A.I.G. Will Accept Monitor and Pay $80 Million to Close Inquiries
By Joseph B. Treaster
The New York Times
Published: November 24, 2004
American International Group, the world's leading insurance company, has agreed to accept an independent monitor and to pay about $80 million to settle investigations into the sale of insurance that was used by companies to manipulate their earnings, people briefed on the investigations said yesterday.
The imposition of a monitor is unusual, and it represents a remarkable concession by a company that until recently had a reputation for standing up to regulators.
A.I.G. said in a statement yesterday that it had made a settlement offer to the Securities and Exchange Commission and had reached an agreement in principle with the Justice Department. The company offered no details on the terms of the settlements. But the prospect that some of the regulatory clouds over the company could soon lift was enough to drive its stock price. Shares of A.I.G. surged 2.2 percent, to $64.20, yesterday.
One person briefed on the case said approval by the S.E.C. and senior Justice Department officials of the terms worked out by investigators was expected in the next week or so. A penalty of $80 million would far exceed the $10 million A.I.G. paid last year to settle S.E.C. allegations that it helped Brightpoint, a small distributor of cellphones in Indiana, conceal $11.9 million in losses in 1998.
A much broader settlement with the S.E.C. and Justice Department would conclude the investigations and bring an end to the work of a federal grand jury in Indiana that has been hearing evidence against A.I.G. in the Brightpoint matter. But it is expected to leave the authorities free to pursue any wrongdoing that might be turned up by an independent monitor who will be examining the company's books.
A.I.G. was close to a settlement earlier but balked at the idea of a monitor. But the company, which called for a quick resolution to the dispute a few weeks ago, acquiesced when the S.E.C. and the Justice Department refused to yield on that demand, people briefed on the investigations said.
"They didn't want an independent monitor," one of these people said. "These monitors can be terribly intrusive. You are forced to hire some lawyer to investigate you and the law firm can just descend on you and investigate and investigate and eventually publish all they've learned. It's a way of getting dirty laundry out and it just ties you in knots as a company."
The change of heart is not surprising given that the use of insurance contracts to smooth out earnings has been drawing increasing scrutiny - from Eliot Spitzer, the New York attorney general, as well as from the S.E.C. Regulators have found the sale of such products to be widespread. Last week, Ace Ltd. and other big insurers said that they had received subpoenas from the S.E.C. and from Mr. Spitzer's office seeking information on the sale of what is often referred to as finite insurance.
Such insurance is legal. But the transactions arranged by A.I.G. that are at the center of the settlement have raised questions about whether such insurance can be properly used to smooth financial statements.
Finite risk or loss mitigation insurance was developed in the 1990's. The policies have become the subject of investigations because they sometimes do not operate like insurance - which protects against unexpected events - but may simply amount to loan agreements, possibly violating accounting standards. Payments of insurance claims should be recorded, for example, as income. But a loan must be recorded as a liability. A crucial test in insurance is whether there is a transfer of some risk from an insurance company's customer to the insurance company. If there is no transfer of risk, there is no insurance.
The S.E.C. and Justice Department investigations, which had been first disclosed in September, were soon followed by another investigation that embroiled A.I.G.
On Oct. 14, Mr. Spitzer accused Marsh & McLennan Companies, the world's largest insurance broker, in a civil lawsuit of bid-rigging and price-fixing. A.I.G. has also been implicated in that investigation, and two of its executive have pleaded guilty to bid-rigging charges.
The S.E.C. and Justice Department investigations have focused on nine transactions, including three that enabled PNC Financial Services Group, a bank holding company based in Pittsburgh, to shift $762 million in loans from its balance sheet.
In the PNC case, A.I.G. helped the company improve the appearance of its financial strength. It did so not with insurance policies but by creating three special-purpose entities in 2001. Investigators argued that there was no transfer of risk.
Last year, PNC paid $115 million in a fine and restitution to settle claims made by the S.E.C. and the Justice Department. A.I.G. was not involved in the settlement and analysts assumed the matter was closed.
But then the S.E.C. and Justice Department began investigating the insurance company. They began negotiations with the insurer toward a settlement this past summer, but the talks broke off. On Sept. 21, A.I.G. said that it had been notified that the S.E.C. was on the verge of naming it as a defendant in a civil lawsuit. A few days later, A.I.G. added that the Justice Department was also investigating.
In October, A.I.G. said it had been admonished by the federal authorities for not being sufficiently forthcoming in its two earlier announcements. At that point, A.I.G. said it had arranged five other transactions with two unnamed insurance companies similar to those involving PNC.
In late October, A.I.G. disclosed that it was the focus of a federal grand jury in Indianapolis for its role in helping Brightpoint reduce its losses for 1998 by $11.9 million.
During the earlier S.E.C. investigation, the commission contended that A.I.G. "withheld documents and committed other abuses."
In its dealing with Brightpoint, the S.E.C. said then, A.I.G. "played an indispensable part" in a "fraudulent transaction," selling the cellphone distributor a policy that the insurer "had developed and marketed for the specific purpose of helping" companies "report false financial information to the public."