NU Online News Service
WASHINGTON–Maurice Greenberg, former head of American International Group, has agreed to pay $15 million to settle charges of fraudulent accounting to boost the company’s financial outlook, the U.S. Securities and Exchange Commission announced.
Besides Mr. Greenberg, who was forced to leave his posts as chair and chief executive officer at AIG in 2005, the SEC said that Howard Smith, former AIG vice chair and chief financial officer, had also agreed to penalties and disgorgement fees–in his case amounting to $1.5 million.
The pair was accused of inflating AIG’s reported financial results between 2000 and 2005. Neither admitted guilt. Mr. Greenberg issued a statement that he was glad he was not facing formal fraud charges from the SEC.
Mr. Greenberg has consented to a judgment enjoining him from violating securities law, as well as from “managing any person who violates the reporting, books and records and internal control provisions of the federal securities laws,” the SEC said.
Mr. Smith’s settlement, the agency said, prohibits him from acting as an officer or director of any public company for three years, as well as from appearing or practicing before the Commission as an accountant for five years.
The SEC announcement of its action did not discuss its effect, if any, on related civil fraud charges, still pending, originally brought against Mr. Greenberg and Mr. Smith by New York’s attorney general at the time, Eliot Spitzer, currently being pursued by his successor, Attorney General Andrew Cuomo. In September, there were reports that a $100 million settlement was under discussion.
In a statement, Mr. Greenberg said he was “pleased” with the settlement because the SEC had decided not to charge him with fraud despite a four-and-a-half-year investigation “involving the review of millions of pages of documents and numerous depositions.”
He said the only charges made by the SEC against him were as a “control person” under a provision of the Securities and Exchange Act.
Mr. Greenberg has “consistently made clear that he personally never engaged in any fraud whatsoever, and that the vast majority of AIG’s Restatement was unnecessary and concerned accounting issues for which he had no responsibility,” the statement said.
“As the SEC acknowledges, Mr. Greenberg does not admit even this claim, although he acknowledges the obvious fact that he was CEO of AIG at the time of the accounting at issue,” the statement added.
Mr. Greenberg “believes that this is an appropriate basis to resolve the SEC’s investigations and put these issues behind him,” the statement said. “With these issues behind him, Mr. Greenberg looks forward to being able to concentrate on building for the future.”
An SEC civil complaint against Mr. Greenberg and Mr. Smith was filed simultaneously with the settlement in New York U.S. District Court for the Southern District in Manhattan.
Previously, in 2006, the SEC charged AIG with securities fraud and improper accounting. The company settled the charges by paying disgorgement of $700 million and a penalty of $100 million, among other remedies.
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.
The accounting issues at the company, in addition to leading to the ouster of Mr. Greenberg and Mr. Smith, have prompted lawsuits between the company and its ex-CEO.
Among three transactions cited in the SEC complaint was a reinsurance deal between AIG and GenRe, which prompted a federal investigation leading to the conviction of four former GenRe officials and one AIG executive.
The five were convicted of inflating AIG’s reserves by $500 million in 2000 and 2001 through fraudulent reinsurance deals that made AIG appear in better financial condition than it was. The moves kept AIG’s stock price high during an economic downturn. Mr. Greenberg was disclosed as an unindicted co-conspirator in that case.
Another transaction cited in the SEC complaint was with Capco Reinsurance Company Ltd., a special-purpose entity that the SEC alleged “AIG created and used to conceal underwriting losses by converting them improperly to capital losses,” along with transactions to misstate net investment income or capital gains. Capco is no longer in existence.
In its complaint, the SEC alleged that the Capco deal was used to conceal approximately $200 million in underwriting losses in AIG’s general insurance business.
“Underwriting was AIG’s core business,” the SEC said in its complaint dealing with the Capco transaction. When AIG’s auto warranty underwriting business was suffering in 2000, AIG was facing projected losses of approximately $210 million.”
“Instead of reporting these underwriting losses, Mr. Greenberg initiated and approved a reinsurance transaction with Capco, an offshore shell company funded and controlled by AIG, to inaccurately re-characterize and report the underwriting losses as capital losses,” the complaint said.
That was because “capital losses were less troublesome to investors because they viewed them as not relating to AIG’s core business,” the SEC said.
The complaint also detailed what the SEC said were “economically senseless round-trip transactions to report improper gains in investment income, and the purported sale of tax-exempt municipal bonds owned by AIG’s subsidiaries to trusts that AIG controlled in order to improperly recognize realized capital gains.”
Mr. Smith issued a statement through his lawyer, Vincent A. Sama, of Winston & Strawn, which said that “Some of the transactions in the Complaint filed by the SEC today are almost ten years old.”
It added that, “Although Mr. Smith was originally inclined to litigate this matter, resolving the SEC matter allows him to move forward with his life without the added legal costs and distraction of this lawsuit.”