Wednesday, November 24, 2004
American International Group Inc. (AIG) issued a terse press release Tuesday evening (Nov. 23) stating,
AIG and its subsidiary AIG Financial Products Corp. (AIGFP) have submitted an offer of settlement to the Staff of the Securities and Exchange Commission (SEC) that the Staff has agreed to recommend to the SEC, and reached agreement in principle with the U.S. Department of Justice, with respect to issues arising from certain structured transactions with The PNC Financial Services Group, Brightpoint, Inc., and related matters. Final settlement is subject to approval by the Securities and Exchange Commission, the Department of Justice, and the United States District Court.
A report in the Wall Street Journal (Nov. 24) describes the insurance products that AIG sold to companies to help "smooth" their earnings that is the subject of the civil and criminal actions. The purchasers, Brightpoint Inc. and PNC Financial Services, used the insurance to spread losses over a longer period of time (Brightpoint) and remove underperforming loans and investments off the company's balance sheet (PNC). According to the Journal:
The probes involve two very different financial products, with an element in common, according to regulators: They were aimed at helping the buyers hide adverse financial developments from their shareholders. One of the products was an alleged bogus insurance policy that in reality was little more than a loan, regulators have maintained. This allegedly sham policy allowed Brightpoint Inc., a Plainfield, Ind., cellphone distributor, to spread a large quarterly loss from a United Kingdom trading unit into future periods by using the more-favorable accounting treatment that insurance allows.
The other was an off-balance-sheet investment vehicle, into which Pittsburgh-based PNC Financial Services Group Inc. allegedly stuffed $762 million of underperforming loans and venture-capital investments, avoiding write-down charges, regulators have said.
What does it cost to enter into a global settlement with the government? According to the Journal:
People familiar with the matter said the pact could obligate the company to an independent review of its past transactions with other customers, a move regulators have sought as part of a widening campaign to crack down on companies' use of financial engineering to manipulate their earnings results.
Another person familiar with the discussion said the cost of the SEC portion of the settlement to American International Group would be between $60 million and $90 million. At the high end, such a penalty would rank among the largest paid by any of the financial-services firms that have come under scrutiny for allegedly helping clients cook their books. Under the tentative SEC pact, the agency would file civil securities-fraud charges against AIG, which would neither admit nor deny wrongdoing, according to one of the knowledgeable people.
The settlement only covers the federal government, and does not resolve the various private law suits by shareholders and securities purchasers. That will add to the final tab for AIG. Another interesting question is whether Maurice Greenberg, AIG's long-time CEO and Chairman, will last much longer in his position. Greenberg's son, Jeffrey, was forced out as CEO of Marsh & McLennan last month shortly after New York Attorney General Eliot Spitzer sued the company for bid-rigging in the insurance brokerage industry. (ph)