AIG headquarters in New York. (Photo: AP)

The board of American International Group will weigh Wednesday whether to join a lawsuit filed by former chairman Maurice “Hank” Greenberg that argues that the government was unfair to its shareholders through the way it conducted its bailout of AIG.

Lawyers for Greenberg at Boies, Schiller & Flexner LLP, in New York, lawyers for the Federal Reserve Bank of New York (FRBNY) at Debevoise & Plimpton, and lawyers for the Treasury Department will make presentations on both sides of the issue.

Officials at AIG and the New York Fed confirmed that they will appear at the meeting.

Greenberg will be attending the board meeting, which starts at 10 a.m., according to Alison Preece, communications coordinator for Starr and Greenberg’s lawyers. Several of the firm’s lawyers will be presenting to the board, including David Boies, a senior partner, Preece said.

Someone close to the AIG board cautioned that AIG is unlikely to make a decision on the issue instantly, but should make a determination by the end of January.

The lawsuit was filed by Starr International, a company controlled by Greenberg that owned 12 percent of AIG at the time of the bailout, which occurred Sept. 16, 2008.

Starr filed two suits, one in New York federal court, and the other at the Federal Court of Claims, based in Washington, D.C. That court hears claims filed against the government.

The New York suit was dismissed out of hand Nov. 11. But, a $25 billion lawsuit making similar claims is pending in the Court of Claims, which is awaiting AIG’s decision whether to join before deciding what to do.

The suits claim that the nature of the rescue was punitive because the federal government ultimately took control of 92 percent of AIG, although the original bailout, for legal reasons according to Fed lawyers at the time, was 79.9 percent.

Other allegations that the takeover cost was punitive was because the Fed originally charged AIG an interest rate of 14 percent on its original $85 billion loan, and that the Fed unfairly paid counterparties to credit default swaps issued by AIG’s Financial Products subsidiary 100 cents on the dollar, when it was possible that the counterparties would have accepted less.

The government’s huge stake in the company also diluted the holdings of existing shareholders like Starr, which at the time was AIG’s largest investor, lawyers at Boies, Schiller & Flexner LLP, allege.

The punitive nature of the actions by the Federal Reserve Board and the Treasury Department deprived shareholders of tens of billions of dollars and violated the Fifth Amendment, which prohibits the taking of private property for “public use, without just compensation,” the suit claims.

The first lawsuit, in New York, was dismissed out of hand by Judge Paul A. Engelmayer of the Federal Court for the Southern District of New York in a scathing decision filed Nov. 11.

Supporters of the lawsuit contend that the board must join the suit because it has a fiduciary responsibility for shareholders, “regardless of whether it is distasteful to sue the government,” one Washington source told National Underwriter.

However, in his Nov. 11 decision, Engelmayer dismissed that argument.

In his 89-page opinion, Engelmayer said, amongst other findings, that Starr “failed to allege facts sufficient to carry its heavy burden of calling the trustees’ independence from the NY Fed into question.”

The Court, accordingly, holds that Starr’s claim that FRBNY was a “controlling shareholder” or a “controlling lender” of AIG is not plausible, in light of the facts pled and documents referenced in the amended complaint, the judge said in his opinion.

“Because Starr’s fiduciary duty claims are all premised on such control, those claims must be dismissed,” the judge said.

In his decision, Engelmayer said the facts stated in the case “instead plausibly permit only one conclusion, and it is inconsistent with Starr’s thesis of control.”

It is that, in September 2008, “AIG was in extremis, and its independent board of directors, to save the company, voluntarily accepted the hard terms offered by the one and only rescuer that stood between it and imminent bankruptcy—the NY Fed,” the  opinion said.