Tuesday, March 22, 2005
An article in the Wall Street Journal (here) states that two senior American International Group Inc. executives -- Howard Smith, the company's CFO, and Christian Milton, a vice president -- have been fired because they indicated that they would assert their Fifth Amendment rights in response to the investigation of the company by the SEC and N.Y. Attorney General Eliot Spitzer. The investigation concerns an insurance transaction between AIG and General Re (a unit of Berkshire Hathaway) that is in effect a reinsurance contract that may have been used by AIG to pump up its insurance reserves. Reinsurance contracts are nothing new to these companies, but this one was odd because it was General Re buying reinsurance rather than its usual business of selling such contracts. The contract triggered the resignation of long-time AIG CEO Maurice Greenberg last week, and the focus on Greenberg will be heightened.
The firings of the two executives, who had been put on leave last week when Greenberg resigned, highlights a growing trend in corporations that are being investigated by the government and seek to avoid criminal charges by cooperating and conducting internal investigations. In this case, Smith and Milton have every right to assert the Fifth Amendment to internal investigators because their statements will be turned over to the government, but they have no protection from their employer using that assertion to terminate their employment, unless they have a contract protecting them from such termination. There could be an argument about whether assertion of the Fifth Amendment is "good cause" if they are not at-will employees, but that issue won't get decided for quite a while. A more immediate issue for them will be whether the company continues to pay their legal bills, which is a common right given to corporate executives. The Department of Justice is suspicious of companies that continue to pay the legal bills of executives who are the targets of criminal investigations, and has stated that it may view the corporation as not being cooperative in that situation. A criminal charge could cripple AIG because its licenses to sell insurance could be at risk, so the company needs to avoid a criminal charge at almost any cost. A refusal to pay attorney's fees for its executives would be an issue of contract and state corporate law, and AIG may refuse to pay for the executives' attorneys to show how cooperative they are now, and deal with any legal consequences from a breach of contract later.
For the executives, their assertion of the Fifth Amendment will ratchet up the pressure from the government to cooperate. A Fifth Amendment claim usually has a "where there's smoke, there's fire" effect on prosecutors, and the involvement of the U.S. Attorney's Office in the AIG/General Re investigation will increase, if it hasn't already. This is hardly good news for Greenberg and executives at General Re who were involved in the transaction because they are now the primary targets of this new phase of the investigation. Warren Buffet will continue to rue the day he decided to buy General Re, which has been a millstone for Berkshire Hathaway. (ph)