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By John Helmer in Washington

When Hank Greenberg owned and ran AIG as his personal fiefdom, he was credited in the industry with originating the policy of never paying out claims unless the claimants threatened costly recovery litigation. When Greenberg tried the non-payment ploy himself recently, his reputation has come back to haunt him in a Boston courthouse.

A secret exercise in public relations spending and planting of newspaper articles to burnish Greenberg, and smear his prosecutor, then New York state attorney-general Eliot Spitzer, has been exposed in a detailed court claim, charging Greenberg with stiffing his PR agents, and refusing to pay more than $2 million in unpaid invoices for the services he had procured. One of the services Green paid for was to hire a prominent US business academic to “blunt” the impact of the prosecution against Greenberg for AIG’s business practices.

A Massachusetts company called eSapience, with an office in Cambridge, near Boston, has filed a breach of contract claim against C.V. Starr & Co., the specialist insurance and investment company which Greenberg controls, and which he has headed since he was ousted from AIG in 2005. The court papers were filed in the federal US District Court on March 7. The claims relate to an unusual operation which Greenberg arranged with eSapience, starting a year ago, in March 2006.

Bertil Lundquist, one of a number of Swedes who have done Greenberg’s bidding and dirty work, was Starr’s general counsel and executive vice president at the time. He engaged eSapience through contacts with three academics — Richard Epstein of the University of Chicago, Richard Schmalensee, Dean of MIT’s Sloan School, and David Evans of University College London. Evans is also chairman of eSapience; Schmalensee managing director; and Epstein the company’s new business scout.

They agreed to act as the cutout to engage a ghostwriter, John Sedgwick, to write Greenberg’s autobiography; Sedgwick is a novelist whose last book was a history of several generations of manic depression in his own, upper-class Boston family.

Greenberg also wanted eSapience to create a website and front organizations, pseudo-academic institutes to generate a stream of academic-sounding attacks on Spitzer’s case against Greenberg, and positive endorsements of Greenberg’s character and business practices. Two former US Government officials, one from the occupied Iraq administration and another from the US Department of Justice, were assigned various taks in the campaign. A New York Times journalist was targeted to compose a promo.

Over much of last year, the court papers allege, eSapience’s front called The Barbon Institute held expensive events to which Greenberg was invited as keynote speaker, and whose speeches were drafted by eSapience. By November 2006, Greenberg apparently suspected his campaign wasn’t helping much. Starr then refused to pay eSapience’s bills.

The method used was vintage Greenberg. According to eSapience’s court filing, when the monthly invoice landed on his desk — $978,028.58 for August 2006, for example — Lundquist sent it to a Boston outfit called Allan Gray Inc., to see if it could break the payment claims by challenging the items. By last Christmas, eSapience had billed Greenberg for $2.3 million, but AGI had been able to shave only $305,411.78 off the bill — just 13%. And noone knows how much that cost Greenberg and Lundquist.

They decided, according to eSapience, not to pay the bills which AGI had approved. Lundquist stopped taking calls from eSapience, and commissioned AGI to get tougher.They did, challenging the amount of time claimed for payment by people like Schmalensee, whom witnesses confirm had been with Greenberg at the promotional events organized by The Barbon Institute. Greenberg was now biting the hand that he had been paying to shake his.

The court claim asks for more than $2 million still owed to eSapience “plus double or treble damages, attorneys’ fees, interest and costs.”

The terms of agreement between eSapience and Starr, with an acceptance signed by Lundquist, show that Greenberg’s academics were billing him at rates of $400 to $1,000 per hour. The mission statement Greenberg wanted executed, and Schmnalensee and Evans took money to implement, describes three objectives:

— “To position Mr Greenberg as a visible and highly credible public intellectual on a small set of issues that are completely unrelated to his current leghal situation”

— “To demystify the insurance industry…and to represent it as one which also operates within a complex maze of tax, accounting, and regulatoiry law created by the government that necessarily invites confusion and ambiguity”, and

— “To raise questions about the effectiveness of the current legal and regulatory environment…and the need to give companies and CEOs incentives to innovate and the degrees of freedom to take risk and create shareholder value.”

The court record shows that just one newspaper, the Wall Street Journal, fell for Greenberg’s scheme, publishing a report of a Barbon Institute event at which he had starred.

A Starr spokeswoman, Sarah Lubman, was reported by the Boston Globe as confirming that her company had “hired eSapience as a public relations adviser in the spring of 2006. After several months, the company decided to end the relationship, and there’s now a billing dispute.” Lubman said. that Greenberg would have no further comment, and she declined to provide more details on what eSapience was hired to do.”

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