendent of Insurance for New York, against American International Group, Inc., Maurice R. Greenberg and Howard I. Smith can be found online at www.oag.state.ny.us under the Press Release section.