White Collar Crime Prof Blog

Greenberg Resigns from AIG Board

Maurice Greenberg faxed in his resignation from American International Group's board of directors last night, severing his last official tie with the company that he served as CEO and Chairman for over forty years.  Greenberg remains chairman of two entities that control approximately 14% of the company's shares.  In his resignation letter, Greenberg reiterated his complaint about the lack of information provided to him by AIG as it conducted an internal investigation that includes criticisms of accounting decisions by former senior executives: "I previously stated my intention not to stand for re-election to the board. My decision to resign now results from my inability to receive information regarding the company and its operations necessary to fulfill my fiduciary duties. I wish the employees of A.I.G. every future success."  No sour grapes there.  A New York Times story (here) discusses the resignation. (ph)

Govt. Gets Cooperator in AIG-General Re Investigation

According to the Wall Street Jrl here, a General Re executive who lives in Ireland and worked there has agreed to plead guilty to a conspiracy count and provide the government with cooperation in their investigation.    A key issue here may be how much information this cooperating witness will be able to provide to the government. 

The cooperation here had two benefits to the Government.  First it may provide them with information to move the investigation a step forward.  Second, if they had planned to proceed against this individual, they can now do so without having to go through an extradition process.

(esp) (with thanks to Joe Hodnicki for also noticing this newsbreak)

                                                                                       

UPDATE (6/6): The SEC filed a complaint against John Houldsworth that outlines the government's allegations and identifies the involvement of both former AIG CEO Maurice Greenberg and former General Re CEO Ronald Ferguson, both of whom asserted their Fifth Amendment privilege and refused to testify before the SEC.  The complaint (here) summarizes the case in this way:

This case is not about the violation of technical accounting rules. It involves the deliberate or extremely reckless efforts by senior corporate officers of a facilitator company (Gen Re) to aid and abet senior management of an issuer (AIG) in structuring transactions, having no economic substance, that were designed solely for the unlawful purpose of achieving a specific, and false, accounting effect on the issuer’s financial statements. The only economic benefit to either party of the transactions at issue was a $5.2 million fee – agreed to in an undisclosed side agreement – to be paid by AIG to Gen Re for putting this deal together. The "premiums" purportedly due AIG under the terms of the bogus transaction documents were merely window dressing and were in fact pre-funded by AIG to Gen Re in another undisclosed side agreement. Gen Re and AIG also created a phony paper trail to make it appear as though Gen Re had solicited reinsurance from AIG when, in fact, AIG had solicited the deal to manipulate its financial statements.

The complaint does not identify Greenberg and Ferguson by name, but does describe their involvement in this way: "AIG’s then Chairman (the "AIG Chairman") called Gen Re’s then CEO (the "Gen Re CEO") to solicit help in structuring a transaction between AIG and Gen Re that would transfer $200 million to $500 million of 'loss reserves' to AIG by year end through a reinsurance arrangement between AIG and Gen Re."  The AIG side of the transaction clearly is based on information provided by AIG's former president of its reinsurance unit, Joseph Umansky, who testified before a New York state grand jury under an immunity grant (see earlier post here). The Houldsworth guilty plea brings the government one step closer to bringing a case against Greenberg and Ferguson, the top officials at the two companies involved in the transaction.  (ph)

Greenberg's Focus on AIG's Stock Price

While it is hard to feel much sympathy for former American International Group CEO Maurice Greenberg, who viewed regulations as a pest to be swatted rather than a guide to proper business conduct, N.Y. Attorney General Eliot Spitzer's recent complaint against the company and Greenberg for alleged fraud engages in a bit of character assassination of its own.  The complaint (here) states in its "Preliminary Statement" that Greenberg was "intensely focused on the daily movement of AIG's price," and on Feb. 3, two days after AIG announced underwriting losses from natural disasters, Greenberg told a trader for AIG to buy the company's shares on the open market and "I don't want the stock below $66 so keep buying."  On Feb. 18, a few days after the subpoenas to AIG were revealed, the company's stock again declined and Greenberg urged a company trader to buy up to 250,000 shares, saying he wanted the trader to be "a little bit more aggressive."  That's the last the complaint mentions of Greenberg's dealings with AIG's stock, and it's unclear why this information is in there except to somehow cast Greenberg as a nefarious manipulator of the market. 

But is what Greenberg did wrong?  It is certainly not a violation of New York state law, and none of the charges against Greenberg have anything to do with stock trading.  If there is any violation, it would be of the federal securities laws and related regulations, a claim that the SEC (and DOJ) could bring.  Company's are limited in the amount and timing of purchases of their own shares on the open market, and it's possible that Greenberg's requests to the traders caused a violation of those rules, but the evidence to this point does not show a significant violation, if there even is one.  For a Rule 10b-5 violation for market manipulation, it appears that a crucial aspect of such a case is missing: the benefit to the trader from the manipulation.  Greenberg was not selling shares while trying to prop up the company's price, and it does not appear that the trading had any purpose other than to help maintain the stock price in the face of negative news.  Without the back-end benefit from the transactions, it's difficult to show a manipulative purpose for a fraud violation.  Greenberg's extensive holdings in the stock (since transferred to his wife by gift in March) might be a reason to maintain the stock price, but he didn't sell any AIG shares to show that he sought to manipulate the price.  An executive obsessed by the price of his company's stock is not unknown in CEO circles, much less illegal.  What is the benefit from including the recitation of Greenberg's conversations with AIG traders when they have nothing to do with the alleged legal violations in Spitzer's complaint?  Surely not grandstanding. (ph)

Spitzer Files Civil Suit Against AIG, Greenberg, and Smith

New York Attorney General Eliot Spitzer and state Superintendent of Insurance Howard Mills filed a civil suit alleging fraud, violation of the state securities law (Martin Act), and violation of the state Insurance law against American International Group, former CEO Maurice Greenberg, and former CFO Howard Smith (summons & complaint here).  The suit had been widely anticipated, and it contains no new allegations that have not already been aired in the press and discussed by the company as part of its internal investigation.  A press release issued by Spitzer's office (here) summarized the allegations involving AIG:

• Engaged in sham transactions with a reinsurance company to create the appearance of insurance reserves where none existed. These deals were personally conceived and negotiated by Greenberg;
• Hid underwriting losses from an auto warranty unit by transferring the losses to an off-shore entity that it secretly controlled; Papered over losses in a Brazilian subsidiary by linking the losses to a Taiwanese subsidiary;
• Created false underwriting income derived from the purchase of life insurance policies; and
• Repeatedly deceived state regulators about AIG’s ties to off-shore entities.

The suit also cites a separate scheme in which AIG improperly booked worker’s compensation premiums as general liability and other coverage. This misconduct reduced the company’s taxes and other assessments.

No word on the status of the criminal investigations by Spitzer's office (see earlier post here) and the Department of Justice.  The SEC usually coordinates its civil actions with the U.S. Attorney's Office, so I expect that the Commission will hold off for now pending decisions on whether to pursue federal charges against individual executives. An AP story (here) discusses the filing. (ph)