At the outset of a trial in Manhattan federal court, a lawyer for AIG's Lavastone Capital accused Coventry First of artificially inflating the price of about 300 such policies, known as "life settlements," and using a network of subsidiaries to conceal the markups.

"This is a racketeering scheme so audacious it would make the mob blush," Randy Mastro said in his opening statement.

But Heidi Hubbard, a lawyer for Coventry, said AIG had been aware that Coventry was selling certain policies at a gain and never objected.

"There is no fraud if the people handling this business on a day-to-day basis understand and accept the practice that AIG is now challenging," she said.

Investors who acquire the policies on the secondary market pay the premiums and then collect the payout when the individuals die.

Coventry, founded by Philadelphia philanthropist Alan Buerger, is the "leader and creator" of the life settlement industry, according to its website.

AIG bought nearly 7,000 life settlements from Coventry with a total face value of $20 billion.

Coventry caused Lavastone to pay more than $150 million in hidden markups and fee overcharges, including broker's fees it did not incur, Mastro said.

But Hubbard said Coventry had a "reasonable belief" that its agreement with AIG did not preclude it from acquiring some policies and then selling them to AIG at a profit, and that AIG executives understood that.

AIG said it is already entitled to more than $250 million in damages, including interest, based on pretrial rulings from Rakoff that found Coventry liable on certain breach of contract claims.

AIG is also seeking to have Coventry disgorge all of the fees it collected, including legitimate payments for undisputed policies, as well as to impose triple damages under the civil racketeering statute.

AIG stopped acquiring life settlements in 2011, although it continues to hold about 5,000 policies, regulatory filings show.

U.S. District Judge Jed Rakoff is overseeing the trial without a jury.

The case is Lavastone Capital LLC v. Coventry First LLC et al., U.S. District Court for the Southern District of New York, No. 14-7139.

(Reporting by Joseph Ax; Editing by Richard Chang)

By Joseph Ax