AIG Investors Finally Get Payback For Accounting Fraud

National Underwriter News
May 20, 2009

WASHINGTON -- American International Group investors will get $843 million as part of the company's 2006 settlement of a huge accounting fraud, a federal court in New York ruled yesterday.

U.S. District Court in Manhattan approved the settlement distribution for a group of investors estimated to number 257,000.

The settlement resulted from allegations the company issued misleading financial statements to investors from 2000 to 2005 based in part on sham reinsurance transactions with General Re, the Securities and Exchange Commission announced.

Four executives from Gen Re and one from AIG were convicted in February of 2008 for their involvement in the phony reinsurance activity.

The 2006 AIG agreement settled federal and state actions for a total of $1.6 billion and included the resolution of claims related to improper accounting, bid-rigging and practices involving workers' compensation funds.

In addition to the SEC, the investigations included then New York State Attorney General Eliot Spitzer, the New York Insurance Department, the Department of Justice and the U.S. Postal Inspection Service.

Prior to the settlement in May 2005, AIG acknowledged accounting errors and restated earnings downward by $3.9 billion over a five-year period and cut its net worth by $2.7 billion. Six months later the firm announced it would revise its statements again after finding a $500 million understatement of previously disclosed retained earnings.

Besides the restatement, the investigations led to the replacement of Maurice Greenberg as chairman and chief executive of AIG, as well as the replacement of Howard Smith, AIG's chief financial officer. It also sparked continuing lawsuits between Mr. Greenberg and his former company.

The SEC said the settlement took place under the Fair Funds provisions of the Sarbanes-Oxley Act, which granted the SEC increased authority to help harmed investors by allowing both ill-gotten gains as well as civil money penalties to be distributed to them directly.

The AIG Fair Fund's court-appointed distribution agent estimates that checks will be mailed to more than 257,000 affected AIG investors within the next few months.

Regulators charged that AIG entered into two sham reinsurance transactions with Gen Re that had no economic substance but were designed to allow AIG to improperly add a total of $500 million in phony loss reserves to its balance sheet in the fourth quarter of 2000 and the first quarter of 2001.

In its restatement, AIG admitted not only that its accounting for certain transactions had been improper, but also that the purpose behind some of those transactions was to improve financial results that AIG believed to be important to the market.

Under the agreement, AIG paid a total of $800 million --$700 million in disgorgement of "ill-gotten gains" and $100 million in penalties. The payment to investors was authorized last June.

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