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(Adds details of settlement and AIG bailout, comments, case citation, byline)
By Jonathan Stempel
NEW YORK, April 23 (Reuters) - American International Group Inc has reached a $40 million settlement of claims it should not have let employees invest their retirement savings in company stock as the insurer headed into the 2008 financial crisis, which nearly caused its collapse.
The preliminary settlement was filed on Thursday in Manhattan federal court, which must approve the accord.
It resolves claims that AIG caused the loss of hundreds of millions of dollars of retirement savings by imprudently offering company stock as an investment option in retirement plans such as the AIG Incentive Savings Plan and the American General Agents' and Managers' Thrift Plan.
Lawyers for the plaintiffs called the settlement one of the largest under the federal Employee Retirement Income Security Act, or ERISA, stemming from the financial crisis.
AIG denied wrongdoing in agreeing to settle. Its insurance carriers are expected to fund the settlement. AIG reached a $960 million settlement of shareholder litigation related to the crisis last August.
Once the largest U.S. insurer by market value, AIG narrowly avoided collapse after making bad bets on mortgage debt through hundreds of billions of dollars of credit default swaps.
Huge losses led to a bailout that began in Sept. 2008, which at one point gave the government a 92 percent stake, and caused AIG's share price to bottom at around 35 cents in March 2009.
The government has since shed its stake, and New York-based AIG is now profitable.
Thursday's settlement covers retirement plan participants and beneficiaries from Aug. 7, 2007 through May 1, 2009.
Legal fees will not exceed one-third of the settlement fund, court papers show.
On Wednesday, a federal judge in Washington, D.C. heard closing arguments in a $50 billion bench trial over whether the bailout shortchanged AIG shareholders, including a company run by the insurer's former chairman, Maurice "Hank" Greenberg. A decision is not expected soon.
The case is In re: American International Group Inc ERISA Litigation II, U.S. District Court, Southern District of New York, No. 08-05722. (Reporting by Jonathan Stempel in New York; Editing by Richard Chang and Alan Crosby)