AIG Resolves State and Federal Fraud Claims

As expected (see earlier post here), American International Group Inc. reached a global settlement with federal and state authorities, including the civil suit filed by New York Attorney General Eliot Spitzer, to resolve the various investigations of insurance and securities fraud at the company.  AIG's total payment will be $1.64 billion, comprised of the following: $700 million in disgorgement and a $100 million penalty to the SEC; $375 million to AIG policyholders; $344 million to states harmed by AIG's practices involving underreporting for workers' compensation funds; and, fines of $100 million to New York and $25 million to the U.S. Department of Justice.  The SEC's settled complaint (here) concerns the reinsurance transaction with General Re that led to the indictment of four defendants on Feb. 1 on conspiracy and securities fraud charges in the Eastern District of Virginia (indictment here), including three senior General Re executives.  According to the SEC's Litigation Release (here): "The Commission’s complaint, filed today in federal court in Manhattan, alleges that AIG’s reinsurance transactions with General Re Corporation (Gen Re) were designed to inflate falsely AIG’s loss reserves by $500 million in order to quell analyst criticism that AIG’s reserves had been declining. The complaint also identifies a number of other transactions in which AIG materially misstated its financial results through sham transactions and entities created for the purpose of misleading the investing public."  The settlement with New York covers a broader array of conduct, including the bid-rigging with Marsh & McLennan and other firms that first triggered the regulatory scrutiny (see NYAG settlement here).

With the company settlement, the remaining issue is whether federal prosecutors will pursue criminal charges against former AIG CEO Maurice Greenberg and former CFO Howard Smith.  Attorney General Spitzer has already stated that no criminal charges against them will be filed, only the civil case in which the company reached the settlement.  Whether prosecutors will be able to put together a case against Greenberg is very much an open question.  The prosecution in Virginia arising out of the AIG-General Re "finite insurance" transaction will probably be the key to any further criminal actions.  Unless former General Re CEO Ronald Ferguson or former AIG reinsurance executive Chris Milton, both defendants in the criminal case, agree to cooperate and provide solid evidence against Greenberg and Smith, it is unlikely the government will be able to file charges absent the discovery of a "smoking gun" document, which is unlikely to occur at this point in the investigation. An AP story (here) describes the settlement. (ph)