AIG Trying To Settle Justice, SEC Cases

AIG said last Thursday that a federal grand jury in Indianapolis was investigating it over activity that federal officials said allowed a mobile phone company to put out a misleading balance sheet in 1999.

The AIG dealings with Brightpoint, Inc. of Plainfield, Ind. were the subject of a Securities Exchange Commission case, which the New York-based insurer settled for $10 million in 2003.

In its announcement, AIG said the U.S. Attorney for the Southern District of Indiana informed the company that it is a target in the grand jury probe over "non-traditional insurance" or "income-smoothing" products marketed by AIG.

AIG's conciliatory stance stating it wants to settle with the Justice Department differs somewhat from the remarks of company Chairman and Chief Executive Officer Maurice Greenberg, who reacted angrily last Thursday when the company was notified it was a target of the Southern District of Indiana's grand jury inquiry

"The timing of this last letter was not by accident given we were putting out earnings today," he said.

Earlier this month AIG said the SEC was looking into similar income smoothing activity connected with transactions involving its AIG Financial Products Corp., PNC Bank and two unnamed insurance groups.

According to AIG, the grand jury in Indianapolis is looking at products "that were directed at creating agreements with businesses that would appear to be insurance and accounted for as insurance, but did not involve any actual risk transfer."

AIG stock–already depressed by charges in a civil suit filed by the New York Attorney General's Office that it was part of a brokerage price-fixing scheme–was down in early trading by about 1 percent of its value, declining to $57 a share.

More specifically, AIG said the investigation is directed at the contract with Brightpoint, Inc., for which it announced a settlement on Sept. 11, 2003 in which it neither admitted guilt nor denied SEC findings.

At that time, the SEC said the $10 million penalty reflected "AIG's participation in the Brightpoint fraud, as well as misconduct by AIG during the Commission's investigation of this matter."

Wayne Carlin, director for the SEC's Northeast region, said AIG had "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."

He described the transaction as a round trip of cash from Brightpoint to AIG and back that was described as insurance, and enabled the phone company to spread a loss over several years that should have been recognized immediately.

The AIG announcement follows another one earlier this month in which the company said the SEC was considering a lawsuit against it for putting out false and misleading press releases–one of them which dealing with a Department of Justice target notification.

The SEC and federal prosecutors are investigating a variety of other income-smoothing transactions involving AIG subsidiary AIG Financial Products Corp., PNC Financial Services group and two unidentified insurance groups.

AIG has said it believes the SEC's contentions are without merit, and has said its actions have been based on the advice of independent auditors.