Greenberg, SEC Clash Over Significance Of Settlement On Accounting Fraud Suit

The SEC announcement 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, Andrew Cuomo.

In September, there were reports that a $100 million settlement was under discussion, but Mr. Cuomo's office did not respond to NU queries on the matter.

In his initial statement, Mr. Greenberg, who now heads C.V. Starr, 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."

However, the SEC took umbrage and released a statement the next day countering Mr. Greenberg's comments. SEC representative John Nester said the settlement "does not express any view that minimizes Mr. Greenberg's role in any of the transactions that have been the subject of restatement by AIG."

Mr. Nester said that "under governing law, the charge against Mr. Greenberg as a control person with respect to AIG's alleged securities fraud requires his culpable participation in the underlying fraud."

Mr. Nester would not say whether the SEC had been in contact with Mr. Greenberg after he issued his initial statement, stating: "We wouldn't discuss communications with respondents."

However, Mr. Greenberg issued a follow-up statement after the SEC reiterated the settlement's serious implications, tempering his initial comment.

His later reaction–released through C.V. Starr–said that the size of the fine he is paying is "a reflection of the importance of the charge to the SEC, and Mr. Greenberg's willingness to make it is a reflection of his recognition of that importance."

The latter statement said further that "while Mr. Greenberg indicated that he is pleased with the terms of today's settlement, he recognizes the seriousness of a control person charge, and the significance with which the SEC treats it."

However, the second statement added, "despite the parties' agreement as to the specific elements of AIG's 2005 restatement included in the control person charge, the parties continue to disagree as to the appropriateness of other components of the restatement."

On the other hand, "Mr. Greenberg was not meaning to suggest in his public statements that the SEC shares his view as to appropriateness or inappropriateness of the restatement as a whole," the statement read.

Robert Khuzami, director of the SEC's Division of Enforcement, said in a statement that "corporate leaders cannot avoid the truth and consequences of their companies' performance by using improper accounting gimmicks and signing off on distorted financial reports."

He added that both Mr. Greenberg and Mr. Smith "oversaw various improper transactions that presented a false financial picture and allowed AIG to claim success in meeting its performance goals."

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, in addition to leading to the ouster of Mr. Greenberg and Mr. Smith from AIG, prompted lawsuits between the company and its ex-CEO.

Among three transactions cited in the SEC complaint was a reinsurance deal between AIG and General Reinsurance, which prompted a federal investigation leading to the conviction of four former Gen Re 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, while keeping AIG's stock price higher than it might have otherwise been. Mr. Greenberg was cited 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."

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."