Friday, January 13, 2006
The Wall Street Journal reports (here) that American International Group Inc. is close to a settlement of the federal and state investigations of its accounting for reinsurance and other transactions that it used to burnish its results, which were among the most consistent on Wall Street for years. The Journal reports that the payment will be more than $1 billion , and perhaps as much as $1.5 billion, to resolve investigations that have ranged from its accounting for transactions with General Re that were disguised as reinsurance to its reserves for workers compensation policies. New York Attorney General Eliot Spitzer filed a lawsuit against the company in May 2005, while the SEC and U.S. Attorney's Offices in New York and Virginia have been investigating AIG. It is not clear how the final dollar figure will be divided between penalties, fines, and restitution, and how much New York will claim. Expect a deferred prosecution agreement with the Department of Justice that will contain the usual terms (outside monitor, strengthened internal controls, cooperation in continuing investigations, etc.).
Importantly, the settlement will not cover former AIG CEO Maurice Greenberg and former CFO Howard Smith, both of whom were sued for fraud by Spitzer's office along with the company. It will be interesting to see if the government pursues criminal charges against the two former executives, or will rely on the SEC to pursue civil securities fraud charges. Greenberg has been aggressive in his attacks on the company's acknowledgment of accounting problems and assertions that the subject of the investigation concerns reasonable accounting judgments. Greenberg (through his wife) owns approximately 1.7% of AIG, a stake that is worth billions, so he has a deep enough pocket (and powerful incentive) to fight any case the federal government decides to bring. An AFP story (here) quotes a Greenberg spokesman: "Shareholders lose when companies choose to settle investigations motivated by political ambition, fueled by threats and settled out of fear." (ph)