In a move that should surprise absolutely no one who's been following the career of NY State Attorney General Eliot Spitzer (who is running for governor in 2006, after all), Spitzer initiated a civil lawsuit Thursday against the insurance giant American International Group (AIG) and its former chairman and CEO, Maurice ("Hank") Greenberg.

The suit, filed in NYS Supreme Court, the state's trial court of original jurisdiction, alleges that the company and its former top executives "manipulated its books to deceive regulators and the investing public," and "engaged in numerous fraudulent business transactions that exaggerated the strength of the company’s core underwriting business to prop up its stock price."

These allegations first began to come to light a bit over three months ago, when AIG disclosed that it had been subpoenaed by Spitzer's office as well as the SEC. In March, AIG was forced to admit that it had overstated the company's net worth by some $2.7 billion; Greenberg was forced out as a result, and the CFO (who was also named as a defendant today) was fired a week later.

More after the break.

The complaint (PDF only) has clearly been drafted to be read by a popular audience, and while it's 37 pages long overall, it includes a helpful 2-page summary describing the nature of the insurance industry as relevant to the accusations made against American International Group (AIG) (see pages 5-7).

The press release provides a helpful guide to the allegations:

Specifically, the company and top management:

• Engaged in sham transactions with a reinsurance company to create the appearance of insurance reserves where none existed. These deals were personally conceived and negotiated by Greenberg;

• 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 compensation premiums as general liability and other coverage. This misconduct reduced the company’s taxes and other assessments.

Again, quoting from the press release, Spitzer noted: "The irony of this case is that AIG was a well-run and profitable company that didn’t need to cheat. And yet, the former top management routinely and persistently resorted to deception and fraud in an apparent effort to improve the company’s financial results."

Many of the allegations involve AIG's dealings with General Re, the nation's largest reinsurance company, controlled by Berkshire Hathaway and thus, Warren Buffett. Back on May 1, Buffett expressed his confidence in Greenberg, who he said "developed an extraordinary company in his lifetime," and was "the number one man in insurance." Guess who's already reserved himself a spot on the witness list.

Greenberg is being represented for now by media-hound attorney David Boies, who has yet to issue a statement or provide any comment. Boies has seen his share of prominent setbacks in recent years, having been personally sanctioned at least three times for filing frivolous motions on behalf of his clients and narrowly escaping more serious sanctions and bar disciplinary proceedings for having paid a witness a $1 million "bonus" for assistance with a case. (See this recent Forbes article for details on these as well as his representation of Greenberg.) A few weeks ago, Boies was bounced from representing his law firm's CFO in a suit because of multiple violations of the court's orders. Boies tends to play right up near the very edges of acceptable legal behavior; sometimes he's successful in doing so, other times, however, it ends up harming his clients.

According Bloomberg News, Greenberg was called to testify before Spitzer and the SEC last month, but invoked his Fifth Amendment rights against self-incrimination. There is a distinct chance that the grand jury empaneled by Spitzer may ultimately issue criminal indictments against Greenberg and others. Spitzer has informed Buffett that he is not a target of the investigation, although the SEC has indicated that as many as three General Re executives may be sued as a result of the federal probe. One observer, Jacob Frenkel, a former federal prosecutor, believes that AIG will look to settle this suit quickly while Greenberg fights it, seeking to protect his 38-year legacy as head of the company:

"The AIGs of the world don't want to get bogged down in a lawsuit with the attorney general of New York or the SEC for that matter," said Frenkel, who now practices law in Rockville, Maryland. "But for an individual of Mr. Greenberg's stature, the outcome of this case follows him for the rest of his life, which may make the desire for vindication greater."

Given the nature of the personalities involved here, as well as the potential political implications for Spitzer as he continues to gear up for his gubernatorial bid (many had expected him to lessen his involvement in cases like this, based on statements he'd made back in December), this definitely bears watching as it plays out. As Bloomberg News notes:

Spitzer's suit against AIG marks the second leg of his industrywide probe of insurance companies. He sued Marsh & McLennan Cos., the world's biggest insurance broker, in October for allegedly rigging bids and taking kickbacks from insurers. The company ousted Hank's son, Jeffrey Greenberg, as Marsh's CEO, and in January agreed to pay $850 million to settle the allegations.

When Spitzer decides to after a company and its executives, he's always loaded for bear.

Somewhat bizarrely, AIG's stock has risen by nearly 5% (as of posting) since word of the lawsuit was made. Of course, they'd previously dropped by some 30% in the months following the original mid-February announcement of the problems that have now led to this suit. Market analysts seem to be viewing the suit as a net positive for the company, since the tone of the language in the complaint is such that they feel a "reasonable" settlement is likely in the fairly near term.

(Story cross-posted from DailyKos.)