U.S. Said to Probe AIG's Cassano, Forster, Athan (Update1)

By David Voreacos and Hugh Son
Bloomberg News
April 28, 2009

April 28 (Bloomberg) -- U.S. prosecutors are probing whether former American International Group Inc. executive Joseph Cassano and two deputies, Andrew Forster and Tom Athan, misled investors and auditors about subprime mortgage-related losses, a person familiar with the inquiry said.

The Justice Department is weeks from determining whether to press criminal charges related to how Cassano, 54, Forster and Athan valued contracts protecting $62 billion in mortgage-backed securities, the person said.

Prosecutors and civil investigators from the U.S. Securities and Exchange Commission are examining statements by AIG executives in 2007 about its portfolio of "super senior" credit-default swaps, which insured bond losses tied to the U.S. housing market. No grand jury has taken testimony yet, the person said.

"The big question is were the statements by these individuals about the transactions made in good faith or with some knowledge that unrealistic risks were being taken that needed to be concealed," said Daniel Richman, a Columbia University law professor and former federal prosecutor.

The inquiry and any possible criminal case leads to "the duel between prosecutors who claim that an individual was fully aware that his assurances were not supported by fact, and defendants who claim that they regretfully made ridiculous business decisions that don't amount to crimes," Richman said.

Executives' Lawyers

Cassano's attorney F. Joseph Warin and Forster's attorney Richard Owens did not immediately return calls seeking comment. Athan's attorney Mary Jo White declined to comment.

Last November, Warin said in an e-mailed statement that his client was cooperating with investigators and acted lawfully.

"His actions were appropriate, including during the valuation of AIG's credit-default swaps," Warin said. "He provided full and complete information to investors, his supervisors and auditors."

AIG Chief Executive Officer Edward Liddy has blamed the financial products unit for losses that forced the insurer to turn to the U.S. government for four bailouts valued at $182.5 billion. AIG's credit-default swaps, contracts similar to insurance that reimburse investors if bonds don't pay as promised, helped push the company to a $99.3 billion loss last year.

Cassano, who ran AIG's London-based financial products unit, was paid $280 million in the eight years before he resigned in March 2008, according to U.S. Representative Henry Waxman, former chairman of the House Oversight and Government Reform Committee.

Consultant Pay

After Cassano stepped down, the insurer paid him $1 million a month as a consultant through at least September 2008.

Forster, an executive vice president, works in the London office of the financial products unit. Athan works in Wilton, Connecticut. Forster and Athan didn't immediately return calls seeking comment.

Cassano's unit sold credit-default swaps on securities backed by corporate loans, mortgages, auto loans, credit cards and other assets. Those securities, known as collateralized debt obligations, are sliced into layers carrying different risks. AIG sold credit protection on the top layer, or AAA-rated portion, which is typically the last to suffer in a default.

The company is "aware of ongoing investigations by the Department of Justice and the SEC with respect to the subsequent valuation of the multi-sector CDS portfolio" and is fully cooperating with the probes, spokesman Mark Herr said.

AIG Spokesman

"To date, neither AIG nor AIGFP is aware of any fraud or malfeasance in connection with the underwriting and creation of the multi-sector CDS portfolio, as opposed to what, with hindsight, turned out to be bad business decisions," said Herr.

On Dec. 5, Cassano told investors gathered at New York's Metropolitan Club not to fear losses on AIG's portfolio of credit-default swaps.

"It is very difficult to see how there can be any losses in these portfolios," said Cassano, 54, according to a transcript of the investor meeting. Though he said the contracts had dropped in value by $1.1 billion in October and November 2007, Cassano told investors the "losses will come back."

AIG sold CDO protection worth about $441 billion as of June 30, 2007, including $64 billion backed by subprime mortgages, according to company documents.

"It is hard for us, without being flippant, to even see a scenario within any kind of realm or reason that would see us losing $1 in any of those transactions," Cassano said on an Aug. 9, 2007, investor call, according to a transcript.

Cassano's Career

Cassano graduated from Brooklyn College in 1977 with a degree in political science. He later worked two years at Drexel Burnham Lambert, the defunct investment bank. In 1987, AIG hired him to help found the financial products unit.

Cassano's business drew attention from authorities. In 2004, he signed an agreement on behalf of the company to defer prosecution on a charge of aiding and abetting securities fraud. U.S. prosecutors alleged the unit helped Pittsburgh-based PNC Financial Services Group Inc. improperly remove assets from its balance sheet. AIG paid $126.4 million to resolve the case.

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