New York Attorney General Eliot Spitzer filed suit yesterday against American International Group and its former chief executive, Maurice “Hank” Greenberg, for allegedly using accounting tricks to distort the insurer’s finances and mislead regulators.

AIG, the world’s biggest insurer, used sham reinsurance contracts and other transactions to understate liabilities for claims and hide losses, Spitzer said in a statement yesterday. The complaint follows New York-based AIG’s admission May 1 that improper accounting overstated its net worth by $2.7 billion.

“The irony of this case is that AIG was a well-run and profitable company that didn’t need to cheat,” Mr. Spitzer said in the statement, which indicated the suit was filed yesterday in New York State Supreme Court. “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.”

The complaint, which also names the former chief financial officer, Howard Smith, follows a three-month investigation that triggered the end of Mr. Greenberg’s 38-year reign, wiped out almost $50 billion of AIG’s market value and tainted Warren Buffett’s Berkshire Hathaway. AIG, which is also being probed by the U.S. Securities and Exchange Commission, will probably move quickly to settle, while Mr.Greenberg, 80, may seek to protect his legacy, said Jacob Frenkel, a former federal prosecutor.

“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 Mr. Frenkel, who now practices law in Rockville, Md. “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.”

Mr. Spitzer and the New York Insurance Department, which was a party to the suit, said Greenberg was “personally involved” in negotiating fraudulent transactions and was “directly” responsible for the company’s alleged misconduct.

Mr. Spitzer has simultaneously been presenting evidence to a state grand jury, which will determine whether the accounting missteps warrant criminal indictments, people familiar with the matter said on May 20.

Mr. Spitzer and the SEC, which have subpoenaed more than a dozen insurers, began examining AIG amid a probe of a type of nontraditional reinsurance policy that can be abused to mask losses or smooth earnings at the insurers that buy them. That triggered AIG’s admission in March that it understated liabilities by failing to disclose its control of two offshore reinsurers, Union Excess Reinsurance Company and Richmond Insurance Company.

AIG also uncovered misleading or improper booking of asset write downs, hedge-fund proceeds, and underwriting results, the company said on May 1. The accounting inflated book value and pumped up operating profit, the earnings measure used by Wall Street analysts, the company said. AIG plans to restate five years of financial results by May 31.

AIG has cast the spotlight on Mr. Greenberg, saying unidentified former senior executives circumvented internal controls to alter numbers. The company said some adjustments were made to meet analysts’ estimates.

Mr. Greenberg, who’s made more than $50 billion of acquisitions since taking over AIG 1967, is the most prominent executive to step down since Mr. Spitzer began investigating fraud in the insurance industry in October. He’s boosted AIG’s assets more than a thousand-fold to reach 50 million customers in 130 countries. He and his wife own more than $2.3 billion worth of AIG stock.

Mr. Buffett, the billionaire chairman of Berkshire, became entangled in the probe when AIG admitted to improperly accounting for a four-year-old transaction with Berkshire’s General Re unit, the largest U.S. reinsurer. Mr. Spitzer said in April that Mr. Buffett was a “cooperative witness,” not a target. At least three executives from General Re have been told by the SEC they may be sued in the probe.

The attorney general said in April that he expected a civil resolution with AIG, though he didn’t rule out a criminal case against Mr. Greenberg. AIG has delayed filing its 2004 financial report, which will include the restatement, three times in 10 weeks in order to complete an internal accounting review.

Mr. Greenberg said in a May 4 letter to AIG’s board that the company was using incomplete information to make “vile accusations” that were “impugning” his integrity. AIG’s statements on irregularities “entails hindsight analysis about complicated accounting issues” that were handled by both current and former management, he said.

Mr. Greenberg refused in April to testify before investigators for Mr. Spitzer and the SEC, invoking his Fifth Amendment right to avoid self-incrimination. Since the probe began AIG has fired Mr. Smith; Christian Milton, a vice president for reinsurance; and Bermuda-based executive Michael Murphy, saying they failed to cooperate with regulators.

Mr. Spitzer sued Marsh & McLennan Companies, the world’s biggest insurance broker, in October for allegedly rigging bids and taking kickbacks from insurers. The company ousted Hank’s son, Jeffrey, as CEO, and in January agreed to pay $850 million to settle the case.

Edward Matthews, a former AIG senior vice chairman, said regulators are overreacting.

“If this were another Enron or WorldCom, that would be one thing,” he said. “But using the most conservative accounting – if accounting is even the word for it – to decide they want to cut 3% off net worth over five years, is that really worth all of this?”