AIG to pay $1.6 billion in settlement of fraud charges
By Vikas Bajaj
The New York Times
February 10, 2006
NEW YORK American International Group agreed on Thursday to pay more than $1.6 billion to settle U.S. government and New York State charges that the insurance giant had engaged in fraud, bid-rigging and improper accounting.
Of the total, $800 million will go to investors, $375 million will be repaid to policy holders and $344 million will go to states harmed by AIG's actions. New York State will also collect a separate $100 million penalty and the U.S. government will receive $25 million.
AIG also agreed to reduce commissions to brokers and agents for steering insurance contracts to certain companies, and said it would support laws banning certain kinds of "contingent commissions" and requiring better disclosure of other payments.
The settlement with the New York State attorney general's office, the U.S. Securities and Exchange Commission, the Justice Department and the New York Insurance Department will end a series of investigations into AIG, some of which started as long as four years ago.
U.S. government and state authorities started working together early last year to look into what officials said was a sham deal between AIG and General Re, an insurance company owned by Berkshire Hathaway, that allowed AIG to bolster its reserves by $500 million.
That transaction was questioned because AIG took on no risk for the money it received from General Re and the payments were deliberately hidden. Last week, three former General Re officials and a former AIG executive were indicted on federal fraud and conspiracy charges in connection with that reserves transaction.
The settlement announced on Thursday does not cover shareholder lawsuits and cases against Maurice Greenberg, who was removed as AIG's chairman and chief executive in March. He has said that he did nothing wrong and that AIG's audit committee and accountants were just as responsible as he was for the company's accounting.
Among the various charges that AIG is settling, some stem from a yearlong investigation by the attorney general, Eliot Spitzer, into insurance industry bidding practices. Spitzer and the New York Insurance Department also jointly investigated the company's use of insurance reserves and the underpayment of workers compensation taxes to states.
The SEC, meanwhile, had been looking into falsification of financial statements by AIG officials to bolster the company's publicly disclosed results.
"AIG was and is a solid company that didn't need to cheat," Spitzer said in a statement. "It finds itself in this position solely because some senior managers thought it was acceptable to deceive the investing public and regulators."
The company, which has cooperated with many of the investigations, has already addressed many of the problems raised by the authorities. Last year, it reduced earnings for the past five years by $4 billion. AIG said Thursday that it would take a $1.15 billion charge to account for the settlement against its earnings in the fourth quarter of 2005.
"These settlements are a major step forward in resolving the legal and regulatory issues facing AIG," the company's chief executive and president, Martin Sullivan, 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." AIG will also hire an "independent consultant" for three years to review the company's procedures for how it collects and reports financial information and also to monitor the company's compliance with its self-imposed changes.
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