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Insurance AIG cooks books and apologizes { February 10 2006 } Original Source Link: (May no longer be active)
http://www.nytimes.com/2006/02/10/business/10insure.html?_r=1&oref=sloginhttp://www.nytimes.com/2006/02/10/business/10insure.html?_r=1&oref=slogin
February 10, 2006
A.I.G. Apologizes and Agrees to $1.64 Billion Settlement
By GRETCHEN MORGENSON
Apologizing for deceptive business practices extending as far back as two decades ago, American International Group, the global insurance giant, reached a $1.64 billion settlement yesterday with federal and state securities and insurance regulators.
The company also agreed to changes that would soften its historically combative approach to business, a trademark of its ousted chief executive, Maurice R. Greenberg.
Under the settlement, reached with the Justice Department, the Securities and Exchange Commission, the New York attorney general's office and the New York State Insurance Department, A.I.G. acknowledged that it had deceived the investing public and regulators.
The settlement resolved allegations that A.I.G. had participated in bid-rigging schemes and paid insurance brokers to steer business its way, used fraudulent insurance transactions to bolster the quality and quantity of its earnings and underreported to state insurance departments the amounts of workers' compensation premiums it had collected, on which it owed taxes.
In its apology, A.I.G. said: "Providing incorrect information to the investing public and regulators was wrong and is against the values of our current leadership and employees."
The company said it was committed to business practices "that provide transparency and fairness in the insurance markets."
Both the settlement and the apology are a clear repudiation of the company's practices under Mr. Greenberg, its longtime chief executive who ruled A.I.G. with an iron hand and often battled openly with regulators.
Mr. Greenberg, who was removed by A.I.G.'s board last March, remains under investigation by the Securities and Exchange Commission and the Justice Department and faces a lawsuit by the New York attorney general, Eliot Spitzer.
"This settlement is a complete and total vindication of everything we said from Day 1, despite significant pushback from others," Mr. Spitzer said in an interview. "It sends an important message that this kind of gamesmanship won't be tolerated; we don't care who you are or what company you're running."
Under the terms of the settlement, A.I.G. will pay $200 million in fines and penalties and put $1.5 billion into three funds to benefit victims of the company's deceptions.
One fund, totaling $800 million, will be available to investors who lost money in A.I.G. stock after its accounting irregularities were disclosed. Another $375 million fund will repay former customers who may have paid too much to buy A.I.G.'s insurance policies. A third fund, with $343 million, will go to the states that A.I.G. cheated by underpayment of taxes relating to workers' compensation premiums earned in those states.
S.E.C. officials said the settlement was important because it will deliver meaningful monetary relief to those harmed by A.I.G.'s conduct.
"While this settlement concludes our investigation of A.I.G., our investigation continues with respect to others who may have participated in A.I.G.'s securities law violations," said Linda C. Thomsen, director of enforcement at the commission.
A.I.G. is also paying $25 million to the United States government to resolve criminal liability arising from its accounting missteps. The company will also cooperate with the Justice Department in its continuing criminal investigation.
A.I.G. has been cooperating with the federal and state investigators since last March, when Mr. Greenberg left the company. Last year, it restated its financial results for five years beginning in 2000, stating that improper accounting during that period had inflated the company's earnings by more than $3 billion.
"These settlements are a major step forward in resolving the legal and regulatory issues facing A.I.G.," Martin J. Sullivan, the company's chief executive, said in a statement. "We have already implemented a wide range of improvements in our accounting, financial reporting and corporate governance, and will continue to make enhancements in these areas."
After taxes, A.I.G. will pay $1.15 billion under the settlement.
A spokesman for Mr. Greenberg issued this statement: "We have already debunked many of the allegations settled today by A.I.G. in a white paper issued last summer. The suggestion in the attorney general's public comments that Mr. Greenberg may have been involved in any wrongdoing is false. We are confident that when the debate moves from the newspaper to the courts, Mr. Greenberg will be vindicated."
Shares of A.I.G. rose 74 cents yesterday, or 1.1 percent, to $67.12.
Yesterday's settlement grew out of two separate inquiries, one in New York and another in Washington. The bid-rigging practices were turned up by Mr. Spitzer's office in a 2004 investigation into insurance brokers who act as middlemen between the corporations that buy insurance and the companies that sell policies. Guilty pleas by officials at Marsh Inc., a unit of Marsh & McLennan, and other insurance brokers led investigators to A.I.G.
In Washington, the S.E.C. uncovered an insurance product sold by A.I.G., known as finite-loss coverage, which seemed designed to help the companies that bought it hide profit shortfalls. In 2003, A.I.G. paid $10 million to settle a lawsuit filed by the S.E.C. over the insurer's sale of finite insurance to Brightpoint Inc., a cellphone distributor in Indiana.
The insurance, which the S.E.C. said A.I.G. had developed "for the specific purpose of helping issuers to report false financial information to the public," helped Brightpoint conceal $11.9 million in losses in 1998.
Investigators soon discovered that finite insurance was also central to a manipulation of A.I.G.'s own results. They uncovered insurance deals the company struck with General Re in late 2000 and early 2001 that were intended to add $500 million in phony loss reserves to A.I.G.'s balance sheet.
Insurance analysts had voiced concern over A.I.G.'s declining reserves in the third quarter, putting pressure on the company's stock; to address the analysts' concerns, A.I.G. bolstered its reserves artificially through the General Re deal.
Last week, federal prosecutors in Virginia charged three former officials of General Re and a former A.I.G. executive with fraud and conspiracy related to the fraudulent transactions.
Under the terms of the settlement, A.I.G. agreed to a raft of reforms. It will soon disclose commissions it pays to insurance brokers on its Web site, create companywide standards of conduct regarding those commissions, and train employees in business ethics, professional obligations, conflicts of interest and recordkeeping procedures. A.I.G. also agreed to hire a consultant to examine its internal controls over financial reporting; regulatory, legal and compliance policies; and adequacy of whistle-blower procedures.
The agreement also stated that the consultant hired by A.I.G. will issue a report to the S.E.C., the New York attorney general, the New York State Insurance Department and A.I.G.'s board recommending best practices for the company to adopt. The consultant will remain on the job for three years.
A.I.G. will also provide New York's superintendent of insurance with a report detailing the reinsurance contracts it has struck with other insurers. Such policies must contain risk transfer if the companies buying them are to receive preferred insurance accounting; where such a risk transfer is not evident, A.I.G. must supply appropriate documentation.
The settlement requires A.I.G. to cooperate on all examinations and regulatory requests. A.I.G. will cooperate with the New York attorney general in his continuing investigation into the insurance industry and former A.I.G. employees.
Copyright 2006 The New York Times Company
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