SEC: AIG To Pay $10 M Fraud Penalty

New York-based insurance giant American International Group Inc. agreed to pay a $10 million civil penalty to settle fraud charges involving Plainfield, Ind.-based phone distributor Brightpoint Inc., the Securities and Exchange Commission announced last week.

According to the SEC statement, charges stemmed from AIGs alleged role in fashioning and selling what the securities regulators referred to as a “purported insurance product that Brightpoint used to report false and misleading financial information to the public.”

“The penalty reflects AIG’s participation in the Brightpoint fraud, as well as misconduct by AIG during the Commission’s investigation of this matter,” the SEC stated. But in a separate statement, AIG neither admitted nor denied the regulators findings.

This is the second time in recent months that regulators have linked AIG to improper business conduct. In July, the New York State insurance department found that AIGs New Hampshire Insurance Co. had repaid $500,000 in improperly collected terrorism insurance premiums on some 600 New York City homeowners policies. The department initially called the collections “illegal” and then said it was investigating.

Commenting on SECs enforcement action against AIG, Wayne Carlin, regional director at SEC’s Northeast regional office, said that in this case, “AIG worked hand in hand with Brightpoint personnel to custom-design a purported insurance policy that allowed Brightpoint to overstate its earnings by a staggering 61 percent.”

This transaction, Mr. Carlin continued, was simply “a ’round-trip’ of cash from Brightpoint to AIG and back to Brightpoint.” And by disguising the money as ‘insurance,’ AIG enabled Brightpoint to spread over several years a loss that should have been recognized immediately, he observed.

Stephen Cutler, director at SEC’s division of enforcement, also noted that this case illustrates how securities regulators will “pursue insurance companies and other financial institutions that market or sell so-called financial products that are, in reality, just vehicles to commit financial fraud.”

Another SEC official noted that AIG did not “come clean” in the course of the Commission’s investigation

“On the contrary, AIG withheld documents and committed other abuses, as outlined in the administrative order, compounding its overall misconduct,” said Mark Schonfeld, associate regional director at SEC’s Northeast regional office,

AIG issued a statement defending its actions. “The consent decree issued by the SEC relates to a non-traditional insurance product with respect to which a single insurance policy was issued in 1999 by an AIG subsidiary,” the insurer stated. “AIG consented to the SEC order to settle the matter and neither admitted nor denied the SECs findings.”

AIG acknowledged that “mistakes were made” in the underwriting of this policy. But consistent with its long-standing commitment to ensure sound and effective internal controls, it has taken “steps to correct those mistakes. AIGs profit from this policy was less than $100,000.”

Additionally, AIG said it doesnt expect settlement terms with the SEC to have any material impact on the companys current or future operating results.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 15, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.