AIG $126M Settlement Finalized With Justice, SEC

The company said while it did not admit or deny wrongdoing, it will pay $46 million in fees and interest on fees to the Securities and Exchange Commission to resolve claims that grew out transactions that AIGFP structured with PNC Bank in Pittsburgh.

In addition, AIG agreed to take on a U.S. Justice Department and SEC-approved independent consultant who will serve as an outside monitor, examining transactions between 2000 and 2004 to ensure that AIG did not violate accounting rules.

A portion of the settlement, which includes the Department of Justice Fraud Section and U.S. Attorney for the Southern District of Indiana in Indianapolis, will involve paying an $80 million penalty to the Justice Department to settle prosecutions in connection with both the PNC transactions and transactions involving Brightpoint, a Plainfield, Ind., phone distributor. (AIG entered into a $10 million settlement with the SEC on Brightpoint last year.)

The Brightpoint transaction, written by AIGs Loss Mitigation Unit, involved insurance designed to spread a large loss over a number of years that the SEC once likened to disguised loans. The PNC dealings involved transactions known as C-GAITS (Contributed Guaranteed Alternative Investment Trust Secuity). C-GAITS were essentially designed to take $762 million in bad loans and lagging venture capital assets from the banks balance sheet, transferring them to a special-purpose entity.

Mr. Greenberg said AIG has been forming a Complex Structured Finance Transaction Commit-tee comprised of senior executives, including AIG Chief Risk Officer Bob Lewis, to assure the company sells no products to help an insured or other party "misrepresent either its income statement or balance sheet."

At AIGFP, he said, John M. Foster, a former member of the Financial Accounting Standards Board, has been put on the board, and Frank Zarb, AIG Executive Committee chairman has been added as well. He also said that since April, AIGFP has had a Transaction Review Committee that makes sure deals follow accounting rules and they are assessed for "reputational risk."

He said Mari Maloney, the AIG associate general counsel in charge of AIGs corporate legal compliance group that oversees member companies compliance with laws and regulations, has been given the title chief compliance officer. Ms. Maloney is a former New York narcotics prosecutor and enforcement attorney with the National Association of Securities Dealers who joined AIG in 1999.

Mr. Greenberg noted that the company has an anonymous hotline so employees can ask compliance questions or report violations.

Concerning the placement of an outside monitor, Mr. Greenberg said, "We welcome this enhancement to our overall risk management and control mechanisms."

Stephen M. Cutler, SEC enforcement division director, said "AIG was reckless" in not knowing that the C-GAITS product it developed did not satisfy accounting standards. The SEC action, he said, is "a message to insurance companies and others that sell structured finance or other products to public companies that are designed for no purpose other than to improve those companies accounting results."

"In appropriate circumstances, marketers of such products will be held liable for the resulting misstatements in their customers financial disclosures," he warned.

Reproduced from National Underwriter Edition, December 3, 2004. Copyright 2004 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.