The Securities and Exchange Commission (SEC), last week simultaneously announced with the Office of the Attorney General of New York State and The U.S. Department of Justice, (DOJ), the filing and settlement of charges that American International Group, Inc. (AIG) committed securities fraud. The agreement also settles charges against the company by New York and The DOJ of claims related to bid rigging and practices involving workers’ compensation funds. Both the SEC, and New York’s Attorney General, Eliot Spitzer, commented on the current AIG management’s outstanding cooperation in the investigation, according to Reuters.
The settlement does not cover a pending lawsuit against Maurice “Hank” Greenberg, former chief executive officer, or Howard Smith, former chief financial officer, or any possible federal charges against the two men, Reuters reports.
The SEC, filing in federal court in Manhattan, alleges that AIG’s reinsurance transactions with General Re Corporation were designed to falsely inflate loss reserves by $500 million. The filing also alleges that AIG materially misstated its financial results through sham transactions and entities created for the purpose of misleading the investing public.
AIG has agreed, without admitting or denying the allegations of the complaint, to pay a civil penalty of $100 million to the SEC, and an additional $700 million which the Commission will distribute to wronged shareholders, and to undertake certain business reforms. The settlement ends the threat of criminal charges against the company.
AIG will also pay $375 million to policyholders injured by alleged bid-rigging and $344 million to states harmed by AIG’s practices, from 1986 to 1995, that involved state workers’ compensation, and fines of $100 million to New York State and $25 million to the DOJ. The total fines exceed the fines imposed by the SEC in other corporate scandals.
Linda Thomsen, Director of the SEC’s Division of Enforcement said that while the settlement concluded their investigation of the company, the investigation continues “with respect to others who many have participated in AIG’s securities laws’ violations.” Three former Gen Re executives and one former AIG executive, were indicted last week in connection with the accounting scheme, the AP reports.
The New York investigation of AIG and Greenberg began with an investigation of Marsh & McLennan companies over bid rigging and price fixing, as well as hidden commissions. Four former AIG executives were among 20 former insurance executives who have pleaded guilty to charges in this probe, Reuters says.
Mark K. Schonfeld, Director of the SEC’s Northeast Regions Office said in the SEC press release, “In this settlement, we have sought to balance AIG’s historical misconduct – which was substantial – with its new approach to compliance and cooperation with regulators and law enforcement. The Commission’s settlement will also deliver meaningful monetary relief to those harmed by AIG’s prior conduct.”
Among the business reforms that AIG has agreed to is a three-year hiatus on “contingent commissions”, an arrangement in which brokers and insurers reward each other for steering business to each other. Reuters reports that these payouts have been the subject of the bid-rigging investigation.
AIG said that it would take a fourth quarter after-tax loss of $1.5 billion to pay for the settlement.