Former American International Group Inc. Chief Executive Officer Maurice “Hank” Greenberg must face a fraud lawsuit brought by the New York attorney general, the state’s highest court ruled.

The state can pursue its case over a sham reinsurance transaction and isn’t barred from seeking to ban Greenberg from the securities industry or from serving as an officer or director of a public company, the New York Court of Appeals said in a decision today.

The lawsuit, originally filed in 2005 by then Attorney General Eliot Spitzer, stems from an alleged sham reinsurance transaction with General Reinsurance Corp. in 2000 and 2001 that inflated AIG’s loss reserves by $500 million.

Greenberg, 88, had argued the lawsuit was fatally flawed following a $115 million settlement of a class-action lawsuit resolving claims against Greenberg and former AIG Chief Financial Officer Howard Smith.

New York Attorney General Eric Schneiderman said in an April letter to the appeals court that although he was withdrawing his claim for damages, he still seeks to hold Greenberg and Smith personally accountable and ban them from working in the securities industry and serving as officers or directors of a public company.

“There is no doubt room for argument about whether the lifetime bans that the attorney general proposes would be a justifiable exercise of a court’s discretion; but that question, as well as the availability of any other equitable relief that the attorney general may seek, must be decided by the lower courts in the first instance,” the appeals court said.

The case is State of New York v. Greenberg, 401720-2005, New York state Supreme Court (Manhattan).