UPDATE: SEC Settles Lawsuit Against Former AIG CEO Greenberg
07 August 2009 - 3:53AM
Dow Jones News
Former American International Group (AIG) chief executive
Maurice "Hank" Greenberg and former chief financial officer Howard
Smith will pay penalties to settle civil allegations of accounting
fraud, the U.S. Securities and Exchange Commission said
Thursday.
The lawsuit, filed in a federal court in Manhattan, alleges the
men are liable for AIG's numerous accounting violations which
helped inflate the now-troubled insurance giant's financial results
between 2000 and 2005.
Greenberg will pay $15 million in penalties and disgorgement
while Smith will pay $1.5 million. Both are settling without
admitting or denying the charges.
Smith will also not be able to act as an officer of a public
company for three years, the SEC said.
"Greenberg publicly described AIG as the leader in the insurance
and financial services industry with a history of delivering
double-digit growth," the SEC said in its lawsuit, noting that his
words led investors to trade the company's stock at a premium
compared with its competitors.
"In reality, AIG under Greenberg faced a number of financial
challenges that, had they been properly reported or accounted for,
would have exposed significant missteps in AIG's operations."
A statement issued on behalf of Greenberg said he is pleased to
have the four-and-a-half year investigation behind him.
"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. "He also
made clear to the SEC that he would never settle a charge of
securities fraud, even if the settlement did not require him to
admit the charge, and that he was confident that he could defeat in
court any such claim if it were made."
Andrew Lawler, an attorney for Smith, said Thursday in a
statement that "some of the transactions in the complaint filed by
the SEC today are almost ten years old."
"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," Lawler added.
The SEC says the men should be held responsible "as control
persons" for three different areas of fraud, two of which involved
deals with re-insurance firms General Re Corporation, a subsidiary
of Berkshire Hathaway Inc. (BRKA) and Capco - a now-defunct
Barbados-based shell company controlled by AIG. Reinsurance allows
insurance companies to completely or partly insure the risk they
have assumed for their customers. The transactions with General Re
helped the company increase its loan loss reserves while its
dealings with Capo were used to conceal underwriting losses by
converting them to capital losses, the SEC alleges.
A third area of alleged fraud, meanwhile, entailed accounting
transactions used to misstate net investment income or capital
gains.
The SEC said the accounting fraud involving Gen Re began in 2000
after analysts had criticized the company for declining loss
reserves. In response, Greenberg initiated two reinsurance
transactions with Gen Re and wrongfully accounted for them as real
reinsurance. That falsely increased the reported loss reserves and
premiums written.
Without those phony loss reserves added to the balance sheet,
the SEC said, the true reported loss reserves would have been a
total of $500 million less over the course of two quarters in 2000
and 2001.
This latest lawsuit by the SEC comes a little more than three
years after AIG settled accounting charges with the SEC by agreeing
to pay disgorgement of $700 million and a penalty of $100
million.
Greenberg, who headed AIG for decades before stepping down amid
the start of the accounting scandal in 2005, also is still
contesting civil charges originally filed by former New York
Attorney General Eliot Spitzer.
Separately, he was named as a co-conspirator but never charged
in a criminal prosecution that ended last year after four former
General Re executives and one AIG executive were convicted of
inflating AIG's reserves by $500 million in 2000 and 2001 through
fraudulent reinsurance deals.
A federal judge later ruled the government had enough evidence
to try to convince a jury that that a conspiracy to fraudulently
boost the financials of American International Group Inc. started
with a phone call by Greenberg.
People familiar with the matter told The Wall Street Journal, a
Dow Jones publication, that Greenberg is still under investigation
in that case.
He has lost much of his net worth after the company nearly
collapsed in the financial meltdown and had to be propped up with
U.S. tax dollars.
-By Sarah N. Lynch, Dow Jones Newswires; 202-862-6634;
sarah.lynch@dowjones.com