Regulators have filed a civil suit in a state court in New York that accuses American International Group Inc. of using improper accounting practices to inflate its earnings.[@@]

New York Attorney General Eliot Spitzer and New York Insurance Superintendent Howard Mills allege in the complaint that AIG, New York, “engaged in misleading accounting and financial reporting, projecting an unduly positive picture of AIG’s underwriting performance for the investing public.”

The defendants named in the suit include AIG, former AIG Chairman Maurice Greenberg and former AIG Chief Financial Officer Howard Smith.

New York officials say AIG and AIG executives:

o Engaged in “2 sham insurance transactions” that gave investors the impression the company had larger reserves for claims than it did. Officials say the transactions were negotiated and approved by Greenberg.

o Hid loses from its underwriting business by converting the underwriting losses into capital loses.

o Created false underwriting income that involved false reporting of income from the purchase of life insurance policies as underwriting polices. This move was approved by both Greenberg and Smith, officials allege.

New York officials further allege that Greenberg manipulated AIG’s stock price, instructing traders to “aggressively purchase” the stock and increase the worth of his and Smith’s holdings.

AIG is accused of booking workers’ compensation insurance premiums as regular liability insurance revenue, which may have reduced AIG’s contribution to the state’s workers’ comp system and avoided payment of taxes on the premiums.

AIG also is accused of deceiving New York state insurance regulators and other insurance regulators about offshore relationships with reinsurers. Documents related to this investigation were destroyed by AIG, officials allege.

The officials seek punitive damages, restitution and other payments without specifying any amounts.

AIG has reviewed the complaint and is pleased that the attorney general noted the company’s continued cooperation with the investigation, AIG spokesman Joe Norton says.

“There are no new claims raised in the complaint,” Norton says.

Spitzer has “previously indicated his expectation of reaching a civil settlement with AIG,” Norton says.